The International Comparative Legal Guide to:

Gas Regulation 2010

A practical insight to cross-border Gas Regulation work

Published by Global Legal Group in association with Ashurst LLP,

with contributions from:
ÆLEX Estudio Gálvez Abogados O’Flynn Exhams
Aguilar, Loera, Cortina & Martínez Fortunati & Asociados Pachiu & Associates
Ali Budiardjo, Nugroho, Reksodiputro Garrigues Rolim, Godoi, Viotti & Leite Campos Advogados
Allens Arthur Robinson Guerrero, Olivos, Novoa y Errázuriz Rosenberg, Hacohen, Goddard & Ephrat - Law Office
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CMS Cameron McKenna Jankovic, Popovic & Mitic Travieso Evans Arria Rengel & Paz
Criales, Urcullo & Antezana JeantetAssociés AARPI Uría Menéndez
Denton Wilde Sapte Lovells LLP Vellani & Vellani
Dewey & LeBoeuf LLP Loyens & Loeff N.V. Wardynski & Partners

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The International Comparative Legal Guide to: Gas Regulation 2010

General Chapters:
1 Lessons From the Tough Times - The Return of the Debt Market and Fightback For Small
to Mid-Cap Oil and Gas Companies - Huw Thomas & Nick Williamson, Ashurst LLP 1
2 Floating LNG Regasification: Legal Issues - Anthony Patten, Ashurst LLP 4

Contributing Editor
Geoffrey Picton-Turbervill,
Country Question and Answer Chapters:
Ashurst LLP 3 Argentina Fortunati & Asociados: Roberto A. Fortunati & Monica Centeno Lappas 8
Brand Manager 4 Australia Allens Arthur Robinson: Angus Jones & David Maloney 16
Oliver Smith 5 Austria Schönherr Rechtsanwälte GmbH: Christian Schmelz & Bernd Rajal 25
Marketing Manager 6 Bolivia Criales, Urcullo & Antezana: Adrián Barrenechea & Daniel Mariaca 34
Sophie Granlund
7 Brazil Rolim, Godoi, Viotti & Leite Campos Advogados: Maria João Rolim
Cover Design & Vitor Henriques 43
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8 Bulgaria CMS Cameron McKenna: Kostadin Sirleshtov & Pavlin Stoyanoff 53
Sub Editor 9 Chile Guerrero, Olivos, Novoa y Errázuriz: Gonzalo Delaveau & Marcos Zavala 61
Jodie Mablin
10 France JeantetAssociés AARPI: Thierry Lauriol & Sophie da Cunha 70
Editor 11 Germany Lovells LLP: Matthias Hirschmann & Violetta Pudell 83
Caroline Blad
12 India IndoJuris: Dhritiman Bhattacharyya & Dinesh Singh 91
Senior Editor
13 Indonesia Ali Budiardjo, Nugroho, Reksodiputro: Philip R. Payne 100
Penny Smale
14 Ireland O'Flynn Exhams: Irene O’Donovan & Frank M. O’Flynn 108
Managing Editor
Alan Falach
15 Israel Rosenberg, Hacohen, Goddard & Ephrat - Law Office: Dan Hacohen 117
16 Italy Studio Legale Bonora e Associati: Luigi Giuri 124
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30 Serbia Jankovic, Popovic & Mitic: Jelena S. Gazivoda & Marija M. Kostic 239
31 Singapore Allen & Gledhill LLP, Ashurst LLP: Kelvin Wong & Daniel Reinbott 251
32 Spain Uría Menéndez: Juan I. González Ruiz & María José Descalzo 260
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34 United Kingdom Ashurst LLP: Geoffrey Picton-Turbervill & Erin Dyer 279
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This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified profes-
sional when dealing with specific situations.

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 EDITORIAL

Welcome to the fifth edition of The International Comparative Legal Guide to:
Gas Regulation.
This guide provides corporate counsel and international practitioners with a
comprehensive worldwide legal analysis of the laws and regulations of the gas
sector.
It is divided into two main sections:
Two general chapters. These are designed to provide readers with a
comprehensive overview of key gas regulation issues, particularly from the
perspective of a multi-jurisdictional transaction.
Country question and answer chapters. These provide a broad overview of
common issues in gas regulation in 35 jurisdictions.
All chapters are written by leading energy lawyers and we are extremely
grateful for their excellent contributions.
Special thanks are reserved for the contributing editor Geoffrey Picton-
Turbervill, of Ashurst LLP, for his invaluable assistance.
Global Legal Group hopes that you find this guide practical and interesting.
The International Comparative Legal Guide series is also available online at
www.iclg.co.uk.

Alan Falach LL.M

Managing Editor
Global Legal Group
Alan.Falach@glgroup.co.uk
Chapter 1
Lessons From the Tough Times -
The Return of the Debt Market
and Fightback For Small to Mid-
Cap Oil and Gas Companies
Ashurst LLP
Introduction
Huw Thomas, a partner at Ashurst London, and Nick Williamson,
a partner at Ashurst Abu Dhabi, consider the return of the debt
market and lessons learned by small to mid-cap oil and gas
companies and their lenders during the credit crunch.
Now that we are some way on from the onset of the credit crunch
and the dramatic fall in oil and gas prices from their summer 2008
highs, a sense of tentative optimism is returning to the market: what
lessons can small to mid-cap oil and gas companies and their
lenders learn as a result of their sometimes traumatic recent
experiences?
Debt Troubles
First, it is important to understand the background to some of the
difficulties which have been faced by small to mid-cap oil and gas
companies since summer 2008. During the period of increasing oil
and gas prices, many of these companies took on substantial
amounts of debt to finance the development of upstream assets. A
lot of this debt is in the form of borrowing base facilities (“BBFs”)
under which the amount capable of being borrowed from time to
time is calculated by reference to the value of reserves, which of
course varies according to oil and gas prices.
Some companies perhaps lost sight of the fact that, in the event of
a dramatic fall in oil and gas prices, their borrowing capacity would
suffer a similarly abrupt reduction. The borrowing base is typically
redetermined every six months and a repayment will be necessary
if the outstandings exceed the new borrowing base. Under the
redetermination procedures, the lenders invariably have a wide
discretion over setting the economic assumptions to be used in
recalculating the borrowing base. Some banks will say privately
that they deliberately did not reset their petroleum “price decks” too
sharply down so as to avoid defaulting a large number of their
borrowers overnight. Nevertheless, the result has often been a
substantial and sudden reduction in a company’s borrowing
capacity and in some cases, the need to make an immediate
repayment of debt in the tens of millions of dollars. Matters were
made worse by the fact that, although BBFs have been typically
structured as five to seven-year facilities, the commitments of the
lenders start stepping down long before final maturity, with perhaps
a step-up in interest rate margin. In a normal market the borrower
would be expected to refinance the facility well in advance of the
final maturity. But when the credit crunch hit, it became very
difficult for all but the most established names to arrange
refinancing. So when borrowing base amounts were redetermined
sharply downwards, and credit markets dried up thus removing the
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© Published and reproduced with kind permission by Global Legal Group Ltd, London
Huw Thomas
Nick Williamson
opportunity to refinance, it is not surprising that things got tough for
many small to mid-cap oil and gas companies. Some companies
which had been more aggressive with the use of leverage and took
on debt to finance pre-development assets, such as North Sea
focused player Oilexco, were particularly badly squeezed..
Lessons to be Learned?
How to get out of a hole
Some companies have been in the fortunate position of having
sufficient cash reserves, or production rates, to enable them to
service their debt obligations without significant difficulty. For
others, however, the liquidity trap has resulted in them having to
consider urgent solutions to service their debt obligations. These
solutions have variously involved the renegotiation of facilities,
asset disposals, raising equity from current shareholders, raising
cash from a strategic investor or mergers with other companies.
Can we learn anything from the way different companies have
approached possible solutions? Where companies have been open
with their lending banks as to the difficulties they face and have
worked co-operatively with them to find solutions, so maintaining
the trust of their lending banks even in the midst of a crisis, the
outcome has tended to be more favourable for all concerned.
Borrowers who have tried to carry on as if nothing has happened, or
have tied themselves in knots trying to find artificial solutions, have
eventually found the going perhaps harder than it needed to be.
Raising equity from existing shareholders is one possible solution,
but this has not been easy in the current environment (with over-
leveraged small to mid-cap oil and gas companies not being in the
enviable position of the likes of Cairn Energy and Tullow Oil).
Companies which have been willing to consider imaginative
solutions have been rewarded. An injection of cash from a new
strategic investor has been an option, either for shares (in which
case there is the issue of how existing shareholders will react to the
dilution) or at the asset level. For instance, in September 2009,
Sterling Energy, an oil and gas exploration and production company
with interests in the Middle East, Africa and the Gulf of Mexico,
successfully raised approximately £60m through a placing of its
shares, allowing it to pay down a significant amount of its BBF.
In autumn 2008, Dyas (a wholly-owned subsidiary of SHV, the
largest privately owned conglomerate in The Netherlands) acquired
a portion of the North Sea oil and gas assets of Ithaca Energy and
also stepped into the shoes of The Royal Bank of Scotland under
Ithaca Energy’s debt facility. Dyas subsequently converted the debt
into further assets of Ithaca Energy, leaving the latter debt free. A
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 Ashurst LLP
quick fire-sale of assets, while not ideal, has sometimes been the
only option for some if borrowing capacity has been exhausted.
The problem with this strategy is that companies have found that
the price gained for such assets may be at a discount to their value
as a result of the need to inject cash quickly. If lenders are patient
though, the result can be much more positive. In September 2009,
Stratic Energy, an international oil and gas company operating
principally in the North Sea and Italy, managed to pay down a
significant amount of its bank debt through the sale of its interest in
the pre-development Breagh gas field in the North Sea to RWE.
Also, Sterling Energy finally found itself debt-free after the sale in
December 2009 of its US assets. As the debt market returns it has
become a fairly common ‘ask’ from borrowers for a grace period
(perhaps up to three months) to be allowed post borrowing base
redetermination before a repayment becomes due, so as to allow
time to pursue solutions before having to seek a bank waiver.
Less leverage
It seems likely that the amount of debt which borrowers seek to take
on and which lenders are willing to make available will be less
aggressive in future. A reduction in borrowing capacity may be
imposed by the lenders effectively attributing less value to the reserves
being financed through, perhaps, adoption of more conservative oil
and gas price assumptions or a refusal to take into account P50
reserves (those which have a 50 per cent or more probability of being
economically recoverable), with an insistence only on P90 reserves
(90 per cent or more probability of being economically recoverable).
This could be particularly true of heavily development-weighted
financings, i.e. where there is not a good balance of development and
producing assets in the portfolio being financed. Although likely to
receive strong push back from borrowers, a reduction in borrowing
capacity may also be achieved by increasing the coverage of reserves
required for a given amount of debt - for example, increasing the
project life cover ratio used to calculate the borrowing base amount
from the classic 1.5x to perhaps 1.6x.
Also, there may be a more pronounced tendency to include cash
sweep mechanisms to accelerate repayment of the financing - i.e. a
requirement to apply a certain percentage of excess cash flow to
debt repayment after an initial grace period, particularly in the case
of junior facilities. Companies with simpler financing structures
have, unsurprisingly, found it easier to work through their problems
during the credit crunch. There may therefore be a desire for less
complex debt structures going forward. Pre-development facilities
have attracted particular criticism. Although they looked fairly
conservative in that they attributed only a very few dollars in value
to the oil and gas reserves, it has not always been attractive in a
bearish commodity market with the availability of equity money
severely constrained, to bring assets to the development phase. So
it may be some time before we see pre-development debt financing
make a return. Subordinated debt of any description is likely to be
harder to raise, for a while at least. Inevitably, restructuring
negotiations have been more tortuous where different lenders
appear for different levels of commitment in the senior debt and the
junior debt. From the borrower’s point of view at least, it is clear
that the ideal position is that the lenders are the same under the
senior and junior facilities and that their percentage commitments
are the same under both facilities.
Lenders seek more control
The fundamentals of reserve-based financing have generally
remained conservative compared to forms of lending in other
sectors. For example, the available debt amounts under BBFs
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© Published and reproduced with kind permission by Global Legal Group Ltd, London
Lessons From the Tough Times
calculated by reference to the six-monthly projections have not in
themselves been excessive. The problems have often arisen where
a group has incurred exploration and appraisal expenditure on non-
borrowing base assets and that expenditure is not included in the
cash flow projection which is used as the basis for determining the
group’s borrowing capacity. The expenditure may be incurred by a
member of the group which is not a BBF borrower but,
nevertheless, it represents a drain on the cash of the group which
might otherwise have been available as “equity” to support the
development activities which are taking place within the ambit of
the BBF. So lenders will be more wary of liabilities within the
borrower’s group which may not be directly related to the debt
facility in hand, but which may have an untoward impact on the
viability of the group as a whole. A number of borrowers, amongst
them Oilexco, were caught out by incurring capital expenditure
commitments, including, for example, obligations under drilling rig
contracts, which were hard to curtail when the sudden downturn
came. This experience may be expected to result in lenders seeking
to impose tighter restrictions on the incurrence of such liabilities
and it may well become market standard for BBFs to include whole
group liquidity testing covenants and events of default.
Broader debt funding sources
With debt capacity and risk appetite among commercial banks having
fallen back, there has been a heightened interest among borrowers in
seeking out funding from multilateral lending bodies including the
International Finance Corporation (IFC), the European Bank for
Reconstruction and Development (EBRD) and the European
Investment Bank (EIB). In the past, there has sometimes been a
perception that these organisations are quite bureaucratic and time-
consuming to deal with. To cast off this image, they have been keen
to show themselves to be quick to react and “commercial” in their
approach. Where the loan needs to be, for political risk mitigation
reasons, fronted by the multilateral lender with the commercial banks
taking back-to-back participations, it will of course be necessary to use
the multilateral’s form of documentation, which will vary from the
LMA forms commercial banks normally use. In a co-financing with
commercial lenders where the multilateral “umbrella” is not required
by the commercial lenders, it has sometimes been possible for
borrowers to persuade multilaterals to set aside their traditional
requirement for a separate loan facility agreement, with the additional
work that can involve, in favour of participating in a single loan
facility alongside the commercial banks, albeit with certain specific
provisions applying for the benefit of the multilateral only. This
approach can certainly make the documentation process much more
straightforward.
Prospects
While the signs are looking more positive, the next few months will
continue to be a crucial time for small to mid-cap oil and gas
companies faced with onerous debt repayment obligations. There
is no doubt that the sector has taken a hit in the last 18 months or so
but the trauma has thrown up some good deals for larger companies
with the cash and the desire to purchase a bolt-on company or asset
portfolio with attractive production, reserves or resources. We may
well see further consolidation in the sector and certainly can expect
more surprises in these still uncertain times. Lending appetite
appears to be increasing, although banks will no doubt be more
selective about which deals to go into and the pendulum has firmly
swung back to tighter structures underpinned by more conservative
assumptions. It is a different market which will require different
approaches, but a market that is all the more interesting for that.
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Ashurst LLP Lessons From the Tough Times

Huw Thomas Nick Williamson

Ashurst LLP Ashurst LLP
Broadwalk House, 5 Appold Street Suite 101, Tower C2, Al Bateen Towers
London EC2A 2HA Bainunah (34th Street), Al Bateen
United Kingdom PO Box 93529, Abu Dhabi
United Arab Emirates
Tel: +44 20 7859 1238
Fax: +44 20 7638 1112 Tel: +971 02 406 7208
Email: huw.thomas@ashurst.com Fax: +971 02 406 7250
URL: www.ashurst.com Email: nick.williamson@ashurst.com
URL: www.ashurst.com
Huw Thomas is a partner in the energy, transport and infrastructure Nick Williamson is head of Ashurst’s Middle East practice. He is a
department in London and specialises in project finance. He has partner in the corporate department in Abu Dhabi and specialises in
particular expertise in the development and financing of projects in M&A and corporate finance, advising both companies and financial
the oil and gas and petrochemicals sectors. Huw has substantial advisers. Nick has particular expertise in mergers and acquisitions
experience of working in international markets, including work in the and equity capital markets, both domestic and international. He has
Middle East and Asia. extensive experience in the energy/natural resources sector.

Ashurst operates at the heart of the energy industry worldwide. With a global energy team of over 80 lawyers we can
assemble teams to provide the highest quality advice tailored to our clients’ needs. We have helped hundreds of
companies, financial institutions and governments deal successfully with challenging energy projects by developing
innovative solutions.
Our lawyers provide a comprehensive service to the energy and natural resources industry in the following areas:

Upstream oil and gas Pipelines

LNG Refining and petrochemicals
Power Mining
Renewables Water
Nuclear

We advise on all aspects of work in the energy industry:

Mergers, acquisitions and corporate finance Greenfield projects

Project and acquisition financing International law
Environmental law Joint ventures
Commercial agreements Litigation and arbitration

Contact Geoffrey Picton-Turbervill, Head of Ashurst’s Global Energy Team.

Tel: +44 (0)20 7859 1209; Email: geoffrey.picton-turbervill@ashurst.com

3
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© Published and reproduced with kind permission by Global Legal Group Ltd, London
 Chapter 2
Floating LNG Regasification:
Legal Issues
Ashurst LLP
Introduction
Anthony Patten, a partner at Ashurst London, considers the
increasing popularity within the LNG industry of floating
regasification and the specific issues which need to be considered in
respect of the long-term lease or charter of a floating storage and
regasification unit.
LNG (liquefied natural gas) is formed by the cooling of natural gas
to -163°C (-260°F), resulting in its condensation and conversion
into a liquid. Liquefaction causes a significant reduction in
volume1, meaning that LNG can be transported much more cost-
effectively over longer distances than natural gas via utilisation of
purpose-built road tankers, railway tankers and LNG carrier ships.
On arrival at an unloading destination, the LNG is regasified for
distribution to the end-user. If the LNG has been transported via an
LNG carrier ship (an “LNGC”), a floating storage and
regasification unit (“FSRU”) allows regasification to be undertaken
offshore. Specifically, an LNGC moors alongside the FSRU and
unloads its LNG cargo into tanks onboard the FSRU for storage
prior to its passage through the FSRU’s onboard regasification
system. The regasified natural gas is then piped to shore for onward
distribution to the end-user via the existing gas pipeline network.
Reliance on FSRUs in Today’s LNG Market
The world’s first FSRU based on conversion of an existing LNG
vessel commenced operation in Pecem, Brazil in January 2009.
Chartered by Petrobras from Golar LNG Limited (“Golar”), the
conversion of the Golar Spirit (a 1981-built ship) into an FSRU was
completed in June 2008. While primarily intended to provide
storage and regasification services, Golar Spirit has also retained its
ability to operate as an LNGC. In contrast, other FSRUs forsake
this flexibility and are, instead, designed to remain permanently
moored at the LNG unloading port (other than for relocation due to
drydocking or in emergency circumstances). Currently, a number
of other FSRU (or similar) projects are ongoing including:
the long-term charter by Petrobras of a second FSRU from
Golar, which is intended to be moored in Rio de Janeiro,
Brazil. The FSRU was constructed by conversion of the
LNGC Golar Winter (completed Q2 2009) and will retain the
flexibility to operate as a LNGC;
the utilisation of shuttle and regasification vessels (“SRV”)
in the Gulf of Mexico Gateway Scheme and the Teesport
Project (Teesside, UK). An SRV is a form of intermittent
FSRU as it operates as a shuttle vessel which serves both as
an LNGC and, on arrival at the unloading destination, an
LNG regasification plant;
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© Published and reproduced with kind permission by Global Legal Group Ltd, London
Anthony Patten
the long-term charter by the Dubai Supply Authority of an
FSRU from Golar. The FSRU will be constructed by
conversion of the LNGC Golar Freeze and will be moored at
Jebel Ali Port, Dubai. Golar Freeze will remain classified as
an LNGC, but is intended to be used only for FSRU service
and will be permanently moored at Jebel Ali Port;
the purchase from Golar by OLT Offshore LNG Toscana
S.p.A. (“OLT”) (a joint venture company of which E.ON and
Iride are the major sponsors) of the LNGC Golar Frost, for
subsequent conversion into an FSRU, which is to be
permanently moored at OLT’s offshore LNG terminal in
Livorno, Italy (delivery of the FSRU is scheduled for the
second half of 2010); and
the charter by Kuwait Petroleum Corporation of a
regasification vessel from Excelerate Energy, which will be
stationed at the existing Mina Al-Ahmadi jetty facility in
Kuwait and form the basis of Kuwait’s first LNG import
terminal.
Interest in FSRU utilisation is increasing as parties seek to take
advantage of the associated benefits (please refer to table 1). With
this in mind, summarised below are the main issues which parties
should consider when negotiating the long-term lease or charter of
an FSRU (please note that our commentary assumes an arm’s length
charter hire relationship between owner and charterer, being one
where the owner does not have an equity stake in the receiving gas
terminal).
Table 1 - Potential benefits of FSRU projects
Potentially lower costs than on shore LNG regasification terminals, with
quicker development time.
Flexibility of location - an FSRU is a converted LNG vessel and can therefore
be relocated if necessary.
More simplified decommissioning than onshore LNG regasification
terminals.
Ability to meet seasonal peaks in gas demands.
Extension of life for ships converted into an FSRU.
Ability to meet a shortfall in gas production during an interim period, e.g.
while a permanent energy production facility is being constructed.
Ability to access rapidly high-value gas markets.
Decreased construction and delivery risk for the host country (although
consideration must be given to the potential repercussions for the host country
if delivery of the FSRU is delayed).
Potential reduction in carbon dioxide emissions - commentators believe
that use of an FSRU may result in increased burning of gas rather than diesel
for energy generation, which, in turn, will significantly reduce carbon emissions.
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Ashurst LLP
Issues for Consideration in the Long-term
Charter of an FSRU
Timing of transaction
Typically, a long lead time follows execution of an agreement for
the long-term charter of an FSRU. This is because construction of
an FSRU or conversion of an LNGC into an FSRU is both time-
consuming and costly, thus generating significant capex costs for
the owner which are not typically incurred on a speculative basis.
Form of agreement
The form of agreement typically used for the charter of a ship is a time
charter party (“TCP”). Depending on whether the FSRU is to be
permanently moored or is to retain its flexibility to operate as an
LNGC, an FSRU project may adopt characteristics of: (i) an LNGC;
(ii) a land-based regasification facility; and/or (iii) an offshore floating
crude oil storage or production unit. One may therefore need to
consider issues deriving from each of these types of project.2
Charter hire
Commencement date. Consideration must be given to the
date upon which the FSRU is deemed to be “on-hire” and,
thus, from which charter hire is payable. Specifically, the
owner will want to ensure that charter hire is due from the
date the FSRU is delivered in accordance with the owner’s
obligations under the TCP. This may be the date that the
FSRU is actually delivered at the unloading port or, if the
charterer is unable to accept delivery, a deemed delivery
date. Conversely, the charterer will want to ensure that
payment of full charter hire only commences as and when the
FSRU is delivered in accordance with the contracted
specification.
Terms of charter hire. The charter hire is typically a fixed
daily fee which is due if the FSRU is performing within
certain defined limits. The owner has no ability to manage
the extent to which the FSRU is utilised and should therefore
carry no risk in respect of underutilisation. However,
consideration should be given to what recourse is available to
the charterer if the FSRU is underperforming. Potential
recourse includes a proportionate reduction in the charter
hire and/or an extension of the charter hire period.
Creditworthiness of counterparties. As is the case with
other long-term contracts, consideration should be given
during TCP negotiations to the creditworthiness of each
party. The owner will primarily be concerned about the
charterer’s ability to pay the charter hire when due. If the
charterer’s creditworthiness is inadequate, a letter of credit
may be requested by the owner or, alternatively, the ultimate
parent company of the charterer (or a group company with
sufficient credit strength) may act as guarantor of the
charterer’s obligations. In contrast, the charterer will want to
ensure it is sufficiently protected in the event that the owner
fails to deliver the FSRU on time. Such protection may
include the payment of liquidated damages by the owner.
Force majeure. Although the occurrence of force majeure in
the LNG industry is relatively rare, the consequences can be
significant. Careful consideration must therefore be given to
the extent to which force majeure relieves a party from its
obligations under the TCP.
Scope of definition. Thought needs to be given to
whether the definition of force majeure includes an
exhaustive list of agreed force majeure events or a
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© Published and reproduced with kind permission by Global Legal Group Ltd, London
Floating LNG Regasification: Legal Issues
more general definition (i.e. an event or circumstance
that is beyond the reasonable control of a party, acting
as a reasonable and prudent operator, and materially
and adversely affects the ability of a party to perform
its obligations under the TCP). An exhaustive list of
force majeure events does, arguably, offer more
certainty to the parties with respect to identifying
whether an event of force majeure has occurred, but is
dependent on each event being adequately defined and
the list of force majeure events being sufficiently
comprehensive.
Extent of force majeure. How far along the LNG
value chain should a force majeure event be permitted
to run? For example, should the charterer be
permitted to seek force majeure relief under the TCP
for a force majeure event affecting a downstream gas
buyer or upstream LNG supplier? Should the owner
be permitted to seek force majeure relief for a force
majeure event affecting the shipyard at which the
FSRU is being built? No definitive answers can be
given to these questions as the equitable solution may
largely depend on the relationships (if any) between
the various parties along the LNG value chain and,
ultimately, the level of control that the owner and/or
the charterer may have over such parties.
Relief. The occurrence of a force majeure event
typically relieves a party from performing its
obligations under an agreement and thus prevents that
party from being in breach. With respect to a TCP, the
primary obligations for which the parties will seek
relief are payment of charter hire (charterer) and
provision of services (owner). Consideration must
therefore be given to the extent to which relief is
granted and for how long. For example, should a
termination right accrue for the non-affected party
and/or the affected party after a prolonged period of
continuous force majeure?
Extension of term. If a force majeure event occurs,
should the charter term be extended by a period equal
to the duration of the force majeure event? Any such
extension may provide an opportunity for the charterer
to make good any shortfall in gas delivered to its
downstream gas buyer(s) during the force majeure
period or, alternatively, allow the owner to recoup any
shortfall in charter hire received. However, the
charterer must consider whether the supply contracts
under which it provides natural gas to its downstream
buyer(s) permit it to make good any such shortfall
and/or whether the contracts will remain in place during
the extension period. Conversely, the owner must have
regard to any future arrangements (i.e. post-charter
period) that are already in place for the FSRU.
Off-specification. An FSRU is designed to receive and
regasify LNG within defined specifications. Any LNG
received outside these specifications (“Off-spec LNG”) may
cause damage to the regasification unit. An FSRU is also
designed (and typically contracted) to produce natural gas
within defined specifications - gas not falling within these
specifications (“Off-spec Gas”) may be unacceptable to the
downstream gas buyer and, potentially, cause damage to the
receiving gas network while exposing the charterer to a claim
for damages. Consideration must therefore be given to what
recourse should be available to the owner and charterer for
accepting delivery of Off-spec LNG and Off-spec Gas
respectively. Options include:
a right for the receiving party to refuse to accept
delivery of the Off-specification product;
a reduction in charter hire if Off-spec Gas is delivered;
and
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 Ashurst LLP
granting of an indemnity to: (i) the owner for any costs
incurred in cleaning or remedying the FSRU and/or
venting the Off-spec LNG; and (ii) the charterer for
loss suffered as a result of unknowingly accepting
Off-spec Gas (e.g. inability to fulfil contractual
obligations to its downstream gas buyer(s)).
Regulatory concerns. Consideration should be given to
what regulatory permits, licences and other forms of consent
(together, “Permits”) are required for mooring and operating
the FSRU at the unloading port. This requirement will vary
depending on the country in which the unloading port is
located. Sufficient time and resource must be dedicated to
ensuring all Permits are secured prior to the FSRU’s arrival.
Furthermore, the TCP should expressly state which party is
responsible for securing the Permits. Typically, a distinction
is drawn between those Permits necessary for FSRU
mooring and operation, which are for the owner’s account,
and those Permits required for construction and operation of
the LNG terminal and mooring platform, which are for the
charterer’s account.
Third party access regimes. A further regulatory concern
which should be considered is the applicability of third party
access regimes. In various jurisdictions (such as in the EU),
local law requires the owner of certain infrastructure to make
available to third parties (on reasonably competitive or
regulated terms) some or all of that infrastructure’s capacity.
Consequently, the owner is prevented from awarding 100 per
cent of the infrastructure capacity to one party and, by
extension, an FSRU owner may be prohibited from
contracting 100 per cent of the nominal regasification
capacity to a sole charterer.
Liability and indemnity. The parties to a TCP should give
careful consideration to the liability regime which they wish
to rely on. The two options which typically underpin liability
regimes are:
“guilty party pays”, whereby one party (party A)
indemnifies the other party (party B) for any liability
incurred by party B as a result of the acts or omissions
of party A; and
“mutual hold harmless” (also known as “knock-for-
knock”), whereby one party (party C) is responsible
for and indemnifies the other party (party D) against
any liability incurred by party D which relates to
personal injury, illness or death of personnel
employed by party C (or party C’s affiliates) or
damage to property belonging to party C (or party C’s
affiliates) (and vice versa).
Consequently, the indemnity provided by party C is effective
even if liability accrues due to the actions of party D. The
parties may agree not to apply knock-for-knock principles
where the non-indemnifying party has committed gross
negligence or wilful misconduct. Arguably, the “mutual hold
harmless” approach allows for strict allocation of liability as
each party bears responsibility for its own property and
personnel (which responsibility it could ordinarily seek to
manage through insurance). In contrast, the “guilty party
pays” approach requires determination of fault and, thus,
scrutiny of the actions of each party, which may result in
dispute if the parties fail to agree. The parties should also
consider whether to exclude liability for consequential loss.
Permitting recovery of consequential loss potentially
exposes the parties to loss which may be difficult to foresee
at the time of entry into a TCP.
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Floating LNG Regasification: Legal Issues
Rights of compensation for nonperformance. The ability
of a party to claim compensation for a counterparty’s failure
to perform its obligations under an agreement is always an
area of focus during pre-contractual negotiations. With
respect to a TCP, the owner’s primary concern is to ensure
that the charterer continues to pay full charter hire in the
event of charterer default (e.g. failure by the charterer to
provide, operate and/or maintain a mooring berth for the
FSRU at the unloading port, failure to secure all necessary
permits, etc.). Conversely, the charterer will seek relief from
payment of the charter hire if the owner is in default (e.g. late
delivery of the FSRU). Furthermore, the charterer may seek
liquidated damages as a means of compensation for any loss
suffered under gas supply contracts with downstream gas
buyers.
Termination rights. To avoid future uncertainty, the
termination rights of each party to a TCP should be expressly
identified. Typical termination rights may include:
a right for the owner to terminate for non-payment of
charter hire. The daily charter hire is typically a
considerable amount, therefore the owner may require
a termination right after a short period of non-payment
to limit any compounding effect and, ultimately, its
financial exposure to the charterer;
a right to terminate for prolonged force majeure.
When considering if and/or when a termination right
accrues following a force majeure event, thought
should be given to, among other factors, how long the
force majeure event must continue prior to a
termination right accruing and which party the
termination right accrues to (i.e. non-affected party
only or both the affected and non-affected party);
a right for the charterer to terminate for prolonged late
delivery of the FSRU. Given that the charterer is
likely to have gas supply contracts in place with
downstream buyers, late delivery of the FSRU may
have significant consequences for the charterer. The
charterer may therefore seek a right to terminate the
TCP in such circumstances and negotiations are likely
to centre on what period of delay must pass before any
such termination right accrues;
a right for the non-affected party to terminate for
bankruptcy and/or commencement of insolvency
proceedings; and
a right for the charterer to terminate for loss (actual or
constructive) of the FSRU.
Endnotes
1 LNG is estimated to have less than 0.2 per cent of its original natural
gas volume.
2 Note that this article does not consider any specific marine law issues
(e.g. salvage, outbreak of war, additional war expense and New Jason
clauses), but such issues should be taken into account by all parties
during TCP negotiations.
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Ashurst LLP Floating LNG Regasification: Legal Issues

Anthony Patten
Ashurst LLP
Broadwalk House, 5 Appold Street
London EC2A 2HA
United Kingdom

Tel: +44 20 7859 2464

Fax: +44 20 7638 1112
Email: anthony.patten@ashurst.com
URL: www.ashurst.com

Anthony Patten is a partner in the energy, transport and

infrastructure department in London, specialising in corporate and
project development work in the oil and gas and wider energy
sectors. He has particular expertise in the upstream oil and gas and
LNG sectors, having advised clients on upstream developments,
natural gas liquefaction projects, shipping and trading and LNG
regasification projects across a wide range of jurisdictions, including
throughout the Middle East.

Ashurst operates at the heart of the energy industry worldwide. With a global energy team of over 80 lawyers we can
assemble teams to provide the highest quality advice tailored to our clients’ needs. We have helped hundreds of
companies, financial institutions and governments deal successfully with challenging energy projects by developing
innovative solutions.
Our lawyers provide a comprehensive service to the energy and natural resources industry in the following areas:

Upstream oil and gas Pipelines

LNG Refining and petrochemicals
Power Mining
Renewables Water
Nuclear

We advise on all aspects of work in the energy industry:

Mergers, acquisitions and corporate finance Greenfield projects

Project and acquisition financing International law
Environmental law Joint ventures
Commercial agreements Litigation and arbitration

Contact Geoffrey Picton-Turbervill, Head of Ashurst’s Global Energy Team.

Tel: +44 (0)20 7859 1209; Email: geoffrey.picton-turbervill@ashurst.com

7
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© Published and reproduced with kind permission by Global Legal Group Ltd, London
 Chapter 3
Argentina
Fortunati & Asociados
1 Overview of Natural Gas Sector
1.1 A brief outline of Argentina’s natural gas sector, including
a general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Natural gas leads the Argentine energy matrix, and its importance
has been growing during the last 50 years. Such growth accelerated
after the privatisation process of the gas industry that started in the
early ‘90s. After the referred to privatisation, the industry
developed dramatically, suffering however, the strong impact of the
2002 Argentine economic and financial crisis. Since then, the
negative impact of price controls for the up-stream sector, as well
as the lack of timely adjustment of tariffs for transportation and
distribution -which value deteriorated in US Dollars terms- added to
the existence of debts acquired in foreign currency has put the
industry in a rather complicate situation. It is expected that it may
start to get out from such point sometime this year.
The gas up-stream sector is regulated by a specific legislation (the
“Law on Hydrocarbons”), while transportation, distribution,
commercialisation and storage is specifically regulated by other law
(the “Law on Gas”) and its specific complementary regulation. The
Law on Hydrocarbons contemplates that the Federal or local
Governments where the reservoir is located may grant concessions
for a limited period of time, which can be extended. Such time at
Federal level is 35 years, which can be extended for an additional
10-year period. At Federal level, the Secretariat of Energy regulates
exploration and production. Local administrative authorities have
similar capacity with respect to fields transferred to the provinces.
Various gas fields originally granted under concession by the
Federal Government have been transferred to the provinces where
they are located.
Since the privatisation of the gas industry in the early 1990s,
transportation, distribution and commercialisation is regulated by
the Gas Enforcement Authority.
Due to a shortage of energy in Argentina during the year 2008, the
Federal Government enacted certain incentives to stimulate
additional exploration and production of natural gas to be destined
to the local market.
It is worth mentioning that such incentives have not yet been
enough to increase production and add more reserves as much as
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Roberto A. Fortunati
Mónica Centeno Lappas
needed. Pursuant to the applicable laws and regulations the Federal
Government, through its Executive Branch, is the one that
establishes the policy on gas matters either for the up-stream and
down-stream sectors. Between 2003 and 2007 a carve out to that
capacity was made by virtue of certain law and decrees of the
Executive Branch of the Federal Government, allowing the
provinces to concede exploration and gas exploitation fields
previously transferred to such provinces (Law 24,145).
Note that Argentina is organised as a Federal country. In this
respect, it is worth mentioning that several provincial laws and
regulations often overlap with Federal ones.
As a result of the described legal framework there are Federal and
provincial Enforcement Authorities (for the up-stream sector),
usually belonging to the Executive Branch of the given
Government.
When the domain and jurisdiction of the oil and gas reservoirs have
been transferred by virtue of Law 24,145 -and subsequent Law
26,197- the licensing capacity of exploration and exploitation of gas
reservoirs has also been transferred to the relevant provinces.
Transportation and distribution including commercialisation and
storage of natural gas are regulated by the Federal Government, and
have been licensed to private companies. This notwithstanding, the
Federal Government is an indirect holder of a stake in certain
companies. Currently, the Federal Government -for reasons that are
not necessary grounded on commercial reasons- is delaying the
appropriate adjustment of tariffs for transportation and distribution
of gas.
1.2 To what extent are Argentina’s energy requirements met
using natural gas (including LNG)?
As explained herein above (see question 1.1), the energy matrix of
Argentina indicates a high presence of oil and gas. Such percentage
could reach far beyond 80% of the total energy sources. In this
respect, by 1992 gas reserves were 541 MM dam3. In 2007,
reserves declined to 394 MM dam3.
LNG has started to be used in the local market since 2008, in order
to avoid the serious consequences derived from a shortage of
natural gas production in winter time -when residential
consumption increases. That resulted in the lease of a vessel by the
private company YPF (subsidiary of Repsol), to deliquify imported
LNG. Liquefaction plants are not in operation in the country at the
time this response is given.
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Fortunati & Asociados
1.3 To what extent are Argentina’s natural gas requirements
met through domestic natural gas production?
Most of the local demand is satisfied with local production.
However imports, mainly from Bolivia, are needed to secure the gas
supply requirements. In this respect, the existing import agreement
between the Argentine Government -through Energía Argentina
S.A. (“ENARSA”)- and the Government of Bolivia is currently
been revised. It can be assumed that the main objective for the
Argentine Government is to secure gas supply for a longer term,
and on the Bolivian side is to obtain a better price. Private local
producers claim that prices to be paid for the imported gas would be
higher than the ones paid to them for their gas. Certainly, this
reflects a punctual situation that may vary from time to time.
1.4 To what extent is Argentina’s natural gas production
exported (pipeline or LNG)?
Despite the shortage of production mentioned above, there are
export agreements in force pursuant to which natural gas is
exported to Chile and to Uruguay. In 2008, Argentina exported
22.72 MM m3 to Uruguay and 393.30 MM m3 to Chile.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
Based on the Argentine Constitution as amended in 1994, and on
legislation enacted pursuant to it, property of on-shore gas
reservoirs corresponds to the National State or to the Provincial
State where they are located. As a result of that, an important
number of fields originally under the jurisdiction of the Federal
Authorities have been transferred from the Federal State to
provincial ones. It is worth mentioning that off-shore oil and gas
reservoirs belong to the National State since 12 nautical miles.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
Mineral rights are vested to private companies for a limited period
of time by means of explorations permits or exploitations
concessions. Survey authorisations can be requested by private
companies in connection to areas without sufficient data to be
subject to exploration activity. Concessions are granted for 35 years
extendable for 10 years pursuant to the Law on Hydrocarbons.
Partial relinquishments of the granted area are contemplated to
occur from time to time.
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Argentina
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
Argentina
Exploration is conducted under exploration permits, which grant an
exclusive right to explore the relevant area and get a concession to
exploit the discovered gas fields. The holder of an exploration
permit has to pay a royalty and to comply with the investments
committed and related obligations.
The exploitation concession entitles the holder of it to extract and
own the gas. The concessionaire is entitled to get also a
transportation concession for the extracted gas. Note that the
exploitation concession does not grant property over the reservoirs,
which continue to belong to the relevant States. Thus, the
concessionaire pays a royalty to the States usually equivalent to 12%
of the value of the gas extracted. This percentage could be reduced
under certain circumstances. The concessionaire also undertakes to
carry out the investments committed in the bidding conditions.
Exploration and exploitation of hydrocarbons is deemed of national
interest, and thus can be conducted even without the consent of the
landowner -but certainly with the prior awarding of Court order to
enter into the property.
As mentioned before, authorisations to survey land can be obtained
with respect to unexplored areas. All information obtained under
such authorisations has to be delivered -at Federal level- to the
Secretariat of Energy.
Permits for the exploration and concessions for exploitation of areas
are usually granted as a result of a bidding process, and
consequently, terms and conditions may vary from one to another.
This notwithstanding, such terms contemplate that concessions are
granted by the Executive Branch of the Government prior
inscription in Registers held by the Secretariat of Energy -at Federal
level- is required to participate in those bidding process. Foreign
companies are certainly allowed to be registered.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
Despite the privatisation process that took place in the early ‘90s, in
2004 through Law 25,943, the Federal Government created
ENARSA. ENARSA is a state owned company that carries out by
itself or by third parties, not only the exploration and exploitation of
oil and gas, but also its distribution and commercialisation.
ENARSA´s goal is to promote the development of energy in the
country.
Furthermore, it is important to mention that as stated in Article 2 of
Law 25,943, since October 2004 ENARSA is the “owner” of the
exploration permits and exploitation concessions of all national
maritime areas that then were not subject to such permits or
concessions.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
The Provincial States get the royalties from exploitation
concessionaires that are usually 12% of gas produced value and also
collect local taxes. The royalties are paid on a monthly basis.
Under certain circumstances the royalty could be paid in kind. The
National State gets the taxes collected at Federal level (mainly
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 Fortunati & Asociados
Income Tax and Value Added Tax). Taxes on exports are currently
in force.
Title holders of explorations permits pay a canon until exploitation
starts if that would be the case. The canon is calculated on the basis
of the surface of the land covered under the permit, and paid
annually.
Argentina
2.6 Are there any restrictions on the export of production?
Gas exports require a prior approval of the Federal Government.
Pursuant to the Law on Hydrocarbons such exports can only take
place to the extent that the supply to domestic market is secured.
Since 2004 further regulations in this respect have been enacted due
to the shortage of energy in the local market. For example in 2004,
a Rationalisation Program for the Exports of Natural Gas has been
put in place.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
Regulations on hydrocarbons enacted back in 1989 based on the
Law on Hydrocarbons contemplate that exporters have to transfer
back into the Argentine market at least 30% of the export proceeds
in foreign currency.
In addition, since 2002, as a result of the economic and financial
crisis that took place in Argentina, there is a general foreign
currency exchange control in force in the country. That control has
an impact on trade financing as well.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
The assignment of rights to explore and exploit gas fields is subject
to the prior approval of the Enforcement Authority. At Federal level
such Authority is the Secretariat of Energy. As established in the
Law on Hydrocarbons, the assignee has to evidence adequate
technical and financial capacities to hold such rights.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
No, exploration and exploitation do not require the granting of
guarantees per se. However, as contemplated in the Law on
Hydrocarbons, the granting of guarantees are often required in
bidding process until awarding takes place.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Certainly, based on the nature of the rights rested, security interests
can be created over rights to explore and exploit gas fields. It is
worth mentioning that the Law on Hydrocarbons dedicates some
provisions on this matter, providing certainty to the process of
creation and perfection of security interests on these assets. Prior
authorisation of the Enforcement Authority to disposition of rights
is requested, and eventual assignee of such interests shall meet the
technical and financial capacities to exercise those rights in
accordance to local regulation requirements.
Local laws contemplate rules for the appropriate accounting of
natural gas reserves.
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Argentina
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
The main governmental authorisations to be mentioned are: (i)
depending on which manner rights are acquired -e.g. acquisition of a
company instead of the eventual need for approval by the Federal
Antitrust Authority; (ii) if applicable the concession to transport gas
from the production facilities e.g. through a gas pipeline; (iii) the
correspondent provincial environmental permits, and eventually
health and safety certificates; and (iv) Court authorisations to have
access to private lands in case of lack of agreement with landowners.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
Federal and local regulations contemplate abandonment situations.
The more precisely regulated matter is the one related to the
abandonment of wells. At Federal level, a series of rules have been
issued by the Secretariat of Energy. Most of them follow
international standards.
With respect to other installations dedicated to the operation of any
given field, the Law on Hydrocarbons, contemplates that upon
termination of the concession, the same shall pass on -free of any
lien- to the State to which the property revert.
From the beginning of gas exploitation in Argentina (1907) to the
present, approximately half of the drilled gas wells turned to be
unproductive. Hence, such wells have been or will be timely
abandoned due to inactivity.
In light of the above, Argentine laws have foreseen the proceedings
to be carried out by concessionaires for the abandonment of gas
wells as well as ecological measures to be taken in order to avoid a
negative environmental impact.
Pursuant to Article 69 of the Law on Hydrocarbons, concessionaires
must adopt all the necessary measures to avoid damages to oil and
gas fields, as a consequence of well abandonment. Besides,
concessionaires will be responsible for damages caused to the State
or to third parties.
Resolution 5/1996 enacted by the Secretariat of Energy states that
inactive or “to be abandoned” wells shall be categorised by
concessionaires according to their location, status (i.e. active or
inactive), priority (i.e. importance of situations that may be
generated as a result of the conditions of the well). Such
categorisation will be considered to determine the term for the
abandonment established by the above Resolution.
The above Resolution makes a distinction between the two kinds of
gas well abandonment, the temporary and the definitive, which shall
be determined by the concessionaire of the corresponding area where
the well is located. Such determination will be made according to
technical, commercial or operative reasons. Abandonment could be
temporary when well may be reused in the future.
As regards the techniques to abandon gas wells, the Authority
recommends concessionaires to adopt certain techniques detailed in
Resolution 5/1996 for temporary or definitive abandonment. For
instance, in case that the abandonment is definitive, the well shall be
isolated with cement to prevent further damages to the well area. If
the abandonment is temporary, concessionaires may also adopt other
measures that may be more adequate -technically and economically-
with respect to each well or area provided that they comply with the
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Fortunati & Asociados
requirements regarding environmental security and protection and as
long as the Enforcement Authority does not object them.
Concessionaires must provide to the relevant Enforcement
Authority with certain information concerning the abandonment of
a gas well within 45 days from the date in which such abandonment
took place.
Furthermore, the Secretariat of Energy -at Federal level- enacted in
1996 a Resolution stating that concessionaires must file annually
with the Secretariat of Energy a report detailing the activities
performed within each concessioned field, including the ones
related to the abandonment of wells. All the activities connected
with well abandonment must be supervised by a qualified inspector
of the operating company.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
As indicated before (see response to questions posed in section 2
above), export of natural gas requires the prior approval of the
Secretariat of Energy. Resolution 299/98 regulates natural gas
exports, defining its limitations and the necessary requirements
needed to obtain the Secretariat’s approval to export natural gas.
During the last years, Argentina’s Government followed a strong
policy of intervention in the local gas market. Furthermore, the
Law in Hydrocarbons and the Law on Gas, highlight that natural
gas authorisations for exportation will be granted, to the extent that
it does not affect Argentina’s domestic supply.
As the Law on Gas states in Article 3, as far as natural gas imports
are concerned, they do not require any kind of authorisation.
Copy of the import and export agreements are to be filed before the
Gas Enforcement Authority.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Natural gas transportation is contemplated in the Law on Gas, and
subsequent regulations, establishing that gas transportation shall be
carried out under authorisation -by means of a concession, licence,
or permit- granted by the Executive Branch of the Federal
Government.
The laws in force contemplate that this activity is to be performed
by private companies, and that the States could also participate in
case of absence of interest from private parties.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
As indicated above, the transportation of natural gas requires an
authorisation -by means of a concession, licence or permit- to be
granted under the Law on Gas usually for a term of 35 years that
could be extended for another 10 years.
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Argentina
The Federal Authority is the one that grants the required
authorisation in order to construct and operate natural gas pipelines
when they cross the territory of more than one province or when
pipes are built to export gas.
It is mandatory to be granted from the National Authority a concession
title in order to construct and operate natural gas pipelines.
Argentina
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
In order to construct new gas “sites” or even to expand existing ones,
transporters and distributors must be granted the correspondent
authorisations issued by the Gas Enforcement Authority.
Gas carriers are entitled to get easements on the surface land from
where the pipes would be laid down in case they cannot reach an
agreement with landowners. These easements can be obtained from
the Gas Enforcement Authority, and of the same nature of the ones
to be acquired by natural gas producers.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
The principle that rules the activity is the open access, without
discrimination. Preferences among different parties shall be based
and by objective reasons, before the Gas Enforcement Authority.
Carriers have to offer to third parties, the excess capacity of their
systems through bidding process. The Gas Enforcement Authority
is the one that should resolve conflict among the parties.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
As a result of the Privatisation of “Gas del Estado”, in 1992
Transportadora Gas del Norte and Transportadora Gas del Sur
became the owners of the main gas pipe transportation system. The
interaction and cooperation for a more efficient nationwide
transportation system is a requirement to be complied with as
contemplated in the Law on Gas, and regulation enacted pursuant to
it.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
As indicated above, the rule is the open access to the transportation
system with respect to the capacity that has not been already
acquired by other parties. Carriers however, could be obliged -
pursuant to the terms of the authorisations granted- to expand their
gas transportation systems to the extent that: (i) such extension is
convenient to the needs of the public transport service; and (ii)
applicable tariffs may allow the recovery of the investment and
maintain an adequate profitable business as contemplated in the
Law on Gas.
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4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Tariffs are regulated, as well as most of the terms and conditions to
render the transportation service.
Argentina
Pursuant to the Law on Gas, every distributor must apply the same
gas tariffs for the same service, to all consumers. Tariffs -which are
originally established in the terms and conditions of the
authorisation granted- may vary among different clients when the
characteristics of the service that is rendered changes. Tariffs, to be
modified, require the approval of the Gas Enforcement Authority.
As mentioned, applicable tariffs and its adjustment terms have been
settled at the time the privatisation took place. However, after the
Argentine economic and financial crisis of 2002, the effective
revision of the agreed tariffs -to be adequate at the new situation-
has been delayed, jeopardising the gas transportation business.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The gas industry in Argentina is organised in three sectors: (i)
production; (ii) transportation; and (iii) distribution.
Distribution through pipelines, are considered a regulated public
service to be rendered pursuant to an authorisation -by means of
concession, licence or permit- granted by the Secretariat of Energy,
as contemplated in the Law on Gas. The Gas Enforcement
Authority is the ENARGAS, the same Gas Authority that regulates
transportation of natural gas. It is contemplated that the service be
rendered by private companies.
In 2006 the Federal Government created a fund to be destined to the
expansion of energy facilities, including the ones that may be
required to the natural gas transport and distribution services.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
The Law on Gas stipulates that all companies rendering gas
distribution services must obtain in advance the correspondent
authorisation of the Executive Branch and, the correspondent
provincial authorisations dealing with construction and
maintenance of pipelines. The Executive Branch authorisations are
granted for 35 years and can be extended for 10 more years.
Article 16 of this same Law, demands that all gas distributors start
the construction of any facility with the prior authorisation of the
Gas Enforcement Authority.
5.3 How is access to the natural gas distribution network
organised?
Pursuant to the Law on Gas, distribution is a public service
organised on the open access basis with respect to the excess
capacity of the given system. Conflicts with distributors shall be
decided by the Gas Enforcement Authority.
All natural gas distributors must respond to every gas consumer’s
demand in 30 days.
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Argentina
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
The Law on Gas in Article 32 stipulates that distributors can be
obliged to expand their installations, to the extent that is deemed
convenient to satisfy the needs of the distribution public service.
Tariffs will have to allow the recovery of the distributors´ new
investments, and maintain an adequate profitable business for the
distributor as contemplated in the Law on Gas.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
The Law on Gas dedicates chapter IX to tariffs. Tariffs are
originally established in the bidding conditions, and are expected to
compensate distributors in addition to its operating costs, taxes,
amortisation, taking into consideration the cost of natural gas, and
the need of maintaining a “reasonable” profitable business.
Different tariffs may certainly apply but to the extent it is
economically justified based on differences in the service rendered,
and approved by the Gas Enforcement Authority.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
Effectively, there are restrictions. None of the following gas market
players can have control over gas distribution companies: (i) gas
carriers and their controlling entities; (ii) consumers that acquire
natural gas from producers; and (iii) operators of storage facilities.
Due to the fact that the distribution of gas is considered a public
service, it is a strongly regulated industry where distributors cannot
dispose their assets and networks in a non-limited way. As a
consequence of this, they cannot lease, sublease or assign them to
other uses that are not related with the distribution of gas.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
The legal framework for gas trading is regulated by the Law on Gas
and subsequent regulations pursuant to it. Decree 180/2004
updated regulation of the electronic wholesale market for natural
gas (MEG). Players on the market are not only traders but also gas
producers. This “entity” creates an Authority in charge of the
coordination of the trading. In this respect, traders must be
registered with the Secretariat of Energy.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
In 2004, the Executive Branch of the Federal Government, introduced
certain modifications to Argentina’s gas market regulation (different
from a pure bundling structure), created a fund for investments in
transportation and distribution in the gas sector and classified
consumers into different categories depending on gas expenditures.
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7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
There is no regulation related to liquefaction facilities; Argentina
lacks these facilities.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
There is no regulation in this area.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
There is no regulation in this area.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
Antitrust Law 25,156 aims to control and prevent economic
concentrations and all those conducts that jeopardise the market.
Article 17 of the Law contemplates the creation of an autonomous
Enforcement Authority. However, it has not been created yet. A
Commission whose chairman is the Secretary of Trade is the
Authority currently performing such functions.
The gas market has a double regulatory check with respect to
eventual antitrust practices. The Gas Enforcement Authority has
also the capacity to approve or reject concentration of players in the
gas market (see question 8.4 below).
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
As stated in Article 1 of the Antitrust Law, Argentina punishes two
main behaviours: (i) the lessening of competition -by limiting,
restricting and falsifying or distorting competition-; and (ii) the
abuse of a dominant position. It is considered a prohibited practise
a business that is anticompetitive and inefficient.
Article 2 of this Law, contains 14 different types of anti-competitive
practices. This Article contains only a descriptive list of prohibited
conducts. Other undescribed antitrust behaviours will also be
condemned.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The Commission has been empowered to investigate mergers and
acquisitions.
Anti-competitive behaviours can be denounced by (i) the
Commission, (ii) by an order issued by the Secretary to the
Commission, or (iii) by a third party. The Commission may “cease”
or “desist” such orders. These can be appealed with the competent
Court of Appeals.
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Argentina
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
Argentina
How long does it typically take to obtain a decision
approving or disapproving the transaction?
As far as the natural gas sector is concerned, the Commission and
the Gas Enforcement Authority are the ones in charge of analysing
the different transactions in the gas market.
Article 16 of the Antitrust Law stresses that it is mandatory for the
Commission to request the Gas Enforcement Authority’s opinion
when analysing a possible merger in the gas area.
In addition, Article 8 of this Law, states that transactions in this field
must be reported to the Commission when the amount of the total
turnover of the undertakings concerned, exceeds the sum of Two
Hundred Million Pesos ($200,000,000). Nevertheless, further in
this law, various cases of mergers of these quantities are exempted
from notification.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
No special requirements or limitations on acquisitions of interests in
the natural gas sector exist in the Argentine applicable laws. In
other words, before the local laws foreign investors are to be treated
as well as national ones.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
Pursuant to the Argentine Constitution, local laws have to conform
to international treaties.
Argentina is a party to numerous international treaties for the
promotion and protection of foreign investments, e.g. with France
(Law 24,100), Spain (Law 24,118), Italy (Law 24,122), United
States (Law 24,124), Canada (Law 24,125), Switzerland (Law 24,
099) and Chile (Law 24,342).
In reference to gas commerce, Bolivia and Argentina have signed
several agreements. Bolivia is Argentina’s best gas supplier. Gas
commercialisation between them must respect the terms and
conditions set in the treaties agreed by them.
Argentina and Chile have agreed to encourage free importation and
exportation of natural gas. A few years ago, the energy shortage
situation in Argentina derived in the interruption of gas supply to
Chile.
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10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
Argentina
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Disputes in the gas market related to the rendering of gas
transportation and distribution must be submitted to the Gas
Enforcement Authority. Its decision can be challenged following
the administrative proceeding contemplated in local Federal laws,
or directly appealed before the Court of Appeals of the City of
Buenos Aires with jurisdiction on Administrative Federal Matters.
The term to appeal is 15 days counted as from the service of process
of the decision.
Penalties imposed by the Gas Enforcement Authority can be
directly appealed before the Appellate Court on Administrative
Federal Matters of the City of Buenos Aires, within 30 days since
the penalty is notified.
10.2 Is Argentina a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Argentina has signed the New York Convention on the Recognition
and Enforcement of Foreign Arbitral Awards and the Convention on
the Settlement of Investment Disputes between States and Nationals
of Other States (“ICSID”). The former one has been ratified by
Law 23,619 and the latter one, by Law 24,353.
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Argentina
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
A former Attorney General of the Treasury has stated, while in
office, that awards like the ones issued by ICSID arbitration panels
can (sic) be revised by local tribunals. He explains that the “non-
ulterior” revision “is incompatible with the Argentine constitutional
and legal system”. He argues that the “non-ulterior” revision
confronts the constitutional principle of local judicial control. This
position seems to have not much supporters currently. However,
neither payments have been made yet in connection to awards
favourable to plaintiffs, nor local Courts have revised those awards.
It is worth mentioning that during recent renegotiation of
authorisations (e.g. gas distribution), plaintiff agreed to waive their
claims before ICSID arbitration tribunals.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
In several cases foreign competitors have been able to invoke
bilateral investment treaties and conventions. This resulted in
several arbitration claims. Some gas industry plaintiffs obtained
favourable awards before ICSID arbitration panels. This
notwithstanding we are not aware of payments made under such
awards yet.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Argentina.
In November 2009, the Gas Enforcement Authority’s official site
published the beginning for the construction of an underwater gas
pipeline. This pipeline will cross the Strait of Magallanes. This
new project implies a highly complex and strategic work that has
been fostered by the Gas Enforcement Authority within 2006-2009.
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Fortunati & Asociados Argentina

Roberto Fortunati Mónica Centeno Lappas

Fortunati & Asociados Fortunati & Asociados
Av. Leandro N. Alem 855, 23rd floor Avenida Leandro N. Alem 855, 23rd floor
Buenos Aires Buenos Aires
Argentina Argentina

Argentina
Tel: +54 11 5219 1300 Tel: +54 11 5219 1300
Fax: +54 11 5219 1313 Fax: +54 11 5219 1313
Email: roberto.fortunati@fortunati.com.ar Email: monica.centenolappas@fortunati.com.ar
URL: www.fortunati.com.ar URL: www.fortunati.com.ar

ROBERTO A. FORTUNATI established Fortunati & Asociados back MONICA CENTENO LAPPAS graduated in 2007 as attorney at law
in February 2003. His professional activity is mainly concentrated from Universidad Austral, in Buenos Aires, Argentina. In 2006 she
in banking, and corporate finance mainly focused in the oil and gas was a foreign student (exchange program) at Universidad Rey Juan
and mining sectors. He has also been acting as consultant to The Carlos in Madrid, Spain.
World Bank in insolvency matters. Mr. Fortunati acted as leading She joined the Fortunati & Asociados in June, 2008. From January
local counsel for several major project financings, mainly related to through April, 2008 she was a foreign intern at Gónzalez Calvillo
mining (including the one related to Veladero Gold Project in 2004), S.C Abogados in the City of Mexico, Mexico D.F.
oil and gas, and utilities. He has led the market in the area of out- Her area of practice is General Corporate Law.
of-court debt restructurings (work-outs), and largely participated in She is a member of the Buenos Aires Bar Association.
the privatisation of state-owned companies, M&A and in the start- Languages: Spanish, English and French.
up of venture capital investments.
He is member of the board of directors of several corporations,
including his acting as independent director and member of auditing
committees, and arbitrator to the MAE (the local OTC electronic
market).
In the academic ground, he is a member of the Advisory Board of
the School of Law of Torcuato Di Tella University, Buenos Aires, and
teaches project financing in a postgraduate course on Oil and Gas
Law, at the School of Law of the University of Buenos Aires. Mr.
Fortunati is a frequent lecturer on oil and gas, debt restructuring,
project financing, and other financial matters.
Mr. Fortunati acted as General Counsel of Citigroup in Argentina, after
being partner and member of the Administration Committee of Estudio
Beccar Varela, in Buenos Aires. He started his professional career as
in-house counsel of Amoco Argentina Oil Company. He graduated from
the Law School of the University of Buenos Aires in 1979.

Fortunati & Asociados is a law firm founded in 2003 which provides legal services and representation to local and
international companies in a wide variety of industries.
The Firm counts with a team of highly qualified professionals which, to the highest international standards, works in a
coordinated manner in order to efficiently respond to the demands of today’s globalised businesses, caring on providing
personalised services to attend the most diverse needs that its clients may have for their diversified transactions.
Clients of the Firm include industrial and commercial companies, financial institutions and private funds.
Practice Areas:

Energy & Natural Resources. Mergers & Acquisitions.

Corporate Finance. Banking Law.
Capital Markets. Real Estate.
Private Equity. Tax.
Litigation & Arbitration.
The Firm is member of worldwide and regional associations of leading law firms serving international clients.

15
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 Chapter 4
Australia
Allens Arthur Robinson
1 Overview of Natural Gas Sector
1.1 A brief outline of Australia’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Natural gas reserves and production
As of January 2009, Australia’s natural gas reserves were estimated
to be over 170 trillion cubic feet with 30 trillion cubic feet being
proven reserves. In 2008-09, Australia’s gas production was 40.1
billion cubic metres and is forecast to increase to 50.7 billion cubic
metres in 2009-10. This increase is due to the realisation of new
conventional gas fields plus production of methane from coal seams.
Australia’s natural gas is produced from a number of offshore and
onshore basins. Key gas provinces include the Carnarvon Basin off
the north-west coast of Western Australia, the Gippsland Basin off the
coast of Victoria, the onshore Cooper Basin in the north-east of South
Australia, the onshore Surat-Bowen Basin in Queensland and the
Timor Sea area to the north of Australia, including the Joint Petroleum
Development Area between the Northern Territory and Timor-Leste.
Appendix 1 provides a summary of Australia’s natural gas reserves
and the transmission and distribution networks for natural gas.
Importation and exportation of natural gas
Excluding natural gas sourced from the Joint Petroleum
Development Area, no natural gas is imported into Australia. There
are no re-gasification facilities in Australia.
Natural gas is exported from Australia as LNG. Currently, Australia’s
two LNG export facilities are the North West Shelf Joint Venture LNG
Project located on the Burrup Peninsula in the north-west of Western
Australia and the Conoco-Phillips operated LNG Project located at
Darwin in the Northern Territory. A significant number of LNG
projects are scheduled to begin first production in the next few years
(for example: Pluto, Gorgon, Wheatstone, Ichthys and various coal
seam methane LNG projects near Gladstone in Queensland).
In 2008-09 Australia exported approximately 16 million tonnes of
LNG at a value of A$10 billion, a 13% increase in production and a
72% increase in value from 2007-08 levels. Demand for LNG in Asia
and North America is projected to remain strong in the years ahead.
Currently, Australia is the World’s 6th largest LNG exporter and if all
the LNG projects scheduled to begin first production in Australia in
the next few years eventuate, Australia is projected to become the
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Angus Jones
David Maloney
World’s 2nd largest LNG exporter by 2020. Australia’s major LNG
markets currently include Japan, China, Chinese Taipei and the
Republic of Korea. Some recent LNG Sale and Purchase Agreements
concluded between Australia and its trading partners include:
ExxonMobil and PetroChina Company Limited agreeing on
the supply of approximately 2.25 mtpa of LNG sourced from
the Gorgon Project over a 20-year term;
ExxonMobil and Petronet LNG Limited agreeing on the
supply of approximately 1.5 mtpa of LNG sourced from the
Gorgon Project over a 20-year term; and
Chevron securing three separate supply agreements for a
total of nearly 3 mtpa of LNG sourced from the Gorgon
Project to Osaka Gas (25-year term), Tokyo Gas (25-year
term) and GS Caltex (20-year term). A further agreement
with Chubu Electric is expected to be confirmed before the
end of 2009.
Transportation and distribution/transmission network
Refer to section 5.
Commodity sales and trading
Refer to section 6.
1.2 To what extent are Australia’s energy requirements met
using natural gas (including LNG)?
After coal and oil, natural gas ranks as Australia’s third primary
energy source and accounts for 20% of Australia’s total energy
consumption. Of course, Australia is a vast country with substantial
variations in energy profiles between areas depending upon their
access to different fuels. For example, in Western Australia gas
accounts for approximately 60% of energy requirements.
1.3 To what extent are Australia’s natural gas requirements
met through domestic natural gas production?
Australia’s natural gas requirements are met exclusively from local
production. Australia’s primary gas consumption has increased
from 688 petajoules in 1989-90 to 1,743 petajoules in 2007-08.
1.4 To what extent is Australia’s natural gas production
exported (pipeline or LNG)?
Approximately 50% of Australia’s natural gas production is
exported, all of which is in the form of LNG. Australia is not
connected to its trade partners by a natural gas pipeline. However,
having regard to the additional LNG developments noted above, the
percentage of gas exported as LNG is expected to increase - but
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Allens Arthur Robinson
note also the ‘domestic gas reservation’ policies referred to in
question 2.6.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
Mineral rights to natural gas
A fundamental principle of Australian petroleum legislation is that
the ownership of natural gas in situ is vested in the Crown (i.e.,
Commonwealth, State or Territory governments). The right to
explore for and recover petroleum is obtained through the grant of
various titles and approvals from the relevant government
department administering the applicable legislation and regulations.
Principal legislation
Each Australian State and Territory has natural gas legislation. The
statutory regimes are effectively separated into three distinct
geographical areas:
1. State or Territory onshore;
2. State or Territory offshore (adjacent waters from low
watermark extending seaward three nautical miles and
including islands and drying reefs with surrounding adjacent
waters); and
3. Commonwealth offshore (waters beyond the three nautical
mile mark to the edge of Australia’s continental shelf and
incline).
The principal legislation applying to the development of natural gas
reserves depends upon the location of those reserves. By way of
example, the principal Commonwealth legislation is the Offshore
Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPA).
Government authorities responsible for the regulation of natural
gas development
Offshore petroleum operations in Commonwealth waters are
administered by a combination of the Joint Authority (which is
comprised of the Commonwealth Government Minister and the
relevant State or Territory Minister) which is responsible for the grant
of petroleum titles and the Designated Authority (comprised of the
relevant State or Territory Minister) which has responsibility for the
more day-to-day petroleum operations. The relevant Commonwealth
Department is known as the Department of Resources, Energy and
Tourism, and for Western Australia the relevant State Department is
known as the Department of Mines and Petroleum.
Major policies and initiatives
Significant recent natural gas policy initiatives in Australia include:
The Commonwealth’s implementation of an assortment of
reforms to the Petroleum Resource Rent Tax and its application
to natural gas producers to provide incentives to industry. See
question 2.5 and section 11 for further information.
Queensland Government’s ‘Gas Scheme’ - Queensland
electricity retailers and other liable parties are required to
source a prescribed percentage (currently 13%, increasing to
15% in 2010) of their electricity from gas-fired generation.
Western Australian Government’s ‘Domgas Reservation
Policy’ - the equivalent of 15% of gas production from new
export LNG projects offshore Western Australia must be
reserved for the Western Australian domestic gas market.
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Australia
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
Australia
A statutory licensing regime applies to the exploration for, appraisal,
development and production of natural gas. Relevant petroleum titles
are granted to parties meeting certain criteria and these titles permit the
parties to carry out prescribed activities in a certain area. The award
of an exploration title under the OPA (see question 2.3) is by way of a
competitive bidding system over relevant acreage released annually
which, consistent with the overarching principle of efficient and
orderly exploitation, awards the permit to the party committing,
through minimum work and expenditure commitments, to invest and
engage most rigorously in exploration. Geoscience Australia, an
Australian government body, assists the competitive bidding system
by providing applicants with an overview of the geological formations
and prospective oil and gas leads and prospects in the acreage areas.
Certain technical data and analysis is also made available.
Titles are administrative in nature and cannot be obtained as of
right; they lie in grant rather than in possession and are subject to
cancellation in the event of non-compliance with the conditions
subject to which they were granted.
Ownership in natural gas only transfers to a production licence holder
once it has been produced and saved by the licensee at the wellhead.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
The most significant titles applying to the different stages of natural
gas development are as follows:
‘Exploration permit’ - Holders of these titles may explore for
natural gas and carry on operations and works for that
purpose within a prescribed permit area. The duration of the
permit varies between jurisdictions, however, for example,
under the Commonwealth legislation, an exploration permit
is for an initial term of six years, with successive five-year
renewals, conditional upon the holder’s surrender of a
portion of the permit area. The integrity of the work
programme bidding system is protected by requiring the
successful bidder to perform its minimum work programme.
‘Production licence’ - Holders of a production licence may
recover commercial quantities of natural gas in the licence
area and also further explore for natural gas and conduct
related operations and activities. Under the Commonwealth
legislation, production licences will be granted on an
indefinite basis, with the relevant Government department
retaining a discretion to terminate the licence if no operations
have been conducted in the licence area for a continuous
period of five years.
‘Retention lease’ - Holders of a retention lease may retain
title to an area in circumstances where the recovery of that
natural gas is not yet commercially viable, but is likely to
become so within the next 15 years (note recent
developments referred to in question 11.1). The gas can be
“stranded” by reason either of market conditions or for
technological reasons (such as the depth of water in which
the discovery was made).
Other relevant titles include ‘infrastructure’ and ‘pipeline’ licences
which are granted for production and transportation activities
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 Allens Arthur Robinson
outside the licence area.
Each of the titles referred to above may be granted subject to
whatever conditions the Joint Authority thinks appropriate. All
titleholders must carry out their operations according to good
oilfield practices and must meet certain environmental
requirements. Annual fees also apply in respect of the titles.
Australia
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
Australian governments adhere to a well-established policy of not
owning or seeking to participate in the development of natural gas
reserves. They have an economic interest in natural gas production
arising from royalties or Petroleum Resource Rent Tax and seek to
promote the orderly development of the Australian natural gas
industry for public policy purposes. The Commonwealth, State and
Territory governments hold regular meetings and consultations
through the Ministerial Council of Mineral Energy and Resources
with the aim of coordinating policy and regulatory requirements in
the petroleum resources industry.
A key aspect of the petroleum legislation applying to both
Commonwealth and State or Territory areas is that certain dealings
and transfers are of no force until they have been approved and
registered by the relevant government department administering the
applicable legislation. Registration fees up to an amount equal to
1.5% of the value of the relevant dealing or transfer may apply.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
Natural gas produced in Commonwealth waters is subject to the
Petroleum Resource Rent Tax which levies a secondary tax at the
rate of 40% on profits derived from the relevant project. Taxable
profits are assessed as being the excess of the relevant project’s
assessable receipts over the project’s deductible expenditure
associated with exploration, development and production.
State and Territory governments levy royalties on natural gas
produced within their jurisdiction which is normally set at a rate
between 10 - 12.5% of the net wellhead value of the natural gas
produced.
2.6 Are there any restrictions on the export of production?
There are currently no explicit trade restrictions on the export of
natural gas. However, note the possible effect of Western
Australia’s domestic reservation policy as outlined at question 2.1.
The State of Queensland has also recently published a discussion
paper which, among other measures, contemplates a domestic gas
reservation policy. Most of Australia’s coal seam methane reserves
are found in Queensland.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
There are currently no restrictions on the transfer of funds derived
from production out of Australia. There is legislation, aimed to
deter money laundering, which imposes reporting obligations on
financial institutions and prohibits the transfer in and out of
Australia of cash amounts of AU$10,000 or more (or the foreign
currency equivalent) however such legislation is unlikely to apply.
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2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
Generally, the transfer or disposal of a natural gas development
right or interest is of no force until it has been approved by the
relevant government authority. An additional layer of approval may
apply where a foreign entity is involved (see section 9).
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
Generally, participants are not obliged to provide any security or
guarantees in relation to a natural gas development. However, the
Commonwealth, State or Territory legislation provides a broad
discretion for the relevant authority to grant a title on whatever
conditions it thinks appropriate, which may potentially include the
applicant providing security.
Relevant Environmental Protection Authorities may require
‘environmental bonds’ in certain circumstances (most likely for
onshore natural gas activities in areas of acute environmental
sensitivity). Well control and clean-up insurance is also obligatory
for drilling operations.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Natural gas titles may be used as security; for example by way of
mortgage or charge. Such encumbrances on title constitute
‘dealings’ under most legislation, and are of no force until approved
and registered by the relevant authority.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Other government authorisations likely to be required to develop
natural gas reserves include:
environment - Australia’s robust environmental protection
regime requires project approvals from the relevant
environmental department;
occupational health and safety - natural gas operations must
comply with requirements imposed by legislation (such as
the need to produce a ‘Safety Case’). Safety requirements
are administered by authorities such as the National Offshore
Petroleum Safety Authority; and
native title - natural gas proponents seeking access to land or
water over which indigenous Australians’ assert customary
rights and interests in the form of native title or cultural
heritage, must obtain the necessary approvals.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
Abandonment or decommissioning of natural gas facilities and
associated infrastructure must be effected in compliance with
applicable legislation and regulations, generally including the
principal natural gas and environmental statutes and, for offshore
developments, in accordance with applicable international
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conventions (such as United Nations Convention on the Law of the
Sea (UNCLOS)).
3 Import/Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Commonwealth legislation and government policy impacts on the
export of commodities out of Australia. Since 1997 export controls
on LNG (such as the requirement for an ‘export licence’) have been
abolished. LNG exporters must also consider the possible effect of
Australia’s bilateral trade agreements with certain countries and
trade embargoes imposed from time to time.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Natural gas developments including associated infrastructure are
typically owned by private companies and they will be governed by
each jurisdiction’s applicable legislation. A separate pipeline
licence or permit is required in each jurisdiction.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
Pipelines or associated infrastructure planned for construction
outside the production licence area will require a separate pipeline
or infrastructure licence. The pipeline licensee will need to obtain
a ‘consent to construct’ and a ‘consent to operate’ licence in each
relevant jurisdiction.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
The onshore portion of the pipeline and associated infrastructure
may traverse land held under different tenure, including private land
and government land.
Access to private land for the purpose of constructing and operating
a pipeline will typically require the private land owner to grant,
generally for a negotiated fee, an ‘easement’ over the pipeline route.
This allows the pipeline licensee to enter and exit the easement land
so as to do such things as survey the pipeline route, install and
operate the pipeline and to carry out routine inspections. Subject to
payment of proper compensation and to restrictions on proximity to
improvements, private landowners can be compelled under the
pipelines legislation to grant pipeline easements. Where the
pipeline traverses government land, a government authority, licence
or permit under the applicable land legislation will need to be
obtained. Discussions with other interested parties may also need
to be undertaken including in regard to native title parties and
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Australia
adjoining land or mining titleholders.
Whilst the government has power to compulsorily acquire land,
those powers are generally only exerciseable where the land is
required for the instalment of works for public purposes.
4.4 How is access to natural gas transportation pipelines and
Australia
associated infrastructure organised?
As the gas transportation pipeline and associated infrastructure are
typically privately owned, third party access will need to be negotiated
with the pipeline owner. See question 4.6 for further information.
Third party access to natural gas pipelines (see questions 4.6 and
5.3) applies only to “covered” transmission and distribution
pipelines downstream of production and processing facilities.
Pipelines that are directly associated with production and
processing operations are excluded from that regime.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
Domestic gas transportation systems in the eastern part of Australia
are now largely interconnected. Most major demand centres in
south and eastern Australia can now be supplied with gas from at
least two major production sources, resulting in gas-on-gas
competition. Interconnection of gas pipeline systems is a matter for
negotiation between the respective pipeline owners, subject to
shipper demand.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Natural gas pipelines may be subject to a national third party access
and economic regulation regime set out in the National Gas Law
(NGL) and the National Gas Rules (NGR). However, where there is
a competitive gas transmission market, pipelines tend not to be
“covered” by the NGL and NGR. The NGL is based on a negotiate/
arbitrate model where operators of regulated pipelines must provide
key information about the pipeline to access seekers and access
seekers may negotiate terms and conditions of access. If negotiations
fail, the access dispute can be referred to the Australian Energy
Regulator (AER) for a binding determination (see question 10.1).
The NGL only applies to natural gas pipelines if they are ‘covered’
pipelines within the meaning of the NGL. There are a number of
ways a pipeline may become ‘covered’, including:
by the pipeline operator voluntarily submitting a full open
access arrangement for approval by the regulator; or
any person making an application to the National
Competition Council for a recommendation that the pipeline
be covered, and the designated Minister then determining
that the pipeline should be covered after applying the
National interest based statutory criteria.
A covered pipeline may be subject to either ‘light’ or ‘full access
arrangement’ regulation. Light regulation essentially involves non-
discriminatory access and price-monitoring, and may be applied
where the costs of full regulation are unlikely to justify the benefits
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(in terms of promoting access to pipeline services). Under full
regulation, the service provider is required to submit a full access
arrangement to the AER for approval, which includes minimum
access principles (such as procedures for expanding pipeline
capacity and technical gas specifications), conditions and pricing
rules for various firm, interruptible, back-haul and other services.
Australia
In terms of expansion, the National Gas Rules provide that the AER
cannot order the operator of a pipeline subject to light regulation to
expand its capacity unless the access seeker funds the expansion in
its entirety. In the case of pipelines subject to full regulation, the
service provider cannot be required to fund any capacity expansion
unless the access arrangement provides otherwise. In any case, a
service provider cannot be required to expand the geographical
range of the pipeline.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Any access arrangement and pricing terms that have been approved by
the AER (as will always be the case for a covered pipeline subject to
full regulation, and may be the case for a covered pipeline subject to
light regulation) will be a natural starting point for negotiations
between parties, however the parties are free to depart from the terms
and conditions set out in the access arrangement. If a dispute arises,
the AER must give effect to any already approved access arrangement.
5 Transmission/Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
Australia’s domestic gas demand is served by a number of private
and State-owned transmission pipelines running from the onshore
processing facilities to major demand centres. These transmission
pipelines are largely interconnected through the eastern part of the
country. Western Australia and the Northern Territory are served by
separate transmission pipelines.
Most distribution networks and some transmission pipelines are
subject to a National third party access regime, regulated by the
AER. Western Australia retains its own economic regulator, but has
adopted a substantially similar access regime.
A joint council comprising all Federal and State Ministers for Energy
has established an energy market reform programme which is likely to
continue for a number of years. The principal objective is to achieve
full contestability in the retail markets for gas and electricity.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
The operation of distribution networks requires compliance with the
licensing regime of the relevant jurisdiction, including obtaining
pipeline licences and environmental authorisations.
5.3 How is access to the natural gas distribution network
organised?
Most distribution networks, and some transmission pipelines, are
covered by an industry-specific access regime, set out in the NGL,
incorporating the NGR. Pipelines that are not covered under the
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NGL may be subject to access-related conditions in their pipeline
licences, but generally speaking, access will only be regulated in
circumstances where the pipeline has a degree of monopoly power
that has the potential to affect competition in a relevant market.
Where no access regulation applies, access to pipeline services will
be by commercial negotiation.
As noted in question 4.6, the NGL provides for two types of
‘coverage’, being ‘full access arrangement regulation’ or ‘light
regulation’.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
The AER can require a distributor to grant access to a specific
user(s) in relation to an access dispute that has been referred to it
under the NGL. However, this power is constrained by a number of
NGL conditions including, for example:
the AER’s access determination must not deprive another
person of an existing contractual right (e.g. another user’s
right to reserved capacity in the pipeline must not be
reduced);
a distributor can only be required to expand the capacity of
the pipeline if the expansion is funded entirely by the
prospective user, is technically and economically feasible
and is consistent with safe and reliable pipeline operation;
and
the AER cannot require a distributor to extend the
geographical range of the pipeline.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
Fees and charges for distribution services are set on an individual
basis by each service provider. If the network is subject to full
access arrangement regulation, tariffs for the principal haulage
services will be regulated under the NGL. Regulated tariffs are
generally set at a level that is designed to allow a service provider
to earn a specified ‘total allowable revenue’, determined using a
building block approach.
Charges for some other services, such as network connection, may
be specifically regulated, or may be subject to rules that require
them to be set on a cost-reflective basis.
Service providers and potential users are free to agree alternative
prices, but the regulated tariffs will be applied in any dispute. In
practice, departures from those tariffs are rare.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
The transfer of any licences necessary to operate a transmission or
distribution pipeline will generally be subject to regulatory
approval. Otherwise, no sector-specific restrictions apply to the
acquisition of an interest in distribution assets or a distribution
company, except in Victoria. Legislation in that State imposes
limits on the level of interest or control that any person may hold in
more than one relevant entity across the gas production,
transmission, distribution and retail sectors.
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6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Most domestic gas trades continue to be based on bilateral,
negotiated contracts between producer and customer and are
typically contracted on a medium to long-term basis. However,
shorter term and ‘as available’ gas supply agreements are becoming
more common as contestability in retail markets has been
progressively implemented across all jurisdictions. Retailers and
other traders who have contracted gas from producers will often
trade all or part of their entitlements with other retailers on a shorter
term basis.
There has been some movement towards standardisation of gas
contracts for shorter term trades, based on an ISDA® Master
Agreement, Schedule and Confirmation format, providing for
physical delivery of gas rather than cash settlement.
Currently, only Victoria has a regulated wholesale gas spot market,
which operates within its principal transmission system. In mid
2010, a new short term trading market is scheduled to commence at
distribution hubs in Sydney and Adelaide, and may subsequently be
implemented for other major demand centres.
6.2 What range of natural gas commodities can be traded?
For example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Gas may be traded as a commodity on its own, in which case the
purchaser is responsible for arranging transportation with the
relevant pipeline service provider(s), or as a delivered product, in
which case the seller arranges for delivery of the gas to the point
nominated in the contract. The choice will generally depend on the
purchaser’s ability to obtain transmission pipeline capacity
(although for regulated pipelines users will generally be able to
subcontract capacity), and whether or not a spot market operates at
the delivery point.
For gas distribution networks, each retailer who is responsible for
gas delivered to a customer on that network must contract for that
capacity with the distributor.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
LNG facilities are generally owned by those companies which hold
the underlying production licences - but this need not be the case.
For example, the recent trend is to separate the upstream joint
venture holding the titles from the midstream/downstream joint
venture owning the pipeline to shore and LNG plant. It is also
possible for separate processing trains to be owned by different
interests or in different proportions.
Whilst the specific regulatory framework applicable to a facility
depends upon where it is located, they are typically subject to
environmental, planning, occupational health and safety and
facility-specific regimes.
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Australia
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Generally, prior to the construction of LNG facilities, it will be
necessary to obtain environmental, works related and potentially
native title authorisations. The applicable legislative regime will
Australia
depend upon the jurisdiction in which the facility is located. See
question 2.11 for further information.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
There is no governmental regulation of LNG sales in Australia.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The Australian Competition and Consumer Commission (ACCC) is
the regulator of competition law and policy and is responsible for
enforcing the Trade Practices Act 1974 (Cth) (TPA). Among other
things, the TPA prohibits anti-competitive behaviour and misuse of
market power, provides a third party access regime for essential
services, and regulates mergers. The ACCC is also responsible for
authorising certain potentially anti-competitive conduct under the
TPA, such as the joint marketing of gas, by applying a public
benefit test.
Under the third party access/economic regulation regime established
by the NGL, the NCC and the relevant designated Minister are
responsible for making decisions regarding coverage and the type of
regulation that applies to covered pipelines, as described under
question 4.6 above. Once a pipeline is covered within the meaning
of the NGL, the AER is the main regulator for setting prices,
approving access arrangements, investigating and enforcing
breaches of the NGL, and determining any access disputes.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
Certain anti-competitive conduct between competitors, such as price
fixing, market sharing, bid rigging and output restrictions, is
prohibited regardless of any effect on competition. In other cases, the
key test is whether the relevant conduct has the purpose or effect, or is
likely to have the effect, of substantially lessening competition in the
market. This requires a careful analysis of the relevant product or
service, geographic and functional market and the effect on
competition of conduct in the market as so defined. It is possible to
obtain authorisation of certain anti-competitive practices where the
public benefit flowing from the relevant conduct outweighs the public
detriment which results from the lessening of competition.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The ACCC has the power to investigate companies and individuals
who may be engaging in anti-competitive conduct and seek
significant penalties against them. For corporations, the maximum
penalty for both criminal and civil offences is the greater of AU$10
million, or three times the gain from the contravention or, where
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gain cannot be readily ascertained, 10% of the turnover of the
corporation. The maximum penalty for individuals convicted of a
criminal offence is 10 years imprisonment and AU$200,000 per
offence. For civil offences, individuals face up to AU$500,000
pecuniary penalty per offence. Individuals may also be disqualified
from being a director of a company.
Australia
The ACCC can also seek a range of other court orders, such as an
injunction to restrain anticipated or continued anti-competitive
behaviour, or an order that a company conducts a compliance
programme for its employees.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
There is no mandatory notification or pre-approval of mergers in
Australia. However, as the ACCC has the power to seek injunctions
to restrain acquisitions or divestiture orders to undo transactions post-
acquisition, it is common practice for parties to seek clearance for
substantial acquisitions of shares or assets. Parties have three options:
1. Informal clearance. The ACCC considers whether the
acquisition has the purpose, effect or likely effect of
substantially lessening competition in the particular market.
Informal clearance does not provide immunity from third
party actions.
2. Formal clearance. A formal clearance provides immunity
from third party actions. It can also be the subject of review
by the Australian Competition Tribunal.
3. Authorisation by the Australian Competition Tribunal. The
Tribunal assesses whether the public benefits of the
transaction outweigh the public detriments.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Foreign investment in Australia is subject to regulation under the
Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA),
associated regulations and Commonwealth Government policy.
Under this regime, foreign investment is subject to review and
control by the Commonwealth Treasurer, who is advised by the
Foreign Investment Review Board (FIRB).
The FATA requires notification of certain acquisitions, transactions
and proposals which may result in Australian assets or businesses
being controlled by a foreign person or by a different foreign person
or corporation. The regulations establish monetary thresholds by
which certain transactions are exempt under the FATA. For
example, non-US investors do not require FIRB approval where
they are acquiring an interest in an Australian business with a value
of AU$219 million or less and US investors do not require FIRB
approval where they are acquiring an interest in an Australian
business (not falling within a prescribed sensitive sector such as
media and telecommunications) with a value of AU$953 million or
less. All direct investments by foreign governments or their
agencies, including the establishment of new businesses, must be
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notified to FIRB regardless of size.
The Treasurer may prohibit proposals which are adjudged contrary
to the National interest or approve proposals subject to such
conditions as the Treasurer considers necessary to protect the
National interest.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
In 2007, Australia became a signatory to the Kyoto Protocol,
pursuant to which Australia is obliged to limit its GHG emissions in
2008 - 2012 to 108% of its 1990 emissions. Australia will be
represented at the United Nations Climate Change Conference in
Copenhagen in December 2009.
At present, Australia does not have an emissions trading scheme;
however, both major political parties broadly support taking
regulatory action on climate change. Climate change matters have,
to date, been regulated indirectly and often through conditional
approvals.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Australian law affords parties (including State entities) a high
degree of autonomy to resolve disputes as they see fit.
A government authority may also have a ‘sufficient interest’ in a
natural gas access dispute, meaning that the government authority
may become a party to the dispute. Recourse may be available to
the State Administrative Tribunal, the Administrative Appeals
Tribunal, Australian courts, or sui generis courts such as the New
South Wales Land and Environment Court in regard to
administrative decisions made in regard to natural gas titles.
Internationally, Australia is a signatory to UNCLOS and has
participated in international dispute resolution proceedings with
neighbouring States concerning maritime and Continental Shelf
delimitations and oil and gas disputes.
Natural gas access disputes are determined by the AER, which has
the power to require parties to mediate. If matters are unresolved
following mediation, the AER will make a determination on those
matters which is binding. AER proceedings are conducted much
like a desk arbitration, with minimal oral argument and a preference
for written submissions.
10.2 Is Australia a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Australia acceded to the New York Convention on 26 March 1975
and this Convention has applied in Australia since 24 June 1975.
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Allens Arthur Robinson
This means that foreign awards may be enforced in any state or
territory court as if the award had been made in that state or territory
under its domestic laws.
The ICSID Convention was ratified on 2 May 1991 and entered into
force on 1 June 1991. Chapters II - VII (inclusive) of the ICSID
Convention have the force of law in Australia under the
International Arbitration Act 1974 (Cth).
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
There is no special difficulty in litigating or seeking to enforce
judgments or awards against government authorities or State
organs. The State is essentially in the same position as a private
litigant in litigation for or against the State and public bodies enjoy
no special immunity from litigation.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
Foreign entities have successfully challenged the administrative
decisions of government authorities in respect of natural gas
developments and have also obtained awards against State-owned
utilities.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Australia.
Carbon Pollution Reduction Scheme
The Australian Government has introduced into parliament its
blueprint for carbon reduction, namely the Carbon Pollution
Reduction Scheme (CPRS). The CPRS will price carbon and
Source: Australian Bureau of Agriculture and Resources Economics, Energy in Australia 2009 (Australian Department of Resources,
Energy and Tourism).
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Australia
involve the sale and allocation of carbon pollution permits. Of note
to LNG industry stakeholders is the emission-intensive trade-
exposed assistance programme which (on the basis of draft
regulations) will assist industries which are adversely affected to
transition to the CPRS regime. The assistance programme will
provide LNG producers with an assistance rate of 66% in 2011-12
Australia
financial year, diminishing incrementally to 53.5% by 2020-21.
Carbon capture and storage
In 2008, the OPA was amended to provide for a carbon capture and
storage regulatory regime which creates a licensing framework
broadly similar to that currently used for petroleum activities and
which specifically includes tenure rights for ocean sequestration.
Retention lease policy review
In 2009, the Commonwealth Government announced that it will
more ‘rigorously’ apply the commerciality test to retention lease
applications and renewals (see question 2.3) in order to ensure that
gas fields are developed at the earliest possible time.
PRRT amendments
In June 2009, a series of amendments were made to the PRRT (see
question 2.5), including:
Functional currency translation rules which now permit
proponents whose accounts are kept predominately in a
particular foreign currency, to elect to calculate their tax
liability by using that currency (for example, US dollars).
‘Look back’ rule amendments which will ensure that all
exploration expenditure is deductible for PRRT purposes
against the appropriate area’s production licence.
An extension to the frontier exploration tax concession to the
2009 annual offshore acreage release. The concession
operates to immediately uplift the value of exploration
deductions for PRRT determining from 100 to 150% where
the exploration costs are incurred in ‘designated frontier
acreages’.
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 Allens Arthur Robinson Australia

Angus Jones David Maloney

Allens Arthur Robinson Allens Arthur Robinson
Level 37, QV.1, 250 St Georges Terrace Level 28, Deutsche Bank Place
Perth WA 6000 Corner of Hunter & Phillip Streets
Australia Sydney NSW 2000
Australia
Australia

Tel: +61 8 9488 3709

Fax: +61 8 9488 3701
Email: Angus.Jones@aar.com.au
URL: www.aar.com.au
Angus Jones is a partner specialising in the energy industry and its
associations and is based in Perth. He has particular expertise in
contractual issues and negotiations, having advised producers,
generators, operators, purchasers and government and is recognised
in independent guides (see Chambers Global 2009) as one of the
top oil and gas lawyers in Australia.
Angus has more than 21 years’ experience as a commercial lawyer,
including four years working with Slaughter and May in London.
During this time he has been involved in advising in relation to
projects and transactions in the UK, Norway, Indonesia, Japan,
China, Turkey, Mauritania, Argentina, Korea, Papua New Guinea and
in each state of Australia. He is a member of the Association of
International Petroleum Negotiators, is active within industry bodies
(including APPEA, AMPLA and the Australian Institute of Energy)
and is a contributor to International Energy Law and Taxation
Review.
Tel: +61 2 9230 4727
Fax: +61 2 9230 5333
Email: David.Maloney@aar.com.au
URL: www.aar.com.au
David Maloney is a partner specialising in energy and natural
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Chapter 5
Austria
Schönherr Rechtsanwälte
1 Overview of Natural Gas Sector
1.1 A brief outline of Austria’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
In 2007 gross domestic consumption (production + imports -
exports + storage variations) of natural gas in Austria amounted to
7.94 Gm³. Only about 23% of gross domestic consumption may be
covered by domestic production of natural gas. (www.e-control.at
Energiestatistik Berichtsjahr 2007.)
Austria thus is dependent on the import of natural gas, mainly from
Russia, Norway and Germany. Transmission capacity of existing
transit pipelines such as Trans Austria Gas Pipeline (TAG) or West
Austria Gas Pipeline (WAG) is scarce. Expansion of the existing
pipeline network and construction of new transit pipelines is
required in order to diversify Austria’s natural gas import portfolio
and to increase security of supply.
Currently planned gas infrastructure joint venture (JV) projects are
such as Nabucco Gas Pipeline, linking Austria and Central Europe
with the Caspian Region / Middle East / Egypt, or TGL
(Tauerngasleitung - Tauern Gas Pipeline), connecting Austria and
the central European pipeline system with the Adriatic region and
major natural gas markets in South-East Europe (SEE) and Italy.
The Austrian gas market is currently not linked with LNG terminals
outside Austria. Import of LNG gas nevertheless may be an option
in the near future as some Austrian companies, together with JV
partners, plan to construct new LNG infrastructures in the Adriatic
region and to build or expand the necessary transport capacity.
The Central European Gas Hub (CEGH) in Baumgarten is one of
the most important natural gas hubs in Europe. Russian natural gas
is transferred from that point via the Austrian pipeline system to
“Europe”. Central European Gas Hub GmbH, a JV of OMV Gas &
Power GmbH and GAZPROM, provides hub services such as title
transfer service, wheeling service or gas auctions (e.g. within the
context of gas release programmes).
Transit of natural gas is carried out via the TAG and WAG pipeline
systems, the South-East-Gas-Pipeline (SOL), the Hungarian-
Austria-Gas-Pipeline (HAG), the March-Baumgarten Pipeline
(MAB) and the PENTA-West pipeline. All of these pipelines are
operated by OMV Gas GmbH. OMV Gas GmbH is also the holder
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© Published and reproduced with kind permission by Global Legal Group Ltd, London
Christian Schmelz
Bernd Rajal
of capacity rights in terms of Austrian Gas Act for SOL, HAG,
MAB and PENTA-West, while capacities of TAG and WAG
pipelines are allocated by JVs Trans-Austria-Gas-Pipeline GmbH -
TAG GmbH (89% Eni International B.V., 11% OMV) and
Baumgarten-Oberkappel Gasleitungsgesellschaft - BOG (51%
OMV, 35% Gaz de France, 15% E.ON Ruhrgas).
Domestic transmission lines are operated by Transmission System
Operators (TSOs) OMV Gas GmbH, EVN Netz GmbH, Gasnetz
Steiermark GmbH, Oberösterreichische Ferngas AG and BEGAS -
Burgenländische Erdgasversorgungs-AG. Distribution lines are
operated by several regional and municipal Distribution System
Operators (DSOs). The Austrian natural gas system has a longitude
of around 30,000 km and is currently being expanded.
One third of the annual Austrian natural gas requirement is stored in
secure natural underground storages. It is estimated that the
Austrian reserves including possible new founds of natural gas
account for 23.9 billion m³ (Energy Report 2003 of the Federal
Government of Austria, 36). Storage operators are OMV and Crude
Oil Exploration AG (Rohoel-Aufsuchungs Aktiengesellschaft AG -
RAG). Phase II of expansion of RAG underground storage facility
Haidach (Upper Austria) is currently in preparation by JV partners
RAG, WINGAS GmbH and GAZPROM EXPORT, start of
operation is intended for April 2011.
Import of gas from Russia (GAZEXPORT) and Norway has been a
monopoly of OMV since decades. Within this system OMV handed
over the long-term gas import contracts “back to back” to Austrian
regional re-distributors EconGas, which is the dominant supplier in
the Austrian Control Area East (comprising the Federal States
Burgenland, Vienna, Lower Austria, Upper Austria, Salzburg,
Carinthia and Styria), and the former incumbents of Styria
(Steirische Gas Wärme - STGW), Carinthia (KELAG) and Salzburg
(Erdgas Import Salzburg - EIS). EconGas is a JV between BEGAS
(2.60%), EGBV (13.55%), EVN (15.70%), Linz AG (2.45%),
OMV Gas & Power (50%) and WIEN ENERGIE (15.70%). OMV
also acted as the supplier of gas originating from domestic
production.
Since the end of 2006 OMV does no longer act as intermediary.
Gas import contracts are concluded directly between Austrian
regional re-distributors and Russian, respectively Norwegian
producers. While EconGas is able to purchase gas directly from
GAZEXPORT, STGW, KELAG and EIS purchase their quantities
from the intermediary GWH Gas- und Warenhandelsgesellschaft
m.b.H., a JV of GAZEXPORT and Centrex Europe Energy & Gas
AG (Federals Competition Authority - FCA; Final Report on Sector
Inquiry of the Austrian Natural Gas Sector, Nov 2006, 15).
EconGas is the dominant supplier on the market for delivery of
local re-distributors and on the wholesale supply market (wholesale
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customers are industrial customers with an annual natural gas
consumption exceeding 500,000 m³ and power plants; FCA;
Interim Report Gas, 79).
Markets for supply of retail customers (customers with annual
natural gas consumption up to 500,000 m³) are divided into several
geographical areas, which are deemed identical with the
Austria
distribution grids (FCA; Interim Report Gas, 77). Thus the “local
players” (incumbents) are the dominant suppliers on the retail
markets. FCA has identified several barriers to market entry of new
suppliers (FCA; Final Report Gas, 45).
1.2 To what extent are Austria’s energy requirements met
using natural gas (including LNG)?
The Austrian energy supply is based on a balanced mix of energy
sources. In the long run the importance of fossil energy sources has
been declining in favour of renewable energy sources.
Nevertheless data of the Austrian Energy Agency for 2005 show
that the share of fossil energy sources in Austria’s energy portfolio
(imports, domestic production and storage) is still very high
(76.2%; Austrian Energy Agency, Energy Flow of Austria 2005,
www.energyagency.at):
Oil and oil products 41.8% (695.655 TJ).
Gas (mixed gas, natural gas) 24.2% (402.938 TJ).
Coal 10.2% (170.470 TJ).
Renewables 19.4% (323.042 TJ).
Electric energy (imports) 4.4% (73.431 TJ).
1.3 To what extent are Austria’s natural gas requirements met
through domestic natural gas production?
Only 20% of gross domestic consumption may be covered by
domestic production of natural gas (see question 1.1 above). In
2007 Austrian re-distributors imported gas quantities from Russia
(75%), Germany (15%) and Norway (10%; E-Control, Market
Report 2008, National Report to the European Commission, 31 July
2008, www.e-control.at).
1.4 To what extent is Austria’s natural gas production exported
(pipeline or LNG)?
In 2007 OMV E&P produced about 1.8 Gm³ natural gas in Austria
(OMV, Business Report 2007, 37). RAG produces about 0.8 Gm³/a
(FCA, Final Report Gas, 35). Both companies do not provide
public information on destinations of delivery. E-Control’s current
Market Report 2008 reveals that in 2007 0.03 Gm³ natural gas was
exported from Austria (E-Control, Market Report 2008, 8). LNG is
not exported from Austria.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
According to the Austrian federal system exploration and
production of natural gas is regulated by the federal legislator in the
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Austria
Mineral Resource Act (“Mineralrohstoffgesetz - MinroG”, Federal
Law Gazette I 1999/184, as amended). This act is valid for Austria
as a whole and does not only regulate the exploration and
production of natural gas but also the search and exploration of
geological structures which can be used as natural gas storage
facilities. Additionally the act contains provisions concerning the
underground storage of natural gas without tanks and the
purification of stored natural gas.
On an administrative level the only competent authority is the
Federal Ministry of Economics and Labour; the minister is
competent to issue ordinances and to decide on applications.
Applicants can introduce remedies against decisions of the Federal
Ministry of Economics and Labour with the Constitutional and also
the Administrative Court.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
Natural gas is one of the federal state owned mineral resources
which are in possession of the Austrian Federal State (sec 1 no 10
MinroG). Therefore the Austrian Federal State has the right to
search, explore and produce natural gas (sec 68 para 1 MinroG).
The same is valid for the search of hydrocarbon-bearing geological
structures which shall be used as storage for natural gas and the
storage in such structures.
The Federal State is authorised to transfer the exercise of these
rights to individuals or legal entities and also groups of persons
based on commercial law which dispose of necessary technical and
financial means for the establishment and operation of such mining
activities (sec 69 para 1 MinroG). The transfer of these rights is
stipulated by contract governed by civil law. Therein general rights
and obligations and also the consideration for the transfer of such
rights e.g. appropriate remuneration or interest payments for the
used area are determined. Such contracts will be concluded by the
Federal Minister of Economics and Labour in consultation with the
Federal Minister of Finance. Civil courts are competent to adjust
legal differences.
The search, exploration of and the storage in non-hydrocarbon-
bearing geological structures which shall be used as storage for
natural gas is bound on an approval of the competent authority.
Such approval has to be granted to individuals but also to legal
persons and groups of persons based on commercial law. In
contrast to the above, the transfer of the exercise of rights is not
possible in order to prevent malpractice; however, the transfer of
the approval is possible but has to be notified to the authority.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
The search, exploration and production of natural gas and the
search of geological structures which shall be used as storage for
natural gas depend on work plans. Work plans shall provide e.g.
information concerning the purpose, scope mode and time of work
and also safety measures and the names of the responsible persons.
Work plans as well as fundamental changes of work plans have to
be approved by the authority.
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Schönherr Rechtsanwälte
An application for a specific production area has to be filed with the
authority, if the applicant has found natural gas resources. The
rights start two months after the access of the filing with the
authority, if the application fulfils all legal requirements.
See question 2.2 with regards to the search, exploration of and the
storage in non-hydrocarbon-bearing geological structures to be
used as storage for natural gas.
The mining beneficiary has to notify the set up of a mining
establishment or an independent section of a mining establishment
within the authority’s correct period of time to the authority.
According to sec 119 para 1 MinroG an authorisation is required for
setting up or construction of mining facilities on the surface, in
tunnels, mine shafts and the drilling of a drill hole and probes of
more than 300 m in depth for the purpose of mining activities which
start on the surface.
A mining facility is defined as an artificial independent local object
which is used for the search, production, purification in operational
connection with the search and production of natural gas and also
the search and exploration of geological structures used for the
underground storage of natural gas without tanks and the
operational purification in connection with storage.
An authorisation for a mining facility can only be granted, if:
(i) it is constructed (set up) on the property of the applicant or
on the property of another person with the owner’s consent
or on the basis of a legally binding decision of the authority
(sec 148 et seq. MinroG);
(ii) according to the best available technology avoidable
emissions do not exist;
(iii) on the basis of medical or other sciences which come into
consideration life or health of persons is not endangered and
no unreasonable disturbance of persons exists;
(iv) it is not expected that the property of the applicant which is
not committed to use will be endangered and that there will
not be any damage of the environment and water; and
(v) the operation of the mining facility does not produce any
waste which can be avoided or is not justifiable according to
the best available technology. Produced waste must be
disposed in proper form, if waste cannot be avoided or
recycled economically.
Additionally public interests have to be taken into consideration.
The authority has the power to impose obligations, terms and
conditions and limitations in order to grant an authorisation.
Generally there is no operating approval required (see sec 119 para
8 MinroG).
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
Generally OMV and RAG carry out natural gas development
activities in Austria.
Currently the Austrian Federal State, namely the Austrian Industry
Holding AG (“Österreichische Industrie Holding AG - ÖIAG”) has
a stake of 31.5% in OMV. Different Austrian states have an indirect
holding in the RAG. The states’ interests have been reduced in
recent years.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
As stated above (see question 2.2), the exercise of specific rights in
connection with natural gas development (production) is transferred
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Austria
by contract (sec 69 para 1 MinroG); this is done against payment of
an appropriate consideration. Therefore the contracting party has to
pay:
(i) an area interest for the search of natural gas and the search
and exploration of hydrocarbon-bearing geological
structures are to be used as storage for natural gas;
Austria
(ii) a field interest and production interest for the production
including the right to acquire natural gas; and
(iii) a storage interest for the storage of natural gas in
hydrocarbon-bearing geological structures.
Sec 69 MinroG and the ordinance of the Federal Minister for
Economic and Labour on Production Interests - Production Interest
Ordinance (“Verordnung des Bundesministers für Wirtschaft und
Arbeit über Förderzinse für Kohlenwasserstoffe -
Förderzinsverordnung 2006”, Federal Law Gazette II 2006/83)
regulates the calculation of the production interest.
Under certain conditions (economic reasons) a liberation from the
area, field, production and storage interest is possible and is
regulated in a special ordinance based on sec 69 para 1 MinroG.
2.6 Are there any restrictions on the export of production?
The Austrian law does not provide special restrictions on the export
of natural gas production. In the event of a crisis certain measures
(including export restrictions) can be taken on the basis of the
Energy Steering Act (“Energielenkungsgesetz”, Federal Law
Gazette 1982/545, as amended).
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
No specific currency exchange restrictions or restrictions on the
transfer of funds derived from production out of the jurisdiction can
be determined in Austrian law.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
The transfer or disposal of specific natural gas development rights
(search, exploration and production of natural gas and the search of
hydrocarbon-bearing geological structures and storage therein) can
only take place with the consent of the competent Federal Minister
(see question 2.2).
The authorisation to search and explore non-hydrocarbon-bearing
geological structures which shall be used as storage for natural gas
as well as the storage therein can be transferred by contract; it has
to be notified and verified to the authority. The authority has to
authorise the transfer of the storage right, if the acquirer disposes of
necessary technical and financial means for the storage of natural
gas in such structures.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
According to sec 69 para 1 MinroG participants are obliged to
dispose of necessary technical and financial means for the
establishment and operation of mining activities. Therefore
securities or guarantees in relation to natural gas development are
stipulated in civil contracts with the applicants. Existing contracts
are not disclosed to the public.
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2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
There are no special regulations in connection with the pledge for
security or the booking for accounting purposes of rights to develop
Austria
natural gas under the Austrian law; such regulations may be
stipulated in the civil contract with the competent Federal Minister.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Apart from authorisations based on the Austrian Mineral Resource
Act (see question 2.3) several other authorisations (of different
authorities) may be required, this depends on the specific project.
Therefore authorisations e.g. according to the Nature Conservation
Act or Water Rights Act) may be required. If a specific project is
subject to an Environmental Impact Assessment (EIA), the
competent authority issues a single decision under the EIA Act,
covering all necessary licences (“one-stop-shop”).
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
According to sec 119 para 14 MinroG the abandonment of a mining
facility has to be notified to the authority. This is not required if the
abandonment of a mining facility has been indicated to the authority
in connection with a closing operating plan. Such closing operating
plan has to be authorised by the authority. The authority is
empowered to prescribe safety measures.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
According to sec 31c of the Austrian Gas Act (Gaswirtschaftsgesetz
- GWG, Federal Law Gazette I 2000/121, as amended), generally
the regulations on grid access for domestic customers e.g. non-
discriminatory grid access, refusal of grid access, transparency of
system capacities, dispute settlement and arbitration procedure,
apply.
Generally TSOs and owners of transport rights on transmission
networks have to grant access on the basis of approved general
terms and conditions (GTC) as well as on the basis of fees
calculated according to methods approved ex ante by the regulatory
authority (E-Control Commission).
Transit of natural gas is based on the GTC and on the approved
calculation methods. The OMV Gas GmbH coordinates the use of
transit pipelines of different operators in the event of natural gas
transit (“one-stop-shop”). 70% of the Austrian import capacities
are reserved for transit.
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Austria
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
As regards ownership of transportation pipelines and storage
facilities see questions 1.1 and 2.2.
Regulations on the operation of transportation pipelines and storage
facilities can be found in the GWG.
The Austrian transmission and distribution grid is divided into three
control areas. Transport capacities are managed by the independent
control area manager. Transit of natural gas is outside the control
area, as well as storage.
Any person who wants to act on the Austrian natural gas market has
to be member of a balance group. A balance group representative
bears the responsibility for the balance group. He has the obligation
to develop schedules and transfer them to the clearing and
settlement agent and control area manager. The clearing and
settlement organisation is responsible for the clearing and
settlement between balance groups.
Natural gas storage facilities are operated by RAG and OMV Gas
GmbH. Natural gas is stored in hydrocarbon-bearing geological
structures.
Storage undertakings are obliged to grant access to their storage
facilities to parties entitled to storage access (producers, natural gas
traders and suppliers domiciled in the European Union) at non-
discriminatory and transparent conditions. Storage utilisation charges
have to be stipulated on a non-discriminatory and cost oriented basis.
Access can be denied under certain conditions (sec 39 para 2 GWG).
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
According to the law the construction, expansion, fundamental
changes and the operation of natural gas pipelines are generally
bound on an authorisation of the authority (see sec 60 GWG). The
authority has especially to examine life, health, real rights, technical
(safety) and environmental aspects (sec 45 GWG).
The competent authority must be notified of any completion or
permanent shutdown. Generally natural gas pipelines can be
operated after this notification.
Depending on the specific project, several other authorisations may be
required (e.g. Nature Conservation Act). If a specific project is subject
to an EIA, the competent authority issues a single decision under the
EIA Act, covering all necessary authorisations (“one-stop-shop”).
Further a licence of E-Control Commission is required to operate
transmission and distribution pipelines (sec 13 GWG). The licence
has to be granted if certain licence conditions are fulfilled. The
authority may impose obligations and terms or grant the licence
temporary.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
According to sec 56 para 1 GWG the authority shall authorise upon
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Schönherr Rechtsanwälte
application the temporary utilisation of properties belonging to third
parties with a view to undertaking preliminary works in connection
with the construction, extension or alteration of a natural gas
pipeline system. The application shall state the nature and duration
of the intended preliminary work with a work plan attached. The
applicant is only legally entitled to obtain such a decision, if the
preliminary work begins within one year of the application being
filed.
The party authorised to carry out preliminary work has duly to
compensate the owners of the properties concerned, any parties
having a right in rem in these properties (except mortgage creditors)
and any parties holding mining licences for any restrictions they
had at the time when the permit was granted (see further sec 56 para
9 GWG).
Property owners and any other parties having a right in rem in a
property may be deprived of or restricted in these property rights,
provided that this is required with a view to construct a pipeline
(transmission or distribution line) and that it is in the public interest
to do so. In any event no public interest exists, if a natural gas
pipeline already legally exists or is planned in the area in question
and if the existing or planned capacity is not fully utilised.
Public property has to be used for pipeline routes, except if the
applicant has concluded agreements on the pipeline routes with all
property owners concerned prior to submitting its application. The
applicant has to prove this to the authority. Only if public property
is not available private property may be expropriated (see sec 57
GWG).
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
The system operator operating the system to which the customer
wishes to be connected is obliged to grant non-discriminating
access under approved GTC as well as regulated tariffs (see in
detail sec 17 et seq. and sec 24 et seq. GWG).
In the event that the application for access also concerns natural gas
line upstream of the relevant distribution system, the DSO is obliged
to pass on promptly the application to the control area manager for
further action. Applications for access to miscellaneous transports
have to be addressed to the control area manager who communicates
this to the relevant system operators. The control area manager is
obliged to take steps to ensure transport through the natural gas lines
upstream of the relevant distribution system which are operated or
owned by third-party natural gas undertakings.
The natural gas undertakings shall enter into contracts under civil
law for the benefit of the party entitled to system access. The line
capacity formerly used for the customer in the line system shall
continue to be available to the customer in the event of a change in
supplier.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
The Austrian natural gas transportation network is disconnected and
consists of three control areas. Transportation of natural gas
between different control areas, e.g. from the Eastern part of Austria
to Tyrol, is only possible by using foreign networks (e.g. via
Germany). A control area manager is established for each of the
three networks. It is responsible for the network access and
capacity management, the schedule and balance energy
management and the long-term planning.
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Austria
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
Austria
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
As stated above the system operator operating the system to which
the customer wishes to be connected is obliged to grant non-
discriminating access under approved GTC and regulated tariffs.
Access may be denied under certain conditions e.g. extraordinary
system conditions, insufficient system capacity or insufficient
interconnection of systems. The refusal has to be notified in writing
(sec 19 GWG). E-Control Commission can be appealed if the right
of access is damaged.
In the event of insufficient system capacity or insufficient
interconnection, access has to be granted in accordance with
following principles provided that the capacity to be utilised is duly
notified:
(i) transports under terms of existing contracts and of
contractual obligations superseding such contracts if this is
in accordance with the competition rules;
(ii) applications to use additional capacities have to be
considered in chronological order however transports for
final customers within a control zone area have priority in
relation to miscellaneous transports; and
(iii) transports to supply customers who must perform service
obligations.
Committed transport capacities which are not used have to be made
accessible to third parties. If no notice of the required capacity is
given, or if it is not given in due time, the respective party’s right of
access shall be subject to available capacity.
The party entitled to system access can apply for the expansion of
the system in the event of refusal of access because of insufficient
system capacity or insufficient interconnection of systems for
transports within a control area. The requested capacity needs have
to be considered in the long-term planning by the control area
manager.
The application for expansion of the system shall be accepted under
certain conditions when:
(i) the long-term planning of the control area manager, which
contains the respective expansion, has been approved by E-
Control Commission; and
(ii) contracts required in order to implement the expansion
measures, have been concluded between the affected TSOs
and DSOs and the control are manager.
Costs deriving from capacity expansion are allocated to the users of
the grids via the regulated transportation tariffs: E-Control
Commission as the authority competent for setting the tariffs (sec
23 et seq. GWG) has to recognise real and proportionate costs
claimed by the respective system operator, arising from
implementation of measures contained in the long-term planning of
the control area manager (sec 12e para 8 GWG).
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
GTC for access to the grid have to be approved ex ante by E-
Control Commission, which also sets the tariffs for access to the
domestic transport system. Tariffs are paid by the end-consumers
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 Schönherr Rechtsanwälte
(“postage stamp tariff”). For the transmission system no tariffs are
set but costs deriving from transport within the transmission system
are allocated to the downstream distribution systems.
Tariffs for transits have to be calculated by the TSO respectively
owner of transportation rights upon a method approved ex ante by
E-Control Commission (see also questions 4.4 and 5.5).
Austria
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The existing Austrian transit pipelines are owned and operated by
OMV Gas GmbH. Domestic transmission and distribution
networks are owned and operated by various TSOs and DSOs (see
question 1.1).
Domestic transmission and distribution networks are subject to
regulated third party access (TPA), which means that GTC are
approved ex ante and tariffs are regulated (see questions 4.1, 4.4,
4.6 and 5.3). For transit similar provisions do apply (approved
GTC, approved calculation methods; see question 3.1).
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
A licence of E-Control Commission is required to operate a
distribution network and has to be granted if certain licence
conditions are fulfilled (e.g. third-party liability insurance). The
authority may impose obligations and terms or grant the
authorisation temporary (sec 13 GWG).
DSOs are required to appoint an individual as technical director in
charge of managing and supervising operation of the system before
the initial operation. Additionally the operator may appoint a
managing director to carry out its function (compare sec 16 GWG).
The managing director is accountable to the authority with regard to
compliance with the provision of the GWG. DSO has to notify the
appointment of these two persons to the authority (compare
question 4.2).
5.3 How is access to the natural gas distribution network
organised?
The DSO operating the system to which the customer wishes to be
connected is obliged to grant non-discriminating access under
approved GTC and regulated tariffs. DSOs are obliged to enter into
private-law contracts with consumers on the connection to the
natural gas distribution system and system utilisation under
approved GTC within their distribution area (compare sec 25 and
26 GWG).
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
Access to the distribution system may be denied by DSO under
certain conditions only, provided by the law. E-Control
Commission can be appealed if the right of access is damaged (see
question 4.6).
DSOs are obliged to enter into private-law contracts with
consumers on the connection to the natural gas distribution system
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Austria
and utilisation under the general terms and conditions within their
distribution area (general obligation to connect). The system user’s
facility has principally to be connected to the system at a technically
suitable point with due regard to the economic interests of the
system user. The general obligation to connection does not apply if
the DSO cannot with any reasonableness be expected to make an
individual connection, considering the interest of all its customers.
If no agreement can be achieved on whether or not a systems
operator is obliged to connect a consumer, the provincial governor
will decide upon application of either party.
Compare also question 4.6 to insufficient system capacity or
insufficient interconnection.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
According to sec 23 para 1 GWG and the Gas Tariff Regulation
2008 the following tariffs for the usage of the distribution networks
are charged:
(i) a grid utilisation charge (price set by E-Control
Commission);
(ii) a metering charge (expenditure-based; E-Control
Commission sets price cap);
(iii) a grid provision charge (currently fixed at €0); and
(iv) a charge for access to the grid (expenditure-based).
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
There are no restrictions or limitations in relation to acquiring an
interest in a natural gas utility, or the transfer of assets forming part
of the distribution network.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
According to the GWG natural gas traders are natural or legal
persons buying and selling natural gas without carrying out the
function of transmission or distribution within or outside the system
in which such a natural gas trader is established. Natural gas traders
buying or selling natural gas for customers in the federal territory of
Austria have to notify their activities to E-Control GmbH, which is
the second regulatory body, prior to their commencing.
Additionally independent natural gas traders (applicants) have to
register as balance group representative who are to be responsible
for and establish a balance group in at least one of three Austrian
control areas (or may join an existing balance group). Therefore
contracts with the clearing and settlement centre and the control
area manager have to be concluded. Finally E-Control GmbH
grants permission for participation in the Austrian natural gas
market after having received certain documents (“Green Card”,
contract) from the applicant.
Specific regulations exist in relation to consumers. Natural gas traders
and providers selling natural gas to consumers in the sense of the
Austrian Consumers Protection Act (“Konsumentenschutzgesetz -
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Schönherr Rechtsanwälte
KSchG”, Federal Law Gazette 1979/140, as amended) shall always
provide for an option to enter into non-interruptible natural gas supply
contracts.
Finally the GWG regulates minimum requirements for invoices,
information material and advertising and the creation, publication,
alteration and content of general terms and conditions which have
to be notified to E-Control Commission. The application thereof
can be prohibited.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Natural gas may be traded as an “unbundled” product, e.g. at the
CEGH (see question 1.1), which is a “virtual” trading platform.
Traded volumes and physical throughput thus differ (E-Control,
Market Report 2007, 87).
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
Currently no LNG facility in Austria does exist. Some Austrian
companies plan to construct such terminal in the Adriatic region as
part of a JV (see also question 1.1).
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
LNG is not regulated under the Gas Act.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
No there is not.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
E-Control GmbH and E-Control Commission are responsible for
the regulation of competition aspects, or anti-competitive practices,
in the gas sector (sec 10 para 1 no 1 Energy Regulatory Authority
Act (“Energie-Regulierungs-behördengesetz - E-RBG”, Federal
Law Gazette I 2000/121, as amended)). The competence of other
authorities being responsible for competition aspects, such as FCA,
the Federal Cartel Attorney and the Cartel Court, remains
unaffected.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The regulator has to observe the criteria of the Austrian Anti-Trust
Act (“Kartellgesetz”, Federal Law Gazette I 2005/61, as amended),
Art 81 and 82 EC Treaty and also that of the Gas Act and Energy
Regulatory Authority Act.
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Austria
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
E-Control GmbH has within the scope of its surveillance and
control duties and responsibilities the power to request the
compliance of the market participant with the law within a certain
Austria
period of time. If the market participant does not comply with the
law within the period of time set up by the authority it has to post a
notice in order to create a status in accordance with the law.
Additionally E-Control GmbH has the power to enforce all orders
which are necessary to create a status in accordance with the law.
Due to Austrian Constitution Law E-Control GmbH is not entitled
to impose any administrative fines in case of non-compliance with
its orders.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
According to the Austrian Anti Trust Act intended mergers have
generally to be notified to the FCA, if the companies involved
reached in the last year before the merger the following turnover:
(i) worldwide more than EUR 300 million;
(ii) in Austria more than EUR 30 million; and
(iii) worldwide at least two companies each with more than EUR
5 million.
FCA and the Federal Cartel Attorney may within a period of four
weeks from notification either clear a merger or may request the
Cartel Court to examine the intended merger.
Cartel Court has to decide within a period of five months from
reception of the request. The court has to interdict the merger, if it
expects that the merger leads to the creation or strengthening of a
dominant position.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Currently there are no special requirements or limitations on
acquisitions of interests in the natural gas sector by foreign
companies.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
The regulatory policy in respect of the natural gas sector is
especially influenced and affected by European Law, in particular
the EC Treaty.
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10 Dispute Resolution 11 Updates

10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
Austria
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Austria.

authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
No compulsory dispute resolution procedures apply between the
regulator and corporations in the natural gas sector.
10.2 Is Austria a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
The New York Convention on the Recognition and Enforcement of
Foreign Arbitral Awards was ratified 1961 and the Convention on
the Settlement of Investment Disputes between States and Nationals
of Other States in 1971.
At the beginning of 2009 E-Control Commission has amended the
tariffs for the distribution grid for the first time according to the new
system: tariff regulation is exercised within a five-year regulation
period. Within this system maximum productivity offsets are
defined ex ante and remain valid for the whole regulation period.
These offsets are applied individually to DSOs, depending on their
efficiency, and lead to annual adjustments of the tariffs. The system
is subject to evaluation after five years.
In June 2009 E-Control GmbH issued an amendment of the Natural
Gas-Energy Steering Regulation (“Erdgas-Energielenkungsdaten-
Verordnungs-Novelle 2009”). The regulation contains new
guidelines concerning the delivering of data in case of supply
shortfall.
In July 2009 the political agreement among the Nabucco transit
countries, Austria, Hungary, Romania, Bulgaria and Turkey has
been signed. This agreement guarantees stable legal framework for
gas transit.
The Third Energy Package will have significant impact on the
Natural Gas legislative. At the end of 2009 the first drafts for the
implementation should be available.

10.3 Is there any special difficulty (whether as a matter of law

or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?

Generally there is no special difficulty in litigating, or seeking to

enforce judgments or awards, against government authorities or
state organs.

10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?

Generally there is no difference between Austrian and foreign

corporations before the law.

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Schönherr Rechtsanwälte Austria

Dr. Christian Schmelz Bernd Rajal

Schönherr Rechtsanwälte GmbH Schönherr Rechtsanwälte GmbH
Tuchlauben 17 Tuchlauben 17
1010 Vienna 1010 Vienna
Austria Austria

Tel: +43 1 534 37 227 Tel: +43 1 534 37 203

Austria
Fax: +43 1 534 37 6100 Fax: +43 1 534 37 6100
Email: c.schmelz@schoenherr.at Email: b.rajal@schoenherr.at
URL: www.schoenherr.at URL: www.schoenherr.at

Christian Schmelz is a partner of Schönherr Rechtsanwälte GmbH,
where he specialises in the field of environmental, energy and public
law, i.e. constitutional and administrative law.
Christian Schmelz, who is a member of the Vienna bar, graduated
from the University of Vienna in 1979. Before entering Schönherr
(1984), Dr. Schmelz worked as Assistant Professor and lecturer at
the University of Vienna.
At Schönherr Christian Schmelz has been serving not only national
and international corporate clients but also municipalities,
provinces, the federal administration, the Austrian Chamber of
Commerce and the European Commission. He has been member of
advisory boards on legislative projects such as amendments to the
Austrian Waste Disposal Act, the Environmental Impact Assessment
Act and the Act on Environmental Management Auditing Scheme.
Dr. Schmelz is co-editor of the monthly journal “ecolex”, which
emphasises administrative and environmental law and author of
numerous books and articles on environmental law in national and
international journals. Additionally he is rapporteur of the European
Environmental Law Review.
Bernd Rajal is Junior Partner of Schönherr Rechtsanwälte GmbH.
His practice focuses on Regulatory issues such as Energy,
Environment, Waste and Water Management, and Restoration of
Contaminated Sites. Furthermore he is specialising in Data
Protection law.
Bernd Rajal, who is a member of the Vienna bar, graduated from the
University of Vienna in 2001. He is author of the book NATURA
2000, Das Schutzgebietssystem der Europäischen Union, Manz,
and author of various articles on Environmental and Energy Law.
Before entering Schönherr Rechtsanwälte Bernd Rajal gained broad
experience in other renowned law firms. At Schoenherr Bernd Rajal
is also responsible for regulatory issues concerning cross-border
transactions in CEE/SEE.

Schönherr Rechtsanwälte GmbH is considered to be among the leading Austrian firms with more than 50 years
experience and outstanding reputation with offices in Belgrade, Brussels, Bucharest, Budapest, Kyiv, Ljubljana, Sofia,
Vienna and Zagreb. The firm has established a well-know team dedicated to regulatory, energy, environmental, IT- and
data protection, procurement and also life science law.
The broad expertise and specialisation of Schönherr in all disciplines allows the firm to provide outstanding legal service
and advice to clients at the highest quality level. Further, the law firm’s lawyers are often involved in drafting and
commenting on legislation. Such close cooperation with the legislature and high level government administration puts
the firm in a unique position to offer specialised advice and solutions to its clients. Schönherr’s international branch
offices in Central and Eastern Europe and its carefully selected network of independent partner firms in other
jurisdictions allow the firm to provide top quality legal advice to its clients well beyond the borders of Austria.

33
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 Chapter 6
Bolivia
Criales, Urcullo & Antezana
1 Overview of Natural Gas Sector
1.1 A brief outline of Bolivia’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Bolivia has the third largest reserves of Natural Gas (NG) in South
America, right after Venezuela and Brazil.
Currently 17 oil and gas companies operate 70 gas fields in Bolivia.
Bolivia exports around 24 MM cubic meters of NG per day
(847,560,000 MCF per day) to Brazil and 6 MM cubic metres per
day (211,890,000 MCF per day) to Argentina, through pipelines
owned by concessionaires. Bolivia produces all the NG required by
the domestic market and does not import NG.
The total NG reserves in Bolivia are estimated to be 26.7 TCFs
(proven) and 22 TCFs (probable) for a total of 48.7 TCFs. Potential
reserves are estimated at 15.2 TCFs (in accordance with the YPFB’s
Report on Reserves dated January 1st, 2005, which is the latest
report on the matter).
The total NG production, as reported by “Yacimientos Petrolíferos
Fiscales Bolivianos” (YPFB), the State-owned hydrocarbons
company, is around 1,474 MCF per day, 100% of which is not
associated with liquids.
There are no liquefaction or re-gasification LNG facilities in
Bolivia; therefore, currently there are no LNG importation or
exportation activities.
There are no significant NG storage facilities in Bolivia.
The Bolivian NG Transportation network operates under “open
access” rules, subject to concession and regulation by the
Hydrocarbons Regulatory Authority “Agencia Plurinacional de
Hidrocarburos” (ANH) formerly “Superintendencia de
Hidrocarburos”. The NG pipeline network is 4,262.03 miles
(6,819.248 kilometres) long, and is operated by 8 companies
throughout the country.
There are NG distribution networks in the 6 major cities. During
2009, YPFB has taken control of distribution activities in 4 of the
aforementioned cities, where up until then private concessionaires
performed such activities. It should be noted that no expropriatory
or confiscatory actions were taken by the Government, because the
concession contracts reached their respective terms and were not
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Adrián Barrenechea
Daniel Mariaca
renewed.
Even though in October 2008 YPFB-PetroAndina SAM (a partly
State-owned company YPFB, in association with PDVSA
(Petróleos de Venezuela S.A.) announced the initiation of
exploration activities in non-traditional hydrocarbons areas in
Northern La Paz, to this date no discoveries have been reported.
1.2 To what extent are Bolivia’s energy requirements met
using natural gas (including LNG)?
Bolivia’s energy requirements are met by various means. By the
end of 2009, some 59.5% of all electric power consumed in Bolivia
(in the National Interconnected Grid) was generated using NG.
Also, many of the major industries use NG as an energy source.
Other major sources of energy include:
1. Gasoline (automobile consumption).
2. Diesel (electric generation, agriculture and transportation).
3. LPG (domestic consumption).
4. Kerosene (domestic consumption).
5. Fuel Oil (Industrial consumption).
1.3 To what extent are Bolivia’s natural gas requirements met
through domestic natural gas production?
All NG requirements (318 MCF per day) in Bolivia are met entirely
by domestic production.
1.4 To what extent is Bolivia’s natural gas production exported
(pipeline or LNG)?
Bolivia exports around 78% of its total NG production through
pipelines to Brazil and Argentina.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
In 2008, as part of the proposed governmental reforms, a new
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Criales, Urcullo & Antezana
Constitution was drafted by a Constitutive Assembly. Such draft
was then subject to a referendum held on January 25th 2009 and
approved by 61.73% of the Bolivian people; consequently, the new
Constitution was enacted on February 7th 2009.
1. Legal Framework:
1.1. The Bolivian Constitution has reformed the entire legal
framework applicable to the Natural Gas Sector, some of the major
aspects being the following:
a) The Bolivian State maintains the ownership over all
hydrocarbons reservoirs. Exploration, development and
production activities are subject to a service provision
regime. A company intending to perform such activities may
only do so by: (i) creating a joint stock company in
association with YPFB; or (ii) entering into a service contract
with YPFB, thereby providing a specific service for a
specific activity.
b) The abovementioned service contracts entered into by a
company and YPFB shall need approval of the Bolivian
Congress (called the Legislative Assembly) in order for them
to enter into full force and effect.
c) Article 366 provides that in no case shall the State be subject
to foreign jurisdictions nor shall it be subject to international
arbitration or diplomatic reclamations, being the only
accepted jurisdiction the Bolivian courts.
d) All existing Agreements for the development of NG
activities shall be renegotiated in accordance with the new
legal framework.
By mandate of Transitory Disposition 8th of the new Constitution,
in a term of one year from the election of a new Government (which
occurred on December 6th 2009) all concessions related to natural
resources shall be reviewed and adjusted to the, then enforced, legal
framework.
1.2. The Hydrocarbons Law (Law No. 3058) dated May 17th, 2005
establishes that YPFB, the State-owned hydrocarbons company, is
in charge of all NG production and trading.
However, YPFB is authorised to enter into three types of
agreements with private companies in order to produce NG (the
“YPFB Agreements”) listed below:
Shared Production Agreements.
Operation Agreements.
Association Agreements.
Notwithstanding any of the aforementioned, the Bolivian
Government has recently announced that a new hydrocarbons law
shall be enacted sometime during the first quarter of 2010.
1.3. Regulations by the Executive Branch. Supreme Decrees are
used by the Executive Branch to regulate the Hydrocarbons Law on
matters such as royalties and tax payments, transportation and
trading regulations, and various other technical matters.
2. Regulatory Framework:
2.1. The Ministry of Hydrocarbons and Energy, a Department of the
Executive Branch is in charge of setting and developing the
Bolivian Hydrocarbons Policy.
2.2. YPFB, the State-owned hydrocarbons company is in charge of: (i)
the negotiation, execution and performance of oil and gas agreements;
(ii) the direct performance of all activities in the NG productive chain
(exploration, exploitation, transportation, trading and distribution);
and (iii) the supervision of NG exploration and production activities,
when performed by other duly authorised companies.
2.3. The Hydrocarbons National Agency (today subordinated to the
Ministry of Hydrocarbons and Energy), is the sector regulatory
agency in charge of regulating, controlling and supervising the
transportation, trading and distribution of NG, as well as other
sector-related activities.
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Bolivia
3. Governmental Policy:
YPFB was established in 1936 as a State-owned operating
company, vertically integrating exploration, production,
transportation, trading and distribution activities.
In 1994, the Bolivian Government started a privatisation process,
called “Capitalización” through the injection of private capital and
Bolivia
transfer of operations and management to the private sector.
Law No. 1689, dated April 30th 1996, provided the legal
framework for private operators to perform all hydrocarbons
activities. Under this law, YPFB was divided into six different
companies (through the vertical and horizontal segregation of
activities in the hydrocarbons sector). Five companies were
privatised and one (the residual YPFB) stayed under the control of
the State, in order to control and monitor exploration and
production activities granted to private companies.
A national referendum on the hydrocarbons policy was held in
2004. A substantial majority of the Bolivian people voted to abolish
Law No. 1689 and to reinstate YPFB as a fully operating company.
Law No. 3058 was enacted in 2005; it established a new legal
framework, including a tax increase of up to 50% of the NG
production (12% royalties, 6% for the National Treasury and 32%
direct taxes on the relevant production) and an obligation for all
participants in the NG production to change their existing Joint Risk
Agreements to new YPFB Agreements.
Supreme Decree No. 28701 (the “Nationalisation Decree”) was
enacted in 2006 to regulate the change of all existing Joint Risk
Agreements to new YPFB Agreements. Under such new YPFB
Agreements all NG production belongs to YPFB, which is also in
charge of setting prices, volumes and conditions for trading and
exporting.
As a result, 44 Operation Agreements were entered between YPFB
and 17 oil and gas companies. As established in the Constitution,
these Agreements were individually authorised and approved by the
Bolivian Congress, resulting in the passing of 44 different laws.
The current Government has taken over all NG related activities,
except for detail distribution.
The Government, through YPFB, now holds ownership or interests
in all the key hydrocarbons companies.
Historically in Bolivia, there has been a pattern of alternating
periods with Governments that favour open market approaches with
those that favour greater Government intervention.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
Exploration and production activities may only be performed by
those participants who have entered into an YPFB Agreement (as
defined herein). YPFB Agreements grant a participant the right to
develop NG reserves. Such participants are allowed to transfer
their rights by means of assignment, subject to previous
authorisation by (i) the Ministry of Hydrocarbons and Energy and
(ii) YPFB.
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2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration or production
arrangements), please specify those authorisations and
briefly summarise the most important (standard) terms
(such as term/duration, scope of rights, expenditure
obligations).
Bolivia
The following authorisations are required in the NG sector in Bolivia:
1. Exploration Activities. The right to explore is granted to a
participant through an YPFB Agreement, following an
international tender process. In general, exploration rights
may not exceed 7 or 10 years, depending on whether the
relevant block is considered to be in a traditional (a
productive area) or non-traditional hydrocarbons area as
defined in the Hydrocarbons Law No. 3058.
At the end of this term, a participant may request an
extension to continue exploration activities, but on an area
not greater than 30% of the original exploration area.
However such extension may not exceed 7 years past the
original 7 or 10-year period, as applicable.
2. Production Activities. The right to produce NG from a
relevant field is also granted to a participant through an
YPFB Agreement (which may be the same Agreement that
granted the right to explore an area), which includes the
relevant economic and technical conditions.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
By a Constitutional provision, all hydrocarbons reservoirs are
owned by the State and they may not be transferred at any title. Any
private oil and gas companies intending to participate in
hydrocarbons activities need to enter into YPFB Agreements or
obtain the relevant concessions or authorisations from the SH.
As established by Law No. 3058 and the existing YPFB
Agreements, the State, through YPFB shall have a participation of
no less than 50% of the profits.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
Any participant (either YPFB or any other company) involved in
exploration and production NG activities in Bolivia is subject to the
following taxation regime:
1. Royalty, which is imposed on the total production of a field,
equivalent to 12% of the relevant production, payable in cash.
2. National Treasury Participation, which is imposed on the
total production of a field, equivalent to 6% of the relevant
production, payable in cash.
3. Direct Tax on Hydrocarbons (Impuesto Directo a los
Hidrocarburos - IDH), which is imposed on the total
production of a field, and is equivalent to 32% of the relevant
production, payable in cash.
4. Exploration Yearly Excise Tax (Patente), which is payable
annually on the basis of a sliding scale depending on the
number of years an area is under exploration. It may go from
Bs. 4.93 per hectare in phase one (years 1-3), to Bs. 39.42 per
hectare in phase 6 (years 13-14). This Tax is paid by YPFB,
but must be reimbursed by the relevant participant. YPFB
controls (in representation of the State) all hydrocarbons
production, and it is therefore responsible for paying royalty,
national treasury participation and IDH.
As described in the foregoing numerals, 50% of the total production
is taxed (12% Royalty, 6% National Treasury Participation and 32%
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Bolivia
IDH); the remaining 50% is divided between the participant (part of
an YPFB Agreement) and YPFB.
2.6 Are there any restrictions on the export of production?
The Hydrocarbons Law No. 3058 establishes that the domestic
market must be given priority over the export of production.
Therefore, exports can only take place after the domestic market
demand has been satisfied as certified by the SH.
YPFB, as the sole owner of all hydrocarbons in Bolivia (on behalf
of the State), is the only entity allowed to export and, in general,
trade Bolivian NG.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
There are no restrictions currently in force and effect.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
Development rights, granted through the YPFB Agreements, may not
be transferred or disposed of without prior written authorisation of
YPFB and the Ministry of Hydrocarbons and Energy. Any transfer of
development rights under the YPFB Agreements may only be
perfected by means of assignment of the relevant YPFB Agreement.
Voluntary change in control of a company, affecting a participant
which in turn is party to an YPFB Agreement, requires prior written
authorisation by YPFB and the Ministry of Hydrocarbons and Energy.
Any involuntary change in control of a company (such as a hostile
takeover) that in turn controls a participant party to an YPFB
Agreement, regardless of the manner in which it was performed, will
be subject to review by YPFB, who can instruct to undo the transfer
of the relevant interest, whenever the takeover was undertaken by an
entity not acceptable to YPFB on grounds of State Policy or when
there are litigious pending issues between YPFB or the Bolivian State
and such entity. Penalty for the non compliance with this provision
may result in the termination of the YPFB Agreement.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
By constitutional provision, no agreement of any kind (regarding
hydrocarbons) may at any title, report economic loses to YPFB or
the Bolivian State - the extent of this provision or its enforcement is
not clear at this point.
The Hydrocarbons Law No. 3058 establishes that all participants
that enter into YPFB Agreements shall provide a guarantee to YPFB
for the due performance of its obligations.
The current YPFB Agreements require for the participants to
provide a Parent Guarantee in the form of a letter executed by its
parent company, undertaking jointly and severally the due
performance of such participant’s obligations.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Rights to develop NG reserves emerge from an YPFB Agreement,
granted to a participant on an intuitu personae basis. Those rights
are transferable only by means of assignment previously approved
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by YPFB and the Ministry of Hydrocarbons and Energy. Under
those conditions, such rights are not transferable for purposes of
pledge for security.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
The following authorisations are required by a participant:
Incorporation of a company or a branch in Bolivia and
registration as a commercial entity before the Registry of
Commerce.
Registration as a tax payer before the inland revenue
authority (Servicio de Impuestos Nacionales).
Registration as an employer before the Ministry of Labour.
Registration as an employer before the relevant social
security entities (including health and pension funds).
An Environmental Licence must be obtained for every
project individually from the Vice Ministry of Biodiversity,
Forestal Resources and Environment.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
Abandonment or decommissioning of physical infrastructure is
subject to (i) the regulation for technical safety norms for the
activities of exploration and production of hydrocarbons in Bolivia
(Supreme Decree No. 28397, dated October 6th, 2005) and (ii) the
environmental regulation for hydrocarbons activities in Bolivia
(Supreme Decree No. 24335, dated July 19th, 1996).
Well abandonment is subject to a programme to be submitted by the
participant to YPFB for approval, such programme should include
such measures as pipeline stopper placement, cementing and
signalising to prevent any environmental damages.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
The ANH must certify that the volume to be exported is in excess
of the domestic demand, and on that basis, grant an export permit.
As the sole owner of all hydrocarbons in Bolivia, YPFB (on behalf
of the State) is the only entity capable of exporting and (if needed)
importing NG.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Six Private and two State-owned* companies own and operate the
pipeline network in Bolivia (about 4,262.03 Km), in accordance
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Bolivia
with individual concessions granted by the SH (today ANH).
The ANH as the Hydrocarbons Regulatory Agency is in charge of
regulating all matters related to the transport of NG, such as the: (i)
granting of concessions to construct and operate NG transportation
pipelines and associated infrastructure; (ii) approval of the transport
fee charged by the concessionaire; (iii) approval of all agreements
Bolivia
entered into by the relevant concessionaire and any consumer relating
to the transport of NG; (iv) approval of changes in the effective control
of the concession; (v) auditing of concessionaires; (vi) inspection of
the concessionaires’ infrastructure; and (vii) guaranteeing that the
domestic market is supplied by compelling a relevant concessionaire
to expand its infrastructure and to grant capacity for new consumers.
* During 2008, the Bolivian Government forced, via Supreme
Decrees (Nos. 29541 and 29542), two companies to sell controlling
interests to YPFB, turning one of them into a partially State-owned
and the other one into a fully State-owned company.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The following authorisations are required:
Incorporation of a company or a branch in Bolivia and
registration as a commercial entity before the Registry of
Commerce.
Registration as a tax payer before the inland revenue
authority (Servicio de Impuestos Nacionales).
Registration as an employer before the Ministry of Labour.
Registration as an employer before the relevant social
security entities (including health and pension funds).
An Environmental License must be obtained for every
project, granted by the Vice Ministry of Biodiversity,
Forestal Resources and Environment.
A concession to construct and operate pipelines and associated
infrastructure, which may be obtained through (i) direct request by
the interested entity to the ANH, or (ii) a bidding process conducted
by the ANH.
When the construction of a pipeline requires crossing lands of
indigenous communities, an additional authorisation must be
obtained from the relevant indigenous community.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
There are three basic ways to obtain the necessary land rights to
construct NG transportation pipelines:
1. A concessionaire may obtain land directly though the
purchase from the relevant land owner.
2. A concessionaire may request the granting of a voluntary right
of way to an individual or individuals whose land the pipeline
will cross. In such event, the land owner and the transport
company may enter into a private agreement, subject to the
payment of an easement, which then needs to be confirmed by
the Ministry of Hydrocarbons and Energy and by the Ministry
of Rural Development, Farming and Environment (Ministerio
de Desarrollo Rural, Agropecuario y Medio Ambiente).
3. A concessionaire may obtain easement of access, whenever
an agreement with the land owner cannot be reached, before
a civil judge, who may award a compulsory acquisition of
the needed land.
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4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
NG transportation pipelines and associated infrastructure are
operated under “open access” rules, and as such, access is subject to
the approval by the ANH of transport agreements executed between
transport companies and shippers or costumers.
Bolivia
Open Access is regulated by the ANH through specific Open Access
Norms, which provide the guidelines for accessing the Bolivian NG
transportation system.
The Open Access Norms allow transport companies to provide 2
types of services (i) Firm Service, characterised by the granting of
specific capacity to the relevant user by the transport company,
which anticipates no interruptions and (ii) Interruptible Service,
which anticipate and permit interruption by reason of the claim of
Firm Service customers.
Access to transportation pipelines may be requested by a user
directly to the transport company by means of a written formal
request, specifying (i) the type of service, (ii) the term,
commencement and termination dates, and (iii) the maximum daily
load. Thereon, the transport company, whenever there is available
capacity in the relevant pipeline, may execute a transportation
agreement and submit it to the ANH for approval. Should there not
be any available capacity the transport company shall summon
interested customers to enter into transportation agreements in order
to finance an expansion of the pipeline system.
However, under the Hydrocarbons Law No. 3058, transport
companies are not allowed to contract the total load capacity of their
pipelines system, having to reserve 15% of such capacity for other
costumers, who may use NG for industrialisation projects in Bolivia.
In appliance of the Hydrocarbons Law No. 3058 and the taking over
of property of all hydrocarbons by the State, through YPFB, the
Executive Branch enacted Supreme Decrees Nos. 29129, dated May
13th, 2007, 29325, dated October 28th, 2007, 29510, dated April 9th,
2008, and 29709, dated September 17th, 2008, whereby YPFB, as the
sole owner of all NG produced in Bolivia, was instructed to enter into
new transport agreements with transport companies. As a result,
YPFB is currently the only shipper in Bolivia.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
The NG transportation systems installed and in operation today are
fully interconnected within the Bolivian territory.
Cooperation between different transportation systems is established
through agreements executed between concessionaires (transport
companies), such as: (i) balancing agreements; and (ii)
interconnection agreements, which may be freely negotiated and
executed by and between the transport companies.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
The Hydrocarbons Law No. 3058 defines transportation of NG as a
public service and as such it may not be denied to any person who
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Bolivia
wishes to transport hydrocarbons. Therefore, both the ANH and a
new consumer (through such regulator) can compel a pipeline
operator to grant capacity or expand its facilities in order to
accommodate the new customer, subject to a formal written request
as described in question 4.4 above.
The expansion costs are included in the transport fee charged by the
transportation company.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
The general terms and conditions of the service, tariffs, fees and
templates of transport agreements for each transportation company
are approved by the ANH for each individual case.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The ANH is in charge of regulating distribution activities and the
granting of concessions to transport companies. There are distribution
networks in eight out of the ten principal cities in Bolivia.
The NG domestic distribution infrastructure in Bolivia is divided
into (i) Primary networks, entirely owned by YPFB and (ii)
Secondary networks, also owned and operated by YPFB in charge
of the NG distribution, as follows:
1. Primary networks are in place in eight cities: La Paz; El Alto;
Cochabamba; Santa Cruz; Oruro; Potosí; Sucre; and Tarija.
They are owned and operated by YPFB.
2. Secondary networks are installed in the same eight cities.
They are also owned and operated by YPFB*.
Ministry of Hydrocarbons and Energy Resolution No. 196/2006
from August 16th 2006, determines that all private concessionaries
shall be audited to verify compliance with their relevant concession
terms. Non-compliance with the concession terms can lead to the
revocation of the concession, in which case YPFB shall take control
of their NG distribution networks in the relevant concession area.
*As of 2009, YPFB has taken control of distribution activities in all
of the cities where up until then private concessionaires performed
such activities. It should be noted that no expropriatory or
confiscatory actions were taken because the concessionaires
contracts reached their respective terms.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
The following authorisations are required for any participant:
Incorporation of a company or a branch in Bolivia and
registration as a commercial entity before the Registry of
Commerce.
Registration as a tax payer before the inland revenue
authority (Servicio de Impuestos Nacionales).
Registration as an employer before the Ministry of Labour.
Registration as an employer before social security entities
(including health and pension funds).
An Environmental Licence must be obtained for every
individual project, granted by the Vice Ministry of
Biodiversity, Forrestal Resources and Environment.
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A concession to perform the distribution of NG is necessary, which
may be obtained through (i) direct request by the interested entity to
the ANH, or (ii) a bidding process conducted by the ANH.
5.3 How is access to the natural gas distribution network
organised?
The NG distribution network operates under “open access” rules,
and as such, access may not be denied and is subject to the
execution of supply agreements between distribution companies
and NG consumers (being them residential, commercial or
industrial), which in turn require the approval of the ANH.
Connection to the distribution network may be requested by a
consumer directly to the distribution company by means of a written
formal request. A distribution company is obliged to reply to every
request. In case of a negative response, on the basis of lack of
capacity, an expansion schedule must be submitted by the distribution
company for the consideration and approval of the ANH.
Interconnection works and costs are assumed by each consumer and
must be executed under the supervision of the relevant distribution
company.
Each category of consumer (residential, commercial or industrial) is
determined by: a) the operating pressure of the system to which
such consumer is connected; b) the maximum NG flow demanded;
and c) the average NG consumption volume.
As a result of the enactment of the Nationalisation Decree and the
taking over the property of all hydrocarbons by the State through
YPFB, the Ministry of Hydrocarbons and Energy enacted
Ministerial Resolution No. 196/2006, dated August 16th 2006,
whereby YPFB, assumes control of the entire existing NG
distribution network in Bolivia.
During 2009, YPFB took control of distribution activities in all of
the cities, where up until then, private concessionaires performed
such activities.
It should be noted that in this regard no expropriatory or
confiscatory actions were taken. The take over of control by YPFB
was due to the completion of the term of all concession agreements
in force and effect up until 2009.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
The ANH can require a distributor to expand its distribution system
within its concession area in order to accommodate any new
consumer.
The costs of such system expansion are assumed by the distributor
but are included in the distribution tariff paid by the consumers and
approved by the ANH.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
To access the distribution network a consumer must pay
interconnection costs. Once connected to the distribution network
a consumer must pay a distribution tariff approved by the ANH,
which includes the NG price (measured by volume), the distribution
costs charged by the distributor and, whenever applicable, the
system expansion costs.
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Bolivia
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
NG transportation companies may not, at any title, directly or
indirectly acquire interests in distribution companies.
Bolivia
All physical assets that form part of a distribution network belong
to the concessionaire who is in charge of NG distribution by virtue
of a concession granted by the ANH. As NG distribution is
considered a public service, the transfer of such assets is limited to
the assurance of the provision of such public service, which in turn
may only be performed by a concessionaire.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
The only entity legally allowed to trade NG whether in the domestic
or export markets is YPFB.
In the domestic market the NG price is set by the ANH. The priorities
for the distribution (trading) of the Bolivian NG production are as
follows (in this specific order): (i) the domestic market must be fully
supplied; (ii) the Brazilian demand must be met, in accordance with a
Gas Supply Agreement executed between PETROBRAS and YPFB in
1996; (iii) the Argentinean demand must be satisfied, in accordance
with a Gas Supply Agreement entered into by ENARSA (the
Argentinean public NG company) and YPFB in 2006; and (iv) any
other market as may be secured by the Bolivian Government.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
YPFB, being the only entity allowed to trade NG in Bolivia, is
authorised to set the conditions for such trading. Therefore there
are no other NG wholesalers in Bolivia.
However, once a company has purchased NG from YPFB, it can
sell it, but only in the domestic market.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
There are no such facilities in Bolivia or applicable legislation.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
To this date, there is no legislation regarding the construction and
operation of LNG facilities in Bolivia.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
No, there are no such regulations in Bolivia. However, the Bolivian
Government has announced that a new hydrocarbons law shall be
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passed during the first quarter of 2010 and it is likely to incorporate
regulations regarding LNG.
8 Competition
8.1 Which Governmental authority or authorities are
Bolivia
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
Up until 2009, the regulatory system in Bolivia (SIRESE) included
five sector specific (autonomic) regulators responsible for
telecommunications, hydrocarbons, transport, electricity and basic
sanitation, respectively, and a General Superintendence acting as
the hierarchic superior regulation entity of the system.
With the enactment of Supreme Decree No. 29894 dated February
7th 2009, four of the five sector superintendences where eliminated,
and specific authorities (dependent of different ministries) where
created to replace them. The only sector superintendence that was
not eliminated was the Superintendence of Hydrocarbons, today
named ANH.
In the first instance, the ANH directly regulates, supervises and
controls the transport, distribution and trading of NG, including
competition aspects and anti-competitive practices.
Above the ANH, the Ministry of Hydrocarbons and Energy is the
authority in charge of resolving appeals against the ANH’s decisions.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The SIRESE Law No.1600, dated October 28th 1994, considers the
following activities as anti-competitive practices:
a) Direct or indirect joint setting of prices (collusion).
b) Unfair limitation to competitors, through the control of
production, relevant markets, supply lines or investments
(abuse of a dominant position).
The Hydrocarbons Law No. 3058 tasks the ANH with the prevention
of economic concentrations between and amongst competitors so that
such concentrations do not contradict free or open market principles
contained in the aforementioned SIRESE Law No. 1600.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The ANH may apply sanctions to participants, whom it determines
are participating in anti-competitive practices, such sanctions are
primarily economic.
According to article 20 of the SIRESE Law No. 1600, any
agreement executed in contradiction of the dispositions of said Law
is considered null and void and shall have no effect over the parties
or any third party whatsoever.
In the case of NG transportation, the specific regulation states that
if a transportation company does not act in compliance with the
SIRESE Law No. 1600, the ANH must apply the applicable fines
for each individual violation; these fines may range from U$6,000
to U$600,000.
In the case of NG distribution, the specific regulation states that non
compliance with the SIRESE Law No. 1600, on the part of
distribution companies, makes them subject to fines imposed by the
ANH equivalent to 3% through 10% of their last three-month
average income.
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Bolivia
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
The SIRESE Law No. 1600 expressly prohibits mergers and/or
changes in control of whatever type, which may cause any given
company to gain a dominant position in a relevant market.
Supreme Decree No. 24504, dated February 21st 1997, provides
that any company operating in a regulated activity may request to
the specific regulator (in the case of NG, the ANH), before the
execution of any agreement, contract or merger, an opinion
regarding the feasibility of such agreement contract or merger under
free competition principles. In answering such request, the ANH
shall apply the criteria established by the SIRESE Law No. 1600
and the Hydrocarbons Law No. 3058.
According to Supreme Decree No. 24504, a total maximum term of 75
business days is provided for the ANH to resolve the matter. However,
typically, the ANH will resolve such requests in a shorter term.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
By Constitutional provision, foreigners may not acquire, own or be in
possession of land within 50 kilometres of Bolivian international
borders, unless a specific “National Need” is determined and
approved by the Legislative Branch through passage of a specific law.
The Investments Protection Law No. 1182, dated September 17th
1990, establishes the principle of equal treatment for foreign and
local investors from all Bolivian authorities.
The Bolivian Commercial Code determines that companies that
regularly operate in Bolivia shall be subject to Bolivian Law.
The Hydrocarbons Law No. 3058 requires that any foreign
company that enters into an YPFB Agreement must renounce to any
diplomatic complaint.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
There are no international treaties or conventions nor multinational
arrangements signed by Bolivia in respect of NG regulatory policies.
However, there are bilateral agreements signed by Bolivia with
Brazil and Argentina that facilitate NG exports and assist the
avoidance of double taxation.
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10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
Regarding the ICSID Convention, Bolivia has officially denounced
the convention on May 2nd 2007, thus withdrawing from the World
Bank’s dispute resolution facility. This denouncement became
effective on December 3rd 2007, according to Article 71 of the
ICSID Convention.

authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Every YPFB Agreement has an arbitration clause which states that in
case of unsolvable disputes, the arbitration process must be held in the
city of La Paz, applying the Bolivian Arbitration Law No. 1770, dated
March 10th 1997. Also, the arbitration process must be performed in
accordance to the ICC Arbitration Regulation and procedures.
Aside from Arbitration, all activities in the NG sector are subject to
administrative proceedings; in the first instance, through a
Revocation Recourse directed against administrative resolutions
from the ANH or the Ministry of Hydrocarbons and Energy. A
Revocation Recourse is intended to obtain the revocation of any
administrative resolution that may unfairly and negatively affect
rights from any participant in the sector.
Beyond the Revocation Recourse, there is the Hierarchic Recourse,
presented before the Ministry of Hydrocarbons and Energy,
whenever the administrative resolution was enacted by the ANH; or
before the President whenever the administrative resolution was
enacted by the Minister of Hydrocarbons and Energy. Finally,
participants have the Administrative Contentious Recourse,
presented before the Bolivian Supreme Court.
Despite all the abovementioned, the new Constitution expressly
determines that all companies performing activities in the
hydrocarbons production chain, are subject to the Bolivian courts’
jurisdiction and that no foreign tribunal or jurisdiction (such as
arbitration tribunals) shall be recognised by the State.
10.2 Is Bolivia a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Bolivia
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
There is no immunity of any kind that may impede litigating or
make seeking to enforce judgments or awards against
Governmental Authorities or State Organs difficult.
The Bolivian State itself, all Governmental Authorities and State
Organs may be subject to legal procedures and arbitrations, within
Bolivia and abroad.
As a matter of law, there is not any difficulty. However, as a matter of
practice, the damages payable by the Bolivian State are subject to
scheduling by the Finance Ministry, which cannot be conditioned.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
There have never been any such cases.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Bolivia.
As a consequence of the enactment of the new Constitution, the
entire Bolivian legal framework must be adapted. Therefore it has
been announced that during 2010, a new hydrocarbons law shall be
passed and all necessary regulations thereto.
In that same line, a special commission is currently working on the
complete modification of the Commercial Code.

Bolivia is signatory and has duly ratified the New York Convention
on the Recognition and Enforcement of Foreign Arbitral Awards.
However in order for an arbitral award to be enforced in Bolivia, an
internal execution proceeding must be followed before Bolivian
courts.

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 Criales, Urcullo & Antezana Bolivia

Adrian Barrenechea Daniel Mariaca

Criales, Urcullo & Antezana Criales, Urcullo & Antezana
Av. Arce #2799 - Edificio Fortlaeza, piso 12 Av. Arce #2799 - Edificio Fortlaeza, piso 12
La Paz La Paz
Bolivia Bolivia

Tel: +591 2 243 2343 Tel: +591 2 243 2343

Bolivia

Fax: +591 2 243 4940 Fax: +591 2 243 4940

Email: abarrenechea@bolivialaw.com Email: dmariaca@bolivialaw.com
URL: www.bolivialaw.com URL: www.bolivialaw.com

Adrián Barrenechea was born in La Paz in 1980. He lived in Bolivia
most of his life, but finished High School in The U.S. where he took
Law classes. He graduated from the Universidad Privada Boliviana.
Adrián has attended various courses in actualisation, the most
relevant being a course in “Infrastructure Financing” in Ryad, Saudi
Arabia in 2003, where he learned about different ways to involve
the private sector in the financing of infrastructures typically in the
charge of the State, such as roads, basic sanitation and rural
electrification. He also holds a diploma on negotiation, mediation
and conflict management awarded in 2006 from the Universidad
Mayor de San Andrés and the Universidad Autónoma de Barcelona.
Adrián joined Criales, Urcullo & Antezana in 2004 and has since
become an Associate. His practice focuses on corporate matters,
including the negotiation of various agreements, especially in the
Energy sector.
Daniel Mariaca was born in La Paz in 1980. He graduated from
Law School at the Universidad Católica Boliviana.
Daniel holds diplomas on Taxing procedures awarded in 2007,
Commercial Law in 2006, Administrative and Regulatory Law
awarded in 2005. He is currently attending an LL.M programme at
the Universidad Privada Boliviana.
Daniel has worked in the Superintendencia de Hidrocarburos, the
Bolivian Hydrocarbons Regulatory Agency as part of the commission
of open access and free competition, where he participated in the
elaboration of regulatory norms for the hydrocarbons sector and the
review of numerous contracts.
Daniel joined Criales, Urcullo & Antezana in 2006 and has since
become an Associate. His practice focuses on hydrocarbons and
corporate matters including the analysis of various aspects of the
sector and the representation of major oil and gas companies.

Criales, Urcullo & Antezana is a full-service law firm serving the needs of businesses, governmental entities, non-profit
organisations and individual clients from Bolivia and all over the world.
At Criales, Urcullo & Antezana success is measured by the success of its clients and their long lasting relationships.
Criales, Urcullo & Antezana is one of the most important law firms in Bolivia.
In 2007 the Firm was designated the leading law firm in Bolivia for Corporate/M&A by PLC Which lawyer? 12th Edition,
Yearbook 2007 (www.practicallaw.com/whichlawyer).
Both the Law Firm and its Partners have been ranked as Leading Firm and Leading Individuals by Chambers Global -
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Yearbook 2008 (www.practicallaw.com/whichlawyer).
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42
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Chapter 7
Brazil
Rolim, Godoi,Viotti & Leite Campos Advogados
1 Overview of Natural Gas Sector
1.1 A brief outline of Brazil’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Worldwide gas has been linked to oil production as a by-product. In
the eighties, however, and mostly due to the oil price crises, natural
gas has become an important energy source and a market has
emerged As an example: from 1973 to 2007, the world gas
production has doubled from 1,227 to 3,031 billion m3 (Key World
Energy Statistics -IEA-2008).
Historically Brazil has never figured among the major natural gas
producing countries, producing approximately 18-19 billion m3 gas
per year. Its main primary sources of energy have been oil and
markedly hydro sources for electricity. Gas represents 9.3% of the
Brazilian Energy matrix (BP Statistical Review of World energy
2008), figuring as 5th place in the matrix. Thus, since 1999 the
national demand is supplied in a large amount by means of imports
from Bolivia.
The interest for the gas market has emerged as a response to the
environmental pressures as well as from the need to search for less
costly alternatives to the oil. This movement has stimulated an
emergent gas market with an expansion in terms of volume and
geographical areas explored. The result has been a crescent
technological progress in the field and also an incentive to develop
the transportation facilities.
The market in Brazil has been led by the company Petroleo
Brasileiro SA - Petrobras which, since its creation in 1953 until
1995, performed its activities in a monopolistic regime.
Constitutional Amendment No. 09, of 1995 has lifted the monopoly
regime and opened the market to the participation of private
investors. Since then Federal Law 9478 /97 (Petroleum Law) has
been the main act regulating the oil and gas sector and allows the
private participation to explore, produce, import and transport
natural gas through a concession or an authorisation regime. In
March 2009, Law No. 11,909 (“Gas Law”) was enacted. Although
still pending of further regulation, it establishes the main legal and
institutional framework to be applicable specifically to the gas
sector.
Nowadays, exploration and transportation of natural gas is
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Maria João C. P. Rolim
Vitor dos Santos Henriques
performed by Petrobras acting alone or jointly with private
companies. Distribution counts with 27 companies, mostly with
Petrobras participation. These companies have a concession to
operate in a monopolistic regime in their respective concession
areas.
In terms of transportation infrastructure, Brazil currently counts
with a total of around 7.4 milion km of pipelines network divided
into two main systems: 3,939 km transporting national gas; and
3,465 km (2,900 km in operation) for imported gas from Bolivia
with a transportation capacity of around 77 million m3/day.
Proved national reserves are 364 billion m3, mainly located in the
Federal states of Rio de Janeiro, Sao Paulo and Espirito Santo,
representing less than 0,2% of world production. National
Production is 60,000 million m3/day with a net production of
34,482 million m3/day and an importation of 30,917 million
m3/day, totalling an offer of 65,399 m3/day.
Recently, Brazil has discovered two important oil and gas reserves,
Jupiter and Tupi, which contain approximately 176 and 256 billion
m3 of gas yet to be explored. Such future potential will imply many
changes on Brazilian oil and gas production and consumption. In
addition, in 2010, the Mexilhao Campo (with an estimated capacity
of 15 million m3/day) shall start its operation, being the first
Petrobras’s gas extraction asset non-associated to oil.
The increase of natural gas availability and the ongoing process of
change in the Brazilian regulatory framework shall stimulate the
growth of the Brazilian gas trade market, which is still relatively
small given Brazil’s potential and domestic demand.
LNG technology is being recently implemented in Brazil not only
as an option to reduce dependence on the importation from Bolivia,
but also to supply areas where the transportation system is still poor.
The LNG market is still a premature one with a reduced number of
facilities. Currently, there are three facilities. The first one, Projeto
Gemini, was implemented in 2005. Located in Paulinia, Sao Paulo
state, it has a capacity of 380 million m3/day. The other two
projects are in Pacem, Ceara State and another in Guanabara Bay,
in the state of Rio de Janeiro. Both are re-gasification facilities and
aim to increase security of supply as an alternative to importing
from Bolivia. The projects have not yet initiated operation (source:
Ministry of Energy, 2008).
1.2 To what extent are Brazil’s energy requirements met using
natural gas (including LNG)?
Natural Gas represents 9.3% of the country’s energy matrix and
represents 7.2% of the country’s energy requirements. Considering
just non-renewable energy sources, natural gas represents 18.83%
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of the domestic offer and its consumption had an increase of 16.9%
in 2008.
Gas contributes 3.3% of the power generated in Brazil which is
85.5% dependent on hydroelectric energy and has a hydroelectric
potential still to be explored. A crescent national demand and a
need for increasing security of supply through diversification,
however, tend to expand the role of gas in the country’s electricity
Brazil
generation considerably (source: EPE 15/04/2009).
1.3 To what extent are Brazil’s natural gas requirements met
through domestic natural gas production?
Approximately 60% of the country’s natural gas requirement are
met through domestic production. According to EPE, in 2008,
Brazil had a consumption of 26.8 billion m3 which was met through
a domestic production of 21.5 billion m3 and a volume of
importation of 11.3 billion m3 (the difference between the total
offer and consumption represents loss in the process is around
20%). Most of the domestic offer is channelled to the industry
consumption and thermo power generation (source: EPE Brazilian
Energetic Balance 2009/ year 2008).
1.4 To what extent is Brazil’s natural gas production exported
(pipeline or LNG)?
Brazil currently does not export natural gas.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The Brazilian Federal Constitution establishes that the activity of
exploring petroleum, mineral resources and potential hydro sources
constitute a Federal monopoly but can be performed by third parties
through a concession or authorisation regime depending on the
case. The government owns the reserves which represent a property
distinct from the property of the land. The concessionaire,
however, is entitled to the production after a measure point to be
determined in the concession agreement.
The concession shall be granted in the public interest, through a
public bidding procedure and can be granted to Brazilians or
companies incorporated under Brazilian Law with head-office and
administration in Brazil regardless the nationality of their
shareholders.
Article 177, as amended by Amendment No. 9/95, lists the activities
that are considered a Federal monopoly. State owned companies or
private ones throughout the celebration of a specific agreement and
according to specific legislation, which, currently, is the Petroleum
Law and the recently enacted Gas Law, still pending further
regulation, can carry out these activities. The activities are as
follows:
(i) the exploration of crude oil, natural gas and other fluid
hydrocarbon;
(ii) refining;
(iii) import and export of the products and its derivatives
resulting from the above listed activities;
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Brazil
(iv) maritime transport of crude oil of national origin and its
derivatives as well as transportation trough pipeline of crude
oil, its derivatives and natural gas regardless its origin; and
(v) research and development of mineral and nuclear resources.
Law No. 11,909 enacted on March 3, 2009 (“Gas Law”), although
still pending further regulation, establishes the main legal and
institutional framework to be applicable to the transportation,
treatment, processing, storage, liquefaction, regasification and trade
of natural gas. Until the enactment of such law, Law No.
9,478/1997 (“Petroleum Law”) which remains in force when
applicable, regulated these activities. The last, however, refers
mostly to the particular aspects of the oil sector.
Institutionally Brazilian energy policy is established by the National
Council for Energy Policy (“CNPE”), which is directly
subordinated to the president of Brazil and headed by the Ministry
of Mines and Energy.
The oil and gas sectors are currently regulated by the National Oil
and Gas Agency (Agência Nacional do Petróleo, Gás Natural e
Biocombustíveis) - ANP, created by Federal Law No. 9478/97. The
sector-specific regulator is responsible for, amongst other
competencies, inspecting, judging, and starting administrative
procedures and enacting normative rules regarding such a sector. A
particular aspect of the Brazilian gas sector is that according to the
federative pact, competencies regarding the gas exploration are
shared between the states and the union. Under the constitutional
distribution of competence, commercialisation and distribution are
activities to be explored as a monopoly of the federative states
subjected, however, to Federal principles and state regulatory
powers. Therefore, ANP actions shall be coordinated with the state
regulatory bodies.
Future normative rules concerning the newly enacted Brazilian Gas
Law may set a more detailed discipline for the ANP regulatory
activity in the gas sector. The Law, still pending future regulation,
brings relevant changes in the regulatory framework for the gas that
will be discussed throughout the questions.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
The Brazilian Federal Constitution sets forth the monopoly by the
Federal Government of the natural gas reserves and of the research
and exploration of gas. The development of natural gas reserves
shall be carried out directly by the Federal Government or
transferred to participants by means of a concession regime or
authorisation, subjected, in the concession case, to a compulsory
public bidding process.
The rules applicable to the bidding process are established in the
Petroleum law as well as in the Bid invitation. The procedure
follows the following main steps: (i) the “expression of interest”
from the company; (ii) payment of participation fee and receipt of
preliminary seismic data; (iii) legal, technical and financial
qualification; (iv) presentation and tender of bids; (iv) awarding and
confirmation of the awarding; and (v) execution of the concession.
The grant of a concession may be awarded to national or foreign
companies. The last, however, if awarded the concession, must
constitute a company with head office and administration in Brazil
which shall be subjected to Brazilian Law regardless the nationality
of its shareholders. Brazilian Corporate Law (Law No. 6,404/76
and amendments) establishes specific rules for consortiums. A
worthy highlight is that according to Petroleum Law, consortium
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Rolim, Godoi,Viotti & Leite Campos Advogados
members are jointly liable for the execution of the concession
agreement.
Finally, the bidding procedure, according to constitutional and
specific legislation (Law No. 8666/93), shall follow an objective
and non discriminatory criteria and must be subjected to general
constitutional principles of equality.
Under domestic law, the concession agreement has a status of an
administrative contract and the relationship between concessionaire
and the government will be regulated by this contract as well as the
specific legislation applicable to the sector executed by the sector-
specific independent regulator - ANP.
In the view of the constitutional (Article 25 of the Federal
Constitution) shared competencies between Federal Government
and states, the distribution of piped gas to the final consumers is
considered a local service to be performed by the states directly or
by means of concession granting.
Only producers and importers are allowed to commercialise gas
subject to a licence procedure before the ANP.
According to the present regime, in case of concession regarding
exploration, the granted company owns the extracted gas (as it is
defined in the concession agreement), as well as the facilities used
in the extraction activity, while the government receives royalties
and other kind of payments. (Please refer to question 2.5.)
The recent discovery might bring about relevant changes in the
rules governing the future rounds to award new concessions. In
light of these new reserves, in November 2007 the Brazilian
government removed some blocks from ANP’s 9th bid round in
order to discuss a new regulatory framework aimed at increasing
the government take in of the sector. The new gas law has emerged
under this review process and the ongoing discussion has been
around the benefits and disadvantages of changing the concession
to a production sharing agreement regime. In addition, the
Brazilian government aims to apply the additional revenue to boost
other sectors. This objective may bring about changes in terms of
the establishment of bidder’s commitments to acquire local goods
and services as well as in the minimum investment level
requirements. Other potential changes include the creation of a
Sovereign Wealth Fund to support domestic investment strategies
as well as social policies and the strengthening of the role of
Petrobras in the new discoveries. Although controversial, the new
proposals affecting both the oil and gas sectors has been openly
discussed with the sectors participants and the government has
always reassured that the previously concessions are not to be
affected by upcoming legislation.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
The concession agreement comprises two main stages: exploration;
and production/development (Petroleum Law, Article 24).
The exploration phase involves the preliminary evaluation of the
potential discovery to determine its commercial viability and this
phase may last from three to eight years. Once the exploration
phase is completed, the concessionaire will submit to ANP an
approval of the plan and project to develop the production - The
Evaluation and Development Plan. The terms and conditions of this
phase are detailed in the concession agreement.
The production and development phase may last to 27 years and can
be extended for an equal period if requested by the concessionaire
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Brazil
12 months before the end of the initial period, subject to ANP’s
approval.
The concession implies to the concessionaire the obligation to
explore the activity on their own account and risk as well as the
obligation to comply with all the concession agreement’s
conditions.
Brazil
Private companies may also enter into different concession
agreements or receive authorisation for transportation and storage
of gas, or even for the construction/expansion and operation of
pipelines, as well as receive an authorisation for the processing,
treatment, liquefaction, and regasification of gas (the trade of gas
requires only the registration of the respective Gas Trade
Agreements before ANP).
All of these concession agreements are regulated by Brazilian law
(which comprises in this case of the Concession Law - Law No.
8.987/1995, the Bidding Law - Law No. 8.666/1993, and the above
mentioned Federal Laws, Law No. 11,909/2009 and Law No.
9,478/1997).
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
According to the Brazilian Federal Constitution, the exploration of
gas is a federal monopoly which can, at the government’s
discretion, be the object of a concession. Therefore, the Brazilian
state may explore gas either through Semi-public Companies
(Sociedades de Economia Mista) or Public Companies (Empresas
Públicas). Currently, Petrobrás, which is a semi-public and openly
held company, holds a dominant position in the gas and oil sector.
Constitutionally, the Federal Government owns the reserves and the
product of the exploration. According to the concession’s terms,
however, the concessionaire acquires rights over the production. In
addition, the Brazilian Federal Government has an exclusive
legislative competence in the energy field. (Article 22, IV).
Public interest, promoting the development and environmental
considerations are principles and objectives of the national energy
policy which must be reconciled with the need to attract investment
and promote competition.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
Currently, the Brazilian State derives value from the natural gas
exploration (governmental takes) according to the “Petroleum
Law” (and by-laws) which provides for an obligation of payment to
the Federal Government of: (i) a signing bonus; (ii) royalties; (iii) a
special participation; and (iv) a payment for the occupation or
withholding of the explored area (Decree No. 2,705/1998).
The signature bonus is the offer placed in the bidding process and
has its minimum amount established in the invitation. It is paid
before the signature of the concession.
The royalties are paid monthly at a value equivalent to 5-10% of the
reference price of the extracted gas (as defined in Federal Decree
No. 2,705/1998) times the amount of gas actually extracted by the
grantee.
The special participation depends on the volume production and its
value corresponds to a percentage (defined according to Article 21
of Decree No. 2,705/1998) incident over the total amount of gas
extracted.
The payment for the area occupation or retention shall be paid
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 Rolim, Godoi,Viotti & Leite Campos Advogados
annually on January 15 as from the date of the signing of the
Concession Agreement, and its amount due is calculated according
to the criteria defined in Article 28 of Decree No. 2,705/1998 based
on the block surface.
In addition, the activity is subject to the domestic tax system.
Currently, companies are subjected to a corporate income tax of
around 34% over the net profits, social contributions worked out
Brazil
over the revenue and Value Added Taxes.
Considering the potential rising in the oil and gas reserves, the
Brazilian government has set forth proposals, currently under
debate, aiming at increasing its participation on the gas and oil
exploration and also to better control the exploration of such
resources. The main discussion in terms of governmental takes is
to replace the current concession regime for a sharing production
agreement regime in the new reserves, so-called pre-salt given their
location. According to this regime, the production is shared
between the concessionaire and the government according to
contract. Other changes include the constitution of a State Owned
Company - “Petro-sal” - which would be in charge of representing
the state in consortiums and committees involved in the pre-salt
extraction. Finally, there is also a proposal to strengthen Petrobrás’s
position in the exploration of the new reserves and the constitution
of a special funding to promote social policies.
2.6 Are there any restrictions on the export of production?
Any company or consortium of companies incorporated under
Brazilian Law with their head office and administration in Brazil
can obtain authorisation from ANP to import and export natural and
condensed gas (Article 5, Law 9,478/97), subject to compliance
with the CNPE established energy policy, particularly regarding the
justified protection of the domestic market, transparency and non-
discrimination conditions. Please refer to question 3.1 below.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
There are no specific rules for the sector itself. As a general rule,
foreign investment in Brazil is regulated by Law 4,131/62 and its
amendments. Accordingly, foreign investments shall be registered
in the Brazilian Central Bank as well as all offshore remittance of
funds. The procedure is, however, only declaratory, being
unnecessary any approval. Despite such a declaration, there are no
other restrictions to the offshore remittance of funds derived from
gas production in Brazil.
The law also establishes rules applying to the reinvestment of
profits, payments of royalties and fees abroad. Remittances abroad
are also subject to domestic tax rules. Currently, dividends are
exempt from tax and other payments are, in general, subjected to
withhold tax at the rate of 15%.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
Brazilian Law and the Concession Agreement currently set forth the
possibility for the grantee to assign its contractual position to
another company. There are, however, some restrictions on such an
assignment, which, in general, are: (i) the previous approval by
ANP; (ii) the assignee must fulfil all technical, economic and legal
requirements set forth in law; and (iii) in the assignment it must be
preserved the subject matter and all other contractual provisions of
the current Concession Agreement. Also, all transferring of share
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Brazil
control, mergers, split-off, change of corporate form or corporate
capital reduction depends on the previous approval by ANP.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
ANP requires guarantees during the bidding procedure which may
vary from round to round and apply to all participants as a way to
ensure that the bidder will execute the concession agreement if
awarded the right accordingly. The analysis of the latest
Concession Agreements entered into by ANP indicates that the
agency has frequently requested a number of guarantees, such as a
letter of credits, guarantee of insurance, performance bonds,
operational, liability, personnel and property insurance policies.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
It is possible to pledge the rights arising out of the concession,
especially to enable the project finance of large gas projects, such
as the construction or extension of pipelines. Also, all rights,
turnovers, revenues and costs related to the right to develop natural
gas can be booked for accounting purposes. It is worthy to notice,
however, that any transfer of the shares emerged from the share
pledge agreement will depend on ANP’s approval.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Despite all regular corporate registers (such as the ones to be made
before the Board of Trade and Social Security, amongst others) and
the mentioned regulatory concessions, approvals and registers, it is
required for the company to obtain some other registers and
authorisations.
Under Brazilian Environmental Law, any activity that can
potentially affect the environment may undergo an evaluation of its
impact and obtain a previous environmental licence (Federal Law
No. 6,938/81). This evaluation in the area of gas and oil are: (i)
Preliminary Environmental Impact Study; (ii) Report of
Environmental Impact - RIMA; and (iii) Report of Environmental
Evaluation.
CONAMA’s Resolutions No.’s 23/94 and 237/97 regulate the
environmental licence procedures regarding the exploration of
natural gas applicable to the different stages of the activity.
Accordingly, the companies responsible for gas exploring in Brazil
must obtain the following listed licences before the state
environment entity (or even before the federal environment entity -
Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais
Renováveis/IBAMA, in case of interstate activity) for each stage of
development in order to carry on its activities:
(i) Provisory Licence for research and exploration drilling, (Pre-
drilling and reserarch licence).
(ii) Installation Licence.
(iii) Operational Licence.
CONAMA’s Resolution No. 350/2004 also establishes the
requirement of specific Seismic licences (Seismic Research
Licence and Operating Licence for Seismic Activities), when the
exploration activity will comprise of offshore areas or transitional
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Rolim, Godoi,Viotti & Leite Campos Advogados
areas (involving offshore and onshore area).
In case of onshore activities with environmental impacts comprised
within the area of a specific state, specific state licensing legislation
applies.
It may also be necessary to obtain some other specific
environmental licenses or authorisations, depending on the
verification of deforestation, or protected or preserved Indian lands,
amongst others.
General rules on Occupational Health and Safety Obligations are
established by the Ministry of Labour and involve, as an example,
the establishment of a specific preventive program to control health
and work environment risks.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
ANP Ordinances (Portarias) No.’s 114/2001, 25/2002 and 27/2006
regulate the abandonment and decommissioning of physical
structures used in natural gas development, setting forth rules
related to costs, deactivation and asset reversion, amongst others.
Thus, the government usually requires from the grantee (in the Gas
Exploring Concession Agreements) a guarantee regarding the
abandonment or decommissioning of physical structures, such as
insurance or a letter of credit.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Under Brazilian Law, any company that carries on activities in the
gas sector may require an authorisation to the Ministry of Energy
for the import or export of gas. Private investors are required to
constitute a special Purpose Legal Entity, incorporated under the
laws of Brazil, which must have its head office and administration
located inside Brazilian territory (Article 4, Law No. 8,176/91).
ANP Ordinance 43/98 establishes the application requirements
related to the transaction volume of gas, the market to be supplied
and other aspects concerning the gas specification. ANP Ordinance
16/2008 set forth rules of quality control over the gas and LNG
commercialised in the domestic Market.
The National Council of Energetic Policy and ANP can also apply
more specific restrictions for the importation and exportation of
gas, usually regarding the maintenance of a desirable domestic level
of gas supplying. Therefore, ANP’s Concession Agreements for gas
exploring usually contains a clause imposing the stoppage of gas
exportation by the grantee under certain circumstances that may put
the Brazilian internal market supply at risk.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Gas transportation in Brazil is constitutionally listed as a Federal
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Brazil
Monopoly which can, nevertheless, be carried out by third parties
throughout a concession or authorisation regime, as it may be the
case.
The activity is governed by Law 9,478/97 as recently amended by
Law No. 11,909/2009 (“Gas Law”) and regulated by ANP which
has the power, among others, to establish criteria for the calculation
of tariffs and also to set up the rules for open access.
Brazil
The objective of the new legislation, “Gas Law”, still pending
regulation, is to create a more competitive environment through the
establishment of an open third part access to the transportation
facilities. Accordingly, it is optional for any interested part to
request the use of existing or future facilities (except LNG
facilities) by means of payment of remuneration to the pipeline
owner. The owner, however, must offer access to its lines on a non-
discriminatory basis and it needs to comply with the terms and
conditions set by ANP, which also has the power to define priority
of the use of such facilities aiming at maximising the capacity use.
The activity can be carried out by any company or consortium of
companies incorporated under Brazilian Law with headquarters in
the country at its own account and risk throughout a concession or
authorisation regime, as it may be. The bidding process to grant the
concession will be organised by ANP and the transportation
company must allow the interconnection of other facilities,
according to ANP’s regulation.
Law No. 11,909/2009 has defined a 30-year concession right to the
grantees (renewable for a subsequent identical period), except for
the transnational pipelines, which will be subject to authorisation
(once it will operate under the term of an international agreement).
The concession must be granted through a public bidding which
rules are yet to be defined by regulation to be enacted by ANP.
Finally, in order to promote the expansion of the transportation
network, the Ministry of Energy, jointly with ANP, shall entitle the
initial operators with a period of exclusivity.
Law No. 11,909/2009 has also defined special conditions to the pre-
existent players of the Brazilian gas sector. It has defined that it
must respect all pre-existent agreements and rights, as well as
maintain all kind of licenses (whether concession, permission,
authorisation or approval), regarding pipelines and gas
transportation (notwithstanding some adjustments - yet to be
defined by ANP`s further regulation - and to be made in the
previous agreements in order maintain a competitive environment).
Also, regarding the remaining term of the previous licenses, it has
been set forth a 30-year concession renewal for the concession
already granted, and a 30-year concession term for the projects with
pending environmental licences. Please refer to question 1.1 for the
current transportation infrastructure.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
As already mentioned above, a private company may enter into a
concession agreement or receive an authorisation for the
transportation or storage of gas, or even for the
construction/expansion and operation of pipelines, as well as
receive an authorisation for the processing, treatment, liquefaction,
and regasification of gas (the trade of gas requires only the
registration of the respective Gas Trade Agreements before ANP).
The construction and operation of natural gas transportation
pipelines and associated infrastructure requires the company to seek
all environmental licenses mentioned in question 2.11. In addition,
the construction and operation of gas pipelines (including LNG)
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involves obtaining a Construction Licence and an Operation
Licence before ANP.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
Brazil
facilitate land access?
Brazilian Law No. 11,909/2009 allows ANP to declare the public
interest of a specific area required to construct the pipeline in order
to allow the expropriation of such an area, by which the owner shall
be duly indemnified.
The expropriation process is to be carried out by the developer upon
the government decree of public interest declaration and also to
indemnify the land owner.
At the same time the party may have to acquire the right to explore
the land by means of acquisition, right of use, contracting or any
kind of lease.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Please refer to question 3.1.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
Brazilian gas industry has just moved from a legal monopoly to a
more competitive regime, encouraging the entrance of new players
and the expansion of the actual infrastructure. Considering the
discovery of new gas reserves and the entrance of new competitors
to the sector and in order to ensure the free access regime entitled
by Brazilian Gas Law in the transportation segment (please refer to
question 3.1), Gas Law sets forth that any gas carrier must allow the
interconnection of other transportation structures to its own,
respecting the pre-existent rights of all carriers.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Law No. 11,909/2009 has brought a free third party access regime
to the gas transport segment. Such third party access requires the
signing of a gas transportation services agreement, and the access to
the pipeline must necessarily be firm, extraordinary (on an available
capacity basis) and interruptible (on an idle capacity basis).
The access to firm capacity will be allocated through a public
procedure of offering (Chamada Pública), regulated by ANP
according to rules established by the Ministry of Energy. Access to
extraordinary and discontinued capacity will be subjected to criteria
established by ANP, according to the principles of publicity,
transparency, right to access and no discrimination.
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4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Currently, ANP’s Ordinance No. 27/2005 regulates the terms of the
Transportation Services Agreement and ANP’s Ordinance No.’s
27/2005 and 29/2005 regulate costs and tariffs applicable to the
transportation of gas based on non-discriminatory criteria.
The “Gas Law”, Article 13.2, pending ANP’s regulation, has
established that the transportation tariffs in the pipeline concessions
will be fixed by ANP considering the annual revenue of the carrier
established in the bidding procedure and the maximum annual
revenue established in the bidding invitation.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The Brazilian Constitution (Article 25) defines the supply of piped
gas to end-costumers as a local service to be carried out by the
states on an exclusive basis, directly or through a concession.
Accordingly, each state should have its own gas distribution system,
and regulate it at its discretion (according to the administration
principles set out in the Brazilian Constitution).
Based on this shared competency, Federal States have organised
their distribution systems by the establishment of their distribution
companies and state regulatory framework. In order to promote a
more competitive environment, considering this shared competency
between the federal and state sphere, the new “Gas Law” has
introduced new players in the natural gas market: the “free
consumers” (consumers allowed to acquire natural gas directly
from any supply agent, importer or trader, as per federative
regulation [still to be enacted]); the “self-producers” (the agent
engaged in the exploration and production activities which uses part
or the totality of the gas in its own industrial activities); and the
“self-importers” (the agent that carries a licence for importing
natural gas and applies part of the totality of such an imported
product in its own industrial activities).
Under the new regulation, these players can construct and install
gas facilities and pipelines whenever the state-owned gas
distribution utilities are unable to meet their needs and provided that
they enter into operation and maintenance contracts with these
utilities, upon payment of O&M tariffs to be set forth by the state-
owned regulators. Facilities built according to these rules shall be,
however, reverted to the state-owned gas distribution utilities upon
payment of the correspondent indemnification. Furthermore, the
state-owned utility can request these players to construct facilities
large enough to allow their use by other consumers, negotiating
additional cost increases with such players upon arbitration of the
state regulatory bodies. This mechanism balances the private needs
of particular users with the pace of the previously planned
expansion. However, this mechanism will still need to be
harmonised with state legislation and with the concession
agreements of the state-owned utilities.
Liquefied Natural Gas does not require the distribution by the
states, being regulated by ANP and therefore possible to trade by
the parties who obtain all necessary licences.
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5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
As already mentioned above, it will depend on specific Federal
State legislation but, as a general rule, a company entering into a
concession agreement for gas distribution will need to provide
licences for the construction (Installation Licence) of natural gas
distribution systems and for the rendering of distribution services
(Operation Licence), besides all environmental licences already
mentioned in question 2.1.
5.3 How is access to the natural gas distribution network
organised?
Each Federal State has its own regulation regarding access to gas
distribution systems. Notwithstanding this diversity, the basic rule
is a non-discriminatory open access to third parties subject to
payment of compensation.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
Brazilian Federal State regulations concerning gas distribution and
Gas Distribution Concession Agreements define as obligations of
the grantee the improvement and expansion of its gas distribution
system, in order to ensure the current and future demand for gas.
This obligation, however, is evaluated by the regulators (state and
federal in coordination), considering economic viability and
priority of demand for the expansion. The concession agreements
also regulate this aspect.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
The access requires the payment of connection. Those fees are
freely negotiated between parties but the connection contract shall
be registered in the name of the state regulator. After connection,
the supply is subject to a regulated tariff.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
All transfers of share control, mergers, split-off, change of
corporate form or corporate capital reduction depends on the
previous approval by the current regulatory entity of the gas
distributor.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Under the new regulatory framework created by the time of the
enactment of “Gas Law”, gas trade in Brazil occurs by means of the
signing of a Gas Trade Agreement between the carriers, which must
be registered before ANP (who will check the compliance with all
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Brazilian laws and regulations). ANP shall inform the origin and
define the reserves that shall support the gas supply on such
agreements. It is important to mention that “Gas Law” allows for
the parties to set forth an arbitration clause in Gas Trade
Agreements for dispute resolution.
6.2 What range of natural gas commodities can be traded? For
Brazil
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Natural Gas may be traded on each of its possible transportation
forms. Therefore, it is possible to enter into trade agreements in
relation to bundled gas (GNC), liquefied (LNG) or piped gas.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
LNG in Brazil is regulated by ANP Normative Rule (Portaria) No.
118/2000. Such rules set forth that the activities related to LNG
must follow the standards of ABNT (Associação Brasileira de
Normas Técnicas), OIML (International Organisation of Legal
Metrology), ISO (International Organisation of Standardisation),
NFPA 59-A (National Fire Protection Association), as well as some
other national standards. LNG has been largely implemented in
Brazil since the middle of the last decade, and has emerged as an
alternative to the lack of full covering of the current gas distribution
grid, as well as an alternative for the pipeline gas imported from
Bolivia, which has recently faced political instability, affecting
Brazilian gas supply. Please refer to question 1.1 on current
Brazilian LNG infrastructure.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
For the construction and operation of LNG facilities, as well as for
LNG distribution inside the Brazilian market, it is currently
required to obtain an authorisation from ANP which will require,
among others, submission of a basic project for the facility as well
as a financial schedule for that. It is also necessary to obtain all
necessary environmental licences before state and also federal
environmental bodies, when applicable. Please refer to question 2.1
for the licences.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
Along with all other laws and rules regarding Brazilian gas sector,
ANP Normative Rule (Portaria) No. 118/2000 specifically
regulates LNG activities in Brazil.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The Brazilian Competition regulatory framework comprises the
Administrative Council of Economic Defence (CADE), acting in
conjunction with the Economic Law Secretariat (SDE) and the
Economic Monitoring Secretariat (SEAE). According to Law No.
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8,884/94, these bodies are the empowered entities for the analysis
of all anticompetitive practices and M&A activities, regardless of
the sector under analysis. Notwithstanding this wide competence,
the sector specific regulator acts as an additional competition
control. The coordination between those systems and the
competition and regulatory system shall be duly coordinated. The
current practice indicates that the transaction shall be presented to
Brazil
both bodies.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The competition authorities can assess any practice or transaction
that potentially may harm competition. Article 21 (combined with
article 20) of Law No. 8,884/1994 (Brazilian Antitrust Law) lists
acts that may be considered potentially harmful to the competition
in a specific relevant market. Those practices include, but not only:
(i) Tied-in sales.
(ii) Dumping.
(iii) Refusal to deal.
(iv) Price discrimination.
(v) Cartel practices.
Relevant to notice, however, is that Brazilian case law has indicated
that the assessment has been based on the “rule of reason”, which
considers the effects of the practice and allows for justified
restriction on competition based on gains of efficiency.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
Both ANP and CADE have the power to monitor, judge and order
the cease of anti-competitive practices, and it is also possible for
them to charge fines of up to 30% of the violating company’s gross
turnover on the previous year. Please refer to question 8.2.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
In the view of the mentioned (question 8.1 above), competence to
judge all mergers, acquisitions, split-offs, transformation,
consolidation, capital reduction and change on corporate control in
the gas sector, it is possible for Brazilian authorities to approve or
disapprove all corporate acts that trigger the current antitrust
notification criteria.
Transactions that might constitute an economic concentration must
be notified before the competition authorities within 15 days after
the closing of the agreement. The criteria to notify a transaction is
as following: (i) the market share of the companies involved must
account for 20% of a relevant market; or (ii) the companies
involved had a minimum of BRL 400 million gross turnover on the
previous balance. The time to obtain an approval will depend on
the case’s complexity.
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9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Companies that carry out activities must be incorporated under the
Brazilian laws and must have their headquarters located therein.
Acquisitions of share control of such companies (either by a foreign
investor or not) are subject to approval by the antitrust authorities,
by ANP and by any state regulatory body, as the case may be.
Foreign companies shall organise a special purpose company and
need to obtain the respective register of the foreign investor and of
the amount invested in the Brazilian Central Bank electronic system
(SisBacen). Please refer to question 2.8.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
Under Brazilian Constitutional Law, international treaties are
mandatory upon ratification by Brazilian Congress. (Federal
Constitution, Article 84, VIII.)
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Disputes in the gas sector - general over unitisation agreements or
transportation access - will be discussed before ANP as an
administrative sphere, assured, however, future access to the
judiciary. Brazilian Law No. 9,307/1996 (Arbitration Law) has
prompted a movement of the adoption of arbitration clauses in
infrastructure contracts. Thus, recent agreements in the natural gas
sector (including the concession agreements) tend to set forth an
arbitration clause for the resolution of conflicts involving
disposable property rights. While the Brazilian Supreme Court has
already acknowledged the possibility of Government authorities
being subjected to Arbitration Law, the Brazilian Arbitration Law
provides that arbitration shall not apply to “non-disposable rights”.
The exact meaning of the restriction and its relation to the energy
sector in general has been a contentious issue still not completely
discussed. The “Gas Law” expressly authorises state-owned
companies to submit to arbitration. This, however, does not clarify
the aspect related to the restriction mentioned above.
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10.2 Is Brazil’s a signatory to, and has it duly ratified into 11 Updates
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment 11.1 Please provide, in no more than 300 words, a summary of
Disputes between States and Nationals of Other States any new cases, trends and developments in Gas
(“ICSID”)? Regulation Law in Brazil.

New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards: Ratified by
Brazil in 2002.
(http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYC
onvention_status.html)
Convention on the Settlement of Investment Disputes
between States and Nationals of Other States: Not
ratified by Brazil.
(http://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSI
DDocRH&actionVal=ShowDocument&language=English)
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
The government has some procedural advantages (e.g., a longer
term to answer judicial queries), but in general, there are no major
difficulties regarding enforcement against government authorities
or state organs. Even administrative procedures are strictly
regulated by law (constitutional principles, Administrative
Procedure Law No. 9,784/1999, amongst others), also making it
possible to propose a writ of mandamus whenever it deems
necessary. For dispute resolution through arbitration, please, refer
to question 10.1.
Brazil
Brazil has discovered two important oil and gas reserves, Jupiter
and Tupi, which contain approximately 176 ad 256 billion m3 of
gas yet to be explored. The discoveries have determined major
changes not only in Brazilian oil and gas production and
consumption, but also in its current regulatory framework.
In this context, the implementation of a sharing production regime
alternatively to the current concession/authorisation regime has
been under discussion. Concerning the gas sector, in particular, the
recently enacted Law No. 11,909/2009, “Gas Law”, is still pending
further regulation. This law aims to promote competition in the
sector as well as to establish a new and specific regulatory
framework to the sector.
The increase of natural gas availability and the change in the
Brazilian regulatory framework should stimulate the growth of the
Brazilian gas market as a whole, which represents investment
opportunities in prospecting, exploring, transportation distribution
and the trade of natural gas.

10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?

We are not aware of specific disputes in this context.

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 Rolim, Godoi,Viotti & Leite Campos Advogados Brazil

Maria João C. P. Rolim Vitor dos Santos Henriques

Rolim, Godoi,Viotti & Leite Campos Rolim, Godoi,Viotti & Leite Campos
Advogados Advogados
Alameda Santos, 1940, 5th floor Alameda Santos, 1940, 5th floor
São Paulo, SP São Paulo, SP
Brazil, 01418200 Brazil, 01418200

Tel: +55 11 3723 7300 Tel: +55 11 3723 7300

Brazil

Fax: +55 11 3723 7328 Fax: +55 11 3723 7328

Email: m.j.rolim@rolimgvlc.com
URL: www.rolimgvlc.com
Partner of RGV&LC Advogados law firm; head of the Energy group.
Graduate in Law by Milton Campos Law School and in Economics
by the Catholic University of Minas Gerais (PUC-MG). Master in
Economic Law from the Federal University of Minas Gerais (UFMG)
and LL.M. from the London School of Economics (LSE). PhD
Researcher at the Centre for Energy, Petroleum and Mineral Law and
Policy (CEPMLP), University of Dundee, Scotland. Professor of
Energy Regulation at the Getúlio Vargas Foundation (FGV). Member
of the Brazilian Institute of Energy Law Studies (IBDE).
Email: v.henriques@rolimgvlc.com
URL: www.rolimgvlc.com
Associate Lawyer of RGV&LC Advogados law firm, specialised in
Regulatory, Energy and M&A areas. Graduate in Law by the
University of São Paulo (USP), Masters candidate in Commercial
Law at the University of São Paulo (USP). Certified by Brazilian
Investment Banks Association (ANBID) for the commercialisation
and distribution of investment products. Member of Brazilian
Corporate Law Institute (IBRADEMP) and of Brazilian BAR
Association.

Rolim, Godoi,Viotti & Leite Campos Advogados (RGV&LC) is a law firm with national and international scope specialised
in providing legal services with a focus on Business law. Counting on highly qualified professionals, with five offices in
Brazil and one in Europe and acting in the fields of Tax law, Corporate law, Environmental and Mining, Energy and
Aviation the firm has stood out since 1993 especially for its extensive knowledge and thorough technical analyses of
tax-related issues applied to a wide range of economic sectors. This expertise stems mainly from the qualification of
the firm’s partners and associates, which combine their knowledge of business practices with other qualifications
greatly needed for the professional practice of the law. The vast experience acquired, added to the policy of permanent
investments in new fields of law, allow the recognition of RGV&LC as one of the leading law firms in Brazil with local
expertise and international experience working in tandem.

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Chapter 8
Bulgaria
CMS Cameron McKenna in cooperation with
Petkova & Sirleshtov Law Office
1 Overview of Natural Gas Sector
1.1 A brief outline of Bulgaria’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Bulgaria imports most of its natural gas from Russia (exceeding 92-
94%). The only existing offshore natural gas production concession
“Galata” was signed with UK based Melrose Resources Plc. in 2001.
Following the recent two new discoveries by the same company, it is
expected that Bulgaria will have two new natural gas production
concessions signed in 2010 providing an excess of 10% of the
Bulgaria’s natural gas supply needs for the coming 10-15 years.
Nearly half of the natural gas in Bulgaria is used for power purposes,
mainly by district heating and CHP plants. In the industry, natural gas
is used mainly as a raw material. Certain quantities of Russian natural
gas (e.g. over 17 billion m3 annually) are transited through the
territory of Bulgaria to Turkey, Greece and Macedonia.
‘Bulgartransgaz’ EAD, a wholly state-owned company, is the sole
entitled natural gas transportation network operator in Bulgaria
(www.bulgartransgaz.bg). The total length of its main gas pipelines
is 2,645 km. One company holds a licence as a public supplier of
natural gas (‘Bulgargaz’ EAD, also wholly state-owned) and there are
about 36 companies carrying out gas distribution and transmission
activities. Currently the transmission and distribution network is
underdeveloped; most of the transmission and distribution companies
are just about to start their investment programmes.
Currently Bulgaria operates only one gas storage facility (‘Chiren’
- nearly 0.6 bil. m3). The state’s intentions are to extend the
capacities of this storage facility and to develop at least one more,
most likely by turning the nearly depleted gas field ‘Galata’ located
in the continental shelf of Bulgaria into a gas storage (in access of
1.6 bil. m3).
The development of any LNG terminal(s) is still within the
unforeseeable future.
The most significant future gas projects for Bulgaria are:
i) ‘South Stream’;
ii) ‘Nabucco’;
iii) inter-system connection Bulgaria-Turkey-Greece-Italy;
iv) pipeline Bulgaria-Romania; and
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Kostadin Sirleshtov
Pavlin Stoyanoff
v) construction of the second gas storage in ‘Galata’ and
extension of the gas storage facility ‘Chiren’.
1.2 To what extent are Bulgaria’s energy requirements met
using natural gas (including LNG)?
According to the latest data, the structure of electricity generation is
as follows: (i) coal power plants - 51.5%; (ii) nuclear power plants
- 33.9%; (iii) natural gas power plants - 5.7%; and (iv) renewables
- 7.7%.
Currently 47% of the gross natural gas consumption in Bulgaria is
used in the energy sector, 50% in the industry (mainly in the
chemistry, metallurgy and construction), about 2% in the public
sector and about 1% of the natural gas was used domestically.
1.3 To what extent are Bulgaria’s natural gas requirements
met through domestic natural gas production?
The Bulgarian dependency from natural gas imports equals to about
92-94% of the total consumption. In 2006, the domestic production
peaked 295 mln. m3 compared to about 3,427 mln. m3 imported
natural gas and has decreased ever since. About 0.6 bil. m3 is
currently the annual storage capacity in the country.
All imported natural gas to Bulgaria comes from Russia.
1.4 To what extent is Bulgaria’s natural gas production
exported (pipeline or LNG)?
The limited quantities of natural gas produced in Bulgaria are
currently sufficient only to cover a small portion of the internal needs
of the country and no export is being realised. The country ensures
transportation of Russian natural gas to its neighbouring countries.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The main legislation regulating the development of natural gas
includes the following acts: the Underground Resources Act 1999; the
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Energy Act 2003 and the secondary legislation for its implementation,
including the Ordinance for the licensing in the energy sector etc.; the
Concessions Act 2006 and the Regulation for its implementation; the
Property Act 1951; the State Property Act 1996; the Protection of the
Environment Act 2002; Waters Act 1999 and others.
According to the Bulgarian Constitution, the underground resources
Bulgaria
found within the territory of Bulgaria are exclusive state property
and their development could be granted to investors only through a
concession, according to the Concessions Act 2006.
The main authorities responsible for the regulation of the natural
gas development include: the State Energy and Water Regulatory
Commission; the Ministry of Economy, Energy and Tourism; and
the state-owned Bulgarian Energy Holding EAD.
With regard to future projects currently considered by the
government, please refer back to question 1.1.
It is expected that within 2010 the Government will finalise and
publish the Bulgarian Energy Strategy until 2020. In addition there
is an initiative for development of a programme for speed
gasification of the country, preconditioned by the current poor
domestically produced natural gas.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
Exploration of natural gas is granted to investors under an
exploration agreement.
The production of natural gas is granted under a concession
agreement signed between the investor and the state (under the
Concessions Act 2006 and Underground Resources Act 1999),
generally following a competitive procedure.
Upon discovery of natural gas resources under an exploration
agreement, the investor is entitled to concession for production
without a tender, if it duly registers the discovery. The concession
agreement grants to the investor the right of exploitation of the
natural gas against the obligation to construct and maintain the
object of the concession for up to 35 years. The ownership rights
over the produced natural gas are vested to the investor upon
extraction of the natural gas from the natural reservoir.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
An exploration agreement may be granted, following a competitive
procedure, to a person registered as a trader who has a sufficient
management and financial capacity. The permit is granted for a
specific territory within which the permit holder has the right to
perform all necessary activities for exploration and prospecting of
natural gas resources.
The exploration agreement is granted for a period of up to five
years, subject to two options for extension by two years each.
Upon discovery of natural gas, the permit holder may register the
discovery (as a commercial discovery) with the Ministry of
Environment and Waters. Upon such registration, the investor may
apply (within six months) for signing of a concession agreement,
thus avoiding the general competitive procedure.
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Bulgaria
Only resources of established quantities of natural gas and within a
defined area could be granted for production under a concession
agreement. The concession includes rights over the production
installations.
The concession agreements are signed with a maximum term of 35
years, subject to an option for a single extension of up to 15 years.
The granting of exploration and prospecting permit and concession
is preconditioned by a positive environmental impact assessment of
the activities. The developer must observe the environmental
legislation requirements, as well as the obligations for provision to
the state of detailed and exact information about the natural gas
resources. The developers are usually obliged by the concession
agreement to make certain minimal levels of investments
throughout the validity of the concession agreement.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
The current single major producer of natural gas - Melrose
Resources is a fully private company. The state is the sole owner,
through the national company Bulgarian Energy Holding EAD, of
the presently only operative gas storage facility in Bulgaria
‘Chiren’. The state’s ownership rights over the gas storage facility
are historically predetermined and not due to any special law
provisions, as ‘Chiren’ is a depleted natural gas field operated in the
past by the state (the natural gas production there began in 1963).
In general, the Concessions Act 2006 gives an option to the state to
determine a certain state share in the concession rights as a
condition for obtainment of a concession. However, it is an option
currently not used in the natural gas production sector.
The Governmental policy is not to interfere in the production
process, so there is no any current or envisaged Governmental
equity participation and/or joint development projects.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
The exploration activities are subject to annual fee, determined on
the basis of the granted exploration area.
In consideration of the right to produce natural gas, the
concessionaire pays royalties to the state, calculated on the basis of
the produced quantities of natural gas and specific conditions for
production (in which point the value may vary).
The royalties are monetary, there are no share production
agreements and other schemes of involvement of the Bulgarian
Government in the production.
2.6 Are there any restrictions on the export of production?
There are no legal restrictions on the export of natural gas from
Bulgaria, subject to transportation pipelines capacities. Nevertheless
export so far has been considered as economically unfeasible.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
There are no currency exchange restrictions or restrictions on the
transfer of funds derived from natural gas production out of
Bulgaria. Bulgaria further benefits from fixed exchange rate with
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CMS Cameron McKenna
the Euro, which remains unchanged since 1997 due to the Currency
Board, introduced in the country. Government plans for Bulgaria to
join the Euro-zone by 2012-2014.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
The rights under an exploration agreement or under a concession
agreement may be transferred to third parties that are compliant
with the general requirements of the law, however only after
approval of the public authority that has issued the permit or
granted the concession, respectively.
Transfer of concession rights requires prior approval by the
Government.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
The development of natural gas is subject to certain requirements
on the guarantees to be provided by the participant. Such could be
one or more of the following:
(i) bank guarantee;
(ii) escrow account payment;
(iii) insurance; and
(iv) others permitted by law.
Usually the developer provides a bank guarantee ensuring the
payment of the royalties or the exploration fee and the fulfilment of
its other obligations. The developer is also obliged to maintain the
insurance policies that are common for the natural gas
development.
A separate guarantee, of any of the above mentioned types, should
be provided in relation to covering the expenses for the ultimate
liquidation, conservation and recovery of the exploited terrains.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Only tangible objects, securities or receivable can be pledged under
Bulgarian law, but not the natural gas development rights.
However, once extracted, the natural gas or the receivables from the
sale of the natural gas could be pledged.
The proceeds/receivables of the natural gas development activities
can be booked for accounting purposes. Developer’s shares could
also be pledged for financing purposes.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
The granting of natural gas exploration rights is subject to a positive
environmental impact assessment of the Ministry of Environment
and Waters.
The developer shall follow the general occupational health and
safety requirements and shall be registered with the national
revenue and social security authorities.
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Bulgaria
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
The Underground Resources Act 1999 regulates the management of
Bulgaria
mining waste resulting from activities of production of underground
resources. In respect of exploitation of the sea bed, the general
applicable law is the Waters Act 1999.
Principally, the developer shall be responsible for protecting the
environment for any pollution caused by the natural gas
development activities. The developer is liable for ensuring the
proper collection, keeping, transportation and deposition of waste.
The specific obligations and application of particular plans for
mining waste management are stipulated in the natural gas
development agreements (e.g. the concession agreement).
Abandonment and decommissioning matters are usually agreed
under the concession agreements. Bulgarian legislation provides
that the ownership rights remain with the Bulgarian state after the
expiration of the concession term.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
The producers, the public supplier, the public and end distributors, the
gas storage operators, gas traders and consumers may freely enter into
gas trade deals with local persons or such located in a member state of
the EU, or with other states with which Bulgaria has signed an
international treaty for mutual application of the EU regulations.
Otherwise, the natural gas traders may freely enter into gas trade deals
with production companies in or outside the country, with consumers,
other traders, the public supplier and gas storage operators. The
consumers may freely choose whether to purchase natural gas from
local or foreign persons, subject to a prior notification thereof to the
transportation or transmission network operator.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
As mentioned, the single transportation operator is the state owned
company ‘Bulgartransgaz’ EAD. It owns the main gas pipelines in
the country. In 2007 the company initiated construction of an 80
km high-pressure natural gas pipeline from the town of Dobrich to
the town of Silistra, aiming the connection of Silistra to the
transportation network and the town’s consequential gasification.
In respect of international projects, please refer to question 1.1.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The responsibility for the management, maintenance, development
and operation of the transportation network is vested to the natural
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gas transportation operator ‘Bulgartransgaz’ EAD under a
transportation licence granted by the State Energy and Waters
Regulatory Commission (“SEWRC”), where only one such licence
may be issued for the country.
The construction of transportation pipelines is subject to the rules of
the Spatial Development Act 2001. First, there should be an
Bulgaria
approved Detailed Development Plan (“DDP”) setting up the
parameters of the future construction within certain area. The DDP
is approved by the relevant Municipal Council or the District
Governor (if more municipalities are concerned), or by the Minister
of Regional Development and Infrastructure in cases when the
pipeline is announced by the Government as an object of national
importance. On the basis of a DDP and an approved investment
design of the project, a construction permit is granted (the
competent authorities being the same as the above mentioned). At
completion of the construction, a technical testing of the pipeline
system is performed after which the construction is permitted to
operation by a compound commission.
The DDP and the investment designs are subject to a positive
decision on the environmental impact of the project.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
Only a Bulgarian person (a locally registered legal entity) may
acquire land or property rights over land. The right to construct is
secured either by acquisition of land or by granting of a right to
construct, together with necessary easement zones. Since the
transportation operator is an energy company, it receives by
operation of law rights to necessary easements over surrounding
properties, necessary for extension of existing and/or construction
of new gas transportation facilities.
The state may expropriate properties owned by private persons only
on the basis of an entered into force DDP and only for the purposes
of state needs that cannot be satisfied otherwise, against a fair
monetary consideration.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Please see question 6.4 below.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
As mentioned, the whole natural gas transportation pipeline is
operated by ‘Bulgartransgaz’ EAD, responsible for the overall
operation and maintenance of the network.
The regional networks are constructed and operated by the
companies that hold licenses for natural gas supply of the respective
territories. The state monopolies and the private licence holders
sign agreements for the interconnection and the supply of natural
gas.
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4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
The connection to the natural gas transportation network is subject
to connection agreements signed with the transportation network
operator and the users of the network. The transportation operator
is obliged to connect to the network the transmission/distribution
networks, the production and gas storage companies. The
transportation company may refuse connection on the basis of lack
of network capacity or economical inexpedience, in which cases the
person applying for connection may suggest constructing at its own
expense the facilities necessary for the connection. If the
transportation company unlawfully refuses connection, it shall be
subject to administrative sanctions and compulsory measures
(namely to provide connection), as prescribed by the SEWRC.
After signing of the connection agreement, the transportation
operator assures at its expense the approval of the project for
construction. The construction of the connection installations is
carried by the transportation operator, unless in the hypothesis
where it has refused connection on the basis of economical
inexpedience and lack of capacity.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
The law requires inclusion of certain compulsory types of clauses in
the connection contract (such as the term for the construction of the
connection facilities and beginning of operation, description and
technical parameters of the installations to be constructed, points of
connection etc.), where the very content of them is subject to
negotiations between the parties. The connection to the
transportation network is subject to regulated prices (depending on
the size of the conjunctions, the current prices vary from BGN
5,988 to BGN 11,232). The transportation fees for natural gas
through the transportation pipelines are also regulated by the
SEWRC (currently, BGN 19.73 per m3).
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The functions of natural gas transmission and natural gas distribution
should be legally and organisationally split. However, until the final
split of these functions, the transmission companies could carry out
distribution services as well. The public and end distribution activities
are carried out by the same persons. There are about 36 licences for
transmission and distribution of natural gas. There are four regional
licences for transmission and distribution granted. As mentioned, the
transmission/distribution network is under developed.
The natural gas transmission/distribution activities are regulated by
the Energy Act 2003, Ordinance 7 of 9 June 2007 for the connection
to the natural gas transportation and transmission network,
Ordinance 12 of 10 June 2004 for the activities of the natural gas
transportation and transmission network operators, and others.
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CMS Cameron McKenna Bulgaria

5.2 What Governmental authorisations (including any provided that the transferee is compliant with the specific
applicable environmental authorisations) are required to requirements of the law.
operate a distribution network?

The transmission and distribution of natural gas is subject to licensing 6 Natural Gas Trading
by SEWRC. The construction of the pipelines is subject to the same

procedures for permission of construction as described in question
4.2. There cannot be issued more than one transmission and
distribution licences for a certain territorial region in the country.
5.3 How is access to the natural gas distribution network
organised?
The natural gas transmission network operator is obliged to connect
the consumers. The junctions and connection installations are the
transmission network operator’s property.
Connection may be refused if:
(i) there is no capacity of the network; or
(ii) the connection is not envisaged or is envisaged to be realised
on a later stage.
The transmission operator may connect the consumer upon
agreeing on the bearing the responsibility for the connection
construction works and costs. The terms and conditions of the
connection are set up in an agreement between the consumer and
the transmission company.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
The transmission operators are obliged to construct at its expense
the necessary installations for connection to the transportation
network at points as determined by the natural gas transportation
network operator.
Upon a request, the SEWRC may require from the transmission
operator, if there are legal basis for this, to connect certain
customers, subject to the rules concerning the capacities and
economical expedience of the connection (see question 5.3 above).
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
The connection to the natural gas transmission/distribution network
is subject to regulated fees, determined by the SEWRC. The fees
vary, depending on the size of the conjunction and the particular
transmission network to which the consumer is connected.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
There are no specific legal restrictions for acquiring equity in
privately owned gas utilities. The merger of a gas company with
another company, or its split up is allowed by the SEWRC only if
the company formed after the corporate restructuring is compliant
with the requirements for holding the relevant licence. Merger and
acquisitions are also subject to competition compliance. The
transfer of assets of a natural gas utility is allowed if the assets are
transferred as a whole, subject to permission by the SEWRC. The
transferee must obtain a licence for carrying out the natural gas
activities in question or the existing licence of the transferor shall
be amended accordingly with the permission of the SEWRC,
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Bulgaria
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
The legal framework of the natural gas trading consists of the
Energy Act 2003 and the Rules for Natural Gas Trading adopted by
the SEWRC.
The participants in the market of natural gas are:
(i) the public supplier;
(ii) the production companies;
(iii) the gas storage operator(s);
(iv) the transportation company;
(v) the transmission operator;
(vi) the natural gas traders;
(vii) the consumers; and
(viii) the distributors.
The natural gas trading is realised under regulated or freely
negotiated prices, with an operation of a balancing market as well.
The natural gas market has been liberalised. Since 1 July 2007 all
consumers may freely choose their supplier of natural gas on freely
negotiated prices.
The main priority for the country is the lack of sufficient
development of the transmission/distribution network and
extension of the whole market. Only about 15% of the
municipalities are currently supplied with natural gas. The political
initiative in this respect is implemented in the operational
programme Regional Development 2007-2013.
The major forthcoming initiatives include:
i) development of the natural gas transmission/distribution
network;
ii) creation of a low pressure natural gas market; and
iii) construction of inter-systematic connections with the
neighbouring countries, etc.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
Unfortunately, there are no LNG facilities developed in the country
so far. During the Russian - Ukrainian Gas Crisis in January 2009
the Government announced plans of connecting the Bulgarian gas
supply system with the Greek LNG terminal, but no further steps
have been taken.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
The legislation does not envisage any specific rules in relation to
LNG operations. Therefore, the main rules regulating the natural
gas development, storage, trading etc. shall apply in this respect.
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7.3 Is there any regulation of the price or terms of service in
the LNG sector?
There is no specific LNG regulatory framework yet. The general
rules regulating the natural gas market shall be applied until more
specific legislation is introduced.
Bulgaria
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The competent authority in respect of regulation of competition
aspects in the natural gas sector is the main competition body: the
independent Competition Protection Commission (“CPC”).
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The general competition principals apply in respect of the
competition in the natural gas sector, where the criteria for
determining anti-competitive conduct refer to: restrictive vertical
and horizontal agreements and coordinated practices; abuse of
monopoly or dominant market position; merger control; sector
analysis and protection of the competition; prohibition of unfair
competition; as well as compliance with Articles 81 and 82 of the
Treaty Establishing the European Community. In this regard, the
natural sector is not subject to any legally determined special
regulatory regime, taking of course into consideration the natural
monopolies established for the activities of natural gas
transportation and public supply.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
For establishing committed violations of the competition rules, the
CPC has the power to carry out an investigation. The measures
within the inspections that the regulator may undertake include:
i) demand of evidence and information;
ii) interrogation of witnesses;
iii) at-site checks;
iv) assignment of expert examinations; and
v) request of information from the competition regulatory
authorities of the other EU member states and the European
Commission.
The possible sanctions that the CPC has powers to impose include
sanction of up to 10% of the company’s last year’s annual income.
The CPC may further impose on the violating companies certain
restrictive measures, or such compelling undertaking of actions for
avoiding further violations or restoration of the normal competition
on the market. For enforcing execution of its compulsory rulings,
the CPC may be imposing further periodical fines if the sanctioned
companies omit to act accordingly. Any person that has suffered
damages from a violation of the competition rules has the right to
be compensated by the offender.
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8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
The CPC is the competent authority that shall approve mergers
between enterprises of the gas sector in cases when the EU
competition law does not apply. According to the Protection of
Competition Act 2009, a concentration is a merger of or acquisition
between one or more independent companies or a case when one or
more related persons exercising a control over at least one company
acquire the direct or indirect control over another company or a part
thereof, in all cases if a permanent change of control is established.
Concentrations are subject to preliminary CPC’s approval if the
total last year’s income of the participating enterprises in Bulgaria
is more than BGN 25 millions and:
(i) the income in Bulgaria for the last year of each one of at least
two of the participating enterprises is more than BGN 3
million; or
(ii) the income of the target enterprises for the last year is more
than BGN 3 million.
The concentration shall be allowed if:
(i) it does not lead to establishment or increase of a dominant
position that would seriously hinder the effective
competition on the market; or
(ii) even if (i) is not complied with, the concentration contributes
to the positive development of the market.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
At present, foreign companies are not restricted in acquiring interest
in the natural gas sector. There should be, however, considered that
foreign companies that are not members of the EU or the EEA may
not directly apply for a licence for natural gas activities unless
through a locally registered (or in another EU/EEA Member State)
commercial entity.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
The main driving force of the recent development of the natural gas
sector in Bulgaria is the country’s obligation for implementation of
the EU law in the sector. In this context, the most significant are the
gas Directive 2003/55, Energy Chapter Treaty and the Energy
Community Treaty of 2006.
Further significance has the bilateral agreement for supply of
natural gas between Bulgaria and the Russia.
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10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Generally, the contracts entered into between the participants on the
natural gas market include dispute resolution clauses.
With respect to the agreements between the state and natural gas
developers, the Underground Resources Act 1999 provides that the
contract must include a dispute resolution clause. The venue,
however, may be a court or an arbitration tribunal. If international
arbitration is envisaged for resolution of disputes, the arbitration
clause must include understanding on the language and place of
arbitration in addition to the other terms and conditions in this
respect. Further, the parties to such agreement may agree to refer
certain disputes for resolution by experts.
10.2 Is Bulgaria a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Bulgaria has signed and ratified both the New York Convention on
the Recognition and Enforcement of Foreign Arbitral Awards and
the ICSID. The basic principles and provisions of the latter are
incorporated in the Bulgarian Law on International Commercial
Arbitration 1988.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
Enforcement of any judicial or arbitral awards against government
authorities and state organs is subject to special rules, thus avoiding
the general ones in this respect. Recognised monetary court
judgments or arbitral awards shall be submitted to the financial
organ of the particular state institution. The sum shall be paid to the
entitled person out of the relevant state institution’s budget. If the
current budget funds are not sufficient to satisfy the whole sum, the
obligation must be paid from the next budget, and not later.
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Bulgaria
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
Unfortunately, there has not been significant investment appetite by
Bulgaria
foreign corporations to invest in the Bulgarian gas sector, mainly
due to the considerable lack of sufficient natural gas reserves.
Despite of the fact that in the recent years the situation is changing,
there are a limited number of international players involved in the
Bulgarian gas sector.
Among the leading participants in the market are companies, such
as: Gazprom and its various subsidiaries, Melrose Resources;
Rimini Gas, Black Sea Gas Company and others.
There were various cases in which Gazprom related entities in
Bulgaria has been successful in litigating the Bulgarian
Government and the SEWRC before the Supreme Administrative
Court.
11 Updates
11.1 Please provide a summary of any new cases, trends and
developments in Gas Regulation Law in Bulgaria.
It is very likely that the Bulgarian natural gas sector will develop
rapidly in the following 3-5 years. Within 2010 the Government
has planned to announce its long-anticipated Energy Strategy to
2020 and to amend the Energy Act 2003 following the Third Energy
Package of the EU.
The Minister of Economy, Energy and Tourism has receintly
announced the plans to privatise a minority package of
“Bulgartransgas” EAD within 2010, which is going to be the most
significant privatisation deal in the Bulgarian gas sector to date.
In 2009 the Government appointed the leading gas expert Mr. Angel
Semerdzhiev as Chairman of SEWRC thus boosting the sector.
It is highly anticipated that within 2010 Melrose Resources will
sign two new concessions for “Kavarna” and “Kaliakra” deposits
offshore Bulgaria and that their “Galata” concession agreement will
be converted into gas storage project for the benefit of the security
of the gas supply.
Both leading international gas pipeline projects “Nabucco” and
“South Stream” are supported by the Bulgarian Government and it
is likely to continue its development. In parallel, it is likely that the
smaller scale interconnections with the neighbouring countries are
developed as well.
There are plans by EVN and CEZ to develop highly efficient CHP
projects in Bulgaria thus increasing the need for gas supply (import)
for the country.
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 CMS Cameron McKenna Bulgaria

Kostadin Sirleshtov Pavlin Stoyanoff

CMS Cameron McKenna CMS Cameron McKenna
14 Tsar Osvoboditel Blvd., Floor 1 14 Tsar Osvoboditel Blvd., Floor 1
1000 Sofia 1000 Sofia
Bulgaria Bulgaria
Bulgaria

Tel: +359 2 921 9942 Tel: +359 2 923 4861

Fax: +359 2 921 9919 Fax: +359 2 921 9919
Email: kostadin.sirleshtov@cms-cmck.com Email: pavlin.stoyanoff@cms-cmck.com
URL: www.cms-cmck.com URL: www.cms-cmck.com

Kostadin is a Partner at CMS’s Sofia office leading the Energy team
of five lawyers. He has LLM from Sofia University and a Diploma in
“English and EU Law” from the University of Cambridge, and has
specialised in the UK, USA, Italy and Austria. Kostadin served as
Chief of Staff for the Minister of Energy and was part of the team
that developed the new energy legislation of Bulgaria.
As part of CMS, Kostadin was involved in various oil and gas related
projects, including acting for:
Melrose Resources (UK) on their existing natural gas
exploration and concession agreements with the Bulgarian
government and for the “Galata” gas storage project.
MREI (Switzerland) on their exploration activities.
Petrol (Bulgaria) on their 40 million Euro dispute with Lukoil.
BNP Paribas (France), on their financing of oil storage project.
Leading international oil contractor on its exploration activities
onshore Bulgaria.
Pavlin joined CMS as an associate in the beginning of 2008 after
obtaining his LL.M. in Law from Sofia University in Bulgaria. He
obtained a Diploma in “Introduction to English and European Union
Law” from the University of Cambridge in 2008 and has been a
member of the Bulgarian Bar Association since 2009. He is part of
the energy, projects and construction (EPC) practice of the office. In
addition to working on EPC projects, Pavlin works on dispute
resolution, enforcement and insolvency and competition matters.
Pavlin is fluent in Bulgarian and English and has very good
knowledge of French and Polish.
Some of his relevant experience includes advising:
Melrose Resources (UK) on their existing oil and natural gas
exploration agreement with the Bulgarian government and gas
storage project.
Play Star Europe SRL (Romania) on the debt recovery case.
EOP Biodiesel AG (Germany) in relation to procedures for
enforcement of a foreign arbitral award.
Gestamp Eolica (Spain) in assistance with their Bulgarian
projects.
PCC DEG Renewables (Germany) on the acquisition of two
power plants.

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Chapter 9
Chile
Guerrero, Olivos, Novoa y Errázuriz Ltda.
1 Overview of Natural Gas Sector
1.1 A brief outline of Chile’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Chile is basically a natural gas importer. Since 1997 and until 2004
the main source of natural gas supply came from Argentina. In 2004,
imports were made from Argentine basins “Northwest” (21.8%),
“Neuquen” (40.7%) and “Southern” (37.6%) and in order to supply
the Chilean demand five natural gas pipelines were built.
After the energy and economic crisis suffered by Argentina, the
supply was decreasing drastically coming at a time to be close to
zero. In 2007 the Chilean authorities reacted to this situation and
began promoting the construction and operation of LNG terminals
and natural gas exploration.
In response to this situation, two consortia decided to build LNG
projects, one in the central area of the country and other in the
northern region.
GNL Quintero SA is the terminal for receiving, storing and
degasification of Liquefied Natural Gas. Since the second half of
2009 this terminal is operating in the Bay of Quintero, supplying
natural gas to the central Chile. Its partners are BG Group, Empresa
Nacional de Petroleo (“ENAP”), Endesa Chile and Metrogas,
whom have invested more than $1.1 billion in this project.
Quintero LNG meets the demand of natural gas to date which it
used to be supplied by pipeline from Argentina. BG Group supplies
from its portfolio of LNG to the Quintero terminal and the supply
contract is not tied to a single source. Thus, LNG is transported in
ships from various countries with which BG Group has a supply
contract, such as Trinidad and Tobago, Egypt, Nigeria, Equatorial
Guinea and other producing countries.
Quintero LNG Terminal has three storage tanks allow the discharge
of LNG with a total capacity of 334,000 cubic metres. The first
LNG tank has a capacity of 14,000 cubic metres and is operational
since June 2009. The second and third ponds have a capacity of
160,000 cubic metres each and will be operational in the winter of
2010. A regasification plant with three vaporisers that can process
2.5 million tonnes per year of LNG, producing about 10 million
cubic metres of natural gas per day on base and 15 million cubic
metres per day at peak, which is injected into the pipeline network
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Gonzalo Delaveau
Marcos Zavala
for distribution in the central region.
In October 2007, Sociedad GNL Mejillones SA was established by
GDF SUEZ and the Chilean State copper company Codelco. This
company was created to encourage the construction and operation
of a Liquefied Natural Gas Plant in the town of Mejillones, in the
Region of Antofagasta (“Mejillones LNG”).
Mejillones LNG project involves an investment of nearly $500
million and is designed to deliver up to 5.5 million cubic metres per
day of natural gas, which will generate up to 1,100 megawatts. This
project involves the construction of a dock that can receive ships
with LNG producers from different countries such as Trinidad and
Tobago, Yemen and Qatar. The date of first delivery of natural gas
through LNG imports is expected in the first quarter 2010.
The production and domestic supply of natural gas is limited only
to oil fields in the Magallanes Basin in Region XII.
In June 2007, the Ministry of Mining announced an international
bid to attract gas and oil exploration and production investments in
ten geographic blocks located in the Magallanes Basin. On October
10, 2007, a total seven companies and/or consortiums presented
offers for nine of the ten blocks under bidding. On November 15,
2007, the Government granted nine blocks to six international
companies. ENAP participates with 50% of the rights in three of
these blocks. On April 30, 2008 the awarded officially entered into
the agreements with the Chilean Government.
The blocks granted, the awarded companies and consortiums were:
Tranquilo Block, IPR- Manas; Russfin Block, Apache; Brótula Isla
Magdalena and Porvenir Blocks, (all three granted to Greymouth).
The awarded companies participate in a 50% association with
ENAP in the three remaining blocks, el Coirón (Pan American
Energy), Caupolicán (Greymouth) and Lenga (Apache).
In the natural gas distribution sector, there are currently six gas
distribution network companies, three trading firms and eight
transportation companies.
1.2 To what extent are Chile’s energy requirements met using
natural gas (including LNG)?
As a consequence of the lack of supply from Argentina most of the
natural gas consumption it is used in supplying domiciliary and
industrial use. Nevertheless, the natural gas installed capacity in the
Chilean Central Interconnected System (SIC) represents 24% and in
the North Interconnected System (SING) represents 58% of the
total capacity. LNG is now accounting for 13% of the power
produced on the SIC. The amount of imported LNG used to fuel
thermo power plants on Chile’s central SIC could double in 2010.
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1.3 To what extent are Chile’s natural gas requirements met
through domestic natural gas production?
The domestic national production is limited and it is basically used
in the Magallanes Region.
1.4 To what extent is Chile’s natural gas production exported
Chile
(pipeline or LNG)?
Chile’s natural gas production is not exported.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The Political Constitution of the Republic of Chile (the
“Constitution”), established that the State has absolute, exclusive,
inalienable and imprescriptibly ownership of all hydrocarbon
deposits and other fossil substances. This principle is reproduced in
the law governing ENAP and the Chilean Mining Code (“CMC”)
embodies this in the same way.
In this way, the Constitution gives the State ownership of all
hydrocarbon deposits and also reserves, therefore, any initiative to
explore, exploit and benefit from liquid or gaseous hydrocarbons in
Chile.
The Constitution provides that liquid or gaseous hydrocarbons,
unlike other substances the ownership of which the Constitution
also reserve exclusively for the State, cannot be the subject of
exploration or exploitation concessions. Moreover, the
Constitution and the CMC provide that the exploration and
exploitation of hydrocarbons can be performed directly by the State
or by its companies or through administrative concessions or
special operating agreements.
On the other hand, storage, transport, distribution, processing,
transformation, refining, sale and marketing of oil or gas, as well,
as the development of any other industrial activity related to
hydrocarbons, the products and derivatives thereof, can be
developed and managed by the private sector.
The regulatory framework of the gas industry in Chile is comprised
essentially by:
a) Statutory Decree 323 of 1931 (the “Gas Services Law”), as
amended, that governs: (i) the transport and distribution of
gas; (ii) the concession and easement for the gas transport
and distribution system; (iii) gas pipeline exploration and
operation; (iv) gas sales; and (v) the gas industry rate-setting
system.
According to the Gas Service Law, pipe gas is understood as
any combustible gaseous fluid that is carried or distributed
through piping, whether natural gas, gas derived from coal,
naphtha or coke, propane and butane in a gaseous state and
any other type or mix of the above.
b) Supreme Decree 263 of July 8, 1995 of the Ministry of
Economy, which contains the regulations on provisional and
definitive concessions for the distribution and transport of
gas (“SD No. 263”). SD No. 263 sets forth the procedure and
requirement to obtain a provisional or definitive concession
of gas distribution or gas transport. Among the most
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Chile
important features of DS 263 is the concept of open access
system, which means that the service offered by the
companies must be made in equal economic, commercial,
technical and informational terms, with regard to available
transport capacity.
c) Supreme Decree No. 254 of October 30, 1995 of Ministry of
Economy, which contains the regulations on safety in the
transport and distribution of natural gas (“SD No. 254”).
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
As provided in the Constitution, the exploration, exploitation and
processing of deposits containing liquid or gaseous hydrocarbons
cannot be given in concession to third parties. Notwithstanding, the
Constitution itself provides that these activities can be undertaken
directly by the State through its companies or through contracts
with third parties called special operating agreements.
The general rules for the making of the so-called Special Operating
Agreements for the exploration and exploitation or working of
hydrocarbon deposits (“SOC” or “CEOPS”) are contained in
Statutory Decree No. 1089 of 1975 (“DL 1089”), as amended.
DL No. 1089 sets the general framework governing this type of
agreement since the requirements and specific operating conditions
for each case are set by the President of the Republic pursuant to a
Supreme Decree (“SD”). A SOC is understood as an agreement by
and between the State of Chile and a contractor for the exploration,
exploitation or processing of hydrocarbon deposits. The contractor
may be a Chilean or foreign individual or body corporate. Under
the SOC, the contractor is empowered to develop exploration
and/or exploitation activities in the territorial areas established in
the respective SD.
Execution of the SOC does not in any case affect the State’s
ownership of the hydrocarbon deposits and other elements and
chemicals compounds accompanying them and does not in any way
constitute a concession nor confer any right regarding the
hydrocarbons, elements and compounds that are found, nor does it
grant powers of appropriation or of use regarding the same.
The payments received by the contractor for hydrocarbon
exploration and exploitation activities performed thereby can be
made either in legal tender or foreign currency or in hydrocarbons
under the conditions stipulated in the SOC.
Likewise, Chilean regulation contemplates Specific Oil Service
Agreement (“SOSA”), to be entered into by a SOC contractor
whereby commissions a service or execution of a specific work from
a third party under payment of compensation in order for such third
party to cooperate in the execution of special hydrocarbon exploration
or exploitation work. The person providing the service or executing
the work is called the subcontractor. Authorisation for the contractor
to enter into one or more SOSA’s and the rights and benefits of the
subcontractor must be contained in the SD approving the SOC.
Special Rights of a Contractor under a SOC
a) Rights contained in the CEOP cannot be modified by a
subsequent law.
The CEOP is what is known in Chilean law as “Contract Law”,
therefore a subsequent law cannot modify or affect the rights
contained therein, unless due indemnification is paid.
b) Access to Foreign Currency.
As we stated, payment by the Government may be made in cash or
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through the delivery of hydrocarbons. If payment has been agreed
upon in foreign currency, the Central Bank of Chile will provide the
foreign currency necessary, for which purpose the SOC must be
recorded with such bank.
If hydrocarbons will be received, the contractor may export them
freely and keep the foreign currency received in exchange without
any obligation to convert it to pesos, the Chilean legal tender.
When a SOC is subscribed, the State guarantees the contractor
access to the foreign currency market called the formal exchange
market (free bank market) for currency conversion and subsequent
remittance abroad of proceeds from the sale of equipment or other
assets or of the compensations received under the SOC.
c) Tax and Customs Benefits
The contractor will be subject to a tax calculated directly on the
amount of compensation equal to 50% of the same; or it may be
subject to the general tax system under the Chilean income tax law as
determined by the President of the Republic, currently 17% if it is a
company or person domiciled and resident in Chile, or 35% if not.
Notwithstanding the foregoing, the President of the Republic may
order reductions in the taxes regardless of the tax system set or of
all or each of the taxes in the Income Tax Law, equal to 10%, 20%,
30%, 40%, 50%, 60%, 70%, 80%, 90% or 100%, when the
difficulties in the territory of exploration or exploitation referred to
in the agreement, the non-existence of agreements avoiding
international dual taxation between the country of origin of the
investment and Chile, and the assessments that may be applied to
the contractor under the other terms of the agreement make it
advisable.
Moreover, DL 1089 provides that the President of the Republic may
release the fees, taxes, duties or assessments and in general the
payments or encumbrances in the same percentages indicated above,
regardless of the authority or agency that collects them, including the
substitute tax established by article third of Stamp Tax Law as well as
the Value-Added Tax under Statutory Decree No. 825 of 1974 and in
general, any other payment or encumbrance that affects directly or
indirectly the import of machinery, tools, materials, spare parts,
species and elements or assets to be used in the exploration and
exploitation of hydrocarbons under the SOC or SOSA.
These powers of the President of the Republic shall be exercised in
the same SD in which the requirements and conditions of the
special operating agreement are set.
It is important to highlight that the owners, shareholders and
partners in the respective companies will exempt from the
aggregate complementary or additional tax, as the case may be,
regarding the income received or approved under the SOC or
SOSA, as well as, any other tax that may be assessed on such
income and the ownership, possession or holding of rights or bearer
securities of the same companies, notwithstanding the tax to which
the transfer or transmission of such rights or instruments is subject.
The assets admitted under benefits granted by provisions in DL
1089 may not be conveyed for 10 years following the date of
clearance through customs unless all taxes and fees, the payment of
which was deferred, are first paid, which will be applicable on the
value of such assets on the date of the act or contract used as the title
to transfer according to an appraisal that will be made by the
respective service for this purpose.
If the compensation consists of hydrocarbons, the transfer of
hydrocarbons made by the contractor and the documents evidencing
the same will be exempt from any tax or encumbrance. The export
of hydrocarbons will also be exempt from any tax or encumbrance.
Moreover, compensation of foreign subcontractors not domiciled in
Chile under a SOSA will be subject to a tax calculated on the
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Chile
amount of such compensation, the rate of which will be 20% and
will replace any other direct or indirect tax that may be assessed on
the compensation or the subcontractor by virtue of the same.
The President of the Republic may order a reduction in this tax
equal to 10%, 20%, 30%, 40%, 50%, 60%, 70% or 75%. The
reduction will be inserted in the respective SOC and will be
invariable for the period for which it is granted.
Chile
The regime in subparagraph fourth of article 5th granted by the
President of the Republic to the contractor will be legally applicable
to the subcontractors in a SOC.
Finally, the machines, devices, instruments, equipment, tools and
parts or components of the same required performing exploration
under a SOSA or SOC, whether or not owned by the subcontractor
or contractor, may enter the country under the system of temporary
admission established in the Customs Ordinance. This merchandise
will enter under the system indicated for a period of up to 5 years,
extendible annually by the National Customs Director according to
the needs and features of the respective SOSA or SOC, as the case
may be.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
See above.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
See above.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
See above.
2.6 Are there any restrictions on the export of production?
Chile has small reserves of natural gas and therefore it produces a
minimum amount, which is for local consumption. SOC
agreements have established that the contractor has an obligation to
give priority to meet the Chilean internal demand of natural gas
with the commercial natural gas of the area of CEOP and that sales
must be made through a public bid entered by the State of Chile.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
Under the SOC, the State of Chile guarantees to the contractor the
right to access the exchange market to buy foreign currency at any
time as well as the right to retain abroad the foreign currency
generated by their exports, equipment sales, or from his own goods,
made in accordance with the terms and conditions of the CEOP,
compensation for damages or payments received by virtue of
insurance and general contracts, for any amount the contractor may
receive and has the right to remit abroad.
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2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
As mentioned in question 2.1 above, the execution of the SOC does
not affects the State’s ownership of the hydrocarbon deposits and other
elements and chemicals compounds accompanying them and does not
in any way constitute a concession nor confer any right regarding the
Chile
hydrocarbons, elements and compounds that are found, nor does it
grant powers of appropriation or of use regarding the same, and
therefore it is not possible to transfer or dispose such rights or interest.
The SOC agreements can be assigned with prior notification and
approval from the Government. Normally the assignee will have to
fulfil with certain requirements set forth in the SOC.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
Indeed, a bank guarantee or letter of credit has been requested an
included in the SOCs in order to secure the minimum investments
agreed in the agreements. Likewise, in some cases a parent
guarantee has been requested to guarantee proper financial backing
for its affiliate regarding due fulfilment thereby of the obligations
related to exploitation.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
There are no specific limitations in the regulation but should be
expressly contemplated in the SOC and prior notification and
approval from the Government will be normally requested.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
It will require further approvals or licences for operation and
construction (at municipal level), environmental (regional or
national environmental agency), health and safety (health and
municipal authorities), and other permits.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
Specific regulation on this regard has been included in the CEOPS
executed in April, 2008, between the Chilean Government and
several companies according to international standards. These
kinds of limitations and obligations are also normally included and
contemplated in the environmental authorisations.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
In the past, when the natural gas was imported from neighbouring
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Chile
countries, essentially Argentina, and in order to avoid a
discriminatory treatment in the delivery of natural gas to Chilean
consumers, Chile subscribed a gas protocol with Argentina.
However, in general, there are no specific limitations on imports of
natural gas. One limitation refers maybe that only Chilean
individuals or legal entities may file applications for gas transport
concessions. Moreover, there are no limitations in relation to the
ownership of the Chilean company requesting the concession,
meaning by this that the company can be wholly-owned by foreigners
with the sole limitation of the existence of at least to partners in order
to incorporate and maintain the corporation in good standing.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Regulatory Framework
As already mentioned, the transport of pipe gas in Chile is regulated
by the Gas Services Law and in particular by SD No. 263 and SD
No. 254.
Provisional and Definitive Transport Concessions
In order to provide public gas transport service, and therefore build
and operate gas pipelines, a gas transport concession must be obtained,
which may be provisional or definitive according to whether the
purpose of the same is to prepare information for a future final
concession or purely and simply to protect the construction, operation
and maintenance of a gas pipeline and its auxiliary works.
Provisional concessions grant rights to perform studies to route the
pipelines for transport or distribution. Definitive gas transport
concessions, the duration of which is indefinite, empower the
concessionaire to build, maintain and operate a public gas transport
system (“Gas Pipelines”) to provide gas transport service, and grant
the right to obtain rights-of-way through the public or private land
crossed by the route.
One or more Gas Pipeline concessions may exist in a certain
geographic area as determined by the authority.
We must highlight that gas transport public service concessions
protect not only the gas pipeline as such but also its auxiliary works
such as pump stations, pressure reducing centres, access roads, etc.
Another very important consideration is that concessions can be
conveyed or transferred in compliance with the requirements of the
Gas Services Law and may also be mortgaged or encumbered in
favour of third parties. All the foregoing is to the extent that it does
not affect the public gas transport service provided by the transport
concessionaire.
Forfeiture of Concessions
Notwithstanding the indefinite nature of definitive concessions, they
may be forfeited by a Supreme Decree of the President of the
Republic before the concession enters into operation if the
concessionaire does not execute the concession decreed to public
deed within the period of thirty days following publication of the
same in the Official Gazette. The Ministry of Economy may also
request that the respective Court of Appeals declare a serious default
on the obligations of the concession if two-thirds of the works have
not been executed in the established terms. Once default has been
declared, the President of the Republic will decree forfeiture.
Once exploitation of the gas transport concession begins, there are
no specific rules in the actual regulations to decree forfeiture of
such concessions as there are to decree the forfeiture of distribution
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concessions. The Bill is expected to incorporate a special chapter
on the issue of forfeiture of transport concessions. Until the Bill is
passed, we believe that the same rules in the case of forfeiture of
distribution concessions are applicable to the forfeiture of transport
concessions.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
Concession Application Procedure
A concession (provisional or definitive) is requested from the
Superintendency of Electricity and Fuel (“SEF”), which is a
technical service within the Ministry of Economy, Development
and Reconstruction. The requirements for such request are set
down in articles 5 and 6 of SD No. 263, which refer principally to
identification of the requester, the type of concession being
requested, a general drawing on the works, the point of origin and
destination between which gas transport is requested, identification
of the fiscal, municipal or private property that will be affected and
the corresponding drawings thereof.
This concession request is analysed by the SEF, which proposes a
draft decree granting the concession to the Ministry of Economy
upon approval of the project.
In turn, the Ministry reviews the draft decree and sends it to the
President of the Republic for signature upon approval. Once such
decree is signed, it is analysed legally by the Controllership General
of the Republic, which is concerned with ensuring that no legal
defects are present therein.
Subsequently, the Ministry will send the decree granting the
concession to the Official Gazette of the Republic of Chile for
publication, while the interested party will have a period of 30 days
as of the date of publication to execute the same to public deed.
Once these proceedings have been completed, the interested party
will have the possibility of judicially requesting the creation of
easements on the private land affected by the gas pipeline as
established in article 22 of the actual Gas Services Law,
notwithstanding the possibility to create voluntary gas easements as
well.
It will require further approvals or licences such as municipal,
Health and Safety and environmental authorisations and other
permits granted by Municipal authorities and Safe and Safety and
environmental agencies. Regulators are also closely involved.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
Chilean law defines easements as “an encumbrance imposed on
land in use of other land owned by another”. Moreover, there are
established by law, by mere operation of the same, and in general
for reasons of public order. These include easements established in
accordance with articles 22 B and 22 F of the Gas Services Law and
with the provisions in SD No. 263.
Easements, the exercise thereof and the corresponding
compensation must be set in a judicial resolution or agreement
between the interested parties. Determination of the amount of
compensation payable for all the damage caused to the landowner
must be made in accordance with article 22 J of the Gas Services
Law.
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Chile
We must state that the permits for the gas pipeline to cross streets,
squares, sidewalks, avenues, roads and other national public assets
are considered to be granted under the transport concession,
notwithstanding the need to obtain the other permits stated by
special laws. The corresponding authority must also be asked to
evaluate environmental impact studies together with the foregoing.
Chile
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
SD No. 263 embodies operation of gas pipelines under the open
access system. Open Access is define as “the offer made by gas
transport concessionaires for their transport services under arm’s
length economic, commercial, technical and reporting conditions
regarding their available transportation capacity”. Open access
implies that each firm transport agreement is entered into after a
public bid among the parties interested in contracting this service.
Through Opinion 933-198, the then Antitrust Resolutory
Commission (the “Antitrust Commission”), ruled that “in
concessions to gas transport companies, operation of the service
must necessarily be subject to the open access system or method
where the supply of services is proposed under arm’s length
conditions for all users and there is always a public supply of
available transport capacity by the concessionaire, which shall also
govern expansions of such capacity that may be planned”.
The features of the open access system therefore lie:
(a) In having the supply of service proposed under arm’s length
conditions to all users.
(b) In the concessionaire having an ongoing public supply of
available transport capacity.
The Antitrust Commission also stated that “services supplied in
transport and distribution concessions must be made under general
objective and non-discriminatory conditions regarding users to
whom public and updated information must be provided on the
structures and levels of rates governing the service thereof.”
In another query, Antitrust Commission stated that open and non-
discriminatory access “means that all parties interested in
transporting gas through a certain gas pipeline can do so by paying
the corresponding transport rates”, and added that “this therefore
facilitates direct access by consumers to producer markets, with the
consequent benefits in terms of competition”.
These principles have been embodied in SD No. 263.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
The current existence pipelines are not interconnected and each
serves specific final areas or users.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Please see question 4.4.
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4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
The parties are to agree the terms upon which natural gas is to be
transported.
Chile
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
Gas distribution in Chile is regulated by the rules established in the
Gas Services Law, SD No. 263 and in SD No. 254.
A public gas distribution service is defined as “the supply of gas
made by a distribution concessionaire to clients or consumers
located in concession areas, or to clients or consumers located
outside of such areas that are connected to the concessionaire’s
distribution facilities by their own mains or those of third parties”.
Provisional and Definitive Distribution Concessions
A definitive gas distribution concession must be granted in order to
provide public gas distribution service in a certain geographic area.
Under this concession, the concessionaire may provide gas
distribution services and may build, maintain and operate a gas
distribution network in the respective geographic area.
A provisional concession may also be requested if the objective of
the same is to prepare the information on a future definitive
distribution concession. Under this concession, the concessionaire
may perform routing studies on the transport or distribution
pipelines.
The system and requirements to obtain a provisional or definitive
gas distribution concession are the same as those discussed in
previous point.
Companies may convey, encumber, mortgage and give in guarantee
their assets, rights and concessions. The foregoing may in no event
hinder public gas distribution service.
Moreover, forfeiture of definitive concessions arises in the same
events indicated above, and on special grounds as contained in
articles 44, 46 and 58 of the Gas Services Law, which in general
refers to deficient operation of the public gas distribution service,
default on orders or sanctions decreed by the SEF and disruption of
the service. If forfeiture of a distribution concession is decreed by
the President of the Republic, the concession should be disposed of
by a public invitation to tender, which shall adhere to the terms and
conditions established in article 22 of the Gas Services Law.
It is important to state that no type of concession is required for the
distribution of liquefied petroleum gas and it is distributed mainly
in cylinders.
The distribution companies are regulated by principles such as non-
discriminatory prices to customers. In addition, the Antitrust
Authority may request the Ministry of Economy to fix tariffs, but
only for gas distribution and related services to customers with
consumptions below 100 Gigajoule.
It is important to state that permits are considered to be granted
under a distribution concession for the gas pipeline to cross streets,
squares, sidewalks, avenues, roads and other national public assets,
notwithstanding the need to obtain the other permits indicated in
special laws.
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5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
In addition to the concession, it will be necessary to obtain further
approvals or licences such as municipal, health and safety and
environmental authorisations and other permits granted by
Municipal authorities and Health and Safety and environmental
agencies.
5.3 How is access to the natural gas distribution network
organised?
The current regulations do not establish limitations regarding the
number of concessions per geographic area. Notwithstanding the
foregoing, it is also possible, although less clear than in the case of
transport, to establish local monopolies, mainly because there are
already gas networks installed in the area of largest consumption,
which will be apt for natural gas distribution.
Pursuant to article 23 of the Gas Services Law, “Companies will be
obligated to supply gas for electric lighting, heating and any other
purposes to whoever requests the same inside the service areas of
their concession, provided the consumption is compatible with the
capacity and safety of their production and distribution facilities.”
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
Pursuant to article 23 of the Gas Services Law, “Companies will be
obligated to supply gas for electric lighting, heating and any other
purposes to whoever requests the same inside the service areas of
their concession, provided the consumption is compatible with the
capacity and safety of their production and distribution facilities.”
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
Under current legislation, gas distributors are empowered to set
their rates freely, based on determining distribution sectors where
sale prices to like consumers are the same so that there is no
discrimination between them. This same principle of rate-setting
freedom has been extended to natural gas transport rates.
Notwithstanding the foregoing, rates may be set by the Ministry of
Economy when so determined by the Antitrust Commission
(currently the Antitrust Court). To do so, there must be proof that
the rate-setting system established by the concessionaire for public
gas distribution service generates sufficient operating revenues
throughout the calendar year so as to obtain an economic rate of
return on the assets in the concessionaire that is five percentage
points higher than the annual capital cost rate defined in article 32
of the Gas Services Law.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
There are none.
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Guerrero, Olivos, Novoa y Errázuriz Ltda.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Gas trading it is not regulated and the free market rules apply.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
See above.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
See above.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
There are no limitations on liquefaction activities, except for those
generally applicable to any company wishing to establish itself in
Chile, such as municipal, security and environmental authorisations
and other permits. Normally, these kind of facilities also include
ports and maritime concessions and zoning amendments.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
According to Chilean law, gas companies can freely determine their
prices. Only gas distribution companies are ruled by principles
such as non-discriminatory prices to customers. Moreover, the
Antitrust Commission may request the Ministry of Economy to fix
tariffs in certain circumstances mentioned above. Therefore, the
Government does not intervene in price determination of import,
transportation and export of gas.
Law 20.063 established a mechanism of price compensation that will
operate through a public reserve fund in order to maintain the balance
of relative prices of liquefied natural gas and liquefied oil and diesel
oil in accordance with the provisions determined in that regulation.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The Fiscalía Nacional Económica (National Economic Prosecutor) is
a public service which ensures the fair competition. Its main function
is to investigate any fact, event or convention that tends to prevent,
eliminate, restrict or interfere with economic competition in the
markets. The Fiscalía Nacional Económica has the power to subject
the results of its investigations to the Antitrust Court which is a
different and independent body which, exercising its powers, can
adopt appropriate measures or sanctions to prevent or remedy the
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Chile
anticompetitive effects of the conduct or matter under investigation.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
In this market there is not fixed criteria and the antitrust authority
Chile
evaluate it case by case. However, It is important to highlight that
through opinion 933-198 of April 28, 1995, the Antitrust authorities
gave a clear interpretation in response to a question posed by the
antitrust prosecutor, to the effect that gas transport and distribution are
businesses that must be developed separately and by companies the
sole and exclusive purpose of which is to perform only one of such
activities. The opinion recommends limitations on ownership and
reciprocal control of companies acting as distribution and transport
concessionaires, even for large gas purchasers. It therefore states that
“Market regulation must prohibit a distribution company from owning
or controlling the transport concessionaire and from the latter in turn
being able to own or control the company making distribution”. The
Commission also considered, in relation to control of companies and
so as to prevent vertical integration on the market, that 15% is the limit
that must exist in the ownership of capital of transport companies by
distributors and by large buyers and vice versa. This opinion is not
mandatory for the Regulators, but doubtless illustrates the thinking of
the Commission, which is the one called upon in last instance to
decide on antitrust problems such as vertical integration.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The Antitrust Court can:
a) modify or terminate the acts, contracts or agreements that are
contrary to the free competition;
b) order the modification or dissolution of partnerships,
corporations and other private legal entities who have
participated in the acts, contracts or agreements referred to
the previous letter; and
c) impose fines and takes corrective measures or prohibitive
with regard to facts, events or conventions it considers anti-
competitive and can be arranged in each case.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
According to current antitrust regulations, the Antitrust Court have
the power to approved/disapproved or other changes in control over
businesses in any economic sector, including natural gas, that may
affect the free market and competition. This consultation and
decision process may take between 3 months and a year.
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9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
Chile
distribution or other) by foreign companies?
No there are not.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
It is not. The Chilean experience in this regard has been a quite
disappointing base of the fact that the Treaties and Complimentary
agreements with Argentina were breached.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
There are no specific dispute resolution procedures. Disputes
among private parties can be submitted to local courts or local
arbitration. It can also be submitted to foreign arbitration and in the
case of international agreements such as supply agreements,
international agreements, they can be subject to foreign law and
foreign courts.
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Chile
10.2 Is Chile a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Yes it is.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
No there is not.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
Not that we are aware of.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Chile.
The government must establish clearer rules and regulations for the
distribution of compressed natural gas (CNG) for vehicles (aka
vehicular natural gas) in order to create a market and spur private
sector investment.
Regulations are required to cover business, environmental and
taxation aspects. For the moment Chile has a single annual tax for
natural gas, which is applied for industrial clients as well as buses
and other vehicles. The government should find a way to
differentiate regulations for each one of these sectors and establish
specific regulations for each one.
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Guerrero, Olivos, Novoa y Errázuriz Ltda. Chile

Gonzalo Delaveau Marco Zavala

Guerrero, Olivos, Novoa y Errázuriz Ltda. Guerrero, Olivos, Novoa y Errázuriz Ltda.
Av. Vitacura 2939 8th floor Av. Vitacura 2939 8th floor
Las Condes 7550011, Santiago Las Condes 7550011, Santiago
Chile Chile

Tel: +56 2674 2947 Tel: +56 2674 2900

Fax: +56 2674 2901 Fax: +56 2674 2901

Chile
Email: gdelaveau@guerrero.cl Email: mzavala@guerrero.cl
URL: www.guerrero.cl URL: www.guerrero.cl

Gonzalo Delaveau is a partner member of the Energy and Natural
Resources He specialises in electricity regulation merger and
acquisitions and project finance. He has a law degree from Pontificia
Universidad Católica de Chile School of Law, Santiago, Chile. He
also attended the Academy of American and International Law,
International and Comparative Law Center of the Southwestern Legal
Foundation, Dallas, U.S.A. (1993). Publications: Chilean Foreign
Investment Laws (LatinFinance Magazine, 1994), The Chilean Gas
Legal Framework (CERI, 1997), Marco Regulatorio del Sistema
Sanitario Chileno (Privatización del Sistema Sanitario Chileno,
different authors, 2000), and Chile’s New Electricity Law: An
Analisys of Law 19,940 (Latin America Energy Report, May 2004).
Member of the board of BCI Securitizadora S.A. Member of the
International Bar Association (IBA), American Bar Association
(ABA), Chilean-American Chamber of Commerce (AmCham Chile),
Chilean Canadian Chamber of Commerce, and Chilean Bar
Association.
Marco Zavala is member of the firm’s energy and natural resources
and litigation areas, and specialises in project development as well
as civil and commercial litigation, constitutional actions, arbitration
and dispute resolution.
Universidad Diego Portales, Santiago School of Law, Chile. Post
graduate Degree in Tax Law, Universidad de Santiago de Chile
(1991). International Practice Diploma in International Joint
Ventures, The College of Law, London and International Bar
Association (2004).
Partner at Zavala Abogados (1993- 2002). Consultant at
Hammonds, London, United Kingdom. (2002-2003). Head of
Latin America Practice at Hammonds, London UK, (2004- 2009).

The experience of the firm in the area of energy and natural resources has led it to create a team to assist its clients in
projects related to electricity, hydrocarbons, mining, water, and waste treatment, among others. The team includes
experts in electric, gas, mining and water regulation, environmental and natural resources law, financing, litigation, and
arbitration.
The team’s experience includes obtaining concessions as well as other permits required to develop these activities. We
have advised our clients in the developing natural gas pipelines projects, generation power plants, grid systems and
negotiate local and international contracts of purchase, management and transport of natural gas, including the
negotiation hydrocarbons exploration agreements with Governmental entities.
This experience has been recognised by development such as Latin Lawyer which in its specialised report on April/May
2003 highlighted that “Though Guerrero, Olivos, Novoa y Errázuriz Abogados began life as a primarily financial
operation, it has recently developed a strong energy practice, gaining recognition through the work of young partners
Gonzalo Delaveau and Roberto Guerrero V”. More recently Chambers and Partners recognised that our firm “enjoys
long-standing prestige in the Chilean market and is a regular player in the energy sector. Major recent projects have
included the acquisition, development and approval of 12 hydroelectric projects on behalf of Idroenergia, and
counseling several lenders on environment and regulatory matters concerning the GNL Quintero project. Sources
highlight Gonzalo Delaveau as an active and accomplished practitioner.”

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 Chapter 10
France
JeantetAssociés AARPI
1 Overview of Natural Gas Sector
1.1 A brief outline of France’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
The Portion of Natural Gas in the French Energy Balance:
Natural gas represents around 14 to 15% of the national energy
balance. The demand for natural gas has undergone a considerable
expansion over the last twenty years: in France, this demand has
increased by 52% between 1990 and 2006, whilst the total
consumption of primary energy has only gone up by 20%. There
was a very marked increase between 1990 and 2004 but it appears
that it has since stabilised (www.statistiques.developpement-
durable.gouv.fr; “Summary on Natural Gas Supply”; n°26; October
2009).
National Production of Natural Gas:
France currently produces around 1.1 million tonnes, per year, of
petrol (crude oil and liquids extracted from natural gas). This
production comes from about ten small deposits located in the Paris
basin (mostly in the Marne and Seine-et-Marne areas) and in
Aquitaine (in the area of the Landes, Gironde and the Atlantic
Pyrenees).
The gas production traded comes almost entirely from Aquitaine, with
the Lacq field, operated by the French oil company Total, representing
around 75%, but whose operation is coming to an end.
If the French production of petroleum and gas covers only a small part
of the needs for the country, the presence of around ten companies,
which are active in the two principal basins, shows the economic value
of this production. At current crude oil prices, this production is
profitable and would remain so even at slightly lower prices.
National production continues to drop: -11% in 2008, representing
10.5 TWh and around 2% of the (real) national primary
consumption (www.statistiques.developpement-durable.gouv.fr;
“Natural Gas in France: the principal results for 2008”).
Potential National Reserves of Natural Gas:
The fact that new requests for research permits are regularly lodged
indicates that the potential of French basins, both on-shore and
offshore, is still capable of creating interest. In comparison with
other basins, certain zones appear to be under-explored and
following a history of exploration and production which has lasted
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Sophie da Cunha
Thierry Lauriol
more than half a century, a potential for hydrocarbons still exists.
Associated or non associated gas: Since 2004, six permits have
been granted covering zones which are likely to have resources of
non conventional gas. The objective of five of these permits is gas
carbon and for one of the permits it is “trapped gas”. (Long-term
indicative plan of investments in the gas sector, Period 2009-2020,
Ministry of Ecology, Energy, Sustained Development and the
Development of the Territory, http://www.developpement-
durable.gouv.fr/energie/politiqu/pipgaz_2009.pdf.)
Importations/Exportations of Natural Gas in France:
Gas supply in France is very diverse: in 2008, 33% of gas imported
by France came from Norway; 18% from the Netherlands; 17%
from Algeria; and 15% from Russia
(www.statistiques.developpement-durable.gouv.fr; “Report on the
Supply of Natural Gas”; n°26; October 2009).
Net importation of gas has increased in 2007, in parallel with the
increase in real consumption (+3.7% for total primary
consumption): it has gone from 480 TWH in 2007 to 504 TWh in
2008, namely, an increase of 5.8%, following -5.6% in 2007 and -
3.1% in 2006.
The portfolio of imports has been amended somewhat in 2008 as
compared to 2007:
the importation of liquefied natural gas represents one
quarter of net imports;
the importation under long-term contracts has, in global
terms, increased by 2.8%; importation from Russia, which
had greatly decreased in 2007, advanced by 14% but does
not attain the level reached in 2006: importations coming
from Norway have increased by 7%, and they represent
nearly one third of the total net importations; and
importations coming from the Netherlands and Algeria have
been subject to more modest variations. The new supply
sources of Egypt and Qatar remain fairly unimportant as they
have not varied much between 2007 and 2008; and
short-term contracts have been sought after a little more in
2008; they represent 6.6% of the net entries of natural gas in
2008, as compared to 4.8% in 2007 and 5% in 2006.
By reason of its geographical position, the French territory is a
place for the transit of gas between the North and the South of
Europe, and 16% of the gas coming into France merely transits
through the country.
Gas arrives in France through six (6) principal points of entry
(Tasnières, Dunkirk, Obergailbach, Fos on Sea, Fos Tonkin,
Montoir of Britanny, Biriatou). The gas entering in transit or
“exported” in France are principally through two points (towards
Switzerland via Oltingue, towards Spain via Larrau).
The gas is transported in France by two operators, GRTgaz
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JeantetAssociés AARPI
(subsidiary of GdF Suez) and, for the South West of France, TIGF
(subsidiary of TOTAL).
The net balance of entries-exits of natural gas in France has passed
from 510 TWh in 2006 to 480 TWh in 2007 and 504 TWh in 2008
(www.statistiques.developpement-durable.gouv.fr; “Annual
investigation relating to the natural gas market: principal results for
2008”, figures and statistics; n°63, September 2009).
Storage of Natural Gas in France (www.statistiques.
developpement-durable.gouv.fr; “Annual investigation relating to
the natural gas market: principal results for 2008”, figures and
statistics; n°63, September 2009):
Today, France has two types of storage: in water layers; and in salt
caverns. The underground French storage facilities are operated by
Gaz de France (79% of French capacity) which manages twelve (12)
storage facilities, nine (9) of which are in water layers (focused on the
Paris basin), and three (3) in salt caverns (in the area of the South East)
and by TIGF, which operates two water layer sites in the South West :
Izaute; and Lussagnet (21% of French capacity).
There are currently projects for the transformation of former deposits
of hydrocarbons, which today are exhausted, into storage capacity.
The stocks (measured as at 31 December), which had increased in
2005 (by +7.3 TWh), but reduced by -5.6 TWh in 2007 remained
stable in 2008. Before the period when general heating commences
(30 September) the necessary stocks were at the same level in 2008 as
in 2007.
At the end of last winter (30 April 2009), the necessary stocks were
reduced to 38.9 TWh, as opposed to 51.7 TWh in April 2008, 45.5
TWh in April 2007 and 31.8 TWh in April 2006.
Methane Terminals in France (http://www.cre.fr/fr/acces_
aux_reseaux/infrastructures_gazieres/terminaux_methaniers, 4
December 2009):
There are currently two methane terminals in France, the “Fos
Tonkin” terminal in Fos-sur-Mer, near to Marseilles and the
“Montoir” terminal, near Saint-Nazaire. These two terminals are
managed by Elengy, a subsidiary of GdF Suez and they have
respective capacities for re-gasification of 7 and 10 Gm3/per
annum.
A third terminal is currently being built, also situated at Fos-sur-
Mer. It will have a re-gasification capacity of 8.25 Gm3/per annum
and shall be operated by “STMFC” (Methane Terminals Company),
held 70.2% by GdF Suez and 29.8% by Total.
These infrastructures are accessible to third parties.
In 2008, the terminal for Fos Tonkin received 142 methane ships
and re-gasified 58 TWh of gas, and the Montoir terminal received
91 ships and re-gasified 80,5 TWh of gas. The terminals receive
around 30% of the natural gas used in France.
Distribution (www.statistiques.developpement-durable.gouv.fr;
“Annual investigation relating to the natural gas market:
principal results for 2008”, figures and statistics; n°63,
September 2009):
The distribution of natural gas which is assured by Gaz de France
and twenty-two local distribution companies is an activity which is
managed by public bodies through concession contracts or through
service regulations.
Around 9,550 French towns, and almost all of the towns with more
than 10,000 inhabitants are supplied with natural gas; this enables
nearly 80% of the French population to have access to gas.
Marketing, sales of natural gas (www.statistiques.
developpement-durable.gouv.fr; “Annual investigation relating
to the natural gas market: principal results for 2008”, figures
and statistics; n°63, September 2009):
The sale of gas is open to competition. Since July 2007, the gas
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France
market is totally open to competition, including with regard to
where individuals are concerned. In 2008, around twenty (20)
suppliers in addition to Gaz de France and twenty-two local
distribution companies sold gas in France to end clients.
The sales of gas which had considerably decreased in 2007, as a
result of the mild climate and the stagnation of the number of
France
residential customers, increased slightly in 2008, as compared to
2006 (+0.8%).
The sales of gas to professionals, at 330 TWh in 2008 as compared
to 318 TWh in 2006 and 322 TWh in 2007, have increased by 2.4%
in one year. The opening up of the market of professionals
advances regularly: the alternative suppliers have seen their share
go from 15% of sales in 2005 to 33% in 2008. As regards
individuals, their share remains marginal. Seven regions (out of
twenty-two) represent 62% of the gas sold.
1.2 To what extent are France’s energy requirements met
using natural gas (including LNG)?
See answer to question 1.1.
1.3 To what extent are France’s natural gas requirements met
through domestic natural gas production?
See answer to question 1.1.
1.4 To what extent is France’s natural gas production exported
(pipeline or LNG)?
See answer to question 1.1.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
2.1.1 Applicable legislation
The principal texts applicable to the exploration and the production
of natural gas in France are, notably, the Mining Code, Law n°2003-
8, dated 3 January 2003, relating to the gas and electricity markets
and to the public service of energy, as well as Law n°2004-803,
dated 9 August 2004, relating to the public service of electricity and
gas and to electrical and gas companies and their texts of
application, Law n°2006-1537, dated 7 December 2006, relating to
the energy sector.
2.1.2 The holders of the rights to explore and to produce natural gas
In order to have the right to explore or produce natural gas in
France, it is necessary to comply with the prescriptions of the
Mining Code.
Thus, article 7 of the Mining Code provides that “research for the
discovery of mines may be undertaken:
either by the owner of the surface area in question or with his
agreement, following a declaration to the Prefect (“Préfet”);
in the absence of agreement, with the authorisation of the
Minister responsible for mines, once the owner has been
formally requested to present his comments, in accordance
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with the conditions fixed by decree passed by the Council of
State (“Conseil d’Etat”); or
in accordance with an exclusive research permit.”
In the scope of research carried out concerning liquid or gas
hydrocarbons, article 8 of the Mining Code provides that the person
that has conducted the research has the right to dispose freely of these
France
products.
The persons entitled to proceed with the production of natural gas
must be holders of a concession, which accords them the right to
operate the mines, in accordance with article 21 of the Mining Code.
2.1.3 Authorities
The Prime minister and the Minister responsible for mines who is
also responsible for energy (the latter being, in fact, the current
Minister of Economy, Finance and Industry) set the regulations
applicable regarding the development of natural gas. Within the
Ministry of Economy, Finance and Industry there is a department
specialised in energy and raw materials (in French “DGEMP”)
whose function is, notably, to define and put into operation the
energy policy of France and the supply of raw materials.
Presided over by the Minister responsible for mines, the General
Council of Mines is composed of general mine engineers, as well as
several other top civil servants and leaders of public companies.
There are two sections: the legal section and the technical section.
The council is assisted by the general inspectorate of the ministry
department which supports the general engineers and carries out
missions at the request of the council.
2.1.4 Regulatory Authority
The French energy sector, since 2000, also has a regulator. This
regulator is the Energy Regulatory Commission (“ERC”). As
regards natural gas, the ERC:
is the guarantor of the right of access to the networks and
natural gas installations;
monitors the proper functioning and the development of the
networks and natural gas infrastructures and liquefied natural
gas; and
is the guarantor of the independence of the network
managers.
In a more general manner, the law confers upon the ERC the task of
monitoring the proper functioning of the electricity and gas
markets. The ERC ensures the monitoring of the organised
electricity and natural gas markets, as well as exchanges at the
frontier of both gas and electricity.
2.1.5 Indicative Long-Term Plan for Investments in the Gas Sector:
2009-2020
The drawing-up of this plan is provided for by article 18 of the Law
dated 23 January 2003, referred to above. This is in fact a report,
presented to the National Assembly which describes the foreseeable
evolution of the demand for natural gas over the next ten (10) years,
the adequacy of gas infrastructure (underground storage, methane
terminals, transport canalisations, inter-connection works), as well
as the contribution of long-term contracts for the supply of the
French market.
The 2009-2020 plan is the second report, the first had been
transmitted to the National Assembly in 2006.
The investment decisions in the gas sector belong to the operators
even though public authorities have several ways to support the
development of new infrastructures that are essential for the
security of national supply, such as tariff incentives or temporary
derogations to the access of third parties to the infrastructures.
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France
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
The exclusive research permit and concession are subject to a
specific regime provided for in the Mining Code.
2.2.1 The research regime
The Mining law distinguishes between three research regimes:
research carried out by the owner of the land or his
successors in title;
research authorised by the administration; and
research carried out pursuant to an exclusive research permit.
2.2.1.1 The research carried out by the owner of the land or his
successors
The right to carry out research, which belongs to the owner, is a
consequence of the latter’s right of ownership and a normal use of
this right. He cannot carry out research in the event that his land is
within the perimeter of a concession, of an exploitation permit or an
exclusive research permit.
2.2.1.2 Research authorised by the administration
The procedure for the request for authorisation is provided for in the
Decree dated 14 August 1923. Any person or legal entity, whatever
the nationality, may ask for a research authorisation.
The request, sent to the Prefect (“Préfet”), indicates the operation, the
nature of the substance that is sought and the likely size of the deposit,
as well as the numbers of the parcels of land concerned, and the
owners, and the attempts at amicable settlement. After having been
sent to the mines department, the request is addressed to the mayor of
the local authority where the owners are domiciled in order to enable
the latter to be made aware of the contents of the request.
The owners then have 15 days, as from notification of the request,
to make known any comments that they may have. At the end of
this delay the file is returned to the Prefect (“Préfet”) who forwards
it to the Minister responsible for mines, the latter taking the final
decision by order.
2.2.1.3 The exclusive research permit
The exclusive research permit regime is provided for in articles 7 to
19 of the Mining Code, as completed by the provisions of the decree
of application of the Mining Code n°95-427 dated 19 April 1995,
relating to mining titles.
The exclusive research permit for substances that may be conceded
is accorded by the administrative authority, after a competitive bid
process, for a period of five years at the most.
The request, with a completed file, is sent to the Minister responsible
for mines by registered letter with acknowledgment of receipt.
The request is evaluated in accordance with criteria laid down in the
Mining Code and its decree of application. The applicant must in
particular justify its technical and financial capacities by providing
all of the documents referred to in articles 3 to 5 of the decree n°95-
427 dated 19 April 1995.
The permit confers on its holder the exclusivity of the right to carry
out all works of research within the perimeter of the aforesaid
permit and to dispose freely of the products extracted during the
course of the research.
2.2.2 The Concession
In accordance with article 25 of the Mining Code, the concession is
granted by Decree passed by the Council of State (“Conseil
d’Etat”), following a public enquiry and bidding process.
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Article 26 of the Mining Code provides that only the holder of an
exclusive research permit in force may obtain a concession, within
the perimeter of the research permit and for the substances
mentioned by the permit. In addition, the holder of the exclusive
research permit has the right, if he asks before the expiry of the
permit, to the granting of concessions over the deposits that have
been discovered and may be exploited within the perimeter of this
permit during the period of the validity of the aforesaid permit.
Article 14 of decree n°95-427 dated 19 April 1995 provides a list of
the documents to be provided by the request, which is then sent,
once fulfilled, to the Minister responsible for mines by registered
letter with acknowledgment of receipt.
The request for a concession is subject to a public enquiry for a
period of thirty days.
In accordance with article 36 of the Mining Code: “The institution
of a concession, even for the benefit of the owner of the land in
question, creates a real property right distinct from the ownership
of the surface area. This right may not be made subject to a
mortgage”.
The duration of mining concessions is fixed in the concession
document. The duration can not exceed fifty (50) years.
2.2.3 Mining Permits
Mention should be made of another mining title, the “Mining
Permit”, and to the regime which applies to it. However, this
regime (articles 50 to 63 of the Mining Code) only applies to
permits that are in effect as at the date of the entry into force of Law
n°94-588 dated 15 July 1994 and to the requests for mining permits
which are submitted before this date. It does not therefore apply for
future requests.
2.2.4 Specific Provisions
Mention should also be made that the Mining Code sets out a
regime and specific provisions for French overseas territories.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
See answer to question 2.2.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
Mines or Deposits Belonging to the State:
In accordance with the Mining Code and with its articles 64 to 67, the
mines or deposits belonging to the State may be operated, whether
directly or by State-run entities or by any other method. The State may
also allocate new mining titles on these mines or deposits.
The mines which are not operated and which belong to the State may
be replaced, by order of both the Minister of Finance and the Minister
responsible for mines, where the deposit is open for research.
The administrative bodies, which are responsible for the
management of mines that are operated by the State are subject to
the same rights and obligations as private holders of concessions.
Participation of the State in Gaz de France:
“Gaz de France” (hereafter referred to as “GDF”) was created in
1946 following the adoption of a Law dated 8 April 1946 on
nationalisation of electricity and gas. GDF was a public utility
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company and owned by the State.
The Law dated 9 August 2004, referred to above, has opened up to
the private sector the shares of GDF, which has become a private
limited company in which the State holds more than 70% of the
shares.
The Law of 7 December 2006 has modified this participation of the
France
State, which has been reduced to over one third of the share capital
of GDF (article 39 of the Law n°2006-1537 dated 7 December
2006).
In July 2008, GDF merged with Suez to create the group, GdF Suez.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
In accordance with article 31 of the Mining Code, the holders of the
concessions for liquid or gas hydrocarbon mines are bound to pay,
on an annual basis, a royalty payment to the State at a progressive
rate and calculated on the production.
Scale for Gas (former and new productions (former productions
refer to quantities extracted, in accordance with traditional methods,
from wells that were brought on line before 1st January 1980.
Other quantities extracted constitute new productions) in
percentage of the production value coming from the field):
Per tranche of annual production (in millions of cubic metres):
Less than 300: 0% (former productions) / 0% (new
productions).
More than 300: 20% (former productions) / 5% (new
productions).
The methods for the application of this royalty are specified in the
Decree n°81-373 dated 15 April 1981, relating to the royalty on the
production of liquid or gas hydrocarbons.
2.6 Are there any restrictions on the export of production?
Compliance with obligations of public services and notably the
security of supply in France.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
This is not applicable in France.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
We would note that mining titles in France are provided on an
intuitae personae basis and are only transferable with the approval
of the State.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
See answer to question 2.2.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Article 36 of the Mining Code provides that a concession may not
be mortgaged.
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However, it is also provided that mines are immovable property, as
well as buildings for the operation of the mines, machines, wells,
galleries and other works carried out on site. The machines and
tools which are used for the mining are fixtures. Shares or interests
in a company or business for the operations of mines are movable
property. Raw materials that are mined, supplies and other movable
objects are movable property (article 24 of the Mining Code).
France
In the absence of any express prohibition provided for by the text,
it should be possible for these elements to be the subject of
guarantees/sureties.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
In accordance with article 79 of the Mining Code, “the research
works or operation of a mine must comply with the constraints and
the obligations relating to the safety and health of the personnel,
safety and public health, to the essential characteristics of the
surrounding area, land or at sea, to the solidity of public and
private buildings, to the conservation of ways of communication,
the mine and other mines, and more generally, to the interests of
archaeology and to the interests listed in the provisions of the
articles L. 621-1 (1), L 621-2 and L 621-7 of the Estate Code,
articles L.211-1, L 331-1, L 332-1 and L. 341-1 of the Environment
Code, article 1 of Law n°76-629 dated 10 July 1976 relating to the
protection of nature, as well as to the agricultural interests of the
sites and the places affected by the works and by the installations
relating to the operation”.
2.11.1 The control and monitoring of the administration
In accordance with the provisions of article 77 of the Mining Code,
the administration is invested with the task of controlling and
monitoring mining activities.
The Prefect (“Préfet”) is responsible for policing the mines. He is
under the authority of the Minister responsible for the mines and is
assisted by the regional director for industry, research and the
environment.
In the exercise of its authority, the Prefect possesses a right of
injunction and a right of prohibition.
More specifically, the works that are undertaken by the prospector
or the operator may be submitted to authorisation.
2.11.2 The regulations governing research works and the operation
of mines
Article 83 of the Mining Code provides that the commencement of
research works and the operation of mines are subject to
administrative authorisation, granted following public enquiry and
consultation with the local authorities that are concerned by the
works.
The regime for this authorisation is determined by decree n°95-696
dated 9 May 1995 relating to the commencement of mining works
and to the policing of mines.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
The order for mining works is governed by the Law n°99-245,
dated 30 March 1999, relating to liability as regards damage caused
by the mining operation and the prevention of mining risks after the
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end of the operation. These regulations are taken up in article 91 of
the Mining Code, which provides for the procedure for the
cessation of mining works.
The procedure for the cessation of works provides for a certain
number of declarations.
The operator or the entity carrying out the research must, in
particular, make known the measures that it envisages to put into
operation in order to preserve the interests referred to in article 79
of the Mining Code (safety of the personnel, safety and public
health, conservation of the surrounding area and the environment),
in order to stop or prevent the risk of disorder created by its
activities and in order to, if necessary, manage the possibility of the
resumption of operations.
In view of the declaration for the cessation of works, the
administrative authority prescribes, if necessary, the measures to be
carried out and the methods of termination, which have been
omitted or inadequately provided for and the time for execution.
Automatic execution is provided for as and when necessary.
Following the execution of measures provided for or recommended,
the administration gives official notice to the operator. This
formality brings an end to the policing of the mines provided for in
the Mining Code.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
It is to be noted that since the Law dated 3 January 2003, the
monopolies of importation and exportation of gas have been
removed (article 62 of the aforesaid law).
Transparency and Regulation:
Historically constructed under the authority of public bodies (the
State and local authorities), the works of transportation and
distribution of natural gas, as well as the liquefied natural gas
installations, constitute the key for the opening up to competition of
the gas market. Indeed, competition may only be effected on the
markets if the operators and the eligible consumers are able to
access these networks, works and installations in conditions that are
fair and non-discriminatory.
In this context, the ERC is the guarantor of access to the networks
and installations of natural gas. It monitors the proper functioning
and the development of the networks and infrastructures for natural
gas and the installations for liquefied natural gas and it thus assures
a monitoring of the organised markets for natural gas, as well as
exchanges at the frontiers for natural gas. Thus, decisions regarding
tariffs are taken jointly by the ministers of the economy and energy
upon the proposal of the ERC, and notably upon the request of the
operators, for the tariffs for the use of the transportation and
distribution networks of gas and the installations of liquefied
natural gas (article 7 of the Law of 3 January 2003). The ERC
therefore proposes to the government tariffs for the use of the
networks for the transportation of natural gas, the distribution of
natural gas and methane terminals and it ensures that the tariffs for
the use of infrastructures are applied in a transparent and non-
discriminatory manner for all users, including as regards the
traditional suppliers.
Public Service Obligations:
The Law dated 3 January 2003 puts in place a certain number of
public service obligations which are imposed:
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on the operators of the transportation and distribution
networks of natural gas and to the operators of the
installations of liquefied natural gas referred to in article 2 of
the aforementioned law;
on the suppliers and the distributors referred to in articles 3
and 5; and
on the holders of concessions for underground storage of
natural gas regulated by the Mining Code.
These obligations are, in particular, upon:
the security of persons and upstream installations for the
linking-up to ultimate customers;
the continuity in the supply of gas;
the security of supply;
the quality and the price of products and services provided;
the protection of the environment;
energy efficiency; and
the balanced development of the territory.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Until very recently, the transportation of natural gas in France was
organised in the form of a concession. A new legal regime of
authorisation for the transportation of natural gas has been
implemented in the context of the new gas legislation, and namely,
the Law dated 3 January 2003. The authorisation for transportation
is henceforth granted in the conditions fixed by Decree n°2003-944
dated 3 October 2003.
There are today two managers of the transportation networks for
natural gas in France: “GRT Gaz” (GDF Suez group) and “Total
Infrastructures Gaz France” (“TIGF”). The management of a gas
transportation network must be carried out by a legal entity, which
is separate to the entities which ensure the production or the supply
of gas. The transportation companies, which are the result of this
legal separation, may carry out directly in France any gas storage
activity. The scope of the activities of these companies is
determined in accordance with the by-laws of the companies (Law
dated 9 August 2004).
As mentioned under section 3 above, and as far as tariffs are
concerned, decisions are taken jointly by the ministers of finance
and energy, upon proposals of the ERC, and notably at the request
of the operators, for the tariffs for the use of the gas transportation
and distribution networks and for the use of the natural liquefied gas
installations (article 7 of the Law dated 3 January 2003).
The current tariffs for the use of the gas transportation and
distribution networks came into force on 1st January 2009, in
application of the Order dated 6 October 2008, and thereby
endorsing the tariff proposals of the ERC of 10 July 2008.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The construction and operation of natural gas transportation
pipelines are subject to a procedure of authorisation, together with
specifications, as provided for by the Law dated 3 January 2003 and
by the Decree, dated 3 October 2003 referred to above. According
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to the type of project in question, this may be an authorisation given
by way of ministerial order (Minister of Energy) or by order of a
Prefect (or “Préfet”) or pursuant to a simplified procedure of
authorisation given by a Prefect.
In addition, there are authorisations to be obtained as far as the
environment is concerned in application of articles L 511-1 et seq.
France
of the Environment Code on installations that are classified for the
protection of the environment.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
As indicated in questions 4.1 and 4.2 above, the construction of the
pipelines for the transportation of natural gas is subject to
authorisation.
The criteria for the granting of authorisations are fixed in an
objective, transparent and non-discriminatory manner. Apart from
the conditions relating to the technical and financial capacities of
the applicant, as well as to safety and the protection of the
environment, the criteria also concern the compatibility of the
projects with the principles and the missions of a public service.
The owners of land which is crossed by a gas transportation or
distribution pipeline must refrain from any action which would
harm the construction, the proper usage and the maintenance of the
pipeline, in accordance with the conditions fixed by the texts which
have been produced in application of the Law dated 15 June 1906
concerning the distribution of energy and article 35 of the Law
dated 8 April 1946 referred to above.
In the event of a threat to the safety of personnel, to the environment
or, more generally, in the event of non-compliance with the
conditions imposed by the Law dated 3 January 2003, the State,
through its representative, has the right to issue an injunction
against the operator or the entity responsible for the building works,
or, in the event of urgency, a power to suspend operations.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Access of third parties to the gas transportation networks is
guaranteed by the Law dated 3 January 2003. Articles 3 and 5 of
this law specify the persons that are entitled to access to works for
the transportation of natural gas, namely and principally, eligible
clients and suppliers.
Any transporter of natural gas, any distributor of natural gas and
any operator of liquefied natural gas installations may negotiate
freely with the supplier(s) its choice of contract for the supply of
natural gas and electricity necessary for the operation of its
installations, in accordance with competitive procedures, which are
non-discriminatory and transparent, such as, notably, public
consultations or recourse to organised markets.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
The transportation of natural gas is effected by gas pipelines. Gas
may also be transported by gas tankers as regards liquefied natural
gas (“LNG”).
As mentioned above, there are two managers of the networks for the
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transportation of natural gas in France: “GRT gaz” manages the gas
network in the north of the country, and “Total Infrastructures Gaz
France” (“TIGF”) manages the network in the south west of the
country.
4.6 Outline any third-party access regime/rights in respect of
France
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Access of third parties to the gas transportation networks is
guaranteed by the Law dated 3 January 2003. However, it may be
limited or indeed, prevented, if the infrastructures lack adequate
available capacity. Any refusal to conclude a contract of access to
a method of transportation or distribution of natural gas or an
installation of liquefied natural gas, including the installations
providing ancillary services, must set out the reasons for the refusal
and this is notified to the applicant and to the ERC.
The development of a competitive gas market therefore necessitates
that all the market players can have access, in transparent and non-
discriminatory conditions, to detailed information regarding capacity.
Thus, the ERC has asked operators, through its decision of 28 May
2003, to publish on their internet site, information relating to their
different capacities. This information is published with respect to all
entry and exit capacities and in relation to links between balancing
zones.
The ERC has also asked operators to produce a general note
describing the method of calculation for the maximum capacities that
may be sold and to provide the detail of this method of calculation, as
well as the calculations leading to the published results.
Finally, the ERC has asked operators to publish their forecast
programme, for the following six-month period, reduction in
capacity due to maintenance works, with at least a monthly update
(http://www.cre.fr/fr/acces_aux_reseaux/infrastructures_gazieres/tr
ansport; 30 December 2009).
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
See answer to question 4.4 paragraph 2.
In accordance with article 7 of the Law dated 3 January 2003, the
decisions regarding the tariffs for the use of the transportation
networks are taken jointly by the Ministers responsible for the
economy and for the energy, on the basis of the Energy Regulatory
Commission. A notice, an order and a decree, all dated 27 May
2005, complete the provisions of the Law dated 3 January 2003
concerning the tariffs of use of the natural gas transportation
network and their rules.
See also answer to question 4.1 concerning tariffs.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
In accordance with the Law dated 9 August 2004 (as modified by
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the Law dated 7 December 2006), and notably, articles 13 to 15, the
management of a network for the distribution of natural gas which
supplies more than 100,000 clients on the mainland is assured by
entities that are separate to those that carry out activities of
production or the supply of natural gas.
The Law dated 7 December 2006 has therefore (and as compared to
the Law dated 9 August 2004) reinforced the idea of the legal
separation of activities providing not for a service or a separate
management but distinct legal entities in order to assure the
management activities of the distribution networks and the
production activities or the supply of natural gas.
Today, there are more than 9,200 (out of a little more than 36,000)
French towns supplied with natural gas, which represents only a
fairly small proportion of the total number of towns in France but
which allows 77% of the French population to have access to gas.
Nearly all the towns with more than 10,000 inhabitants are supplied
with gas. The distribution networks for natural gas represent a total
length of 193,700 km, which places them in second place in Europe
(the first place being held by Germany). They are operated through
concession contracts binding managers to local bodies, by GRDF (a
subsidiary of GDF Suez), the twenty-two local distribution
companies (located for the most part in the South West and in the
East) and by Antargaz (a company which has been recently
accredited) (long-term indicative plan for investments in the gas
sector, Period 2009-2020, Ministry of Ecology, Energy, Sustained
Development and for the Development of the Territory;
http://www.developpementdurable.gouv.fr/energie/politique/pipgaz
2009.pdf), that is to say, 24 managers of the distribution networks
for natural gas, of differing size, with GRDF responsible for
distribution to more than 96% of the market.
The Law dated 7 December 2006 specifies the missions of the
manager of the distribution network.
The Decree 2008-740 dated 28 July 2008 (notably taken in
application of article 36 of the Law dated 7 December 2006), now
gives the possibility to the licensor authorities to make a financial
contribution to the managers of public distribution networks, to
render profitable the operations which increase the density of
existing networks and the creation of new public distribution
networks.
For towns which are not supplied with gas and which are not linked
up to the natural gas network, and which are generally located far
from transportation networks of natural gas because they are cut-off
from their surroundings, the development of the public distribution
network of propane gas may constitute a veritable alternative. The
Law of 3 January 2003 confirms the possibility given in 1988 to
local bodies and to their public institutions of cooperation to have
new businesses for the distribution of propane by the public
network, after a period of public consultation, subject to obtaining
the approval of the Minister for Energy.
Perspectives for the development of distribution networks: The
development of the distribution networks is largely complete. The
enactment of the Decree of 28 July 2008 should encourage the
creation of new concessions. However, this potential remains fairly
limited. The essential interest is to be found today in increasing the
number of existing networks, which shall enable the most to be
made, in value, of the investments that have already been carried
out (long-term indicative plan of investments in the gas sector,
Period 2009-2020, Ministry of Ecology, Energy, Sustained
Development and the Development of the Territory,
h t t p : / / w w w. d e v e l o p p e m e n t - d u r a b l e . g o u v. f r / e n e r g i e /
politique/pipgaz_2009.pdf).
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5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
Article 15 of the Law dated 3 January 2003 specifies, notably, that
the public service of the distribution of natural gas is organised, by
the State and the local authorities or by their public institutions of
cooperation.
These provisions have been completed and detailed by the Law
dated 9 August 2004 and by the policy Law n°2005-781 dated 13
July 2005, which sets the principal guidelines for energy policy.
The gas “distributors” carry out their activities in accordance with
conditions fixed by their authorisation of supply, as well as by the
specifications in the concessions or the service regulations of local
public bodies referred to in article L.2224-31 of the General Local
Authorities Code.
Article L.2224-3 of the abovementioned Code recalls that the local
authorities or, if necessary, their public institutions of cooperation,
negotiate and conclude concession contracts and monitor the due
fulfilment of the public service mission fixed, as regards the
granting authorities, by the specifications of these concessions.
The granting authorities assure, in particular, the control of the
public distribution networks for gas.
In accordance with the provisions of article 36 of the Law n°46-628
dated 8 April 1946, on the nationalisation of electricity and gas, the
authorities and institutions referred to above may also be
responsible for the works for the development of public networks
for the distribution of electricity and gas.
The local authorities, their institutions of cooperation between such
local authorities, or their syndicates which do not possess a public
distribution network for natural gas, or in relation to which the
works are not in the process of being carried out, may grant the
public distribution of gas to any company duly accredited for these
purposes by the Minister responsible for energy, in the conditions
specified in article 25-1 of the Law n°2003-8 dated 3 January 2003
referred to above (modified by the Law 13 July 2005). These local
authorities and these institutions may create a public body accepted
by the Minister responsible for energy, use an existing public body
of this kind, or participate in an existing company, which is
privately and publicly owned (“société d’économie mixte”).
The acceptance goes also for the firms that wish to distribute natural
gas or any other combustible gas through a public distribution
network. The approval is delivered according to technical,
economical and financial capacities of the business. The conditions
and methods for the issue, the maintenance, the withdrawal and the
publicity of the approval are specified by a Decree issued in the
Council of State n°2007-684 dated 4 May 2007.
5.3 How is access to the natural gas distribution network
organised?
See answer to question 5.2.
The clients that are eligible (article 3 of the Law dated 3 January
2003), have a right of access to the works for the distribution of
natural gas.
Any refusal to conclude a contract for access to a distribution
network for natural gas, including the installations which provide
ancillary services, must provide reasons and be addressed to the
applicant and to the ERC.
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5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
In the context of the general monitoring and proper functioning of
the natural gas market, the ERC examines refusals regarding access
and the contracts or agreements for access to the transportation
France
works and distribution of natural gas, the installations for the
storage of natural gas and the installations of liquefied natural gas.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
In accordance with article 7 of the Law dated 3 January 2003, and
as for the tariffs for the use of the transportation networks, the
decisions relating to the tariffs for the distribution of natural gas are
taken jointly by the Minister responsible for the economy and the
Minister responsible for the energy, following a proposal of the
ERC, and notably, at the request of the operators. A decree dated 11
January 2005 and an order dated 14 January 2005 complete the Law
of 2003 concerning the tariffs for the use of public distribution
networks, as well as the rules applying to these tariffs.
The following third tariffs for the use of public distribution
networks for natural gas have entered into force:
for GRDF: on 1st July 2008, in application of the Order
dated 2 June 2008, which approved the tariff proposal of the
Energy Regulatory Commission dated 28 February 2008;
and
for the local distribution company: on 1st July 2009, in
application of the Order dated 24 June 2009, approving the
tariff proposal of the ERC dated 2 April 2009.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
See answer to question 5.2.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
The activity of the sale of gas to end consumers, which concerns the
interface between the distributors and end consumers is open to
competition. It consists either in the retail sale of gas which is
purchased wholesale, namely within the context of a long-term
supply contract, of between 15 to 20 years, or in the context of a
short-term agreement.
The sale of gas may be completed by the supply of services linked
to energy (for example, maintenance, advice regarding the control
of consumption) (http://www.developpement-durable.gouv.fr/
energie/gaz/fle_gaz.htm).
Retail trade:
The retail market concerns the end consumers.
Eligible clients may opt between two types of contracts:
Contracts with regulated tariffs (proposed only by historical
suppliers). The regulated tariffs are fixed jointly by the
ministers of the economy and energy upon the proposal of
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the ERC.
Contracts with a market price (proposed by historical suppliers
and alternative suppliers). The possibility to choose this
contract is subject to the exercise by the clients of its eligibility.
The market prices are freely fixed by the suppliers.
There are two types of regulated tariffs: subscription tariffs; and public
distribution tariffs.
France
Wholesale trade:
As specified in the reply to question 6.1, France is supplied for the
most part on the basis of long-term contracts (between 15 and 25
years).
The price of gas in the context of long-term contracts evolves
principally in accordance with the price of oil products (domestic fuel
and heavy fuel oil), with a delay of between three to six months.
Exchanges on the wholesale market are operated at the Gas Exchange
Points (“GEP”), virtual points at the level of each tariff area where the
following are operated:
the exchange of gas between suppliers; and
the gas supply for the network administrators in view of the
management of the network, for the balance of daily statements
for the senders, for the functioning of gas compressor; the
constitution of the stock on its way for new installations.
The transactions at the GEP are operated on a day-by-day basis or are
subject to long-term contracts.
Suppliers that have acquired gas within the scope of the programme
for a temporary gas release in the South of France take the gas at the
GEP South and South West.
The objective of the programme for temporary gas release is to enable
new suppliers to enter into the gas market of the South of France.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Natural gas commodities can be traded subject to administrative
authorisations. We are not aware of any legal restrictions
concerning trading of unbundled products.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
As far as liquefied natural gas (“LNG”) is concerned, we would
mention that since 2009 (the year when the first methane terminal
became operational), France has a new operational methane Terminal,
“Fos-Cavaou” with a capacity of 8.25 Gm3 per year, belonging to the
company, “STMFC”, which was created following the conclusion of
a partnership between Total (30%) and Elengy (“Elengy” is a Gaz de
France - Suez group company, created on 31 December 2008) (70%).
The operator is Elengy.
Two other methane terminals are operational in France, “Fos Tonkin”
and “Montoir”, which have, respectively, a capacity of 7 Gm3 per year
and 10 Gm3 per year, belonging to and operated by Elengy.
The operation of the methane terminal of “Fos Tonkin” is initially
planned to end in 2014. Elengy’s decision regarding an extension in
its activity is not yet known publically, and studies are currently in
process.
At Montoir, renovation and adaptation of the terminal will be
necessary in order to ensure its operation until 2021, at a cost of
around Euros 110 millions.
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In addition, there is a possibility of extension in relation to the three
terminals.
Potential sites for the installation of a new methane terminal are being
studied today by several operators. The criteria for qualification are
both technical (notably as regards the capacity of reception of a
methane gas tanker, to the link-up to the principal transportation
network, to the proximity of a high tension electrical network) and
financial (particularly as regards openings on the national or regional
markets, to the part reserved for access of third parties) (“Plan
Indicatif Pluriannuel des Investissements dans le secteur du gaz
(Période 2006 - 2015)”; Ministry of the Economy, Finance, and
Industry; http://www.energie.minefi.gouv.fr/ energie/gaz/pdf/rapport-
PIP-gaz.pdf).
7.2 What Governmental authorisations are required to construct
and operate LNG facilities?
In order to operate in the liquefied natural gas sector, it is necessary to
follow the authorisation procedure provided for by the Law dated 3
January 2003.
It is also necessary to obtain a planning permit, in accordance with the
Planning Code. Of course, this concerns an installation which is
classified for the protection of the environment. Accordingly, all the
provisions relating to the environment must be complied with and the
appropriate authorisations must be obtained.
7.3 Is there any regulation of the price or terms of service in the
LNG sector?
In accordance with article 7 of the Law dated 3 January 2003, the
tariffs and commercial conditions of use of the liquefied natural gas
installations are drawn up jointly by the Ministers responsible for the
economy and for energy, upon the recommendation of the ERC
depending on public criteria which are objective and non-
discriminatory, bearing in mind the characteristics of the service
rendered and costs linked to this service.
A decree dated 21 September 2004, completes the provisions of the
Law dated 3 January 2003, concerning the tariffs of the use of
transportation networks and installations of liquefied natural gas.
The first tariffs for the use of methane terminals proposed by the ERC
on 26 October 2005 came into force on 1st January 2006, in
application of the decision of 27 December 2005 of the ministers of
the economy and energy.
On 24 July 2009, the ERC proposed a new set of tariffs for the use of
methane terminals of Fos Cavaou, Fos Tonkin and Montoir (which
appeared in the Order of 20 October 2009, approving the tariffs for the
use of methane terminals).
These new tariffs applied for a period of three (3) years as from 1st
January 2010 for the Fos Tonkin and Montoir Terminals and as
from the date of its commercial being online as regards the Fos
Cavaou terminal (http://www.cre.fr/fr/acces_aux_reseaux/
infrastructures_gazieres/terminaux_methaniers; up to date as at 16
December 2009).
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
Created by the Law on the modernisation of the economy n°2008-
776 dated 4 August 2008, the Competition Authority (the
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“Authority”) replaces the Competition Council which had been
established by the Order of 1st December 1986. This Order had
been codified in 2000 in the fourth section of the Commercial Code
The Competition Council had itself replaced the Competition
Commission (instigated in 1977), which replaced the Technical
Commission on Cartels and Dominant Positions. Articles 95, 96
and 97 of the Law on the modernisation of the economy n°2008-
776 dated 4 August 2008 focus on this new Authority and, in this
regard, amend the aforementioned provisions of the Commercial
Code.
This transformation, which aimed to close the gap between the
French system for regulating competition and the European norm,
gathers together responsibilities and means within a single
independent authority (http://www.autoritedelaconcurrence.fr/user/
standard.php?id_rub=273).
The Authority is therefore an independent administrative authority,
which is specialised in the monitoring of anti-competitive practices,
expertise in the operation of markets and the control of merger
operations. At the service of the consumer, it has as an objective to
monitor the free operation of market forces and help with the
competitive operation of the markets at European and international
levels.
The Law on the modernisation of the economy transfers to the new
Authority the powers of the former Competition Council and
accords new powers: the Competition Authority replaces the
Minister of the Economy as regards the monitoring of merger
operations. In addition, the Competition Authority is henceforth
able to itself carry out investigations and possesses the possibility to
decide itself upon recommendations as regards competition
questions and to issue recommendations to the Minister who is
responsible for the sector, which aim to improve the competitive
functioning of the markets.
Order n°2008-1161 dated 13 November 2008, which modernises
the regulation of competition, confers upon the Competition
Authority reinforced powers.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
Anti-competitive practices may take different forms. They are
generally classified into two groups: cartels on the one hand; and
abuse of dominant position on the other hand.
They are defined in articles L 420-1 and L 420-2 of the Commercial
Code.
“Concerted actions, agreements, express or implied cartels or
coalitions are prohibited, even when through the direct or indirect
intermediary of a company of a group located outside France, when
they tend to:
1) Restrict access to the market or the free operation of market
forces by other companies.
2) Hinder the fixing of prices through the free operation of
market forces by favouring artificially their increase or their
decrease.
3) Limit or control the production, outlets, investments or
technical progress.
4) Share out the markets or sources of supply.”
There are so-called “horizontal” cartels, which involve several
competing firms for the same type of product or service and so-
called “vertical” cartels, which are concluded between operators
situated at different levels of the economic chain as, for example,
between suppliers and distributors.
“The abusive exploitation by a company or a group of companies of
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a dominant position on an internal market or with regard to a
substantial part of such market is prohibited in accordance with the
conditions provided for in article L 420-1. Such abuse may notably
consist in a refusal of sale, related sales, or sales subject to
discriminatory conditions, as well in the breach of established
commercial relations, for the sole reason that the partner refuses to
submit to unjustified commercial conditions.
France
In addition, the abusive exploitation by a company or by a group of
companies of the state of financial dependency in which a client
company or supplier finds itself is prohibited when such
exploitation is likely to affect the functioning or the structure of the
competition. Such abuse may consist in a refusal of sale, in related
sales, in discriminatory practices referred to in article L 442-6 or
product range agreements.”
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The dispute jurisdiction of the Authority (http://www.autorited
elaconcurrence.fr/user/standard.php?id_rub=273):
When the financial players infringe competition law the matter may
be brought before the Authority, or the latter may assume
jurisdiction to deal with the matter upon its own initiative. It will
examine the facts and, at the end of a process where each side is
heard, it will take, if necessary, all the steps necessary for the
practices in question to be stopped.
At the end of the process, several decisions are possible:
decision of non-suit (and there is therefore no need for the
process to continue);
rejection (on the basis that there are inadequate supporting
documents);
pronouncement of conservatory measures: (faced with an
emergency situation, before a decision on the merits has been
taken - in the event of a serious and immediate infringement
as regards a financial sector or as regards a company);
financial sanction (up to 10% of the world-wide turnover of
the company);
injunction (to cease an anti-competitive practice or to comply
with competition law);
decision concerning non compliance with an injunction
(possibly accompanied by fines);
injunction against publishing (of the sanction in the media);
and
decisions accepting undertakings: an alternative to litigation,
the process of undertakings enables the company which has
doubts to present to the Authority undertakings which are
such as to put an end to these preoccupations, and before any
notification of contentions.
Consulting Role:
The opinions and recommendations rendered at the initiative of
the Authority
Without it being necessary for a matter to be brought before it, the
Authority can render opinions upon its own initiative with regard to
any questions of competition and to issue general recommendations
on a market or a particular sector. The Authority will put forward
its point of view each time that it considers that this is necessary.
This possibility is crucial to the extent that it enables the Authority
to exercise an advisory and warning role, well before the role of a
sanctioning authority which is also its role.
Opinions rendered on matters brought before it
Compulsory referral to the Authority
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The Authority must be consulted when a draft legislative or
regulatory text envisages regulating prices or restricting
competition (articles L.410-2 and L.462-2 of the Commercial
Code). The Authority renders a reasoned decision to public bodies,
in which it formulates its observations on the proposed text and
suggests, if need be, alternative solutions which are more
compatible with competition.
France
Option referral to the Authority
Upon the request of public bodies (such as the government and
Parliament), local authorities, jurisdictions, or trade union
organisations, consumers or professionals, the Competition
Authority may be called upon to render opinions on any issue of
competition.
The sectorial authorities such as the Audiovisual High Council, the
Energy Regulatory Commission and the Authority for the
regulation of electronic communications and posts, also have the
possibility of referring matters before the Authority.
Following an examination of the competition situation of the market
in question, the Competition Authority proposes any measure that is
helpful as far as strengthening competition is concerned
(http://www.autoritedelaconcurrence.fr/user/standard.php?id_rub=29
4).
Leniency:
It should also be noted that there is a policy of leniency. Leniency
is a tool which enables national competition authorities to have
stopped or to sanction more easily cartels, and especially cartels, in
return for a favourable treatment granted, in certain conditions, to
companies which denounce the existence of cartels and which
cooperate in the proceedings that are instigated with regard to such
cartels.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
See answer to question 8.3.
In addition, and as regards merger operations (a merger operation
occurs when two companies that were formerly independent merge,
when they create a common company, or when a company takes
control of one of several other companies), there are thresholds of
turnover which trigger the obligation to notify the operation to the
Authority (article L 430-2 of the Commercial Code).
Once the operation has been notified to the Authority, the latter
proceeds with an examination of the operation, within a delay
which will depend upon the nature of the operation and the
problems that it comes across during the course of the examination
(and for further details regarding the time periods within which the
Authority reaches a decision, reference should be made to articles
L. 430-5 and L 430-7 of the Commercial Code).
In the event that no particular competition problems are identified
or if the undertakings that are presented by the parties rectify the
problems that have been noted, the operation may give rise to an
authorisation with or without undertakings at the end of a quick
examination, called, phase 1. The decision is rendered within 25
business days as from the date of receipt of a complete file of
notification.
If, on the other hand, a serious infringement of competition remains
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at the end of this phase, the Authority commences phase 2, in order
to proceed with an in-depth analysis of the operation. In particular,
the Authority will examine whether the operation is such as to
impede competition and notably, through the creation, or the
strengthening of a dominant position or through the creation or the
strengthening of a purchase power which would place the suppliers
in a situation of economic dependency. The Authority also
examines whether the operation is justified by gains in efficiency
which compensate for prejudicial effects that may possibly be noted
as far as competition is concerned.
At the end of this examination (normally 65 business days as from
the commencement of phase 2), the Authority renders a collegiate
decision which may either authorise the operation without any
specific conditions, or authorise it subject to the provision of
undertakings, or prohibit it.
The parties, as well as interested third parties have two months
within which to seek an annulment of the decision or an amendment
of the decision before the Council of State.
On an exceptional basis, the Minister of the Economy may pass
over the decision of the Authority, adopting a decision on the basis
of reasons of public interest (http://www.autoritedela
concurrence.fr/user/standard.php?id_rub=273).
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
9.1.1 As regards development
As far as development is concerned, the law does not impose any
specific conditions of nationality, and thus foreigners are likely to
obtain an exclusive research permit or a concession.
9.1.2 As regards access to the networks of natural gas
The Law dated 3 January 2003 has opened up the French market of
natural gas to competition and offers, in this context, a right of
access to the networks of natural gas to eligible clients and
suppliers, as defined in articles 3 and 5.
In light of the context and the objectives of the law, it appears that
eligible clients are necessarily French. On the other hand, all
persons that are domiciled in the territory of a Member State of the
European Union or, in the context of international agreements, on
the territory of another State may be suppliers provided that the
person in question is the holder of an authorisation delivered by the
Minister responsible for energy.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
The legislation applicable to the gas sector is widely influenced by
community undertakings given by France. Thus, recent laws,
which have provided a new legal context for the natural gas market,
have been enacted in order to transpose European Directives into
French law.
On an environmental point of view (because of its impact in the gas
legislation and operation), France is also of course influenced by its
international undertakings such as the Kyoto Protocol as well as its
European undertakings.
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10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
10.1.1 The settlement of disputes by the Energy Regulatory
Commission
The ERC may be resorted to by concerned parties (except in the
case of clients that are not eligible), in the event of any dispute
relating to access to transportation works, or works concerning the
distribution of natural gas and to liquefied natural gas installations,
or in relation to the storage of natural gas. After an examination
during which the parties are duly heard, and after possibly an
enquiry, the Commission reaches a decision within a time period of
two months (which may be extended if necessary) for the resolution
of a dispute. A matter may also be brought before the Commission,
in parallel, for conservatory measures. The decisions of the
Commission may be appealed before the Court of Appeal of Paris,
which may order the suspension of execution of a sentence.
10.1.2 The settlement of disputes by a judge
Chapter X of the Mining Code provides for the offences and
penalties in mining matters. In view of the mixed character of
mining legislation, certain questions fall within the jurisdiction of
administrative judges, whilst others fall within the competence of
civil judges.
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10.2 Is France a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
France
France has ratified these two conventions.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
This is not applicable in France.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
We are not aware of any instances of this kind.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in France.
We are not aware of new cases in Gas Regulation Law in France.
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 JeantetAssociés AARPI France

Sophie da Cunha Thierry Lauriol

JeantetAssociés AARPI JeantetAssociés AARPI
87, avenue Kléber 87, avenue Kléber
75116 Paris 75116 Paris
France France

Tel: +33 1 4505 8008 Tel: +33 1 4505 8008

France

Fax: +33 1 4505 8025 Fax: +33 1 4505 8025

Email: sda-cunha@jeantet.fr Email: tlauriol@jeantet.fr
URL: www.jeantet.fr URL: www.jeantet.fr

Sophie da Cunha admitted to the Paris Bar in 2005. Associate with
the French law firm Jeantet Associés AARPI since 2003 and
member of the Energy and Natural Resources Department headed
up by Thierry Lauriol. Areas of practice include international trade
and contracts, arbitration, energy and natural resources (oil and gas,
electricity, renewable energy sources and mining), as well as African
business law (OHABLA). Languages: French and English.
Thierry LAURIOL, admitted in 1991 to the Paris Bar, with a
specialisation at the Bar in Economic Law and International
Relations Law. University of Paris-Sceaux : PhD in 1989 with
distinction “très honourable” (Henri Capitant award). Joined Jeantet
Associés AARPI in 1992, founder and head of the Energy and
Natural Resources Department. Previously spent five years with
Coudert Frères. Specific Energy and Mining experience: all aspects
of Energy and Mining Law concerning exploration, prospecting,
development, production, transportation, refining and distribution;
drafting of legal opinions (under French law and “OHABLA” law) and
international contracts; negotiation and collaboration with State
companies, as well as with numerous oil and mining companies.
Languages: French, English and Italian.

Established in 1924, Jeantet Associés AARPI is a leading independent French law firm, recognised for its extensive
practice in strategic areas of business law, including long-term financing operations, related litigation, as well as in the
area of energy and natural resources.
Our Firm’s distinguished experience and expertise attract a wide range of clients from public and private, national and
multinational corporations to banking and financial institutions and sovereign and territorial government agencies.
For the past 80 years, Jeantet Associés AARPI has provided its clients with high quality legal services to meet the
demands of an ever-evolving and increasingly integrated business community. Our Firm is particularly prominent in the
French institutional arena for handling complex transactions and litigation.
Furthermore, Jeantet Associés AARPI is recognised as a forerunner amongst French law firms in developing an
international, business-driven practice. Our teams of legal experts support a significant portion of the investment
activities of European and Anglo-Saxon companies in France.

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Chapter 11

Germany Matthias Hirschmann

Lovells LLP Violetta Pudell

1 Overview of Natural Gas Sector Commodity sales and trading are effected on the basis of business
relationships, by brokered transactions and by trading at the
European Energy Exchange (“EEX”). Gas trading at the EEX
1.1 A brief outline of Germany’s natural gas sector, including a started in July 2007 and has ever since increased steadily. In 2008
general description of: natural gas reserves; natural gas
the volume traded at the spot market increased by 185% compared
production including the extent to which production is
to 2007. While in mid-year 2007 only 26 traders participated in the
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG) gas exchange, now the EEX already counts approx. 60 participants.
liquefaction and export facilities, and/or receiving and re- However, as there are in total around 190 traders who could
gasification facilities (“LNG facilities”); natural gas pipeline participate, there is still potential for further increase.
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
1.2 To what extent are Germany’s energy requirements met
using natural gas (including LNG)?
On 1 January 2009 the proven and probable natural gas reserves in
Germany amounted to 193.7 billion cubic metres which is around
In 2008, approximately 22.1% of the total energy demand in
11% less than in the previous year. In 2008, 16.4 billion cubic
Germany was satisfied by natural gas. The major energy source is
metres of non-associated gas were produced from 81 natural gas
still mineral oil which accounts to around 34.7% of the total energy
fields of which only one is an off-shore field located in the North
consumption followed by 24.1% of brown and black coal. While
Sea. Production in 2008 decreased by 8% compared to the previous
the market share of nuclear energy decreased to 11.6% during the
year. Last year’s decline is mainly caused by the exhaustion and
last year, the use of renewable energies is growing further (now
dilution of the fields. In addition to the non-associated gas, 99
approx. 7.4%).
billion cubic metres of associated gas were produced. Based on
actual estimations the German gas reserves will last for
approximately 11.8 years. 1.3 To what extent are Germany’s natural gas requirements
met through domestic natural gas production?
Most of Germany’s proven gas reserves are located in the Federal
State of Lower Saxony where 94% of the total output in the year
Germany is the third biggest gas importer in the world. Only 14%
2008 was produced. Approximately 14% of Germany’s annual gas
of the demands can be satisfied by domestic production while the
demands of approximately 950 billion kilowatt hours are satisfied
rest needs to be imported from Russia, Norway and the
by this domestic production. The remaining 86% are imported
Netherlands. Imports may be executed easier with the completion
mainly from Russia, Norway and the Netherlands. Germany is the
of the Nordstream-Pipeline; which is planned from 2011 onwards to
biggest importer of gas in Europe.
transport larger amounts of gas from Russia to Germany through
The import is exclusively executed by pipelines as there are the Baltic Sea.
currently no LNG re-gasification terminals in Germany. Even
though E.ON Ruhrgas AG (“E.ON”) already possesses an official
authorisation to build an LNG terminal in Wilhelmshaven it decided 1.4 To what extent is Germany’s natural gas production
- at least for the present - not to make use of the building permit but exported (pipeline or LNG)?
to invest in a terminal in Rotterdam instead.
Germany, as a country where the energy demand by far exceeds the
The pipeline network, on the other hand, is very well developed as
production rate, engages in gas exports only to a negligible extent.
Germany is - due to its geographical position - the major gas turning
In 2008 the amount of gas exported sums up to around 177.4 billion
platform in Europe. There are around 438,000 kilometres of
kilowatt hours.
pipelines. The pipeline network in Germany is, as of October 2009,
separated into six so-called market areas, three for H-Gas and three
for L-Gas.
Germany’s geological conditions are quite favourable for the
construction of underground gas storage facilities. In 2008, 47
cavern and pores storages were in operation, the construction of
another 19 is planned. Germany has the highest storage capacities
in Europe and ranks fourth on the worldwide level.
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 Lovells LLP
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
Germany
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
Companies willing to explore or produce natural gas on Germany’s
territory or on Germany’s continental shelf have to seek prior
authorisation from the competent national authority. The
authorisation process is laid down in the Federal Mining Act
(“Bundesberggesetz” - BBergG) as of 1980. The granting of
licences falls under the competence of the 16 German Federal
States. If gas development takes place on the continental shelf an
allowance by the Federal Office for Navigation and Hydrography
might be needed in addition.
The BBergG has not been subject to major changes lately and there
are still no political tendencies pointing towards legal changes in
regard to the gas development.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
The right to develop gas is granted to the production company with
the issuance of the licence mentioned in question 2.1. The licence
is an administrative act; it might contain conditions which have to
be complied with during the development process and might be
withdrawn in case the requirements are not (anymore) met. The
licensing process is normally purely administrative and does not
establish any contractual relationships.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
Different licences are granted for exploration and production of
natural gas: According to Sec. 7 BBergG an exploration licence is
required which grants the exclusive right to explore specified
resources within a certain area (“Licence Area”). The term of such
authorisation is subject to the authority’s discretion but must not
initially exceed five years. It might, however, subsequently be
extended for another three years. The licence includes the right to
construct facilities necessary for the duly exploration of the area.
Prior to their operation, however, the applicant has to submit an
operation plan which has to satisfy certain legal requirements such
as environmental and safety issues and which needs to be approved
by the authority.
According to Sec. 8 BBergG a further licence has to be issued in
regard to the production of natural gas. This licence grants the
exclusive right to explore and product the resources of the specified
area. It includes the right to acquire ownership to the designated
resource and other resources found during production. The
operation of production facilities also require an operation plan
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approved by the competent authority. The licence terms should not
exceed 50 years but can - in case of duly operation - be elongated
until the gas field is fully exploited. In practice, an initial term of
20 to 30 years is common.
Both licences have to be granted in case the applicant satisfies the
requirements for exploration resp. production. In order to ensure
compliance with legal conditions (e.g. environmental, safety) the
authority may couple the licence with auxiliary conditions which
need to be fulfilled by the applicant.
No separate licence is issued for the appraisal of natural gas. As
long as the gas quality or the extension of resources is examined
without extraction of the gas the permit is incorporated in the
exploration licence. If extraction is necessary the appraisal is
subject to the production licence.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
In Germany, the State does not have any ownership shares to the gas
developed nor is it - apart from the granting of licences - involved
in the development process. The production licence grants the
applicant the exclusive right to acquire full ownership.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
According to Sec. 30 BBergG the holder of an exploration licence
has to pay a so-called field charge to the Federal State the field is
located. The charge is calculated by the square kilometres explored
and increases each year in order to intensify and accelerate the
exploration process. Expenditures for the exploration can be
credited against the field charge.
The holders of production licences have to pay a mineral royalty for
the gas produced. According to Sec. 31 BBergG the royalty
amounts to 10% of the market price of the developed resource, but
the Federal State may determine a different mineral royalty.
Further taxes may arise, for example under the Energy Tax Law
(Energiesteuergesetz) when the gas is delivered to purchasers.
2.6 Are there any restrictions on the export of production?
There are no restrictions on the export of natural gas.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
There are currently no exchange restrictions or restrictions on the
transfer of funds derived out of Germany.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
The transfer of exploration or production licences is subject to the
approval by the competent authority. It has to consent to the
transfer unless the legal requirements for development are not met
by the transferee.
It is not a case of transfer if a third person is merely financially
involved in the development (e.g. investors). No restrictions apply
for such investment.
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2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
In principal, no securities have to be provided by the participants.
They have to submit an operation plan, however, which needs to
demonstrate the financial ability and strength to duly operate the
production. Furthermore, the Federal Mining Act requires
sufficient precautionary measures with respect to production field
clean-up obligations. In case this plan does not positively forecast
sufficient economic capacities for the production period or the
clean-up activities, the competent authority may demand a security.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Both, the licence for exploration and the licence for production can
be pledged for security.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Exploration and production licences and permits for operation do,
on principal, not include all administrative decisions required for
production and exploration activities. As the case may be, in
addition to these licences, construction permits may be required by
the local building authority, permits under the Water Protection Act
(Wasserhaushaltsgesetz) or the Forest Protection Acts
(Waldgesetze). However, in case of bigger production sites (more
than 500,000 cubic metres daily) an environmental impact
assessment is required under the Environmental Impact Assessment
Act (Gesetz über die Umweltverträglichkeitsprüfung) which is
executed in a plan-approval procedure. The obvious disadvantage
of this procedure is that the planning process - which involves
public participation - requires a longer time until the respective
permission is granted. On the other hand, with the issuance of the
plan-approval all necessary permits are granted in a single decision.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
For the abandonment or decommissioning of facilities a special
abandonment plan has to be submitted to the competent authority
ensuring - amongst other things - that materials are orderly
disposed, effective measures for the rehabilitation of the surface and
for the safety of workers and the public are undertaken.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Within the European Union, according to the concept of free trade,
national measures, including regulations, that directly or indirectly,
actually or potentially hinder cross-border trade of any good are
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prohibited. Accordingly, no explicit limitations for gas import/export
within the EU exist. However, in the view of the European
Commission energy trade and competition between Member States is
still not very developed. This is why the European Union recently
issued a new legislative package on the further integration of the
energy market, the so-called “Third Energy Package” consisting of
Germany
two directives and three regulations (cf. section 11).
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Networks as well as associated facilities are in the ownership of or
leased by the respective operators.
The legal framework for the transportation of gas in pipelines is the
German Energy Act (Energiewirtschaftsgesetz- EnWG) and its
associated regulations. Under these provisions, which are partly based
on European Union directives, grids cannot be operated by legal
persons who are as well involved in energy production or energy trade.
Networks must be operated independently from production or other
energy activities. Even though the production entity and the network
operator may still belong to the same corporate group, they must
operate independently (“Legal Unbundling”). Full separate
ownership is so far not obligatory in Germany. Furthermore,
ownership unbundling will not be required by the EC Directive
2009/73/EC (“Unbundling Directive”) which is part of the “Third
Energy Package” (cf. section 11) as sole option; Germany will most
probably implement these provisions so as to further allow vertically
integrated companies (cf. section 11). The unbundling provisions
apply not to pipelines belonging to production sites and/or connecting
the production site to the network by direct lines. Further, the
unbundling provisions neither apply to pipelines of a local network
which supply predominantly one economic entity within a confined
area (Objektnetze).
Beyond the guidelines of the European Energy Regulators
(“ERGEG”), currently no legal obligation exists to unbundle
storage operators. However, the Unbundling Directive, implements
mandatory rules as to the legal unbundling of storage operators.
The directive’s provisions on unbundling of storage operators must
be implemented by 3 March 2011.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
As with the licences for exploration and production of gas, also the
construction and operation of bigger pipelines (more than 300
millimetres diameter) require a plan-approval procedure which is a
lengthy process but covers all permits which would otherwise have
to be applied for separately.
The operation of the pipeline has to be authorised and can only be
dismissed in case the applicant does not have the necessary
economic and technical ability or personal reliability.
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4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
Germany
A company planning to build a gas pipeline will try to agree
contractually on a usage right with the respective land owners of the
premises the pipeline will cross, generally secured by an easement
(beschränkt persönliche Dienstbarkeit) in the meaning of Sec. 1090 et
seq. German Civil Code (Bürgerliches Gesetzbuch). Such easement
grants the right to the company to lay the pipeline through the
premises of the land owner without any further use of the premises.
In case a licence for the construction of a pipeline is granted
following a plan-approval procedure, land owners have, according
to Sec. 45 EnWG, to tolerate the use of their real estate and can even
be expropriated. The project developer might have to pay
compensation if this is stipulated by the authoritative decision.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Network operators have to grant everyone access to their pipeline
infrastructure on a non-discriminatory basis. Access fees have to be
published in the internet as well as the necessary technical
requirements for access. Fees and conditions of access have to be
transparent, non-discriminatory and may not be unfavourable
compared to those applied vis-à-vis affiliated companies.
The same applies in regard to the grid connection: the network
operator of a transmission pipeline has to connect any third person
to its network subject to non-discriminatory conditions.
The network operators conclude grid connection and grid access
agreements with the third person seeking access. Access can only
be refused if such is technically or economically impossible or
unreasonable. The German Federal Network Agency
(Bundesnetzagentur) may review such decisions and may, in case of
an unjustified refusal, order the granting of access.
This regulatory framework does not apply to pipelines belonging to a
production site and/or connecting the production site to the network by
direct lines. Furthermore, also local networks supplying energy
predominantly within a confined area to one economic entity
(Objektnetze) are exempted from the regulatory requirements.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
As stated above, Germany has a very well developed pipeline
infrastructure which can be used by the transportation customer.
Under the German Energy Act, network operators are forced to
cooperate to minimise balance zones. Network operators have
therefore agreed on the so-called co-operation agreement; the most
recent is the third version dated 29 July 2008. The co-operation
agreement in particular governs the co-operation within and across
balancing zones, so-called market areas, and sets out the grid access
conditions to be applied by each network operator. The German
network is currently divided into six market areas each consisting
of transportation and transmission/distribution networks and a hub,
where title to the gas can be transferred to third parties. The
customer does not have to specify the exact transportation route
within the market area anymore but only concludes two contracts
(“Entry-Exit-System”): A contract with the pipeline operator the gas
is fed-in (Entry) and another contract with the operator from whose
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network the gas is taken at destination (Exit). In addition, a
balancing contract with the market area operator is required to
balance feed-in and off-take of gas. Should a customer whish to
transport gas outside the respective market area he must conclude
separate entry- and exit-agreements for all the networks involved.
It can, however, authorise the operator responsible for the market
area to conclude these contracts in his name.
This does not apply to pipelines belonging to a production site
and/or connecting the production site to the network by direct lines.
Further, pipelines of a local network supplying predominantly one
economic entity within a confined area (Objektnetze) are exempted
from these requirements.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
As stated above, network operators are obliged to grant any third
person access to the transportation system, as well as to storage
facilities, on a non-discriminatory basis. This right is enforceable
and can only be refused in case the access is not possible for
technical or economic reasons. The operator has to notify such
refusal to the German Federal Network Agency.
Refusal is justified if there are not enough capacities available. The
network or storage operators are not obliged to expand their nets or
facilities so as to be able to accommodate new customers. The
allocation of capacities must be executed on a non-discriminatory
basis. Capacities must not preferentially be allocated to affiliated
companies, but have to be granted in the order in which they had
been requested (“First Come, First Served”).
This access regime does not apply to pipelines belonging to a
production site and/or connecting the production site to the network
by direct lines. Further, such pipelines of a local network which
supply predominantly one economic entity within a confined area
(Objektnetze) are exempted from the access regime. These
pipelines do not underlay any regulatory regimes, their use by third
persons, if relevant, is subject only to general civil law.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
In general the terms and conditions upon which gas is to be
transported are set out in the above-mentioned co-operation
agreement and each network operator is forced to apply those terms
and conditions.
The situation is different for the fees to be charged for the
transportation of natural gas. Operators have to notify their fees based
on a cost plus regime to the relevant network agency and have to wait
for an ex ante approval. Since 1 January 2009 the cost plus regime
provides for incentives to minimise costs, and thus to minimise
transportation fees. Supra-regional long-distance pipeline operators
have had the opportunity to apply for an exemption and accordingly to
charge fees independently from the cost situation, so-called
benchmark fees. Benchmark fees to be offered to third parties must
be non-discriminatory, so that each party gets access to a specific
transmission network based on the same fees. Benchmark fees were,
however, allowed only to the extent that competition in performance
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exists between these operators. In October 2008 the German Federal
Network Agency decided that these supra-regional operators were not
exposed to competition. Following this judgement, the provisions of
the incentive regulations will also apply to supra-regional pipeline
operators as from 1 January 2010 onwards.
The fees for access to storage facilities are currently not subject to
regulatory approval and the storage operator is free to enact its own
terms and conditions. Nonetheless, the fees and terms to be offered
to third parties must be non-discriminatory, such that each party
may get access based on the same terms and fees.
The regulatory regime does not apply to pipelines belonging to a
production site and/or connecting the production site to the network
by direct lines. Also pipelines of a local network supplying
predominantly one economic entity within a confined area
(Objektnetze) are exempted from regulatory requirements.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
In regard to the distribution network basically the same regime
applies as to the transportation pipelines: Distribution pipelines are
in the operator’s ownership or leased by the operator. The smaller
networks are sometimes owned by public entities - municipal
energy suppliers - but may also belong to private entities.
The regulatory framework is the German Energy Act which calls
for “Legal Unbundling” (cf. above question 4.1) also in regard to
distribution networks if more than 100,000 customers are connected
to the distribution network. The German Energy Act will have to
be amended during 2011 following the EC’s Third Energy Package
(cf. section 11), but due to the Unbundling Directive Member States
remain free to exempt small distribution operators from the
unbundling requirements.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
For the authorisation to operate a distribution network, basically the
same provisions apply as in regard to transportation pipelines (cf.
above question 4.2).
5.3 How is access to the natural gas distribution network
organised?
Access to the distribution network underlies the same regulations as
access to the transportation pipelines (cf. above questions 4.4, 4.5
and 4.6).
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
As with regard to distributors the same regime applies as it is
applicable for transportation networks, so distributors are not
required to expand their network in case of insufficient capacities
(cf. above question 4.6).
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5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
Access fees to the distribution network are governed by the same
regulatory regime as access fees to the transportation pipelines (cf.
above question 4.7).
Germany
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
Beyond anti-trust law restrictions there are currently no special
restrictions or limitations to acquiring or transfer interests or assets
of gas utilities or networks in Germany. However, according to the
Unbundling Directive of the “Third Energy Package”, Member
States must grant a permit for investors from third states (so-called
“Gazprom-Clause”). In case they do not fulfil the unbundling
requirements or in case security of energy supply is not guaranteed
anymore, the State may refuse granting the permit (cf. question 11.1
for details).
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Gas trading is not regulated in Germany and underlies the concept
of “freedom of contract”. Validity of the contract is assessed
according to the provisions of the German Commercial Code
(Handelsgesetzbuch) and/or the German Civil Code.
Beyond trading at the European Energy Exchange (“EEX”), gas
trading is effected on the basis of business relationships and by
brokered transactions. It is very common to use the EFET General
Agreement for flat transactions.
The most important initiative of the German Federal Network
Agency relates to the merger of market areas to create liquid hubs
and increase trading at the hubs within each market area. There are
no major initiatives on the legislative level.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
The EEX provides for one and two day ahead as well as derivatives
trading with a minimum contract size of only 1 MW. It is not
possible to trade bundled products at the EEX, but there are two
online platforms, which facilitate the secondary marketing of
transportation (“Track-X”) and storage capacities (“Store-X”).
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
There are no LNG facilities in Germany at the moment. E.ON and
VNG Verbundnetz Gas AG originally planned to construct a
terminal in Wilhelmshaven but E.ON is now investing in the
Rotterdam terminal instead. It can currently not be foreseen if there
will be a LNG terminal in Germany in the nearer future.
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7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Authorisation of construction and operation of LNG facilities also
underlies the provisions of the German Energy Act. Certain
authorisations are necessary such as a construction permit or
Germany
environmental permits.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
The German Energy Act does not provide for specific regulations as
regards the LNG sector. The applicability of the unbundling
provisions in the German Energy Act depends on the fact, whether the
LNG facilities are necessary for realising grid access- then applicable
- or for liquefaction and re-gasification only - then not applicable. As
far as LNG facilities are necessary for the access to the grid, they
belong to the gas grid according to Sec. 3 No. 20 German Energy Act
and are regulated alike regarding access and usage conditions.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The general responsibilities in Germany for applying the
competition rules lie with the competition authorities, namely the
Federal Cartel Office (Bundeskartellamt) for cases which
potentially affect more than one Federal State and the Federal States
Cartel Offices for local cases. The competition authorities also
regulate competition aspects of the natural gas sector.
In regard to gas pipelines the network operators’ market behaviour
is furthermore monitored by the German Federal Network Agency.
It is exclusively responsible for the authorisation of access fees and
for lifting hindrances to network access. In cases affecting only one
Federal State this state’s regulator is the competent authority.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The material rules for the regulators to assess whether a certain
conduct is anti-competitive or not, stem from both the German Act
against Restraints of Competition (Gesetz gegen
Wettbewerbsbeschränkungen) and also the EC competition law.
A market conduct is generally considered to be anti-competitive if it
constitutes an abuse of a dominant market position. In this respect,
for instance, excessive pricing vis-à-vis consumers and specific
long-term gas supply contracts have recently been in the focus of the
Federal Cartel Office and were deemed anti-competitive. For the
energy market a special provision sets particularly strict limits for
market dominant suppliers. It prohibits introducing fees or other
conditions which are less favourable than those of comparable
suppliers if the divergence is not justified by the facts. The supplier
bears the burden of proof for such facts. The special provision also
prohibits fees “inadequately” exceeding costs.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The Federal Cartel Office may prohibit the anti-competitive
conduct, issue preliminary injunctions to stop it, impose significant
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fines or skim off the profits resulting from anti-competitive
conduct.
The German Act against Restraints of Competition applies to anti-
competitive behaviour of all economic sectors with the energy
market additionally being subject to special provisions (cf. above
question 8.2).
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
Merger control is executed by the Federal Cartel Office or - as an
exclusive competence - by the EC Commission in case of a merger
having a community wide dimension. Merger control kicks in if the
companies involved reach certain turnover thresholds. The Federal
Cartel Office may prohibit a merger if it leads to or strengthen a
dominant position.
A proposed merger must be notified to the Federal Cartel Office
prior to its consummation. The Federal Cartel Office has an initial
one month period and must then decide whether to open an in-depth
investigation or not. Straight forward cases are normally cleared
within a one month period. In case of an in-depth investigation the
Federal Cartel Office has a period of four months at its disposal.
The Federal cartel Office may also approve a merger subject to
conditions.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Currently, there are no such special limitations on acquisitions in the
gas sector. Restrictions for companies from inside the European
Union would be invalid due to the EC Treaty. However, as regards
foreign investors, the European legislator has issued an amendment of
the gas directive 2003/55/EC which was published in the Official
Journal of the European Union on 14 August 2009 as directive
2009/73/EG. According to its Article 10 transmission system
operators must be certified by the regulator before operating. In case
of operators which are controlled by persons from a third country the
certification will, as a principle, be refused. Only if the operator fulfils
the directive’s unbundling provisions (see question 11.1) and the
operator has proved vis-à-vis the German Federal Network Agency
that the security of supply in the Member State and the Community is
not endangered the certification will be granted. The directive will
have to be implemented by the Member States until 3 March 2011.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
The German energy market is highly influenced by the European
legislator. Many changes in the national energy law are prescribed
by European directives.
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10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
No statutory compulsory dispute settlement procedures apply in the
gas sector. The co-operation agreement described in question 4.5
above contains an arbitration clause whereby all disputes arising
from the co-operation agreement will be decided by an arbitral
tribunal. Such arbitration clauses are common also in the majority
of commercial contracts for the supply of gas. If no such arbitration
clause is agreed upon the ordinary court applies the regular civil
proceeding order.
10.2 Is Germany a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Germany signed and ratified both conventions.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
There is no special difficulty in litigating and enforcing titles
against State organs. The regular procedural and material
regulations apply before administrative courts. In case of damages
claimed from a State organ, the ordinary courts have jurisdiction.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
There have been successful judgments initiated by foreign
corporations against State organs in the past. As judges work
independently from the administrative power and foreign persons -
whether individual or legal - are granted access to courts, claims of
foreign corporations cannot be judged any differently.
Also in practice, no cases are known of factual discrimination of
foreign entities before German courts.
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11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Germany.
Germany
In 2008 a national legislative package containing energy and
climate related regulations has been passed; the major part of these
national laws entered into force on 1 January 2009 and does not
affect gas regulation. A smaller part of the legislative package came
into force in 2008 which regulates the right to privileged network
access for biogas (also called “Greengas”). This can have indirect
effects for natural gas as well, as in case of capacity constraints a
priority feed-in must be granted for biogas even in case capacities
for natural gas have been booked previously.
On the European level, the “Third Energy Package”, which also
contains the Unbundling Directive, has finally been passed. There
has been a long hassle since 2007 about ownership unbundling
which - according to the Commission - was necessary for full
liberalisation on the European energy market. Germany together
with other countries opposed strongly against the Commission’s
unbundling plans and also Council and Parliament had troubles
finding a common position on the topic. Only in June 2009 the
Council formally issued the new legislative acts which have been
published in the Official Journal on 14 August 2009. The package
contains five legislative acts of which two concern gas: the directive
on common rules for the internal gas market; and the regulation on
conditions for access to natural gas transmission networks. The
directive stipulates that companies must be certified as
Transmission System Operators (“TSOs”) before they are admitted
to operate. Competent for such certification will be the national
regulator. TSOs must each year submit a 10-year net development
plan. As for the unbundling provisions there are now three options
for TSOs for fulfilling the unbundling provisions: full ownership
unbundling, an independent system operator (“ISO”) and an
independent transmission operator (“ITO”). The regulator’s
competences are strengthened and operators controlled by persons
from outside the EU will be certified only under restrictive
conditions (see question 9.1). Germany will most probably decide
to further permit vertically integrated entities by allowing
companies to choose the third option (ITO).
As for the access to gas networks German Ministry of Economics
has issued a corner stone paper in April 2009 concerning the
implementation of new rules on capacity allocation mechanisms
and further merger of market areas. Moreover the Federal Network
Agency has initiated a consultation process concerning new rules
on capacity allocation and congestion management. The main
purpose is to free-up capacity at congested import- and market area
connection points by imposing stricter rules concerning calculation
of available technical capacities by transmission grid operators,
stricter “use-it-or-lose-it” rules and obligations to offer unused
capacity on a day-ahead basis. As those ideas have not yet been
finalised their probable content remains to be seen.
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 Lovells LLP Germany

Matthias Hirschmann Violetta Pudell

Lovells LLP Lovells LLP
Alstertor 21 Alstertor 21
20095 Hamburg 20095 Hamburg
Germany Germany
Germany

Tel: +49 40 4199 30 Tel: +49 40 4199 30

Fax: +49 40 4199 3200 Fax: +49 40 4199 3200
Email: matthias.hirschmann@lovells.com Email: violetta.pudell@lovells.com
URL: www.lovells.com URL: www.lovells.com

Matthias Hirschmann LL.M. (L.S.E.) joined Lovells in November
2000 and became a partner in May 2007. During a secondment to
the legal department of an oil major he has gained in depth energy
industry expertise (in particular in the oil and gas sector) and has
ever since specialised on legal advice in the energy sector. He is the
Head of the German part of Lovells´ international Energy, Natural
Resources & Infrastructure Practice Group, which specialises in all
energy sector related legal issues, in particular energy sector related
domestic and cross-border mergers and acquisitions, takeovers,
joint ventures, as well as general energy law and regulatory advice.
The practice also has substantial expertise in the development of
energy supply and transportation agreements of any kind (in
particular gas) as well as general regulatory compliance aspects
(including meetings with the Bundesnetzagentur).
Violetta Pudell, EMLE (Rotterdam/Hamburg) is based in our
Hamburg office and has worked for Lovells since 2001. She was
appointed as a Counsel in 2007. Violetta specialises in Energy Law
and has a wide experience in advising domestic and international
companies on Energy - specific matters such as energy trading,
unbundling and regulation issues. She has also substantial
expertise in transportation and storage matters (in particular gas).
In addition, she has been involved in energy related mergers and
acquisitions, takeovers, joint ventures.
Violetta was seconded for two years to the law department of an
international oil & gas major and has since then advised on several
projects in the energy sector.

Lovells LLP is an international law firm operating from 26 offices around the globe. The practice group Energy Natural
Resources & Infrastructure (ENRI) has a long history of acting for companies in the energy sector. Our clients include
oil and gas majors, utility companies, banks, gas and electricity transportation as well as transmission/distribution
companies, power generators and suppliers, contractors and major energy consumers. Our work in the sector covers
the complete supply chain (upstream, midstream and downstream) of crude and refined products, gas and LNG, power
generation and gas and power transportation. It involves mergers and acquisitions, joint ventures and other
transactional work as well as regulatory issues and competition and procurement expertise throughout the energy sector.
Our energy lawyers have extensive experience in “getting the deal done” quickly and commercially. One of last year’s
major highlights of the German team of Lovells’ energy practice is the sale of the district heating plant business of
ExxonMobil to RWE.

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Chapter 12
India
IndoJuris
1 Overview of Natural Gas Sector
1.1 A brief outline of India’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
A. Natural Gas Sector in India:
The Geological Survey of India during the 1950s undertook a
comprehensive survey and mapping to locate structures suitable for
the exploration of oil and gas that led to an initial discovery at
Jwalamukhi (Punjab) and Cambay (Gujarat) in 1958. Amongst the
later discoveries, the giant Bombay High field discovered in 1974
has significantly boosted the oil and gas production in India.
Prior to 1991, Oil and Natural Gas Commission (‘ONGC’) and Oil
India Limited (‘OIL’), being government owned entities (‘GOE’),
were involved in exploration and production (‘E&P’) activities. In
1991, the Government of India (‘GOI’) took initiative to liberalise
the petroleum E&P policy by inviting private companies, both
overseas and domestic, to participate in oil and gas field
development. In order to introduce new technologies and improve
production, GOI entered into various Production Sharing Contracts
(‘PSC’) with joint ventures/private companies.
Pursuant to the New Exploration Licensing Policy (‘NELP’)
published in the official gazette on 10th February 1999, the GOI put
an end to mandatory state participation through ONGC/OIL, and
introduced a grant of Petroleum Exploration Licence (‘PEL’)
through international competitive bidding. However, ONGC and
OIL can still compete with others for a licence. To date, pre-NELP
and six rounds of NELP bidding have together awarded 167 blocks,
among them 155 blocks are still under operation. As on 1st April
2008, 125 gas fields and 261 oil and gas fields are involved in E&P.
The bidding for the seventh round of NELP was opened on 13th
December 2007 and on 20th November 2008 the Cabinet
Committee on Economic Affairs of the GOI gave its approval for
the awarding of 44 blocks. Further, the bidding for the eighth round
of NELP was opened on August 2009. The GOI has offered a total
of 70 oil and gas blocks under NELP VIII and 10 blocks under
CBM IV (coal bed methane) exploration policy. Out of these 70
exploration blocks on offer, there will be 18 on land blocks
(including 10 Type-S blocks), 28 shallow water blocks and 24
deepwater blocks. The bid closing date for NELP VIII and CBM
IV is 12th October 2009.
ICLG TO: GAS REGULATION 2010
© Published and reproduced with kind permission by Global Legal Group Ltd, London
Dhritiman Bhattacharyya
Dinesh Singh
According to Oil and Gas Journal, India, the total Natural Gas reserve
as of January 2009 was 38 trillion cubic feet.
Almost 70% of India’s NG reserves are in the Bombay High basin and
Gujarat. A smaller quantity of NG is also produced in Tripura, Tamil
Nadu and Rajasthan.
B. Alternative Sources:
(i) Coal Bed Methane (‘CBM’): The GOI adopted CBM Policy in
1997 to have an additional supply of gas apart from the
conventional NG reserves to reduce the greenhouse effect with
carbon credit earnings. The estimated CBM resource in India
is around 4.6 Trillion Cubic Metres (‘TCM’). So far, three
rounds of international competitive bidding have awarded 26
blocks for CBM exploration. The estimated CBM resources in
these awarded blocks are 1,374 BCM with a production
potential of 38 Million Standard Cubic Metres per Day
(‘MMSCMD’).
(ii) Gas Hydrate (‘GH’): India is among the four countries that
have the world’s richest GH reserves. Total prognosticated gas
resources from the GH in India are placed at 1,894 TCM. GOI
formulated a National Gas Hydrate Programme (‘NGHP’) in
1997 for exploration and development of GH resources.
NGHP had made significant discoveries of fully developed GH
system in the Mahanadi basin of the Bay of Bengal, Andaman
Islands, and Krishna-Godavari Basin (“KG Basin”).
C. Liquefied Natural Gas (‘LNG’) Terminals:
(i) PLL at Dahej-LNG: According to Integrated Energy Policy:
Report of the Expert Committee issued by the Planning
Commission of GOI in August 2006 (‘IEPR’), demand for NG
in the year 2019-20 would climb to 356 MMSCMD (as per
Integrated Research and Action for Development Report and
PWC based on an assumption of ‘Business as Usual’ and the
base year being 2003-04), leaving a huge gap between demand
and supply. To ensure sufficient supply of LNG, GOEs such as
Gas Authority of India Limited (‘GAIL’), ONGC, Indian Oil
Corporation Limited (‘IOCL’) and Bharat Petroleum
Corporation Limited (‘BPCL’) in strategic partnership with
GAZ de France entered into a JV to form Petronet LNG
Limited (‘PLL’). PLL set up its first LNG Terminal at Dahej,
Gujarat, with capacity of 5 Million Metric Tonnes per annum
(‘MMTPA’). RasGas of Qatar is supplying LNG to Dahej
terminal. The capacity of this plant is being doubled to 10
MMTPA and the expanded capacity would be operational by
the first quarter 2009. PLL has planned another project at
Kochi in Kerala with a capacity of 2.5 MMTPA scalable to 5
MMTPA.
(ii) Hazira-LNG Project: The Hazira project of Hazira LNG
Private Limited is one of the largest greenfield foreign direct
investments (‘FDI’) projects in the energy sector in India. The
LNG terminal and its infrastructure have a nominal capacity of
5 MMTPA, though the initial throughput is 2.5 MMTPA. The
capacity of the terminal has recently been expanded to 3.75
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MMTPA. Shell and Total hold a 74% and 26% share
respectively in the project.
In the future, Ratnagiri Gas Power Projects Limited is planning to
set up an LNG terminal at Dhabol. IOC and ONGC are also
planning to set up LNG terminals at Ennore and Mangalore
respectively, for an initial capacity of 5 MMTPA.
D. Pipelines:
India
As of 1st April 2008, the existing length of petroleum and
petroleum product pipeline in India is 16,805 KM with the capacity
of 106.47 MMTPA. The gas pipeline network is about 10,000 KM
with GAIL having a 55% share and the remaining share being with
JV’s of GAIL or with private players.
E. City or Local Natural Gas Distribution Networks
(‘CGD’):
During the last decade, various CGD projects were under
implementation and their success has changed the scenario of
energy supply in India. Mumbai City Gas Distribution Project of
Mahanagar Gas Limited (JV of GAIL, British Gas, and the
Government of Maharashtra), Delhi CGD Project of Indraprastha
Gas Limited (JV of GAIL and BPCL and Government of Delhi),
Gujarat Gas Company (promoted by British Gas), Adani group and
Gujrat State Petroleum Corporation are major CGD projects in the
country that are involved in the transmission and distribution of
natural gas to residential, transport and commercial consumers.
F. Utilisation:
The gas produced in the western offshore fields is brought to Uran,
Maharashtra for use in and around Mumbai and partly in Gujarat.
After sweetening, the gas is partly utilised at Hazira and the rest
feeds into the 2,300 KM Hazira-Bijaipur-Jagdhishpur pipeline that
passes through Gujarat, Madhya Pradesh, Rajasthan, Uttar Pradesh,
Delhi, and Haryana. The gas produced in Gujarat, Assam, etc. is
predominantly utilised within the respective states.
NG is currently the source of half of the LPG produced in the
country. LPG is now being extracted at Duliajan in Assam, Bijaipur
in Madhya Pradesh, Hazira and Vaghodia in Gujarat, Uran in
Maharashtra, Pata in Uttar Pradesh and Nagapattinam in Tamil
Nadu. Plants have been set up at Lakwa in Assam, at Ussar in
Maharastra and at Gandhar in Gujarat. NG contains C2/C3, which
is a feedstock for the petrochemical industry, used for Maharashtra
Gas Cracker Complex at Nagothane, IPCL in Gujarat and Pata
Petrochemicals complex of GAIL in Uttar Pradesh.
G. International Pipelines Project:
The negotiations are underway to import NG from gas producing
countries through Transnational Gas Pipelines. The proposal is to
import NG from Myanmar, Iran, and Turkmenistan to supplement
India’s domestic production. Government level discussions are
being held to conclude agreements regarding the same.
1.2 To what extent are India’s energy requirements met using
natural gas (including LNG)?
Presently, NG comprises approximately 9-10% of the total share of
primary commercial energy consumption in the country. Though
the primary commercial energy consumption of NG has grown
significantly during the past decade from approximately 12.77
BCM during the year 1990-91 to approximately 34.328 BCM
during the year 2009.
1.3 To what extent are India’s natural gas requirements met
through domestic natural gas production?
NG produced in India is not adequate to cater to the total domestic
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demand and the consumption is expected to rise. Growing demand
of NG is usually met by LNG imports (almost 30%) supplemented
by domestic production. Cumulative domestic Natural Gas
production during April 2008-February 2009 was 30,019 MCM
(according to Centre for Monitoring Indian Economy). During the
same period, the demand for NG stood at 34,062 MCM. Demand
for gas in India is expected to increase to 283 MMSCMD in 2012
whereas domestic supply, including gas extracted from the KG
basin, will add up to only 180 MMSCMD.
1.4 To what extent is India’s natural gas production exported
(pipeline or LNG)?
India has deficit resources to be able to export and it imports much
of its NG either via pipeline or LNG. It is mandatory under the
Model Production Sharing Contract (‘MPSC’) entered between
GOI and other parties to undertake E&P activities, to sell in the
Indian market all of its entitlement to NG. .
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
By virtue of Article 297 of the Constitution of India, petroleum in
its natural state is vested in the GOI. MoPNG is the administrative
body entrusted with responsibilities relating to E&P of oil and NG,
their refining, distribution, marketing, and import-export. MoPNG,
constituted the office of the Director General of Hydrocarbon to
ensure optimum exploitation, review/approve development plans,
work programmes, budget, reservoir evaluation, and advise on mid-
course corrections in connection with discovered fields.
The regulation for the granting of exploration licences and mining
leases in respect of NG is covered under the Oilfields (Regulations
and Development) Act, 1948 (‘Oilfields Act’), together with
Petroleum and Natural Gas Rules, 1959 and Petroleum and Natural
Gas Rules, 2002 (‘PNG Rules’) (framed under the Oilfields Act).
The Petroleum Act, 1934, along with the PNG Rules, regulates the
transmission, distribution, and marketing of NG. The Oilfields Act
provides for the regulation of oilfields (the definition of which
covers gas fields) and for the development of mineral oil (the
definition covers NG) resources. The PNG Rules, 1959 regulates
the granting of PEL and Petroleum Mining Leases (‘PML’). The
regulation for exploration and exploitation of resources in the
continental shelf and exclusive economic zone is governed by the
Territorial Waters, Continental Shelf, Exclusive Economic Zone
and Other Maritime Zones Act, 1976. NELP provides for a
competitive bidding structure for E&P based on the MPSC. GOI
offers 100% foreign participation for E&P and grants attractive
concessions such as an income tax holiday for seven years from the
start of commercial production.
The Petroleum and Natural Gas Regulatory Board (‘PNGRB’) is
the downstream oil and gas regulator, established by the GOI under
the Petroleum and Natural Gas Regulatory Board Act, 2006
(‘Regulatory Board Act’) which is effective from 1st October
2007. It has provisions to promote competitive markets by
regulating refining, processing, storage, transportation, distribution,
marketing, and the sale of petroleum, petroleum products and NG,
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IndoJuris
excluding production of crude oil and NG. As per the Policy issued
by GOI in 2006 relating to Development of Natural Gas Pipelines
and City or Local Natural Gas Distribution Networks, PNGRB has
to ensure and regulate the procedures to develop pipeline
infrastructure and standards for interconnectivity, common
carriage, capacity for transmission and regulation of tariffs for LNG
transportation. PNGRB is working on policy to allow companies to
use the unutilised capacity at LNG terminals. The draft regulations
are published by PNGRB (please refer to question 4.1 for details).
The Oil and Industrial Development Board was formed under the
Oil Industry (Development) Act, 1974 wherein the board is invested
with the powers to lay down conditions of granting financial
assistance for R&D, etc.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
PNG Rules require a PEL for the exploration of NG and PML for
the production of NG. According to the provisions of NELP, GOI
transfers the right of developing NG to investors through PSC on
negotiations based on MPSC. The provisions of the PSC’s are
binding on the parties and are legally enforceable.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
Under the PNG Rules, PEL is granted for operations in the allotted
block/area and it is valid for a period of four years which is
extendable for two further periods of one year each. Commercial
exploitation of discovery in the allotted block/area requires
obtaining a PML. The GOI or a GOE is a party to the PSC. The
participating interest of each consortium member under the PSC is
required to be a minimum of 10%. MPSC contains specific
provisions dealing with commercial exploitation of associated and
non-associated gas. Some of the standard terms and conditions of
MPSC includes the following:
The parties are required to commence petroleum operations
not later than six months from the effective date as defined
under the PSC.
Total exploration period is generally for seven years (eight
years, in case of deepwater and frontier area blocks) from the
effective date.
The GOI is entitled to have representation in the
management committee (‘MC’) by nominating two
members of whom one will be the Chairman and the other
will be the Deputy-chairman. All matters requiring the
approval of the MC shall be generally approved by a
unanimous vote. Failing unanimous resolution, it shall be
approved by the majority participating interest of seventy
percent (70%) or more with the GOI representative having a
positive vote in favour of the decision.
Royalty shall be determined in accordance with the PNG
Rules, usually it is 10% (12.5% for crude and 10% for NG if
the blocks are located in the onshore areas).
Exchange Control Regulations, Environmental and other
authorisations are mentioned below (please refer to
questions 2.7 and 2.11).
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India
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
The GOI is the sole owner of petroleum underlying a contract area
except as regards that part of petroleum, the title of which is passed
India
to the party in accordance with the PSC. In pre-NELP PSC’s, the
GOI had the option of acquiring 30% participating interest in a
block. The same has been discontinued in the post-NELP PSC’s.
However, GOI also has the right to nominate two members at the
MC formed in accordance with PSC, who are an integral part of the
decision making process.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
In addition to royalties refereed to in question 2.3, the MPSC
provides for a detailed mechanism of production sharing and the
GOI’s right in the share of petroleum. The GOI has the option to
receive its entitlement either in cash or in kind.
2.6 Are there any restrictions on the export of production?
Please refer to question 1.4.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
MPSC provides that the relevant exchange control laws and
procedures shall govern a party other than a foreign party.
However, each foreign party has the right to repatriate in any freely
convertible currency the net proceeds of sales of petroleum in India
and freely import, through normal banking channels, funds
necessary for carrying out the petroleum operations.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
The licensee or the lessee of a PEL or PML, as the case may be,
cannot assign or transfer its rights, title or interest thereunder,
without the prior consent of the government. Further, a party may
assign or transfer, a part (unless it falls below 10%, which can be
approved only in special cases) or all of its participating interest
under the PSC, with prior written consent of the GOI, which shall
not be unreasonably withheld. If the GOI does not respond to a
request for assignment within 120 days, consent shall be deemed to
have been granted. Change of control of a party is also deemed to
be an assignment under the MPSC requiring consent of the GOI.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
The participants are required to provide an irrevocable,
unconditional bank guarantee in favour of the GOI for the total
estimated annual expenditure; normally it is 35% of the total
estimate of the minimum work programme. Further, submission of
financial and performance guarantee from the parent company or,
where there is no such parent company, the financial and
performance guarantee from the company is required.
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2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
A party may mortgage, pledge or charge at its own risk and cost, all
or part of its participating interest for the purposes of security for
obtaining finance to the extent required for performing its
India
obligation under the MPSC. The encumbrance is subordinate to the
rights of the other parties in the MPSC.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Development of NG reserves requires various authorisations from
the GOI or from concerned state government departments. An
overview is provided below:
Environment: Pursuant to the Environment Protection Act, 1986
read with the Environment (Protection) Rules, 1986, the GOI has
issued the Environment Impact Assessment Notification, 1994
(‘1994 Notification’). It is a measure to protect the environment
and to evaluate environmental consequences of activities before
commencement. The 1994 Notification mandates for a prior
approval of an environmental clearance before commencement of
E&P activities from the Ministry of Environment and Forests. It
also requires approvals from the Central and/or the State Pollution
Control Board under the provisions of Air (Prevention and Control
of Pollution) Act, 1981 and Water (Prevention and Control of
Pollution) Act, 1974. In addition, a separate environmental
clearance is required for drilling activities. Development of NG
reserves affecting the Coastal Regulation Zones also requires
approval from the relevant State Government authority under the
Coastal Regulation Zone notifications.
Labour Laws: The Industrial Disputes Act, 1947 governs
provisions of termination (retrenchment) and lay-offs of workmen
and resolution of disputes between the industrial establishment and
workmen. Requirement of registration under the Factories Act,
1948 and other provisions of the labour related statues will be
applicable, such as: Payment of Wages Act, 1936; Payment of
Gratuity Act, 1972; Payment of Bonus Act, 1965; the Employers’
Liability Act, 1938; Employees Provident Fund and Miscellaneous
Provisions Act, 1952, etc.
Safety Related Laws: The provisions of Petroleum and Natural
Gas (Safety in Offshore Operations) Rules, 2008, Explosives Act,
1884; Manufacture, Storage and Import of Hazardous Chemical
Rules, 1989, etc. are applicable.
Local Laws: The local and municipal laws of the state in which the
exploration area is located, needs to be complied with.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
The PSC requires preparation of a proposal for site restoration
including an abandonment plan and requirement of funds for the
consideration and approval of the MC. An annual contribution is
required to be deposited by the parties in the Site Restoration Fund
established by the GOI pursuant to the Site Restoration Fund
Scheme, 1999. The amounts standing to the credit of such account
is not permitted to be pledged or offered as security and can only be
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withdrawn and to such extent, as is necessary, to meet any
expenditure to be incurred towards removal of all equipments and
installations or towards all necessary site restoration.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
In terms of the Foreign Trade Policy 2004-2009, import of NG
(including LNG) is placed under the open general licence category
i.e. the importation does not require any specific licence. The
Customs Act, 1962 along with the provisions of Customs Tariff Act,
1975 governs the customs duty payable on importation of NG at
10% and an educational cess of 2%. However, LNG imports
currently enjoy an exemption in relation to the basic customs duty,
for importation on an FOB basis and the effective rate as of
September 2009 is 5.1% (5% basic duty plus an education cess of
2%). Regarding exports please refer to question 1.4.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
The Petroleum and Mining Pipeline (Acquisition of Right of Users
in Land) Act, 1962 (‘Pipeline Act’) provides regulatory framework
and provisions for acquisitions of right of way for laying
transportation pipelines. The party is required to publish a notice
with details of land requirements, right of use and description of the
land to be crossed. After the publication of notice, the party is
required to obtain approval from the GOI. Further, it needs to
obtain environment, pollution, and safety clearances depending on
the nature of the project and comply with other applicable
legislations (please refer to question 2.11).
Under the provisions of the Regulatory Board Act, PNGRB has
issued various regulations (some of which are still in the draft
stages) to organise and regulate transportation pipelines and
associated infrastructure, as enlisted below:
(a) Regulation for Determination of Pipeline Tariff for Natural
Gas Pipelines published in November 2007.
(b) Access Code for Natural Gas Transmission Pipelines and
City or Local Natural Gas Distribution Networks published
in December 2007 (‘Regulation for Access Code’).
(c) Affiliate Code of Conduct for Entities Engaged in Marketing
of Natural Gas and Laying, Building, Operating or
Expanding Natural Gas Pipeline as Common Carrier or
Contract Carrier published in November 2007 (‘Regulation
for Transportation and Marketing’).
(d) Regulation for Fostering Fair Trade and Competition
amongst entities by Sharing of Infrastructure published in
October 2008 (‘Regulation for Competition’).
(e) Regulation for Determination of Network Tariff for City or
Local Natural Gas Distribution Networks published in
March 2008, etc.
(f) PNGRB (Authorising Entities to Lay, Build, Operate or
Expand Natural Gas Pipelines) Regulations published in
October 2008.
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(g) Regulation for Authorising Entities to Lay, Build, Operate or
Expand Petroleum, Petroleum products Pipelines published
in January 2009.
(h) Regulation: Registration for establishing and operating
Liquefied Natural Gas (LNG) Terminals published in March
2009.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The Regulatory Board Act contains comprehensive provisions for
authorisations, to lay, build, and operate or expand any pipeline.
(Please refer to questions 1.1-D, 2.11, & 4.1.)
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
The Land Acquisition Act, 1894 governs the acquisition of land for
public purposes by the GOI. In addition, the Pipeline Act provides
for acquisitions of right of way for laying transportation pipelines.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
The Regulatory Board Act empowers the PNGRB to regulate open
access and transportation rates for the common carrier or contract
carrier. A Draft Regulation of Access Code has been issued setting
out the guidelines regarding open access to transportation pipelines.
Generally, the limit of open access is a derivative of the contractual
relationship between parties in accordance with the Regulation of
Access Code. GAIL regulates access of the NG transportation
system on a commercial basis as far as it relates to supply through
its pipelines.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
Interconnectivity between the different pipeline networks has been
cited under the Regulation for Transportation and Marketing and
Regulation for Access Code that proposes a non-discriminatory
open access basis for booking of pipeline capacity as well as for any
available excess capacity. Once fully implemented, it will regulate
the open access and transportation rates for the common carrier or
contract carrier.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
PNGRB has issued a draft Regulation for Competition aimed at
removing or minimising any form of impediment to competition
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amongst entities by facilitating access to certain identified
infrastructure in a non-discriminatory manner. Under the
regulation, PNGRB can declare the infrastructure required for
refining, processing, storage, transportation, distribution, marketing
and sale of petroleum, petroleum products or natural gas as a
common user facility (‘CUF’) which makes its mandatory for the
entity controlling the infrastructure to share its use with other
India
entities under a mutually agreed CUF sharing arrangement. The
entity that controls the infrastructure constituting CUF, shall have
right of first use for its own requirement provided it is not
detrimental to consumer interest. The entity seeking sharing must
first submit to the entity that controls the infrastructure a written
request to negotiate a mutually agreed arrangement for such
sharing. If the entities are unable to reach a mutually agreed sharing
arrangement, a request is filed with the PNGRB, who will issue its
decision as to whether the entity that controls the infrastructure is
required to share it with the entity seeking sharing. Wherever the
entities are unable to negotiate a voluntary sharing and
compensation agreement, the PNGRB may institute a compensation
mechanism for CUF so as to ensure a reasonable rate of return of
12% post tax on the capital employed.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Please refer to question 4.6.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
PNGRB under the provisions of the Regulatory Board Act regulates
the transmission and distribution of NG. GAIL and ONGC hold the
largest transmission, supply, and distribution chain of NG. Private
resellers are also present in the market. (Please refer to question
1.1 C, D, E&F.)
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
The Regulatory Board Act empowers PNGRB to provide for
authorisation and registration to lay, build, operate, or expand any
pipeline as a common carrier or contract and to lay, build, operate
or expand any CGD network. Further, party/ies needs to obtain
environment, pollution, and safety clearances depending on the
nature of project and provisions of applicable laws. (Please refer
to questions 2.11 and 4.1.)
5.3 How is access to the natural gas distribution network
organised?
The Regulation for Access Code, aims at establishing industry wide
transparent and uniform principles for allowing entities to
gain/allow access to the pipeline systems and CGD networks. The
Regulation for Competition, aims at removing and minimising any
form of impediment to competition among entities by sharing of
infrastructure.
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5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
The Regulations for Access Code promotes development of a
competitive gas market by establishing uniform principles,
preventing abuse of monopoly power, and to allow transparent and
India
non-discriminatory access of the gas pipelines and CGD networks.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
Distribution fees are subject to the terms of contract between the
parties; the Regulations for Access Code requires approval of fees
charged for accessing distribution network from PNGRB, to
promote non-discriminatory open access.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
A company authorised to set up or build a NG pipeline in terms of
the PNGRB (Authorising Entities to Lay, Build, Operate or Expand
Natural Gas Pipelines) Regulations 2008, cannot transfer the
authorisation by way of sale, assignment or surrender during a
period of three years from the date of issue of such authorisation
without obtaining prior consent of PNGRB.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Natural gas trading policy is still under progression; however, Multi
Commodity Exchange of India Limited started online trading in NG
in June 2006. In addition, GAIL and Natural Commodity and
Derivatives Exchange Limited has signed a memorandum to work
jointly for developing a spot market for NG that is still waiting for
approval of the board of directors of GAIL.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Natural gas is currently traded as a bundled product and the pitfalls
and advantages of unbundled trading are currently under
consideration.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
There are no specific laws or ownership regulations for LNG
terminals. The Regulatory Board Act provides for registration of
entities for establishing, expansion, and operating LNG terminals.
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7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Please refer to questions 2.1, 2.11, and 4.1.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
As mentioned earlier, PLL being co-promoted by GOE’s is subject
to the supervision of the GOI. As per information, the GOI has
advised PLL to pool the prices of LNG imported by it through long-
term contracts in ‘public interest’. The same does not apply to spot
purchases or to private sector organisations.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
Under the Monopolies and Restrictive Trade Practices Act, 1969
(‘MRTP Act’), the MRTP Commission is entrusted with the
responsibility of promoting fair trade practices and to take suitable
action to discourage anti-competitive practices.
A new law, the Competition Act, 2002 (‘Competition Act’) has
been enacted to repeal the MRTP Act. Under the Act, the
Competition Commission of India (‘CCI’), a quasi-judicial body
shall replace MRTP Commission. However, the Competition Act
has not been fully implemented and MRTP Commission is still
functioning. Further, safeguards are also provided under
Companies Act, 1956 (‘Companies Act’), where approval from
central government is required for acquisition of shares (more than
25%) of any dominant undertaking.
Further, the Competition (Amendment) Act, 2007 has been enacted
to amend the provisions of The Competition Act, 2002. The GOI
vide a Notification No. SO 1242 (E) dated 15th May 2009, in
exercise of its powers under sub-section (2) of section 1 of the Act,
appointed 20th May 2009 as the date on which certain sections of
the Act shall come into force. The section relating to anti-
competitive agreements, inquiries into certain agreements and
dominant position of the enterprise have come into force by virtue
of the above notification.
The Petroleum and NG sector (excluding production of crude oil
and NG) is regulated by PNGRB constituted under the Regulatory
Board Act. One of the important functions of PNGRB is to protect
the interest of consumers by fostering fair trade practices. Recently
private oil companies (Reliance Industries Limited (‘RIL’), Essar
Oil, and Shell India) have filed a petition before the PNGRB against
GOEs for indulging in unfair and restrictive trade practices in the
sale of transportation fuel, which is pending adjudication.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The criteria which the regulator applies under the Competition Act
and MRTP Act are, in case of agreement/arrangement having
appreciable adverse effect on competition:
(a) creation of barriers to new entrants;
(b) driving existing competitors out of market;
(c) foreclosure of competition towards accrued benefits to
consumers; and
(d) improvements in production and services.
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Apart from these, other factors such as (a) abuse of dominant
position, directly or indirectly, (b) unfair or discriminatory
conditions in determining the price for purchase/sale of goods, (c)
limitations or restrictions in production and development of goods,
(d) denial of market access, and (e) making conclusion of contracts
subject to acceptance by other parties of supplementary obligations
which have no connection with the subject of such contracts, also
have a bearing.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The MRTP Commission, on a complaint or on its own, initiates
proceeding against such undertakings or persons indulging in unfair
trade practices. In addition to granting of injunctions restraining
such practices, it is also empowered to award damages to the
aggrieved party that is prejudiced by such unfair trade practices.
The CCI may suggest modification to agreements, impose penalty,
direct the enterprise concerned to abide by such orders or grant
compensation to the aggrieved party. The PNGRB has powers
similar to that of a civil court to grant injunction and damages.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
Regarding change in control of a party under the MPSC, change of
control is deemed to be an assignment requiring consent of the GOI
(please refer to question 2.8).
Except for the above, there are no specific rules pertaining to the
approval of mergers and acquisitions (‘M&A’) of production or
distribution of assets in gas utilities. General provisions of the
Companies Act governing M&A are applicable. Approval of
shareholders and creditors, as well as a sanction from jurisdictional
High Court is required. In addition, permission from the GOI is
required for the acquisition of shares beyond a certain threshold in
dominant undertakings. The provisions of Securities and Exchange
Board of India and (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997 are applicable to the listed
companies. Further, CCI may also investigate the probabilities of
an adverse effect on competition.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
100% FDI is permitted under an automatic route (i.e. no approval
required) for the Petroleum and NG sector (including refining by
private companies) subject to guidelines issued by MoPNG.
However, subject to approval being obtained from the GOI, 49%
FDI is permitted in GOE’s engaged in refining.
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9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
International convention, treaties, agreements and multinational
arrangements have an effect on the domestic policies under the
Constitution of India. Presently, there is no major international
India
treaty or agreement influencing the policies pertaining to NG sector.
It is worth mentioning that India is one of only three non-OECD
countries which signed a declaration of co-operation with the IEA.
The key objectives of IEA-India cooperation signed on 30 April
1998 are to assist India in its transition to a market-based economy,
to integrate India into the IEA’s energy policy framework and to
obtain in-depth knowledge of India’s energy and environmental
system.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
The MPSC provides for resolution of disputes through arbitration.
Further, licences granted by the relevant state government or the
GOI under the PNG Rules provides for an arbitration mechanism.
In addition, PNGRB is also empowered to adjudicate upon any
matter concerning refining, processing, storage, transportation,
marketing, selling, or distribution, unless the relevant agreement
provides for arbitration.
10.2 Is India a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
India being a signatory has incorporated the provisions of the New
York Convention in the Arbitration & Conciliation Act, 1996 to
recognise the foreign awards; however, it is not a signatory to the
ICSID.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
The GOI does not enjoy any sovereign immunity in contracts and is
subject to conditions of reason and fair play. There are no
procedural difficulties in suing or enforcing judgments or seeking
awards against the GOI excep, that, before instituting any suit
against the GOI, a statutory notice of two months is required to be
given. Further, unsatisfied decrees passed against the GOI can only
be executed after three months.
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10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
The Indian courts do not differentiate between foreign and Indian
entities and the courts are not hesitant to decide against the
India
government or state organs if they are found to be non-compliant to
applicable law or to their contractual obligations.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in India.
PNGRB constituted under the Regulatory Board Act, has been
mandated to regulate the refining, processing, storage,
transportation, distribution, marketing and sale of petroleum,
petroleum products and NG, excluding production of crude oil and
NG. PNGRB also protects the interests of consumers and entities
and ensures uninterrupted and adequate supply of NG in all parts of
the country to promote competitive markets in the specified
activities relating to petroleum, petroleum products and NG.
Recently, various regulations (some of which are in draft stages)
have been published by PNGRB to regulate specific activities
relating to petroleum, petroleum products and NG (please refer to
question 4.1). Currently, PNGRB and the GOI are in an impasse
over the powers of PNGRB relating to granting of authorisation to
lay, build and operate pipelines or CGD. This stand off is a result
of the GOI not notifying a particular provision (section 16) of the
Regulatory Board Act. The matter is being sorted out internally.
Additionally Indraprastha Gas Limited (‘IGL’), promoted by GAIL
and BPCL (both being government companies for undertaking
CGD) has in a writ petition before the Delhi High Court, challenged
that in the absence of a notification for the provision relating to the
rule making powers of PNGRB, pertaining to laying or building of
any city gas or local natural gas distribution network, it is beyond
the powers of PNGRB to make any rule or regulation in this regard.
Certain entities including IGL have challenged the powers of
PNGRB to grant authorisation for CGD projects in the absence of
notification of the rule making powers of PNGRB for CGD in the
main statute. The matter is pending in the court.
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Since June 2005, Reliance Industries Limited (‘RIL’) and Reliance
Natural Resources Limited (‘RNRL’) are in a battle regarding
supply of NG, what should it be priced at, how much of it should be
supplied and for how long. The issue being whether the GOI’s
approval is generally required for the gas sale price or that such
approval is only needed for the price for calculating royalty, the
GOI’s profit share and income tax. The GOI asserts by way of
affidavit that it has explicit role in approving sale prices and gas
cannot be sold at a price that is different from that used for its
valuation. Currently, Bombay High Court upheld the gas supply
price at $2.34 to RNRL but the matter is pending adjudication
before Hon’ble Supreme Court.
In March 2008, private oil companies, including RIL, Essar Oil and
Shell India Marketing, filed a joint petition at PNGRB, against the
GOE (ONGC, OIL, IOCL, Hindustan Petroleum, BPCL) for
indulging in unfair and restrictive trade practices in the trade of
transportation fuels. The complainants asked PNGRB to initiate
adjudication proceedings against the GOE under Section 11 and 12
of the Regulatory Board Act. On the complaint, a bench has been
constituted to look into the matter.
Currently, disputes are pending before the Bombay High Court,
where the role of government on pricing of NG is in question.
In a major policy decision, the GOI has floated a proposal to enact
legislation on pool pricing of gas, to be supplied to Ratnagiri Gas &
Power Private Limited in particular, and to other sectors. Essar and
GSCPL have challenged before the Courts, the decision of GOI on
gas pool pricing. The matter is likely to come up before the
Supreme Court in December 2008.
Disclaimer:
All the data cited in the document are taken either from the “Annual
Report 2007-2008” or from “Basic Statistics” of MoPNG or the
Planning Commission. Documents are available at the official
website of MoPNG, i.e. http://petroleum.nic.in/ or the Planning
Commission, i.e. http://planningcommission.nic.in.
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IndoJuris India

Dhritiman Bhattacharyya Dinesh Singh

IndoJuris IndoJuris
S-369, Greater Kailash - II S-369, Greater Kailash - II
New Delhi 110 048 New Delhi 110 048
India India

Tel: +91 11 4143 5356 Tel: +91 11 4143 5356

Fax: +91 11 4143 5360 Fax: +91 11 4143 5360

India
Email: dhritiman.bhattacharyya@indojuris.com Email: dinesh.singh@indojuris.com
URL: www.indojuris.com URL: www.indojuris.com

Dhritiman Bhattacharyya graduated in Law from Delhi University.
He has also done an international legal course on cross-border
transactions in New York. Dhritiman started his career with a
leading law firm in 1994 and became a partner in 2001.
Dhritiman specialises in Corporate and Commercial laws, Mergers
and Acquisitions, Foreign Direct Investment, Privatisation, Oil &
Gas, IT and Telecom. He has worked on some of the most strategic
transaction including acting for companies involved in the oil and
gas sector. He is currently advising entities undertaking E&P
operations in India and a French entity having interest in the oil and
gas sector in India.
He has attended and presented several papers at various
international conferences at Durban, Cancun, Singapore, Malaysia
and London. Dhritiman has been rated as one of the leading lawyer
in India by Asia Law & Practice in its 2001 edition. Dhritiman is a
member of various bar associations and is a guest lecturer with
Institute of Chartered Accountants of India.
Dinesh Singh completed his law from the National Law School of
India University, Bangalore in 1996 and has worked with leading
Law Firms in India. His core area of specialisation is Mergers and
Acquisitions, Joint Ventures, Oil & Gas, Asset and Project Finance
with special thrust on Aircraft Financing.
Dinesh represents both international and domestic clients across
various sectors and has advised on some of the most strategic
transactions including advising and assisting clients on over two
dozen aircraft financing transactions.
Dinesh regularly contributes to various publications and has
published several papers/articles on different areas of law, including
Corporate Laws, Competition Law, Information Technology and
Property Laws in legal Journals, Magazines and Newspapers
including in Economic Times and Financial Express. Dinesh is
member of various national and international bar associations.

IndoJuris is a full service law firm representing both domestic and international clients across all sectors. Founded in
2005, the firm relies on young and energetic team of lawyers to provide seamless legal solutions on myriad and
complex cross-border transactions.
The firm advises clients on aviation, banking and finance, infrastructure, project and asset finance, intellectual property,
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99
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 Chapter 13
Indonesia
Ali Budiardjo, Nugroho, Reksodiputro
1 Overview of Natural Gas Sector
1.1 A brief outline of Indonesia’s natural gas sector, including
a general description of natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
As at 2007, Indonesia had traditional proven natural gas reserves of
112.47 TSCF and probable reserves of 57.60 TSCF. Indonesia is
the eleventh largest holder of proven reserves in the world and the
single largest in the Asia-Pacific region.
More than 70 percent of the country’s traditional natural gas
reserves are located offshore, with the largest reserves found off
Natuna Island, East Kalimantan, South Sumatra, and West Papua.
The annual production volume in 2008 was 70 billion cubic metres or
8.3 billion cubic feet per day, making Indonesia the 13th largest gas
producer in the world. The production rate was due to increase as
development projects such as those in South Sumatra and Tangguh
LNG in Papua came on stream in 2009 and reached full production.
Indonesia is also rich in coal-bed methane (CBM), with proven
reserves put at 453 TSCF - the world’s second largest. The CBM
reserves are located principally in East Kalimantan and South
Sumatra.
Two of Indonesia’s LNG production plants, Arun and Bontang,
have experienced declining production in recent years. To help
make up for this shortfall, Indonesia has vigorously engaged in
natural gas exploration activities, as it strives to meet its long-term
LNG contract obligations and also to satisfy increasing domestic
demand.
The Tangguh LNG project in West Papua commenced production in
mid 2009. The Tangguh fields contain 14.4 TCF of proven natural
gas reserves found onshore and offshore at the Wiriagar and Berau
blocks. The 2 onshore liquidification trains each have an annual
production capacity of 3.8 million tonnes of LNG. The project is
led by its operator BP (37.16 percent stake) and a consortium
including the China National Offshore Oil Corporation (CNOOC,
16.96 percent), Mitsubishi (16.3 percent), Nippon Oil (12.23
percent), KG (10 percent), and LNG Japan (7.35 percent).
Historically, Indonesian natural gas production has been geared
toward export markets, but the country has made an effort to shift
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Philip Payne
natural gas toward domestic uses in recent years as a substitute for
the country’s declining oil output. Natural gas holds great promise
in helping the country reduce its consumption of liquid petrol fuels
through the conversion of natural gas to LPG.
In 2008, Indonesia’s gas consumption was 36.5 billion cubic
meters. The fertilizer, petrochemical and power generation are the
principal domestic consumers of natural gas in Indonesia.
However, Indonesia’s limited natural gas transmission and
distribution network remains an obstacle to further domestic
consumption.
Historically, natural gas transmission and distribution activities are
carried out by the state-owned utility Perusahaan Gas Negara
(PGN).
The Government announced a “Masterplan” in 2006 for the
development of a natural gas transmission and distribution network
and subsequently, following a public tender process, the
downstream regulator, BPH Migas, awarded concessions (“Special
Rights”) to construct and operate a Trans Java and a Kalimantan to
Java pipeline to non PGN consortia.
1.2 To what extent are Indonesia’s energy requirements met
using natural gas (including LNG)?
Currently, approximately 15 percent of Indonesia’s total energy
requirements are met using natural gas (including LNG).
The Government is seeking to increase natural gas use to 30 percent
of the total energy use by 2025.
1.3 To what extent are Indonesia’s natural gas requirements
met through domestic natural gas production?
Indonesia does not import natural gas. All domestic gas demands
are met solely by its domestic gas production.
1.4 To what extent is Indonesia’s natural gas production
exported (pipeline or LNG)?
Indonesia exported about 33.5 billion cubic meters of gas mainly in
the form of liquefied natural gas (LNG) or 47 percent of national
production to Japan, South Korea, and Taiwan. Indonesia also
exports natural gas via a pipeline to Singapore and Malaysia from
the West Natuna fields and by another pipeline from South Sumatra
to Singapore, which reached 350 MMCFD maximum capacity
during 2006.
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Ali Budiardjo, Nugroho, Reksodiputro
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
Under the 1945 Constitution, the Republic of Indonesia (that is, the
Government) owns all oil and gas rights within its territory.
Regulation of natural gas exploration and production is based on
Law No. 22 of 2001 (the “Law”) and its implementing regulations.
Following the enactment of the Law, the State oil and gas company,
Pertamina, which previously had also been responsible for
regulating upstream oil and gas activities, lost its regulatory role.
This has now been assumed by BP Migas, a State agency, and the
Ministry of Energy and Mineral Resources. Downstream activities
(which include processing, transportation, storage and trading) are
the responsibility of BPH Migas.
Private sector companies participate in oil and gas activities through
a Production Sharing Contracts (PSC), entered into with BP Migas.
Under the PSC, a contractor is entitled to a certain percentage of oil
and/or gas production. Upstream activities may be undertaken by
either an Indonesian legal entity or a foreign legal entity, however,
one entity may only have an interest in a single upstream PSC.
Downstream gas activities, must be carried out by an Indonesian
legal entity. In practice, this means that a foreign company must
establish a local subsidiary and obtain a downstream licence from
the Government.
In recent years, the Government has offered more attractive
production splits and other fiscal terms for new gas blocks and
marginal gas fields to try to attract more investment in the
development of natural gas reserves.
As noted in question 1.1, since 2006, the Government has been
encouraging the use of natural gas for domestic use.
As the upstream regulator, BPMIGAS has the authority to do the
following:
To render recommendation to the Minister of Energy and
Mineral Resources (MEMR) in relation to the preparation
and tendering of working areas and cooperation contracts.
To sign PSCs.
To analyse and render recommendation to the MEMR with
respect to the first Plan of Development (POD) for approval
by the MEMR.
To approve subsequent PODs.
To approve work programmes and budgets.
To monitor the implementation of cooperation contracts.
To appoint seller of the Government’s (oil/gas) entitlement
(BP Migas may collect the Government’s share of gas but
must appoint another party to sell the gas).
As a regulator, BP Migas receives a “fee” to fund its activities
which is 1 percent of State revenue from upstream activities.
The principal legislation for the exploration and production of
natural gas are the following:
Law No. 22 of 2001 regarding oil and natural gas (Law 22).
Government Regulation No. 17 of 1974 regarding
supervision of the implementation of offshore oil and gas
exploration and exploitation.
Government Regulation No. 42 of 2002 regarding the oil and
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Indonesia
natural gas upstream business activities of the implementing
body (BP Migas).
Government Regulation No. 35 of 2004 as amended by
Government Regulation No. 34 of 2005 and Government
Regulation No. 55 of 2009 regarding upstream oil and gas
business activities.
Indonesia
Decree of the Minister of Energy and Mineral Resources No.
036 of 2008 regarding development of coal bed methane.
Decree of the Minister of Energy and Mineral Resources No.
02 of 2008 regarding implementation of the obligation of
domestic oil and gas demand by the contractor.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
PSCs, (referred to in the Law as a “cooperation contract”) are
entered between the participants and BP Migas. The PSC is a
legally binding contract governed by, and enforceable in
accordance with, Indonesian law.
As noted in question 2.1 the 1945 Constitution provides that the
Republic of Indonesia (that is, the Government) owns all oil and gas
rights within its territory.
Ownership of natural gas remains with the Government through
production until delivery to a third-party purchaser.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
The PSC covers exploration through production. BP Migas is
required to approve a Plan of Development (POD) before the
participants can proceed with development. A POD will be in
respect of a specific field within a PSC.
The general features of PSCs since the enactment of the Law in
2001 include:
A term of 30 years.
An initial exploration period of 6 years which may be
extended (if no commercial discovery within the exploration
period, the PSC may be terminated).
A requirement to submit exploration work programmes to
BP Migas for approval in accordance with the PSC and
adhere to the approved work programmes;
The participants to appoint an operator responsible for
managing the works under the PSC.
The Government of Indonesia is entitled to a share of the
production from the PSCs, subject to adjustment in
accordance with expenditure formulas:
the general distribution for crude oil production after
recovery of investors’ costs is: participants 62.5%; and
Government 37.5%; and
the general distribution for natural gas production
after recovery of investors’ costs is: participants
71.4%; and Government 28.6%.
BP Migas may require participants to offer up to 10% of the
participant’s interest to Indonesian interests, under recent
changes to promote greater regional government
involvement; BP Migas may require this interest to be
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offered to companies controlled by regional governments in
the area in which the PSC is located. The Indonesian
investor is required to pay the cost of acquiring the interest
and to meet all financial commitments in the same manner as
other participants.
The PSCs may contain certain income tax and import duty
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concessions, including “tax holidays” for agreed periods.
Operators are required to follow tender and procurement
rules designed to promote transparency in the tender process.
Participant’s interests in the PSCs may be transferred or
assigned.
Disputes under the PSCs are resolved by international
arbitration.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
As noted in question 1.1, the Government owns all of the natural
gas reserves, this is also recognised in the terms of the PSCs.
Additionally, the terms of the PSCs require participants to offer a
10% participating interest in the Production Sharing Contract to an
Indonesian Regional Government-owned company (“BUMD”)
upon first approval of a POD.
In the most recent tenders for PSCs, Pertamina has been given the
right to acquire a 15% Participating Interest over the tendered
working area on business to business terms with the winners of such
tenders.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
State revenues comprise tax and non-tax revenues. The tax
revenues include the applicable corporate and withholding taxes.
Non-tax revenues include the State’s production entitlement and
other revenues in the form of exploration fees and other bonuses
(e.g. production bonuses).
Generally the current split is: 65 (Government); and 35
(participants). In theory, the participants can negotiate the
production split. Both the Government and the participants may
receive their respective production portion in kind.
In addition to the production share the Government also taxes the
profits and income of the participants.
The effective tax rate is 44% for participants. Operating costs,
capital expenditures and bonuses are deductible from taxable
income. Losses are carried forward indefinitely.
The Government may also receive a signature bonus and production
bonus based on the terms of the PSC.
2.6 Are there any restrictions on the export of production?
Yes - upstream contractors are required to make at least 25% of
their natural gas entitlement available for the Domestic Market
Obligation (DMO). DMO commences five years from the
production start of each field.
If BP Migas does not notify the participants of any potential
domestic buyers or the negotiation with the potential domestic
buyers fails, the participant may request BP Migas’ approval to sell
the DMO quantity in the international market.
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2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
No regulation applies such restrictions.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
A participant has the right to sell/assign/transfer/convey/otherwise
dispose all or any part of its participating interest to any affiliate or
non-affiliate with prior written consent of BP Migas and the
MEMR. Any assignee/transferee shall not hold any participating
interest in any other PSC at the same time.
During the first three years of the PSC, however, the initial
participants shall remain a majority (greater than 50%) holder of the
participating interest and shall hold the operatorship. As a rule, the
participants shall obtain approval of BP Migas and the MEMR prior
to any direct or indirect change of control.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
The most recent PSCs require participants to provide a performance
bond to cover their seismic shooting commitments during the first
three years of the exploration phase. The bond is for 3 years from
the effective date of the PSC and the Director General will be
entitled to draw down on the bond at any time if the participant
cannot fulfill its seismic obligations during this 3-year period.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Indonesian law requires that for effective security to be taken over
the PSC, BP Migas (as the counterparty to the PSC) must
acknowledge the security interest.
BP Migas views that a participating interest under a PSC is not a
property right, as such it will not approve the contractor to pledge
its right for security.
In practical terms, as BP Migas will acknowledge the security, no
effective security can be granted over the PSC.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
PSC participants must conduct an environmental
monitoring/management assessment (UKL/UPL), and in some
circumstances, may need to conduct an environmental impact
assessment (AMDAL) in relation to the proposed development,
which should then be approved by the relevant government
authorities. The participants must monitor and submit regular
reports on its compliance with the UKL/UPL or AMDAL.
All participants are required to comply with applicable Indonesia
occupational health and safety regulations.
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2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
Upon the termination of the PSC, or the relinquishment or
abandonment of any field or exploratory well, participants must
remove all equipment in a manner acceptable to BP Migas and the
Minister, and must perform all necessary site restoration activities.
In the annual Work Programme and Budget (WP&B), the
participants shall include an estimate of removal and restoration
costs for each exploratory well. All expenditures incurred by the
participants for removal and restoration of their drill sites shall be
treated as operating costs.
Also in the POD, the participants shall include the required removal
and restoration programme together with a funding procedure.
All restoration funds shall be deposited in an escrow account in a
state-owned bank. Any amount deposited shall be treated as
operating costs and any interest earned shall become part of the
escrowed amount.
If the escrow account is not sufficient to finance the removal and
restoration activities, the participants shall, at their own account and
expense, be responsible and liable for completing activities.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
BP Migas agrees that the DMO policy (see question 2.6) shall not
be implemented as to prevent or impede the participants from
fulfilling its obligations pursuant to any pre-existing
commitment/agreement to sell gas, or to materially erode the agreed
economic of the gas project.
All natural gas sold to any third parties shall be valued at actual
contract sales price.
If BP Migas elects to take any of its portion of gas share in kind, it
shall advise the participants in writing. The election shall not
interfere with proper performance of any sales agreement which the
participants have executed prior to the notice.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
As noted in question 1.1, PGN has historically operated the
transmission and distribution networks in Indonesia.
Private companies may own and operate pipelines and storage
facilities and for that they must pay a defined contribution or toll to
BPH Migas, the downstream oil and gas regulatory body, based on
volumes of transported or sold gas.
Gas transportation (if this is intended to be a profit centre) is
considered a downstream oil and gas activity. As such, it must be
carried out by an Indonesian legal entity (which may be
domestically or foreign-owned). Foreign-incorporated companies
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may only conduct downstream activities if these form part of their
upstream activities.
A separate downstream general business licence from the Minister
is required in order to carry out each type of downstream activity,
e.g. for transportation, a Transportation Business Licence is
required. However, if a company performs downstream activities
Indonesia
that overlap with other downstream activities, the company will
only be required to obtain a single business licence.
In addition to the general business licence issued by the Minister,
gas transportation through a section of transmission pipelines or
through a gas distribution network requires an additional Special
Right issued by BPH Migas. The Special Right is granted for the
term of the transportation business licence or for a maximum of 20
years if no term is stated in that licence. The Special Right is issued
through a tender process conducted by BPH Migas, which will
evaluate the bids submitted by the bidders based on their
administrative, technical and financial qualifications. A single
Special Right will be issued to a company for an area of a
transmission segment or a distribution network.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
A downstream business licence is required from the MEMR and to
transport natural gas through pipelines a Special Right from BPH
Migas must also be obtained.
Construction and operation of these facilities will be subject to the
regional, provincial and national regulations generally applicable to
the construction and operation of industrial facilities.
The pipeline operator must also prepare of an environmental
monitoring/management assessment (UKL/UPL), and in some
cases, an Analysis of Environmental Impact (AMDAL) study,
which must be approved by the relevant government agency. Once
in operation, the pipeline operator must submit periodic reports on
the environmental impact.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
In general, land rights will be obtained by negotiating with owners
and occupiers in accordance with prevailing laws.
To the extent these facilities are used for upstream activities within
the framework of a PSC, the participants are responsible for the
payment of these rights and the land that is purchased for a facility
will become the property of the Government, title to which will be
held in the name of BP Migas, while land that is leased for a facility
will be leased in the name of the participants.
Title to land purchased for facilities used for downstream activities
outside of a PSC may be held in the name of the business entity
engaging in the transportation or storage activity.
In most cases, the operator procures the land by entering into
agreements with (and paying compensation to) the landowners or,
if the land is owned by the State, through a long term lease
agreement. This is a time-consuming process, both for commercial
reasons, and because not all land is certified/registered land. There
are no special rights of compulsory purchase for gas pipeline
projects.
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4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
BPH Migas has the authority to determine access to natural gas
transportation systems and interconnection of, and cooperation
between, pipeline systems. BPH Migas is authorised to oversee and
Indonesia
supervise the organisation of gas pipelines and associated
infrastructure. The Special Rights holders are also required to
submit periodical reports to the Minister (copied to BPH Migas)
regarding the planning and development of their business plans.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
To date, most pipelines that have been built are project-specific and
are not interconnected.
PGN has interconnected its pipelines from Sumatra and West Java.
The Masterplan issued by the Government proceeds on the basis of
an integrated national transmission and distribution network,
however, the Masterplan does not specify how this is to occur.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
BPH Migas has issued regulations requiring third party access to
transportation facilities held by a Special Rights holder.
The regulations provide that a Special Rights holder must allow
third party access to its natural gas transportation facilities under
specific terms to be agreed by Special Rights holder and the third
party.
If a Special Right holder refuses to give third-party access to its gas
transportation pipeline, it will need to justify the reasons for its
decision to BPH Migas. If BPH Migas determines that the Special
Right holder is acting unreasonably, it may revoke the Special
Right.
If a Special Right holder has no more capacity, and there is a gas
supply shortage, then it may ask BPH Migas’s approval to expand
its capacity or, if the Special Right holder cannot satisfy the
market’s demand for gas supply, BPH Migas will open a new
segment in the same line for tender. In this case, the holder of
special rights over the existing segment will still continue to have
the Special Right over its own segment.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
By regulation, BPH Migas has the power to set the tariff that will
be charged by the Special Rights holder. The Special Rights holder
may charge the same tariff for customers at any delivery point
within an area or a variable tariff for every point of delivery
depending on the distance from the source of the natural gas to the
customer.
In order to fix the tariff, the Special Right holder will submit the
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proposed tariff to BPH Migas together with its justification for the
tariff.
The proposed tariff should take account of:
(i) the direct cost to construct the pipelines;
(ii) the projected income, based on the anticipated gas to be
transported;
(iii) operational and maintenance costs of the pipeline; and
(iv) depreciation.
Prior to fixing the tariff, BPH Migas will hold a hearing with the
Special Rights holder, the pipeline users, and the buyers of the gas
to determine its reasonableness.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
IBPH Migas has awarded Special Rights to operate transmission
and distribution pipelines to private sector participants.
PGN is listed on the Indonesian Stock Exchange but remains
majority Government owned. PGN has entered into a number of
joint ventures with private sector participants in respect of the
construction and operation of specific pipelines.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
Essentially the same as for transmission pipelines - see question 4.2.
5.3 How is access to the natural gas distribution network
organised?
A Special Right to operate a transmission segment or a section of a
gas distribution area will be granted through a tender process
carried out by BPH Migas. The Special Right holder must give
third parties access to its distribution network.
The third-party access will be regulated based on an agreement
between the Special Right holder and the user, under the
supervision of BPH Migas.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
There is no specific power given to BPH Migas to require a Special
Rights holder to expand its capacity.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
Special Rights holders are required to pay a monthly tariff to BPH
Migas, based on the amount of natural gas transported multiplied by
a percentage of the transportation tariff per thousand cubic feet.
The percentage to be applied to the transportation tariff varies
among the segments.
Special Rights holders may be liable to pay a Special Rights fee to
BPH Migas, however, the amount of this fee has not yet been set.
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5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
Special Rights to operate a section of the gas transmission network
or a section of the gas distribution area are not directly transferable.
However, indirect transfers of interest (for example, a transfer of
shares in the company which holders the Special Right) will not
require BPH Migas approval (although there may be approval
required if the Special Rights holder company is an Indonesian
incorporated company with foreign shareholders).
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
For natural gas trading, the entity must be granted a licence from the
Minister. The licensed trader must:
(i) ensure a continued supply of natural gas through pipelines in
its trading distribution network;
(ii) maintain adequate trading facilities; and
(iii) submit a monthly activity report to the Minister, with a copy
delivered to BPH Migas.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
The regulations do not specify which commodities can be traded.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
LNG facilities may either be operated as upstream as part of the
PSC to produce product to be sold under the PSC, or downstream
as independent profit centres.
An operator of a downstream LNG facility requires a processing
business licence from the Minister.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
The legal entity operating the downstream processing facilities
must be an Indonesian legal entity (which may have foreign
shareholders).
An Indonesian legal entity having foreign shareholders and
operating in the downstream sector must firstly be approved by the
Investment Coordinating Board.
General law licences and approvals to build and operate large scale
facilities will be required for an LNG facility.
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7.3 Is there any regulation of the price or terms of service in
the LNG sector?
The Government effectively determines prices through the LNG
facility marketing the Government’s production share of the gas
(and LNG) and the Government approving the sale price - this
Indonesia
approved price will flow on the participants LNG.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The Business Competition Supervision Commission (KPPU) is the
governmental authority responsible for the regulation of
competition.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The main criteria applied by the KPPU to determine if conduct is
uncompetitive are:
(i) the occurrence or potential occurrence of monopolistic
practices; essentially control over the relevant market by a
business to such an extent that it is able to set prices and
harm the public interest; or
(ii) unfair competition; essentially, adverse competitive
conditions which bar or prevent competition or competition
which is unlawful or fraudulent.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The KPPU has a wide discretion to decide whether to take action in
relation to anti-competitive practices.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
The most recent PSCs provide that changes in control in the
upstream sector need to be approved by BPMIGAS and the
Minister.
A transfer of a participating interest in a PSC requires an approval
from BPMigas and the Minister. The approval process can take 4-
8 weeks or longer.
Changes in control in the downstream sector do not need to be
approved by BPH Migas. However a Special Right is not, itself,
transferable.
Any Indonesian legal entity having foreign shareholders and
operating in the downstream sector must firstly be approved by the
Investment Coordinating Board. The KPPU is authorised to review
mergers and acquisitions above certain thresholds, by which KPPU
could declare an annulment in case of a violation of the
Competition Law No. 5 of 1999. This authority is not yet in force
as the thresholds are yet to be stipulated by the government. Based
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on KPPU Regulation No. 1 of 2009, the thresholds are above Rp 2.5
trillion (about US$ 260 million) of combined assets value, Rp 5
trillion (about US$520 million) of combined revenues, or
maintaining more than 50% of market share. KPPU has circulated
a government regulation draft on this and has stated its aim to have
the regulation issued in 2010.
Indonesia
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Investment in the upstream sector can be carried out directly by a
foreign company.
Investment in the downstream natural gas sector (such as trading,
transportation, distribution and processing) must be done through
an Indonesian legal entity (which may include foreign investors as
its shareholders). There is no foreign shareholding limitation in the
downstream natural gas sector.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
On 5 July 2002, Indonesia signed a memorandum of understanding
with a number of ASEAN (Association of South East Asian Nation)
members to develop an inter-ASEAN natural gas pipeline network.
The participating countries are Brunei, Malaysia, Philippines,
Singapore, Thailand and Vietnam.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
PSC’s will generally specify the dispute resolution procedures and
forum.
Under Indonesian law, the parties are free to select the forum they
wish to use. This means that the parties are free to submit their claims
either to Indonesian or to non-Indonesian courts, or to arbitration.
Foreign court decisions cannot be registered or enforced in Indonesia.
Although no specific legal immunity is available to Indonesian
counterparties, contracts with Indonesian State-owned companies
should include waivers of sovereign immunity.
Pursuant to the revised BPMIGAS’ Guidelines, any disputes arising
out of or in relation to service contracts subject to arbitration must
be settled by a reputable Indonesian arbitration institution and be
held in Indonesia. This provision has been criticised by participants
since it directly limits their option to choose both the arbitration
forum and procedures.
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10.2 Is Indonesia a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Indonesia is a signatory to the NY Convention, ratified by
Presidential Decree No. 34/1981. The provisions of the NY
Convention are also adopted under Law No. 30/1999 on arbitration
and alternative dispute resolution. Under this Law, foreign arbitral
awards are recognised and enforceable in Indonesia as long as they
satisfy the required conditions.
Indonesia is also a signatory to the ICSID convention.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
There is no special difficulty. There have been cases where the
Government has been sued before the local courts.
It should, however, be noted that Indonesian judges operate in an
inquisitorial legal system, they have very broad fact finding powers
and a high level of discretion in relation to the manner in which
those powers are exercised. Consequently, Indonesian judges can
sometimes be influenced by factors, issues and evidence which may
not be immediately apparent on the face of the court documents in
question.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
We are not aware of any specific cases relating to the natural gas
sector.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Indonesia.
The Government has introduced the following policies in the past
year:
(i) prioritising the use of natural gas for the domestic energy
sector;
(ii) the development of a domestic transmission and distribution
system of natural gas pipelines (with the intention that these
be integrated and assist in the development of the domestic
gas market);
(iii) the granting of CBM PSCs to encourage the development of
new gas resources; and
(iv) the requirement for Indonesian arbitration in respect of
disputes between PSC holders and service providers.
In 2009, the Parliament promulgated the Law on State Budget of
2010 and placed a cap on cost recovery of PSCs. The move has
been the subject of substantial criticism by PSC holders and has
been described as detrimental to investment in PSCs. The
Government announced in January 2010 that it is reconsidering the
issue, however, the Government has reconfirmed its intention to
introduce a new regulations on cost recovery.
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Ali Budiardjo, Nugroho, Reksodiputro Indonesia

Philip Payne
Ali Budiardjo, Nugroho, Reksodiputro
Graha Niaga, 24th Floor
Jl. Jend. Sudirman Kav. 58
Jakarta 12190
Indonesia

Indonesia
Tel: +62 21 250 5125
Fax: +62 21 250 5001
Email: ppayne@abnrlaw.com
URL: www.abnrlaw.com

Philip Payne was admitted to practise law in Australia in 1981 and

is also admitted in Papua New Guinea. Prior to joining ABNR, he
was a partner of an international law firm for 17 years including 7
years as that firm’s resident partner in Indonesia.
Philip is recognised in international publications as a leading
individual for projects & natural resources. In the oil & gas sector,
Philip has acted in various matters including; acquisitions and sales
of interests in PSCs, applications for PSCs (including CBM PSCs)
and advising on tenders for Special Rights for gas transmission
pipelines.

Ali Budiardjo, Nugroho, Reksodiputro (“ABNR”) was established in Jakarta in 1967 as a partnership of legal
consultants in Indonesian business law. We are one of the largest law firms in Indonesia and are regarded as a top-
tier firm in the Indonesian legal market. ABNR advises clients on all applicable Indonesian laws and regulations,
administrative procedures and local legal practice. Companies operating in the resource industry represent a
substantial part of our client-base. We are recognised as a leading law firm in the resources sector by various
international publications. Our resources law specialists are familiar with the issues that are likely to arise in oil & gas

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 Chapter 14
Ireland
O’Flynn Exhams
1 Overview of Natural Gas Sector
1.1 A brief outline of Ireland’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Upstream
The natural gas sector in Ireland was originally developed as a result
of the discovery of the Kinsale Gas Field off the south coast of Ireland.
Current operational indigenous gas production in Ireland is from the
Kinsale Gas Field (including Ballycotton and South West Kinsale) and
Seven Heads Gas Field all of which gas flows are delivered to the
onshore transportation system at Inch in County Cork. The gas fields
currently delivering at Inch are in decline, and the South West Kinsale
field has been developed as a storage facility.
A Petroleum Lease was issued in respect of the Corrib Gas Field off
the west coast of County Mayo. The Corrib Gas Field is a medium
sized reserve in world terms but has the potential to supply up to
60% of Irish gas needs at peak production.
An onshore terminal and 150 kilometres of pipeline have been
developed as part of the required infrastructure to deliver Corrib
natural gas to the Irish market and it is currently anticipated that
production may be available to market in 2011.
Four new oil and gas Frontier Exploration Licences were awarded
in 2008 over areas totalling 4,963 square kilometres.
Downstream
The downstream natural gas industry was substantially developed by
Bord Gáis Éireann (Bord Gáis) a State body established pursuant to the
Gas Act 1976 (as amended). Bord Gáis was established for the
purpose of developing and maintaining an economic and efficient
system for the supply of natural gas. Bord Gáis accordingly developed
the natural gas transportation and supply business as a vertically
integrated undertaking. The Irish natural gas transmission pipeline
network developed by Bord Gáis is interconnected with the UK
transmission system at Moffat in Scotland via two Interconnector
pipelines and the existing natural gas transmission system in Northern
Ireland via the recently completed 156 kilometre South/North pipeline.
The Irish natural gas transmission and distribution system consist of
approximately 2,313 kilometres of high pressure transmission
pipelines (including the interconnectors) and approximately 10,062
kilometres of low pressure distribution pipes connecting over 600,000
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industrial, commercial and residential customers.
Planning permission has been granted for the construction of a new
LNG terminal and associated pipeline by Shannon LNG.
Following third party access and full market opening - there are 16
Licensed Shippers/Suppliers.
1.2 To what extent are Ireland’s energy requirements met
using natural gas (including LNG)?
We understand that approximately 27.3% of the country’s total
primary energy requirement is met using natural gas. Natural gas
accounts for 53.4% of all fuels used for electricity generation in 2008.
1.3 To what extent are Ireland’s natural gas requirements met
through domestic natural gas production?
In 2008/2009, 92.3% of the country’s annual gas demand and
84.4% of the peak day demand was sourced in the U.K. and
transported to Ireland via the interconnector pipelines. Remaining
demand was met by indigenous production and storage delivered to
the transportation system at Inch.
1.4 To what extent is Ireland’s natural gas production exported
(pipeline or LNG)?
Ireland does not currently export any of its natural gas production.
The South North pipeline facilitates physical export of gas to Northern
Ireland, however, a legal and regulatory framework remains to be
developed to facilitate such export. Similarly, the Interconnector
pipelines between Ireland and the U.K. could potentially (subject to
investment in technical solutions and development of appropriate
legal and regulatory framework with the operator of the U.K. system)
facilitate export of natural gas to the U.K.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The Petroleum and other Minerals Development Act, 1960 (the “1960
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Act”) is the primary legislation governing offshore natural gas in
Ireland. The 1960 Act prescribes the forms of authorisation required
for exploration and production of natural gas (see question 2.2).
Licensing terms for offshore oil and gas exploration and development
(the “Licensing Terms”) were published in 1992. These Licensing
Terms prescribe the application process for the various authorisations
and the terms upon which authorisations might issue.
Revised Licensing Terms for offshore oil, gas exploration,
development, and production were issued in 2007 as the terms on
which the Minister is prepared to issue the various authorisations.
The revised Licensing Terms will not apply to existing
authorisations; the 1992 Licensing Terms may continue to apply to
certain leases or undertakings awarded as a result of discoveries
made under licences awarded before May 2007.
The Department of Communications, Energy and Natural
Resources (“DCENR”) has responsibility for natural resources.
The Petroleum Affairs Division (“PAD”) of the DCENR
administers the State’s (and the Minister’s) rights and obligations
with respect to gas exploration and production.
The role of the PAD is to maximise the benefits to the State from
exploration for and production of indigenous gas and oil resources
while ensuring that activities are conducted safely and with due
regard to their impact on the environment and other land/sea users.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
The following authorisations with respect to the Exploration and
Production of natural gas may be granted pursuant to the 1960 Act:
(i) Petroleum Prospecting Licence (issued under section 9(1));
(ii) Licensing Option (issued under section 7(1));
(iii) Exploration Licence (issued under section 8(1));
(iv) Lease Undertaking (issued under section 10(1));
(v) Petroleum Lease (issued under section 13(1)); and
(vi) Reserved Area Licence (issued under section 19(1)).
The Licensing Terms published by the DCENR outline the principal
terms of such authorisations.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
Petroleum Prospecting Licence
Petroleum Prospecting Licence is a non-exclusive licence which
confers on the licensee the right to search for petroleum in any part
of the Irish offshore which is not the subject of an Exploration
Licence, Reserved Area Licence or Petroleum Lease granted to
another party.
Prospecting Licences authorise the licensee to do such things as
may be necessary or desirable for the purpose of ascertaining the
character, extent or value of petroleum under the licensed area to
make certain geological, geophysical, geochemical and topographic
examination or remove reasonable quantities of petroleum and
other minerals for the purpose of analysis, test, trial or experiment.
A Petroleum Prospecting Licence may be granted for a period up to
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three years and may be surrendered on one month’s notice in
writing to the Minister.
Licensing Option
A Licensing Option (or “Licence Undertaking”) confers on the
option holder the first right, exercisable at any time during the
period of the option to an exploration licence(s) over all or part of
Ireland
the specific areas covered by the option. The duration of Licensing
Options are determined by the work programme agreed with the
Minister; however, overall duration of any Licensing Option
(including any extensions) may not exceed a maximum period of
three years. The holder of a Licensing Option must also hold a
Petroleum Prospecting Licence.
Exploration Licence
An Exploration Licence operates to vest in the licensee the
exclusive right of searching for petroleum in the area to which the
Exploration Licence relates.
There are three categories of Exploration Licence: a Standard
Exploration Licence; a Deep Water Exploration Licence; and a
Frontier Exploration Licence.
A Standard Exploration Licence applies in respect of an area with
water depth up to 200 meters and is valid for a period of six years
divided into two phases of three years each. During the first phase
the licensee must undertake an exploration programme including
the drilling of an exploration well agreed with the Minister before
the issue of the licence. At least three months before the end of the
first phase of a licence the work programme for the second phase
must be proposed for the approval of the Minister. At the end of the
first phase the licensee surrenders 50% of the licensed area.
A Deep Water Exploration licence applies in respect of an area where
the water depth in any part of the area exceeds 200 meters and is for a
period of nine years divided into three-year phases. Each of Phase 1
and Phase 2 should include an Exploration Well. At the end of each
phase the licensee surrenders 50% of the then licensed area.
A Frontier Exploration Licence - the Minister identifies areas as
frontier areas in respect of which such Licences may be granted
from time to time. The duration will be determined by the Minister
and shall be for a period of not less than 12 years comprising a
maximum of four phases.
Lease Undertaking
A Lease Undertaking is an undertaking by the Minister to grant a
Petroleum Lease to the holder of an Exploration Licence in relation
to part of the License Area which contains a petroleum discovery.
A Lease Undertaking does not grant exploration or production
rights. Lease Undertakings are subject to such terms and conditions
as the Minister may prescribe, including an undertaking that the
holder of the Lease Undertaking use best endeavours to establish
commerciality, the furnishing of an annual report to the Minister
and in the event of commerciality that the holder apply for a formal
Petroleum Lease within the time scales prescribed.
Petroleum Lease
A Petroleum Lease is issued by the Minister pursuant to section 13 of
the 1960 Act. A Petroleum Lease is granted on the application of the
holder of the Exploration Licence (or Lease Undertaking) when a
commercial discovery has been established. A Petroleum Lease
authorises the commercial development of the discovery in
accordance with the terms of the lease. While the Licensing Terms
prescribe certain of the terms and conditions which apply with respect
to a lease, including provision for submission of a plan of
development and otherwise, terms will be negotiated on a case by case
basis and may include additional conditions to those in the Licensing
Terms. The period of a Petroleum Lease will be such period as the
Minister shall decide having regard to the likely production profile.
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The period of the lease may be extended on application provided
twelve months prior notice is given to the Minister.
Reserved Area Licence
This is a form of licence granted to the holder of a Petroleum Lease
in respect of an otherwise unlicensed area contiguous with the
Petroleum Lease. The authorisation is on terms and conditions
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identical to those applicable in respect of an Exploration Licence
and is subject to the payment of the annual rental fee identical to
that for an exploration licence.
All licences generally include work programme commitments,
restrictions on assignment or transfer and an indemnity in favour of
the Licensor against any claims or demands arising out of or the
exercise of the rights conferred by the Licence. Fees are payable in
connection with the grant of Licence and in respect of Petroleum
Leases. Holders of Frontier Exploration Licences may be required
to pay annual contributions to Petroleum research programmes as
directed by the Minister.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
The Irish Constitution provides that all natural resources belong to
the State. The 1960 Act provides that the ownership of all
petroleum in the State is vested in the Minister and the Minister has
the exclusive right to search for and extract petroleum in the State.
The government’s policy is to promote exploration and investment in
indigenous petroleum and direct State involvement is not appropriate.
Licensing Terms are structured towards the participation of private
sector operators, with appropriate financial and technical and other
relevant competencies in the search for natural gas.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
No production related royalties are imposed in respect of natural
gas production. The Licensing Terms provide that authorisations
(other than a Prospecting Licence) will only be granted to an entity
chargeable (in accordance with the laws of Ireland) to tax in Ireland
in respect of profits and gains arising from or connected with
exploration or exploitation activities to which the authorisation
applies. The authorisation holder must continue to be so chargeable
for the full period of the authorisation.
Corporation tax arising from petroleum development is currently
set at 25%.
A profit resource rent tax was introduced in 2007 which may apply
to finds made under licences issued on or after 1 January 2007.
2.6 Are there any restrictions on the export of production?
The Licensing Terms provide that all petroleum produced shall be sold
by and payment made to a person resident in Ireland. Sales of
petroleum produced are required to be on an arm’s length commercial
basis; in the case of the sale to an affiliated or connected company the
arrangements shall be such as if the sale is to an independent company.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
There are no such restrictions.
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2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
The Licensing Terms require that the prior written consent of the
Minister is obtained in respect of assignment or transfer of an
interest in a Petroleum Lease and the Minister may, in giving any
required consent, impose any such conditions as the Minister
considers desirable.
The Licensing Terms also provide that authorisations are granted to
an applicant on the basis of its charter or constitution at the time of
issue; any subsequent alterations in them must be notified in writing
to the Minister addressing what (if any) impact the change would
have on the ability of the authorisation holder to discharge the
responsibilities under the authorisation. The Minister must be
notified of any change in control.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
The Licensing Terms provide that the Minister may, on granting an
authorisation or at a later date direct the authorisation holder to post
a performance bond or guarantee to ensure fulfilment of the
obligations to be undertaken as well as to cover any liability which
may be incurred relating to the activity of the authorisation holder.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
The terms of the individual Petroleum Lease must be considered;
however, leases may include a provision that the lessee must not
encumber the lease or any facility without the prior written consent
of the Minister.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Depending on the location of a proposed activity and other
applicable factors additional requirements may apply e.g.:
1. Planning approvals or permissions (issued by the applicable
Local Authority or by an Bord Pleanala) (where the
exploration involves development on or under land).
2. Integrated Pollution Prevention and Control Licence (issued
by the Environmental Protection Agency).
3. A Dumping at Sea Permit from the Minister.
4. A Work Permit for dangerous activities from the Minister of
Employment.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
The Licensing Terms provide that it is the responsibility of the
authorisation holder to make provision for and to carry out
abandonment of fixed facilities as approved by the Minister.
Abandonment means the removal, part removal or leaving in place
of any installation or facility following completion of operations
involving such installation or facility.
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Where petroleum operations by a licensee (or a former licensee)
under a licence issued under the 1960 Act or the lessee of a
Petroleum Lease have been abandoned or discontinued the Minister
may require that person within a specified time to cause the top or
entrance of a bore hole shaft or outlet to be covered or fenced so as
to prevent accidents.
Provision for abandonment of fixtures and fittings may also be a
condition of planning approval.
The Dumping at Sea Act 1996 provides that a person who dumps or
disposes of inter alia an offshore installation at sea without a
relevant permit or authorisation shall be guilty of an offence.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
As outlined in question 2.6 above the Licensing Terms provide that
all petroleum produced shall be sold by, and payment made to, a
person resident in Ireland. Subject to that there is no regulatory
restriction on cross-border sales or deliveries of natural gas. There
is currently no regulatory or contractual framework which would
facilitate physical export of natural gas.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Transportation pipelines are, for the purpose of this question,
upstream pipelines.
Upstream pipelines are defined as any pipelines operated or
constructed as part of a gas production project, or used to convey
natural gas from one or more such projects to a processing plant or
terminal or final coastal landing terminal.
Such pipelines and infrastructure can accordingly include onshore
pipelines, terminals and processing facilities.
A Petroleum Lease (as referred to in section 2) is part of the
ownership and regulatory framework in respect of the development
of offshore facilities and pipelines and the regulatory framework
within the remit of the Minister and PAD.
Onshore aspects of upstream transportation pipelines are also
regulated by the Minister (as opposed to the CER) including the
construction of and access to such pipelines.
Storage facilities require a licence issued by the CER (or an
exemption from the requirement to hold such a licence).
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The required authorisations may include some or all of the
following:
1. a Petroleum Lease (this is required to develop a commercial
discovery and may extend to the associated pipelines). A
Plan of Development must be prepared pursuant to the
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Petroleum Lease and approved by the Minister in order to
allow development proceed;
2. an authorisation pursuant to Section 40 of the Gas Act 1976
(as amended);
3. Continental Shelf Act authorisation pursuant to Section 5 of
the Continental Shelf Act 1968 (as amended);
Ireland
4. a Foreshore Licence under Section 3 of the Foreshore Act
1933 (as amended);
5. Planning Permission for onshore terminal or associated
processing or infrastructure pursuant to the Planning and
Development Acts 1963 to 2006 (as amended); and
6 an integrated pollution, prevention and control licence (IPPC
Licence) from the Environmental Protection Agency Act
1992 (as amended).
The Operator of offshore pipelines is also required to comply with
Health and Safety Regulations with respect to offshore installations.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
Access to land can be facilitated by way of compulsory acquisition
pursuant to the provisions of the Gas Act 1976 (as amended) or
through the Planning and Development Acts 1963 to 2006
(incorporating the Strategic Infrastructure Act) where the relevant
pipeline constitutes a strategic natural gas development.
Access to land which constitutes foreshore or offshore can be
through the Foreshore Licence or Lease, Continental shelf
authorisation or the Petroleum Lease.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
An upstream pipeline operator is obliged pursuant to the provisions
of Section 10(b) of the Gas Act 1976 (as inserted pursuant to the
Gas (Interim) (Regulation) Act 2002) to offer terms for access to an
upstream pipeline subject to terms and conditions specified in
regulations made by the Minister from time to time. No such
regulations have of yet been promulgated. Parties entitled to third
party access include holders of Petroleum Leases for the purpose of
carrying out any activity connected with the lease.
There are statutory grounds for using any such application for
access and disputes with respect of such access or offers of access
are referred to the Minister which is the relevant competent
authority for such issues. Currently there are only two such
upstream facilities (i.e. facilities upstream of Inch, Co. Cork and the
facilities currently under development with respect to the Corrib
Gas Field).
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
All relevant upstream facilities are connected to the pipeline
network operated by Gaslink as referred to in section 5.
Connections and co-operation between the upstream system
operators and the downstream system operator is generally through
Connected System Agreements negotiated between relevant
operators.
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4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
Ireland
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
See response to question 4.4 with respect to access to upstream.
See response to section 5 with respect to downstream access.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Transportation is currently subject to negotiation subject to the right
of a party to refer any disputed terms to the Competent Authority
(the Minister) and to the Minister’s right to prescribe regulations.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The downstream natural gas transmission and distribution networks
(the Network) were developed and owned by Bord Gáis. The
Network was operated by Bord Gáis up to 4 July 2008. The
Commission for Energy Regulation (“CER”) is the regulatory body
having responsibility for, inter alia, downstream natural gas
transmission and distribution pursuant to the Gas (Interim)
(Regulation) Act 2002 (the “2002 Act”).
The European Communities (Internal Market in Natural Gas)
(BGE) Regulations 2005 (S.I. No. 760 of 2005) were implemented
to give further legal effect to Directive 2003/55/EC of the European
Parliament and of the Council of 26 June 2003 concerning common
rules for the internal market in natural gas by further clarifying the
arrangements for unbundling the transmission systems and
distribution systems operated by Bord Gáis. Pursuant to S.I. No.
760 of 2005 Gaslink Independent System Operator Limited
(“Gaslink”) was established and became the independent system
operator for the network with effect from 4 July 2008. Bord Gáis
retained ownership of the Network. The networks business units of
Bord Gáis continue to provide operational services to Gaslink with
respect to the day to day operation of the network. The
arrangements between Bord Gáis and Gaslink are outlined in an
Operational Agreement, a regulated document concluded between
the parties. Gaslink holds (as it is required by law to hold) a
Transmission System Operator licence and a Distribution System
operator licence in connection with the operation of the Network.
Bord Gáis is licensed to own the distribution system and the
transmission system.
The Network is operated pursuant to a Code of Operations (the
Code) published by Gaslink pursuant to a direction of the CER
issued pursuant to legislation and pursuant to its licence obligations.
The CER is established to issue directions to licence holders as to
terms of its Code including any modification to it. All parties
wishing to access the Transportation System (Shippers) must
adhere to the Code which also prescribes the rights and obligations
of Shippers. The current major regulatory initiatives with respect to
gas transmission and distribution include:
(i) arrangements for an all island gas transmission operation (the
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common arrangements for gas);
(ii) implementation of the Third Package (which could extend to
physical and virtual gas export from Ireland to the U.K.) (see
response to question 11.1); and
(iii) security of supply.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
A licence, issued by the CER under section 16 of the 2002 Act (as
amended) is required to operate a transmission system or a
distribution system. It is an offence to operate a system without the
requisite licence.
5.3 How is access to the natural gas distribution network
organised?
Physical access to the Network is as outlined in the Connection Policy
published by Gaslink with the approval of the CER. The operator of
a natural gas transmission system or a natural gas distribution system
has statutory obligations with respect to providing connections.
The Network is subject to full third party access. Access to use of
the natural gas Network is through the Code referred to under
question 5.1 which provides for an Entry/Exit System of Gas
Transportation; capacity in the system is made available through the
Code of Operations which also prescribes certain of the rights and
obligations of Shippers and the Transporter including the day to day
use of the system by Shippers holding capacity. Shippers nominate
quantities of gas to be delivered to and off-taken from the System
in respect of each Gas Day. Daily balancing applies.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
Yes, the CER can require a Licensed Operator of a transmission
system or a distribution system to expand its system to
accommodate new customers by section 10(a)(vi) of the Gas Act
1976 (as amended).
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
Regulated tariffs apply with respect to access to the transmission
system and/or distribution system. Tariff comprises both a capacity
and commodity component.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
Bord Gáis requires the consent of the Minister given with the
approval of the Minister for Finance in order to transfer to another
person any interest in a pipeline or part of it.
The Minister may attach conditions to any such consent.
Each of the Transmission System Operator licence and the
Distribution System Operator licence prohibit the licensee from
disposing of or relinquishing operational control over any relevant
asset if the disposal or relinquishment of control or use would
adversely affect its ability to discharge its obligations under natural gas
legislation or the carrying out of its licensed activities. The holder of
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the licence is obliged to notify the CER of any change of control.
The CER may withdraw or revoke a licence as a result of a change
of control in certain circumstances and where the Regulator is
satisfied that as a result of the change in control the shareholder
does not have adequate technical, financial or managerial strength
taking into account the size of its shareholding in the licensee and
subject as otherwise provided in the applicable licence.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
The regulatory framework in Ireland is primarily focused on gas
transportation so that open and non-transparent gas transportation will
facilitate competition in gas trading. A licence issued by the CER is
required to engage in the supply of natural gas; currently there are 16
supplier’s licences in issue. The current major initiatives which may
impact on natural gas trading include the CAG and the
implementation of the Third Package (see response to question 11.1).
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
There are no legal restrictions as such on trading of natural gas
commodities. In terms of bundled products however, trading in the
capacity required to transport gas is subject to the Code of
Operations. There is a straight forward Change of Shipper process
with respect to capacity on the distribution system, although
distribution capacity cannot be traded as such as between Shippers.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
There are currently no LNG reception facilities operating in Ireland.
Shannon LNG (a joint venture of Hess Corporation and Poten &
Partners) has plans to construct a regasification terminal on the
Shannon Estuary in Co. Kerry with an initial capacity of 17mscmd
and expansion capacity of 28.3mscmd. Shannon LNG is expected
to commence commercial operation of the initial phase of the
project in 2014 at the earliest.
Under the 2002 Act, a LNG Operating Licence would be required
to operate the LNG terminal.
Given that Ireland is a net importer of natural gas, there are no plans
to establish LNG liquefaction or export facilities.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
The LNG Operating Licence is the only LNG specific authorisation
required. However, for the construction and operation of the LNG
terminal facility, the following key authorisations would be
required: Foreshore Licence; Planning Permission; Integrated
Pollution Prevention Control Licence (IPPC); and Environmental
Impact Statement.
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7.3 Is there any regulation of the price or terms of service in
the LNG sector?
Yes, the EU Gas Directive 2003/55/EC (Article 18) requires that
third parties shall be allowed access to “the transmission and
distribution system and LNG facilities” on the basis of published
non-discriminatory tariffs approved by the CER i.e. Regulated TPA.
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However, an application under Article 22 of the Directive may be
made for exemption from Regulated TPA for major new gas
infrastructure developments which:
enhance competition in gas supply and enhance security of
supply;
would not take place unless the exemption was granted;
is not in the ownership of the TSO;
charges are levied on users of LNG terminal; and
the exemption is not detrimental to competition or the
effective functioning of the Transmission System.
Where an application has been made to the CER under Article 22,
and the CER is satisfied that the relevant conditions have been met,
it must notify the European Commission which, in turn, has two
months within which it may request that the proposed exemption be
amended or withdrawn.
Shannon LNG has applied for a full exemption for both the initial
planned capacity of the terminal of 17mscmd and expanded
capacity of 28mscmd. The view of the CER is that an exemption
should be granted to Shannon LNG subject to certain conditions,
particularly relating to (i) the developer not achieving pivotal
supplier status and (ii) a maximum duration of 25 years. The
consultation process is ongoing.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The Competition Authority (the “Authority”) is the national agency
responsible for enforcing Irish & European competition law. Irish
competition law is embodied in the Competition Act, 2002 (the
“Competition Act”). As the general competition requirements of
articles 81 and 82 of the EC Treaty are directly effective
(implemented in Irish law pursuant to Sections 4 and 5 of the
Competition Act), they apply concurrently with the legislative
sector-specific rules.
The CER has a statutory obligation to promote competition in the
supply of natural gas and gas supply licensees are obliged pursuant
to their licences not to prevent, restrict, or distort competition or
abuse any dominant position they may have.
The Authority and the CER have concluded a cooperation
agreement for the purpose of: (a) facilitating co-operation in the
performance of their respective functions in so far as they relate to
issues of competition between undertakings; (b) avoiding
duplication of activities; and (c) ensuring consistency between
decisions made or other steps in so far as any part of those decisions
or steps consists of or relates to a determination of any issue of
competition between undertakings.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
Section 4 of Competition Act prohibits all agreements or concerted
practices which have the effect of preventing, restricting or
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distorting competition in any part of the State. The standard applied
under article 81(1) of the EC Treaty requires, as an additional
criterion to be met, the effect on intra-Community trade.
Transactions involving dominant players may be assessed under
Section 5 of the Competition Act with a view to establishing
whether they reflect abusive exploitation in any relevant market. In
Ireland
the EC Treaty, article 82 provides the normative standard.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
Where the Authority has concerns relating to competition in the
natural gas sector, it may initiate investigations, carry out dawn
raids and initiate proceedings before the national courts against any
person to ensure that competition concerns are addressed. The
Authority has the statutory right to pursue criminal proceedings
against any person whom it believes has infringed the substantive
provisions of the Competition Act. It also has the right to seek all
appropriate relief from the national courts to ensure that
infringements of the Competition Act are brought to an end. The
remedies available through the courts include criminal and civil
sanctions and remedies.
The CER may direct the holder of a licence to take such measures
as are necessary to cease the contravention of a condition or to
prevent a future contravention. In order to ensure compliance with
a direction, the CER may apply to the High Court for an order
requiring the holder of a licence to discontinue or refrain from
certain practices.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
The Authority reviews mergers over a specified threshold. In
addition, the Competition Act prohibits agreements which prevent,
restrict or distort competition or which constitute an abuse of a
dominant position in Ireland or a substantial part thereof, regardless
of the consideration involved.
All qualifying mergers must be notified to the Authority. A
qualifying merger is one where the worldwide turnover of each of
two or more of the undertakings involved in the merger (not
including the vendor) is more than €40 million, two or more of the
undertakings involved carry on business in any part of the island of
Ireland (i.e. including Northern Ireland) and the turnover in Ireland
of any one of those undertakings is more than €40 million.
Notification must be made within one months of conclusion of the
agreement or the making of the public bid.
If, within one month of notification of a qualifying merger, the
Authority cannot conclude whether the transaction will
substantially restrict competition in goods or services in the State, it
shall carry out a full investigation which may take a further three
months.
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Ireland
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
The only special requirements apply in respect of undertakings
participating in the upstream natural gas sector. See response to
question 2.5.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
All regulation in Ireland is constrained by the requirements of EU
law.
Ireland is a signatory to the 1992 OSPAR Convention for the
Protection of the Marine environment of the North East Atlantic as
well as the Kyoto Protocol to the United Nations Framework
Convention on Climate change. Accordingly, any regulatory
decisions of the Irish government must be made in compliance with
those conventions.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Disputes in respect of terms of connection to the Network may be
referred for determination by the CER under the 2002 Act. The
CER aims to resolve disputes within a two-month period. The 2002
Act provides that only Gaslink shall be bound by the decision of the
CER. In order to ensure compliance with a determination made by
the CER, it may apply to the High Court for an order requiring
Gaslink to comply with the determination.
Disputes between Gaslink and the holders of Supply/Shipping
licences are resolved pursuant to the dispute resolution provisions
of the Code of Operations which provides for disputes to be
reconciled or determined through mediation, the CER (at the option
of the CER), an expert (technical disputes) or an arbitrator in
accordance with the Institute of Engineers of Ireland Arbitration
Procedure (2000). Decisions of the CER/expert/arbitrator, as
appropriate, are final and binding.
In the upstream natural gas sector, the Licensing Terms provide that
any dispute arising out of or in connection with the authorisation
will be settled by arbitration, unless the authorisation holder and the
Minister succeed in resolving the dispute among themselves.
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10.2 Is Ireland a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Yes, both were given effect in Irish Law by Parts III and IV of the
Arbitration Act 1980.
In practical terms, however, the New York Convention has been
overtaken in Irish law by the UNCITRAL Model Law on
International Commercial Arbitration which was given the force of
law by the Arbitration (International Commercial) Act 1998. A
party may now seek recognition and enforcement of an arbitration
award under Articles 35 and 36 of the Model Law.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
There is no special difficulty in litigating, or seeking to enforce
judgments or awards against Government authorities or the State.
Public bodies enjoy no immunity against litigation and are subject
to the rule of law on the same basis as individuals, non State-owned
corporations and other entities.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
We are not aware of any cases specific to the natural gas sector.
There is no reason, however, why a successful claim could not be
made where the merits of the case so dictate.
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Ireland
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Ireland.
Ireland
Third Package of EU Legislation
On 25 June 2009, the Council of the European Union formally
approved the third legislative package on EU electricity and gas
markets, the “Third Package”. The Third Package is a set of
legislative measures that continues the programme of liberalisation
of the European gas market. The Third Package requires, among
other things, the effective separation of supply and production
activities, harmonisation of the powers of national regulators, better
cross-border regulation and effective transparency. The Third
Package entered into force on 2 September 2009 and Ireland has 18
months in which to comply with most requirements of the
legislation, although extended deadlines apply to the unbundling
requirements due to the structural changes that may be necessary.
The immediate effect of the Third Package is likely to be confined
to the relatively small number of energy undertakings that own
and/or operate transmission and/or distribution networks for
electricity or natural gas.
All-Island Gas Market
In February 2008, the CER and the Northern Ireland Regulator,
NIAUR, agreed a Memorandum of Understanding in which they
stated their objective of working together to establish “all-island”
Common Arrangements for Gas (the “CAG”) whereby all
stakeholders can buy, sell, transport, operate, develop, and plan the
natural gas market in Ireland and Northern Ireland. The
Memorandum of Understanding identifies the following as being
key:
establishment of a single: (a) transmission tariff
methodology; (b) transmission operational regime; (c)
connection policy for transmission; (d) transmission
planning regime; and (e) a single approach to security of
supply;
a common framework for regulation of retail markets
including single: supplier codes, change of supplier process,
and retail processes and systems;
the purchase and sale of gas at the wholesale and retail levels
in competitive markets; and
benefits for end customers.
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Irene O’Donovan Frank M O’Flynn

O’Flynn Exhams O’Flynn Exhams
58 South Mall 58 south Mall
Cork Cork
Ireland Ireland

Tel: +353 21 4277788 Tel: +353 21 4277788

Ireland

Fax: +353 21 4272117 Fax: +353 21 4272117

Email: iod@oflynnexhams.ie Email: fmof@oflynnexhams.ie
URL: www.oflynnexhams.ie URL: www.oflynnexhams.ie

Irene O’Donovan is a Partner in the corporate department working
primarily in the areas of energy, natural resources and regulatory
affairs.
Irene has over 15 years’ experience in providing advice to
Transportation Division of Bord Gáis Éireann and, more recently,
Gaslink, the independent TSO. Irene was Bord Gáis Éireann’s lead
lawyer in the production of the Code of Operations, the Moffat
trading arrangements and Corrib gas downstream transportation
arrangements. Irene recently advised Circle Oil plc on a number of
international upstream acquisitions and various financings.
According to the Chambers & Partners, she is “a dedicated energy
lawyer and holds her own against the biggest players in Dublin and
London”…”no one holds a candle to her at what she does”, “she’s
thorough, puts in the hours and gets to the bottom of every issue”
and PLC Which Lawyer “well-regarded corporate and commercial
law expert with notable strengths in the oil and gas sector”.
Frank M O’Flynn is a Partner in corporate department with particular
experience in energy law having nearly 15 years’ experience advising
clients in gas, electricity and power markets in Ireland and
internationally. Recently, Frank advised Bord Gáis Networks and
Gaslink, the independent TSO on transportation system expansion,
transportation and regulatory issues and Centrica plc in relation to a
proposed upstream acquisition.
Prior to rejoining O’Flynn Exhams in 2004, Frank spent several
years in London, firstly with CMS Cameron McKenna and later, with
New York firm, Cadwalader Wickersham & Taft. At various stages
during his career, Frank worked with, or was seconded to, the
Energy Directorate of the European Commission in Brussels, BP
Exploration in Aberdeen and Bord Gáis Éireann in Cork.
Frank is dual qualified in Ireland and England and Wales and is a
member of the Energy Institute, Society of Construction Law and
Association of International Petroleum Negotiators.

O’Flynn Exhams is a leading Irish law firm in the energy sector with particular expertise in natural gas development,
transportation, storage and trading with experience of the Irish and International gas markets.
Our lawyers offer a comprehensive range of services in the energy sector including:

Gas Transportation Gas Sales / Tolling / Trading

LNG Gas Storage
Network Development Interconnection
Upstream A&D Joint ventures, JOAs and UOAs
Market Restructuring Wind
IPP Development / Financing Power Purchase Agreements

O’Flynn Exhams is particularly well known for its work within the energy sector. The firm ‘thrives on complex energy
projects’ and is praised for being ‘partner led’ and ‘seeped in industry knowledge’, Legal 500, 2009 Edition.

116
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Chapter 15
Israel
Rosenberg, Hacohen, Goddard & Ephrat - Law Office
1 Overview of Natural Gas Sector
1.1 A brief outline of Israel’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Israel’s natural gas sector has undergone huge changes in the last ten
years. From a country with virtually no gas reserves, Israel currently
has gas reserves estimated at over 200 BCM. The gas discoveries in
1999-2000 and the commencement of importation of natural gas
from Egypt through a new pipeline in 2008, are transforming the
Israeli energy scene. Consumption of natural gas in Israel began in
2004 and in mid 2009 approximately 40% of the electricity generated
in Israel was derived from natural gas. Consumption of natural gas
in Israel has grown from 1.2 BCM in 2004 to an estimated 4.4 BCM
in 2009. The forecasts of the Israeli Ministry of National
Infrastructures expect gas consumption in Israel to more than double
in the next five years reaching 10.6 BCM in 2014.
Israel’s gas reserves are concentrated in three main fields off-shore
Israel. The Mari field situated offshore southern Israel was discovered
in February 2000 by an Israeli American consortium (Noble Energy
and Delek). The Mari field began supplying natural gas to the Israeli
market in early 2004 and has delivered until mid 2009 approximately
13 BCM of natural gas. In January 2009 the huge Tamar field was
discovered offshore northern Israel and the Dalit discovery followed
soon thereafter. The Tamar and Dalit fields have reserves estimated at
over 200 BCM and are expected to begin supplying natural gas to the
Israel market in 2012. These new reserves are expected to replace the
reserves from the Mari field as it depletes and to meet the growing
demand for natural gas in the Israeli market.
In 2008, Israel began importing natural gas from Egypt, giving the
Israeli market access to the significant gas reserves offshore Egypt.
Sales are made by a private company that has been granted, by the
Egyptian authorities, the exclusive right to export gas from Egypt to
Israel. In 2009 imports from Egypt constituted approximately 35%
of gas consumption in Israel and were made mainly to the Israeli
Electric Corporation.
Israel does not currently export natural gas, however this may
change in the future if additional reserves are discovered. It should
be noted that the new discoveries in 2009, have triggered a
significant increase in gas exploration activities off-shore Israel and
it is possible that these activities will result in additional discoveries
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Dan Hacohen
that will exceed the needs of the Israeli market.
At present Israel does not have any storage facilities for natural gas
nor any LNG facilities.
The Gas Law
The transition of the Israeli market to increased use of natural gas has
been accompanied by new legislation and regulation, a significant
part of which is still in the early stages of implementation. In 2002,
the Natural Gas Sector Law, 5762-2002 (the “Gas Law”) was
enacted. The Gas Law, which applies primarily to the midstream and
downstream segments of the natural gas supply chain, was designed
with the aim of creating conditions for the development of the natural
gas market, encouraging competition in this market and regulating
activities and operations in the natural gas market. The Natural Gas
Authority was established by the Ministry of National Infrastructures
to regulate the gas market and to ensure compliance with the terms of
licences, to approve tariffs, to determine criteria for service and to
deal with issues of safety.
The Gas Law imposes different licensing obligations for many
activities relating to the natural gas industry. Specifically, the Gas
Law requires licences for the: (1) setting up and operation of a
transmission system (defined as high pressure pipelines and related
facilities); (2) setting up and operation of distribution networks
(defined as low pressure pipelines and related facilities); (3) setting
up and operation of LNG installations; and (4) setting up and
operation of storage installations.
The Gas Law envisages four main segments in the gas supply chain,
as follows:
(1) Gas Suppliers: Gas suppliers include producers of natural
gas from local fields, importers of natural gas and suppliers
of LNG. Currently, the sale of natural gas does not require a
licence and gas sales agreements between suppliers and
consumers are not regulated. However, the installation and
operation of pipelines by suppliers and their connection to
the national grid does require a licence. Upstream
exploration and production activities are not subject to the
Gas Law and are covered by the Petroleum Law.
(2) High Pressure Transmission System: Israel Natural Gas
Lines Ltd, (“INGL”) a government owned company, was
established to build and operate the main segments of Israel’s
high pressure gas transmission system (the “INGL Grid”).
The INGL Grid has not yet been completed, however
significant progress was made in 2008 and 2009 enabling the
supply of gas to several major power plants and industrial
areas. The INGL Grid operates as an open access system and
is intended to transport gas to large customers and
distribution networks.
(3) Low Pressure Regional Distribution Networks: The
government has recently granted two licences for building
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 Rosenberg, Hacohen, Goddard & Ephrat - Law Office
and operating low pressure distribution systems for two
regions and has published a tender for a third region. The
regional low pressure distribution systems will operate as
open access systems and are intended to transport gas from
the INGL Grid to customers and marketing companies.
(4) Marketing Companies: At present, marketing of gas does
not require a licence under the Gas Law. However, the Gas
Israel
Authority has recently made it known that it intends to
regulate this segment as well.
1.2 To what extent are Israel’s energy requirements met using
natural gas (including LNG)?
Natural Gas accounted for approximately 28% of the electricity
generated in 2008, and close to 40% in the first half of 2009.
1.3 To what extent are Israel’s natural gas requirements met
through domestic natural gas production?
Israel’s gas reserves should suffice to meet the requirements of the
Israeli economy for the coming years. However, the policy of the
government has been to encourage competition and diversify the
sources of natural gas. Consequently, the share of domestic gas has
decreased form 90% of the gas consumed in Israel in 2008 to
approximately 60% by the end of 2009.
1.4 To what extent is Israel’s natural gas production exported
(pipeline or LNG)?
Israel does not currently export natural gas. Future discoveries of
gas in Israel may prompt the development of an export industry and
the construction of LNG facilities or export pipelines.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
Pursuant to Israeli Law, gas resources belong to the State, whether
or not located on State lands. The principal legislation in Israel in
relation to the exploration and production of natural gas is the
Petroleum Law 5712-1952 (the “Petroleum Law”).
Under the Petroleum Law, the Minister of National Infrastructures
was conferred with the power to implement the Petroleum Law.
The Minster appoints a Petroleum Commissioner as the person in
charge of petroleum affairs having the powers specified in the
Petroleum Law. In addition, an advisory council was appointed (the
Petroleum Council) to advise the Minister and the Petroleum
Commissioner on certain matters brought before it in accordance
with the Petroleum Law. The Minister may, after consultation with
the Petroleum Council, prescribe the policy for petroleum
exploration and the minimum monetary investment required for the
receipt of an exploration licence. The Minister may, after
consultation with the Petroleum Council, declare any area within
the State of Israel to be open, or closed, for petroleum exploration
and production.
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Israel
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
The Petroleum Law empowers the Petroleum Commissioner to
grant rights to explore, develop and produce natural gas. No person
is allowed to explore for, or produce, natural gas without receiving
the required permits and licences in accordance with the Petroleum
Law. The Petroleum Law defines three types of rights: a
preliminary permit for the initial exploration activities (excluding
drilling); a licence for exploration and drilling; and a lease for
development and production activities (see question 2.3 below).
Preliminary permits, licences and leases (collectively “Petroleum
Rights”) are granted by the Petroleum Commissioner in response to
applications submitted from time to time by applicants. The
Petroleum Law enables the granting of licences and leases by way
of competitive bidding, however these procedures have not been
used in recent years, nor has the Petroleum Commissioner initiated
any licensing rounds.
Petroleum Rights take a form of an authorisation pursuant to which
the recipient of the right is required to comply with the terms
specified therein and to carry out the work program attached to such
right. Although most preliminary permits and licences follow a
similar format, there are no standard terms and conditions, or model
clauses, that apply to all permits and licences.
Petroleum Rights can be granted to one or more parties and the
respective percentage interest of each party is specified in the
Petroleum Right. Pursuant to the Petroleum Law, a petroleum
register was established, which is open to the public for inspection.
In this register, the Petroleum Commissioner records all applications
for Petroleum Licences and Leases submitted or granted and such
other matters as are prescribed in the Petroleum Regulations.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
The Petroleum Law defines three types of rights for the different stages
of exploration and production of petroleum (which is defined to include
natural gas), as follows: (1) Preliminary Permit (with or without
priority rights); (2) Petroleum Licence; and (3) Petroleum Lease.
A Preliminary Permit enables its holder to conduct preliminary
investigations to ascertain the prospects for discovering petroleum
in the area covered by the permit. Exploration drilling is not
allowed under the Preliminary Permit and requires a Petroleum
Licence. The recipient of a Preliminary Permit is entitled to request
a priority right on the permit area, which, if granted, provides the
holder of the Preliminary Permit priority in receiving a Petroleum
Licence in relation to areas covered by such Preliminary Permit.
There are no statutory limitations as to maximum size of the permit
area, however the policy is to limit the Preliminary Permits to an
area for which the applicant has a reasonable plan of operation and
has the necessary financial resources to execute the plan. A
Preliminary Permit with priority rights is granted for a term not
exceeding 18 months and is subject to the completion of a
predetermined work programme (typically a seismic survey and
interpretation work). The holder of a Preliminary Permit with
priority right is required to pay modest annual rental fees for the
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Rosenberg, Hacohen, Goddard & Ephrat - Law Office
areas covered by the Preliminary Permit.
A Petroleum Licence confers on its holder the right to explore for
petroleum in the licensed area, the exclusive right to conduct
exploration and development drilling in the licensed area and to
produce petroleum (including natural gas) from the areas covered
by the Petroleum Licence. A Petroleum Licence is limited to a
maximum size of 400 square kilometres, is granted for an initial
term of up to three years and may be extended for a total term of
seven years. The Petroleum Licence includes a work programme to
be carried out during the term of the licence (typically at least one
exploration well for a predefined minimum depth). If the licensee
has made a discovery in the licensed area, the term of the Petroleum
Licence may be extended for up to two additional years so as to
enable the licensee to define the petroleum field that was
discovered. The holder of a Petroleum Licence is required to pay
an annual rental fee for the areas covered by the Petroleum Licence.
A Petroleum Lease confers on its holder the exclusive right to
explore for and produce petroleum (including natural gas) in the area
covered by the Petroleum Lease for so long as the Petroleum Lease
is in force. A Petroleum Lease is granted to a holder of a Petroleum
License that made a discovery of petroleum in commercial quantities
during the term of, and in the areas covered by, the Petroleum
License. A Petroleum Lease is granted for an initial term of thirty
years and may be extended for an additional term of twenty years.
In 2006, the Petroleum Regulations (Principles for Off-Shore
Petroleum Exploration and Production Activities) 5766-2006 were
promulgated. These regulations prescribed certain minimum
experience requirements in off-shore exploration and production
activities, as a pre-condition to granting Petroleum Rights covering
off-shore areas of various water depths, limit the maximum size of
an offshore Preliminary Permit with priority rights to a maximum
of 4,000 square kilometres and prescribe criteria for determining
the minimum financial ability of an applicant.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
The State of Israel does not participate in the exploration and
development of gas reserves in Israel. In the 1990s Israel privatised
its national petroleum companies and since then the exploration and
production of natural gas in Israel is carried out by the private sector.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
A holder of a Petroleum Lease is required to pay the State royalties
equal to one-eighth of the gas produced and saved from the leased
area, excluding the quantity of gas used by the lessee in operating
the leased area. The Petroleum Law prescribes a modest annual
minimum royalty payment that is calculated on the area of the
Petroleum Lease. Royalties may, at the election of the Petroleum
Commissioner, be taken in kind or in cash calculated on the market
value of the gas at the well head. Profits of individuals or
corporations (whether registered as an Israeli company or as a
foreign company operating in Israel) from gas exploration are taxed
at the regular tax rates prevailing in Israel.
2.6 Are there any restrictions on the export of production?
There are currently no exports of natural gas from Israel. Although
neither the Petroleum Law nor the Gas Law prohibit exports of gas
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Israel
from Israel, commencement of exploration activities in the future
will require building of facilities (LNG facilities, pipelines etc.) and
may also necessitate amendments to certain regulations and
licences.
The Petroleum Law grants the Minister of Natural Infrastructures
the right (after consultation with the Petroleum Council) to require
a holder of a Petroleum Lease to supply first, at the market price,
Israel
out of the gas produced by it in Israel, such quantity of gas as, in his
opinion, is required for domestic consumption in Israel. Pursuant to
the Gas Law, the Minister of Natural Infrastructures may prescribe
provisions, in regulations or in a gas transmission license, regarding
the provision of transmission services for the purpose of exporting
natural gas from Israel or for transferring natural gas between two
places outside of Israel through Israeli territory. To date, these
rights have not been exercised.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
Israel does not impose restrictions on currency exchange or on the
transfer of funds derived from production out of the jurisdiction.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
Any transfer of rights in a Petroleum Right requires the consent of
the Petroleum Commissioner and the Commissioner shall permit a
transfer of a Petroleum Licence and a Petroleum Lease only after
consultation with the Petroleum Council. The Petroleum
Commissioner will usually approve the transfer of rights if the
transferee has the financial and technical capabilities for performing
its obligations pursuant to the Petroleum Rights.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
Pursuant to the Petroleum Law, no Petroleum Right shall be granted
unless the applicant has given reasonable security or guarantees, to
the satisfaction of the Petroleum Commissioner, to ensure payment
of damages which may be caused by operations pursuant to the
Petroleum Right and for payments which may become due under
the Petroleum Law. In practice, where the applicant has substantial
assets the Petroleum Commissioner typically does not require any
financial guarantees as a condition to granting of the Petroleum
Right.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
A pledge of rights in Petroleum Rights requires the consent of the
Petroleum Commissioner and the Commissioner shall not permit a
pledge on a Petroleum Licence and a Petroleum Lease except after
consultation with the Petroleum Council. A pledge of rights in
Petroleum Rights is registered in the petroleum register, in a manner
and upon payment of a registration fee as prescribed in the
Petroleum Regulations and no such transaction shall be valid before
it has been so registered.
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2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Israel
Although the Petroleum Law is the primary legislation in relation to
exploration and production of natural gas, operations in general and
development activities in particular, will also be subject to many
additional laws, regulations and standards, including: the Gas Law
in relation to transmission, storage and installation of certain gas
facilities; laws and regulations relating to preservation of the
environment and prevention of pollution; laws and regulations
relating to health and safety; laws relating to hazardous substances
(gas is regarded as a hazardous substance); and laws relating to
zoning and building permits.
It should be noted that the State of Israel has not declared an Exclusive
Economic Zone (EEZ) pursuant to the United Nations Convention on
the Law of the Sea of 1982 (UNCLOS), and, therefore, it has no rights
or powers under the EEZ regime. Pursuant to UNCLOS it does
however, have rights and powers to the continental shelf including the
right to own natural resources (including natural gas) and the power to
manage the exploitation of these resources. It is unclear whether
certain Israeli laws, including the Gas Law, apply to activities that are
carried out outside its territorial waters.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
The Petroleum Law was enacted in 1952, almost fifty years before
the first offshore discoveries were made in Israel and it does not
contain specific provisions relating to decommissioning of offshore
installations. In recent years, the Petroleum Commissioner has
included in Petroleum Leases a requirement to submit a
decommissioning program after a substantial part of the reserves
have been produced and for some form of guarantee, or deposit, to
fund future expenses for decommissioning.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Israel does not currently export natural gas and there are no
liquefaction facilities in Israel nor are there any pipelines for the
exportation of natural gas from Israel.
Israel imports natural gas from Egypt via an offshore pipeline
extending from Northern Sinai to the south of Israel. This pipeline
began operations in 2008.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
There are currently only two upstream pipelines and related
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Israel
treatment facilities that supply gas to the INGL Grid; the first
transporting gas from the Mari offshore production platform and the
second an offshore pipeline transporting gas from Egypt. With the
recent discoveries off-shore northern Israel, it is expected that a
third pipeline will be built to transport gas from these new fields to
the INGL Grid. Each of these pipelines has been installed and is
operated by the owners of the gas (the holders of the Petroleum
Leases for the Mari field and the importer from Egypt,
respectively).
There are currently no storage facilities in Israel.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The construction and operation of natural gas transportation pipelines
and associated infrastructure is regulated primarily by the Gas Law.
In principle, the Petroleum Law granted a holder of a Petroleum
Lease the right to install gathering lines and pipelines to transport gas
it discovered. The Gas Law that was enacted in 2002, created a new
set of rules and at present the installation of upstream gas
transportation pipelines and associated facilities requires obtaining
licences in accordance with the terms of the Gas Law. Installing and
operating gas facilities will require obtaining many authorisations
and complying with various laws and standards primarily in relation
to environmental and safety issues (see question 2.11 above).
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
The Gas Law enables compulsory acquisition and expropriation for
the purpose of installing gas facilities and pipelines in accordance
with an approved plan and subject to receiving the required licences
and approvals. The Gas Law also permits temporary utilisation of
land for the installation of underground facilities and pipelines in
accordance with procedures and subject to the terms prescribed in
the Gas Law. A land owner whose land was acquired or used as
above, is entitled to receive compensation from the licence holder.
Pursuant to the Petroleum Law a holder of a Petroleum Lease may
request the Government to acquire, on its behalf, land needed for
petroleum purposes.
Notwithstanding the provisions of the Petroleum Law and the Gas
Law, licence holders will typically endeavour to acquire by
agreement the land needed to install their facilities or reach
agreements with land owners to access their land.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
There are currently only two upstream pipelines in Israel that are
connected to the INGL Grid (see question 4.6 below).
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
There are currently only two upstream pipelines in Israel that are
connected to the INGL Grid (see question 4.6 below).
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4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
The Petroleum Law and the Gas Law provide the general legal
framework for third party access. The Gas Law provides that third
party access be granted to other gas suppliers so as to enable them
to connect to these upstream pipelines and facilities and to transport
their gas on terms to be specified in the supplier’s transmission
licence. Pursuant to the Petroleum Law, the Petroleum
Commissioner may, after consultation with the Petroleum Council,
require the holder of the Petroleum Lease to transport through such
pipelines gas for others on reasonable terms to be determined by the
Petroleum Commissioner, provided such capacity is not required
for the holder of the Lease.
To date, the need for third party access arrangements has not arisen
and none have been entered into.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
The Gas Law and the licences issued thereunder prescribe the general
principles for provision of services to others. A licence holder is
permitted to charge another supplier a fee for the transmission of gas
through its facilities, in an amount to be approved by the Gas Council
in accordance with the provisions of the Gas Law.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
Pursuant to the Gas Law, there is a clear separation between the
high pressure and low pressure distribution networks. As described
in question 1.1 above, the INGL Grid, Israel’s high pressure
national transmission network, is being built and operated by INGL
(a government owned company). Low pressure distribution will be
carried out by private (non-governmental) companies, that will be
granted licences through a tendering process. Distribution licences
were granted in 2009 for two of the six contemplated regions and a
tender for a third region was recently published.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
The building and operating of a transmission or distribution
network requires a licence under the Gas Law. In addition, the
licence holder will be required to comply with all regular laws and
regulations that apply to construction projects in Israel including in
relation to planning, acquisition of land, preservation of the
environment, health, safety, etc. The distribution licences that were
granted in 2009 also included detailed provisions relating, inter
alia, to safety, maintenance, periodical testing, insurance,
performance guarantees and engagement of technical consultants
and gas engineers.
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5.3 How is access to the natural gas distribution network
organised?
Pursuant to the Gas Law, a holder of a transmission or distribution
licence is required to provide its services to all customers in a non-
discriminatory fashion and to enable every customer to be
connected to the transmission or distribution network, all in
Israel
accordance with the terms of its licence. Services will be granted
based on standard form contracts that will be approved by the
director of the Gas Authority.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
Pursuant to the Gas Law, the director of the Gas Authority may
require the holder of a transmission or distribution licence to
expand or upgrade its network in order to meet the needs of the gas
industry.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
The fees paid for access to the INGL Grid include connection fees,
capacity charges and fees per unit transported. The fees for the use
of the distribution network include connection fees and distribution
fees per unit transported. The fees are regulated and are subject to
the approval of the Gas Authority.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
The Gas Law specifies restriction on the entities that may hold
licences in general and restrictions in relation to different types of
licences. In addition, a holder of a transportation licence may not
hold a distribution licence. Licences granted under the Gas Law
may not be transferred or pledged. Transfer of interests in a licence
holder requires notification and approval in accordance with the
provisions stipulated in the licence.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
At the present time, the marketing and sale of natural gas in Israel
does not require a licence. The Israeli market is still in its early
stages of development with only a small number of consumers
receiving gas (primarily the electricity monopoly and several large
industrial companies). All the existing consumers of gas have
contracted directly with the two main suppliers for long term supply
agreements. The completion of the INGL Grid, the development of
distribution networks, and the development of the new gas
discoveries offshore Israel are expected to increase significantly the
number of customers that will have access to natural gas.
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6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
At this time there is no active market in Israel for trading of natural
gas or of other “bundled” products.
Israel
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
At present, there are no LNG facilities in Israel. In June 2009 the
Gas Authority initiated a pre-qualification process with regard to an
LNG Project that shall include: (1) the design, financing and
construction of an offshore LNG receiving terminal with a daily
processing capacity of no less than 16 million cubic metres (annual
processing capacity of approximately 4 BCM); and (2) the
operation and maintenance of such LNG receiving Terminal
including, inter alia, storage and regasification of the LNG.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Building and operating of LNG facilities require a licence under the
Gas Law.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
At present, there are no LNG sales or services in Israel.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
In general, the Restrictive Trade Practices Law 5748-1988 (the
“Anti-Trust Law”), prohibits anti-competitive practices in Israel.
The Israel Antitrust Authority has the power to investigate and pursue
prohibited restrictive arrangements and other antitrust violations.
The Gas Law was enacted with the aim of enabling competition in the
natural gas supply chain and it includes provisions that are designed
to separate between the different segments of the gas supply chain
and to limit anti-competitive activities.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
In general, the Anti-Trust Law prohibits arrangements that impose
restrictions in a manner that may eliminate or reduce competition
among the parties to the arrangement, or with others. Consequently,
agreements for fixing prices, division of the market (including
geographically, by the type of services or customers) and
agreements to exclude competitors are not permitted.
Block exemptions have been issued, including for certain
arrangements that would cause immaterial harm to the competition,
for certain joint ventures and for certain purchase or supply
contracts, all in accordance with and subject to various limitations
and conditions.
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8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The Anti-Trust Law grants the Anti-Trust Authority wide
investigative and sanctioning powers for the enforcement of the
law. The Anti-Trust Authority has the authority to determine
whether an arrangement violates the Anti-Trust Law and to pursue
administrative remedies such as orders to cease and desist, or a
criminal complaint that may entail fines or even imprisonment.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
Mergers in Israel require notification and approval in accordance
with the Anti Trust Law, if: (1) the companies involved have
combined annual revenues that exceed NIS 150 million
(approximately US$ 40 million) and at least two of the merging
parties have annual revenues exceeding NIS 10 million
(approximately US$ 2.7 million); (2) the combined market share of
the merging parties exceeds 50% of the total manufacture, sales,
marketing or purchases of a particular or a similar product or
service in the local market or a lower percentage that will constitute
a monopoly; or (3) one of the merging parties is a monopoly. The
Anti-Trust Commissioner will object to a merger, or subject it to
conditions, if the Commissioner is of the opinion that there is a
danger that as a result of the proposed merger, competition in the
relevant sector will be significantly impaired or the public interest
will be adversely affected in relation to price levels, quality of
service or goods and availability of goods or services.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Pursuant to the Gas Law a licence may only be granted to an Israeli
company, however, there are no restrictions on foreign individuals
or entities owning shares in such companies. The Petroleum Law
has no restriction on foreign ownership.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
There are no particular international treaties or multinational
arrangements that have driven the regulatory policy in the natural
gas sector.
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Rosenberg, Hacohen, Goddard & Ephrat - Law Office Israel

10 Dispute Resolution 11 Updates

10.1 Provide a brief overview of compulsory dispute resolution 11.1 Please provide, in no more than 300 words, a summary of
procedures (statutory or otherwise) applying to the natural any new cases, trends and developments in Gas
gas sector (if any), including procedures applying in the Regulation Law in Israel.
context of disputes between the applicable Government

Israel
authority/regulator and: participants in relation to natural The continued growth of the Israeli gas market is likely to be
gas development; transportation pipeline and associated followed by increased regulation. There are currently several
infrastructure owners or users in relation to the
initiatives that have been announced by the Gas Authority,
transportation, processing or storage of natural gas; and
including in relation to LNG facilities (see question 7.1 above),
distribution network owners or users in relation to the
distribution/transmission of natural gas. marketing (see question 1.1 above) and regional distribution
systems (see question 1.1 above).
There are no general compulsory dispute resolution procedures that
apply in the natural gas sector. However, under the Gas Law certain
matters may be brought before the Director of the Gas Authority for
resolution.

10.2 Is Israel a signatory to, and has it duly ratified into Dan Hacohen
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards; Rosenberg Hacohen Goddard & Ephrat
and/or the Convention on the Settlement of Investment 24 Raoul Wallenberg Street
Tel-Aviv 69719
Disputes between States and Nationals of Other States Israel
(“ICSID”)?
Tel: +972 3 766 6565
Fax: +972 3 766 6567
Israel is a party to both conventions.
Email: dan@rhlaw.co.il

10.3 Is there any special difficulty (whether as a matter of law

or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
In general there is no special difficulty in litigating, or seeking to
enforce judgments or awards, against government authorities or
State organs.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
In general, there is no difference between Israeli and foreign
corporations before the law. We are not aware of any such
litigation, judgments or awards.
Dan Hacohen is the managing partner of Rosenberg Hacohen
Goddard & Ephrat, and heads its energy practice.
Dan is widely regarded as one of Israel’s leading experts in the energy
sector, with over 20 years of experience in energy projects, with
particular emphasis on natural gas. Dan represents participants in
many E&P projects in Israel, including the consortium that owns the
Yam Tethys project that includes the 1.1 Tcf Mari-B gas discovery
offshore southern Israel and the Tamar consortium which owns the
recent 8 Tcf deep water gas discoveries off-shore northern Israel. Dan
has been involved in all aspects of these projects, including the initial
farm-in agreements, joint operating agreements, acquisition
agreements, the negotiations with the government for receipt of the
exploration rights, gas sale agreements (at an estimated value of
approximately $3 billion), financing agreements and many other
related agreements. Dan has also been involved in international
energy projects in Asia, Africa and the US and has advised the
Government of Israel in the privatisation of four E&P companies.
Dan is the Co-Chairman of the Energy Committee of the Israeli Bar
Association and a member of the Association of International
Petroleum Negotiators (AIPN).

Rosenberg, Hacohen, Goddard & Ephrat - Law Office

Rosenberg Hacohen Goddard & Ephrat, is one of Israel’s most prestigious boutique law firms specialising in energy,
securities, finance and M&A. The firm’s clients include some of Israel’s largest companies and most respected members
of the Israeli business community. The firm is consistently ranked as one of Israel’s leading firms in energy and in
corporate finance. In recent years, the firm has been involved in some of the largest and most complex transactions in
Israel, including many cross border transactions.
The firm has an outstanding reputation within the energy sector, built on over 50 years of experience in advising
companies, governments and financial institutions, in Israel and in other countries. Our energy team has a unique
understating of the Israeli energy sector with a wide breadth of expertise which enables us to execute large corporate
deals, as well as advise on sector-specific issues. We have been involved in almost all of the significant E&P projects
in Israel, including the Yam Tethys project that includes the 1.1 Tcf Mari-B gas discovery offshore southern Israel and
the Tamar project which owns the recent 8 Tcf deep water gas discoveries off-shore northern Israel.

123
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 Chapter 16
Italy
Studio Legale Bonora e Associati
1 Overview of Natural Gas Sector
1.1 A brief outline of Italy natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
In 2008 (based on the latest official data available) the Italian
demand of natural gas remained constant at 85 G (m3). Domestic
production has decreased to 9.3 G (m3), while imports have
increase by 3.9% to 76.9 G (m3). The total demand is met by
domestic production for 11% and importations for 89%.
Import
In 2008 Italy has imported natural gas through gas pipelines mainly
from 5 countries:
Algeria which provides 25.9 G (m3), equal to 33.8% of total
national consumption, of which 24.4 is through pipeline with
entry point in Sicily at Mazara del Vallo;
Russia which has supplied 24.6 G (m3), equal to 32% of
total, through the entry points of Tarvisio and Gorizia;
Libia: 9.9 G (m3) equal to 12.8%;
Netherlands: 10.4%; and
Norway: 6.9% (the last 2 both with entry point at Passo
Gries, near the Switzerland border).
In 2008 the five biggest importers of gas in Italy were: ENI 61.5%,
Enel Trade 13.1%, Edison 9.7%, Plurigas 3.6% and Gas de France
2.3%.
New infrastructure
In 2008 ENI has completed the first expansion of gas pipeline TAG
Trans Austria, which links Italy with Austria at the entry point of
Tarvisio, increasing the capacity from 38 to 41.5 G (m3) per year.
In October 2008 ENI has made the second expansion of pipeline
TTPC (Trans Tunisian Pipeline Company), which joins Tunisia
with Italy at Mazara del Vallo (Sicily). The infrastructure has been
increased after an investigation by the Italian Antitrust Authority
against ENI, which has pledged to expand the capacity by
additional 6.5 G (m3) per year.
Green Stream (pipeline Italy - Libia): the entry point is at Gela
(Sicily). In April 2008 Gasprom has declared that it intends to
participate in the project of ENI for doubling the capacity of the
pipeline from the current 8 G (m3) to 16 G (m3).
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Luigi Giuri
Other pipelines whose construction is scheduled for the next years are:
TAP Trans Adriatic Pipeline (Greece-Albany-Italy) -
operator TAP AG (EGL 50%, Statoil Hydro 50%) - site
Brindisi - length 520 km - capacity 10-20 G (m3);
IGI Interconnector (Italy-Greece) - operator IGI Poseidon
SA (Depa 50%, Edison 50%) - site Otranto - length 212 km
- capacity 8-10 G (m3); and
GALSI (Algeria-Italy) - operator GALSI (Sonatrach 41.6%,
Edison 20.8%, Enel 15.6%, Sfirs 11.6%, Hera Trading
10.4%) - site Porto Botte (Carbonia-Iglesias Sardinia) -
length 940 km - capacity 8 G (m3).
Transportation
From 2008 the national network of natural gas transportation is
operated by 9 companies: 3 for the national pipelines; and 8 for
regional ones (some operators manage both). The two main operators
are: a) Snam Rete Gas, having 31,474 km on a total of 33,478 km on
the Italian gas transportation network; and b) Edison Stoccaggio,
which manages in aggregate 1,365 km, because it also operates the
gas network owned by Società Gasdotti Italia (1,282 km).
Storage
In the period from October 2008 to September 2009 the Italian gas
storage system has offered a capacity of working gas equal to 13.9
G (m3), of which 5.1 G (m3) is reserved to strategic storage to deal
with crises in the import of gas. There are two operators: Stogit
(ENI Group), which has almost the entire Italian storage capacity;
and Edison Stoccaggio.
LNG
From the end of year 2009, a new LNG plant based in the northern
Adriatic Sea, with a capacity of 8 G (m3) - equal to and additional
10% of the total Italian demand - has come on line. The operator is
Edison, which has obtained the exemption (approved by EC
Commission) from the right of access by third parties up to 80% of
the capacity of the LNG plant, for a period of 25 years. For the
residual capacity 1 G (m3) has been awarded, through an open
tender, to British Petroleum for 10 years starting from 2010. The
remaining 0.6 G (m3) will be assigned by tender every year.
Local distribution and sale
In May 2009 the total number of local distributors, which operate
urban gas pipelines, was 308, according to the official register of
Authority of Electric Energy and Gas (hereinafter, “Authority” or
“AEEG”). The market is very fragmented because only 35
distributors serve more than 100,000 final gas customers.
Therefore, mergers and acquisitions are under way between
operators. In 2008 the five main operators were: ENI with 26.6%
of the total; Enel 11.1%; Hera 6.7%; A2A 6.2%; and Italcogim
3.9%.
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Studio Legale Bonora e Associati
In 2003, art. 21, decree 164/00 has obliged the companies operating
in the gas sector to separate gas distribution and sale to two different
subjects. In 2008 the five biggest sellers of gas to Italian customers
(retail segment) were: ENI 38.4%; Enel 18.3%; E.On 5.6%; Edison
4.9%; and Energie Investimenti 4.5%, having in aggregate a market
quota exceeding 71%.
1.2 To what extent are Italy’s energy requirements met using
natural gas (including LNG)?
In 2008 the net demand for consumption of natural gas has been
equal to 83.4 G (m3):
41% electricity production;
36% domestic use;
21% industrial consumption; and
2% other applications (agriculture, car fuel etc.).
1.3 To what extent are Italy’s natural gas requirements met
through domestic natural gas production?
In 2008 domestic production of natural gas has been equal to 9.3 G
(m3), sufficient to cover just 11% of the gross demand. Compared
to 2007, Italian gas production has gone down by 4.6%. Three
quarters of the gas is extracted from gas fields existing under sea.
The 3 most important producers are: ENI 81.8%; Edison 7.8%; and
Royal Dutch Shell 7.7%.
1.4 To what extent is Italy’s natural gas production exported
(pipeline or LNG)?
Given the gap existing between demand and domestic gas
production (equal to only 11% of the national consumption), the
exports of gas have been negligible.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The main law sources on natural gas in Italy are legislative decree
23 May 2000, no. 164, decree 164/00, which has implemented the
first gas directive 98/30/EC and law 239 of 2004.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
The licence to develop natural gas sources in the territory of Italy is
granted after a unique procedure, in which the State and the
concerned Region participate. The licence also includes the right to
build the equipment and the works necessary to develop the gas
well, works which are considered of public utility according to the
law (art. 1, paragraphs 82-ter and 82-quater of law 239/2004).
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Italy
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
Law no. 239/2004 provides for different permits and licences for
Italy
the phases of gas exploration, perforation of sites and development
of gas wells. Each stage requires a specific authorisation issued
through a unique procedure by the State and the concerned Region.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
The State rights in this regard are not a matter of law.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
The State derives value from royalties requested for granting
permits of exploration and licences of natural gas development.
2.6 Are there any restrictions on the export of production?
Export of gas is a liberalised activity (art. 1, para. 1, decree 164/00).
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
No there are not.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
See question 2.10.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
No they are not.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
According to art. 8 and 27 of decree 1443/1927, the transfer of
exploration permit or of development licence requires consent by
the Ministry of Economic Development (hereinafter, MSE or MSE
Ministry). Pursuant to art. 21, the MSE Ministry must also approve
the formation of a mortgage on the exploration site.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
The evaluation of the environment impact of the exploration and
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development of natural gas (VIA) is carried out within the unique
procedure for issuing the relevant permits (law 239/2004).
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
Italy
No, but the activities must comply with the general obligations set
by decree 152/2006 on the environment protection.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Pursuant to art. 3, decree 164/00, the importation of natural gas
produced outside the Member States of the European Union must
be previously authorised by MSE Ministry on the basis of objective
and non-discriminatory criteria.
To obtain the authorisation applicants have to: a) possess technical
and financial capabilities adequate to the import activity; b) provide
adequate information and guarantees on the origin of gas; c)
demonstrate the reliability of the gas producer and of the transport
system; d) have the availability of storage capacity in Italy for at
least 10% of the quantity of the gas imported each year; and e) have
financial capability to contribute to the development and security of
the national gas system through infrastructures for the import,
transportation or distribution of natural gas.
If the Ministry does not communicate the denial within 3 months
from the request, the import activity is considered as authorised.
However, the operator is obliged to offer on the regulated market a
quota of the imported gas, defined by the MSE Ministry in relation
to the aggregated imported volumes (art. 11, decree 7/2007). In
order to import natural gas produced in EU countries, authorisation
from the Ministry it is not required but you must give notice within
60 days to MSE Ministry and to the Authority.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Italian gas transportation network, extended in aggregate 33,478 km
(2008), is divided in national and regional lines. The operators of
national transportation network are: Snam Rete Gas (ENI Group),
which owns 8.779 km; Società Gasdotti Italia (120 km); and Edison
Stoccaggio (83 km). The main operators of regional lines are:
Snam Rete Gas (22.695 km); Società Gasdotti Italia (1.162 km);
and Retragas (399 km).
The national transportation network is formed by pipelines
connected to the sea, import and export pipelines, inter-regional
ones, pipelines linked to gas storage sites and the ones functional to
the gas national system (art. 9, decree 164/2000). The national
network is identified by the Ministry of Economic Development,
with updates every year. The regional network is identified by
Regions. The Ministry has recognised the gas national network by
decree of 29.09.2005. The regional pipelines are determined by
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Italy
exclusion, as other than national ones and local distribution
network. The Energy Authority issues the rules on national gas
transportation (art. 1, par. 8, law 239/2004).
From year 2002 the gas transportation activity, to ensure transparency
of the accounts, is separated from other activities of the gas sector,
except gas storage (art. 21, decree 164/00). From year 2008 -
following the adoption in Italy of the directive 2003/55/EC by AEEG
resolution 11/07, which has approved the Consolidation Act of
Unbundling (TIU) - the gas transportation activity has been unbundled
from other gas activities. This implies that gas transportation has a
separated management and organisation from other gas activities
belonging to the same vertically integrated group. Scope of the
unbundling is to ensure the neutrality of the operator in the
management of the gas transportation pipelines without advantages
for the other companies of the same group, to avoid discriminations
while communicating commercially sensitive data and to prevent
cross subsidies between different gas activities (art. 2.1 TIU).
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The Ministry of Economic Development (MED) issues technical
rules on the requirements for building and operating transportation
network, storage sites and LNG plants (art. 27, decree 164/2000).
To construct and operate natural gas transportation pipelines and
associated infrastructure an authorisation from MED is necessary,
which replaces any other licence required by the law, including the
environmental authorisation (art. 52-quinquies, DPR 327/2001 and
art. 1-sexies, D.L. 239/2003).
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
The MED, by approving the project, declares the construction of a
natural gas transportation pipeline as a work of public utility, if the
capacity of the existing pipelines is insufficient or if the construction
is necessary to ensure the security of the gas system (arts. 30-31,
decree 164/2000). The approval by the MED grants the right to
compulsorily acquire the ownership of the land required for the
construction, by paying an indemnity to the owner (DPR 327/2001).
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
The Authority establishes the criteria to ensure to all users freedom
of access to the gas transportation network at the same conditions
and the neutrality of the neutrality of gas transportation and
specifies the duties of the pipelines operators. Subsequently,
operators must submit the Authority their code of network to obtain
the approval (art. 24, decree 164/00). The Authority supervises that
the operators do not impede access at equal conditions and correctly
apply their network code (art. 8, decree 164/00).
Consequently, the Authority has set the standards to grant all users
freedom of access to gas transportation pipelines at the same
conditions by resolution no. 137/02 (last updated by resolution
146/09). The Authority has approved the codes of transportation
network submitted by the operators Snam Rete Gas, Società
Gasdotti Italia and Edison Stoccaggio and their updates.
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4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
As said, the national gas transportation network is formed by
pipelines operated by 3 different companies. In addition, there are
regional pipelines. All lines are interconnected between them to
form a unique system.
Operators of gas transportation are obliged to cooperate to grant
security, reliability and efficiency of the service (art. 8, decree
164/00).
The Authority, by resolution 145/03, has ordered Edison T&S (now
Società Gasdotti Italia) and Snam Rete Gas to enter into an
agreement, which contains the parameters for the technical
operating management of the interconnection points of their
respective pipelines. The companies have signed an agreement in
2004, which specifies the minimum pressure of the gas and the
capacity of the connected pipelines.
Later, MED, by decree 17/04/2008, has defined the technical rules
for projecting, constructing and operating gas infrastructures.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Because the gas transportation is a public interest activity, operators
are obliged to grant access to third parties, provided that they have
adequate capacity and the necessary works are technically and
economically feasible pursuant to the parameters set forth by the
Authority. In case of refusal the applicant informs the Authority
which, if ascertains a violation of the transportation network code,
can order to allow the access (art. 8, decree 164 of 2000).
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
The tariffs for gas transportation are set up by the Authority (art. 23,
decree 164/2000). Tariffs are determined according to the criteria
contained in the Consolidation Act for transportation prices (2010-
2013) approved by AEEG resolution no. 184/2009, which specifies
that tariffs are based on yield of Regulatory Asset Base, rate for
technical - economic amortisation and reimbursement of recognised
operating costs. Current prices have been set up by AEEG
resolution no. 198/2009.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The law requires that from year 2003 two different companies must
manage the activities of distribution and sale of gas (art. 21, decree
164/00).
In addition, from 2008 the Consolidation Act of Unbundling (issued
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to implement directive 2003/55/EC) prevents directors and
executives of distribution companies of integrated energy groups
from taking managerial roles in sale companies and vice-versa.
With regard to the regulation of the services, art. 1, para. 1, law
481/1995 assigns to the Authority the power to guarantee adequate
standards of quality of the services connected to the gas sector,
while at the same time protecting the rights of the consumers.
Italy
In particular, the Authority issues directives to the operators by
setting up the general and specific standards of quality (art. 2, para.
2, letter h), law 481/95) and monitors the compliance through
inspections, analysis of documents and data. If it imposes to pay the
customers automatic compensations in case of violations of
contractual clauses or insufficient quality standards (letter g).
Distribution of natural gas
The Authority has set up the standards of quality in the gas
distribution service from year 2009 to year 2012 by resolution
120/08, which has approved the First Part of the Consolidation Act
on distribution and measurement of gas, called RQDG, in force
from 1st July 2009. The RQDG contains:
i) obligations for the security of gas distribution: duties to
inspect gas pipelines, to put scent into gas to make it
perceptible, maximum times for answering emergency calls
and for carrying out emergency services;
ii) rules on the causes and duration of the interruption of gas
distribution;
iii) duties to record data on the security and the continuation of
the distribution;
iv) obligations in the relationship with customers: maximum
times for budgeting and performing works for the connection
to the gas pipeline, to start the service, to verify the correct
functioning of the gas meter and to answer claims and
requests for information; and
v) automatic compensations set up for violations of the duties of
the gas distributor.
Sale of natural gas
Companies, which intend to sell natural gas, must previously obtain
the authorisation from MED. To obtain the authorisation the
applicant must demonstrate: a) the availability of an adequate
quantity of gas and of storage capacity in order to meet the
customers needs; b) the origin of the gas and the reliability of its
transport; and c) adequate technical and financial capabilities (art.
17, decree 164/00).
With regard to the customers, companies are free to offer their
conditions for sale if the client consumes more than 200,000 cubic
metres of gas per year. If he consumes less, as in the case of
domestic customers, the operator must submit the client both the
standard economic and contractual conditions set by the Authority
for consumer protection and its own conditions, which usually have
better economic terms. The client is free to choose between the two
offers (AEEG resolution 229/01).
However, free contractual conditions must respect the Code of
Conduct for the sale of gas, which specifies the rules the operator
must comply with in promoting the sales and the necessary clauses
of the contract. For instance, which information the personnel must
give the perspective customers, how the prices for services must be
indicated, and the right of withdrawal of the customer from the
proposal and so on (AEEG resolution 126/04).
The Authority has indicated the general economic conditions
applicable to the regulated offers, as well as to customers who do
not have opted for different offers, in the Consolidation Act for the
retail sale of gas through urban pipelines (TIVG), approved by
resolution 64/09.
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5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
The right to operate is assigned through a public tender for a
maximum period of 12 years. The local municipalities, which grant
the authorisation, plan, supervise and monitor the activity of gas
Italy
distribution. The relationship between the local municipalities and
the operator is regulated by a service agreement, written in
accordance with the standard scheme drafted by the Authority and
approved by MED. The service agreement specifies duration of
service, economic conditions of the authorisation, rights of the
customers, power of control by the municipalities, effects of the
breach of the agreement and conditions of the termination of the
contract in case of violation of the duties upon the distributor.
At the expiry of the authorisation, the local municipality acquires
the repossession of the pipelines and connected infrastructures. The
distribution infrastructures built by the operator during its licence
period are transferred to the local municipality at the conditions
specified in the tender and in the service agreement.
The service is awarded to the contestant in the tender, which offers
the better economic and technical conditions, also in relation to
plans of investment for the maintenance, improvement and
extension of the existing pipelines.
Until the selection of the new operator, the old one is obliged to
carry on the performance of the service with regard to the ordinary
management.
The new operator is obliged to take upon the obligations and the
guarantees for the financing of the investment plan agreed with the
previous tender and to pay to the old operator the value of the
investments not yet amortised. These costs are specified in the request
for bids. The new operator acquires the possession of the distribution
pipelines only after the payment of such costs (art. 14, decree 164/00).
Transition period
Art. 15 of Decree 164/00 set a transition period before the tenders
for the new authorisations until 2005. The deadline could have
been postponed if the operator meets some conditions:
i) 1 year, if the operator makes a merger that allows the new
entity to serve twice the customers of the biggest company
entering the merger;
ii) 2 years, if it serves more than 100,000 customers, distributes
more than 100 million cubic metres of gas per year, or
operates in an area equal at least to an entire province
(administrative districts in which each region is divided); and
iii) 2 years, if private entities own at least 40% of the share
capital.
If it meets all three conditions, the current operator is allowed to
continue the service until the end of year 2010.
However, the legal provisions concerning the expiry of the
transition period have undergone many changes. At present, art. 46
bis, decree 159/2007 requires that the Ministries define the
minimum local areas (called ATEM) for the authorisations of gas
distribution and the criteria for carrying out the selection through
tender and for evaluating the offers. Pursuant to art. 15 of decree
135/2009, Ministries shall issue the above decree by 31 December
2012. The new rule has triggered two different interpretations:
a) the first holds that art. 46-bis has transferred the competence
to make the tender for the authorisations to the
representatives of the local areas. In this way, it has
suspended the tenders until the definition of the limits of the
local areas by the Ministries; and
b) the second interpretation retains that the new provision has not
repealed the rules on the expiry of the transition period, with
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the effect that each local municipality can start the tender to
issue a new authorisation. This position is held mainly by the
Regional Administrative Court of Lombardy (Brescia).
5.3 How is access to the natural gas distribution network
organised?
The access to the natural gas distribution network is regulated by the
Standard Code of Network for the gas distribution (Standard Code of
Network), approved by the Authority by resolution 108/06 (recently
updated by resolution 193/09). The Standard Code of Network is
automatically applicable to the relationship between distribution
operators and customers, unless the operator submits to the Authority
a code with some changes. The personal network code enters into
force only after the approval by the Authority. At present all
distributors apply the Standard Code of Network, although a few
have requested the approval of codes containing different clauses.
The Standard Code of Network contains rules on the following
aspects:
request by customers of connection to the gas distribution;
procedure for activating the service;
procedure for the switch of the customer to a different sale
company;
making of new connections to the distribution pipeline;
type and amount of the financial guarantee granted by the gas
seller to the gas distributor;
the handling of the requests for gas distribution;
list of the services performed by the gas distributor (for
instance, control of the gas meter, suspension of the service,
supply of different gas in case of interruption of the service
and so on);
installation, maintenance and replacement of gas meters;
measurement of the gas provided to each customer; and
responsibilities of the parties and procedures for settling
disputes.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
The operator of the pipelines for gas distribution must connect to its
grid the local customers who make the request, provided that the
operator has sufficient capacity and that the works necessary to
make the connection are technically and economically feasible
according to the criteria issued by the Authority. In case the
operator denies the access to the customer the Authority, if
ascertains the violation of the rules issued on the matter, can order
the operator the make the connection (art. 16, decree 164/00).
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
The Authority approves each year the tariffs for the gas distribution
(art. 2, para. 12, law 481/1995). By setting up the tariffs the
Authority must ensure an adequate return on the capital invested by
the operators to build the pipelines. In addition, it must take into
account the measures for improving the service quality of the
service and for promoting the use of renewable energies and the
cost of servicing difficult areas (art. 23, decree 164/00).
The Authority has set the criteria for determining the tariffs
applicable during the period from 2009 to 2012 in the Consolidation
Act on the gas distribution tariffs (RTDG), approved by resolution
159/08. The tariffs for year 2009 and 2010 have been approved
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respectively by resolutions 197/09 and 206/09, although the
Authority is still reviewing the proposal submitted by many
operators. In brief, the tariffs cover the return on the capital
invested in the distribution infrastructure and the operating costs for
providing the service.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
Participation in the tenders
All shareholding companies can participate in the tenders called for
granting new authorisations, except those which provide public
services by means of a direct appointment, made without public
tender (art. 14, para. 5, decree 164/00).
However, at the end of the transition period - which is still under
course - the companies, which operate the gas distribution service
in a specific area, can participate in the tender for the same service
(art. 46-bis, para. 4-bis, decree 159/2007).
Discipline of the assets
At the end of the authorisation, the operator must return the
ownership of the gas distribution infrastructure build during the
service period to the local municipalities, at the term and conditions
set forth in the service contract, which may or not grant the operator
the right to receive an indemnity (art. 14, para. 4, decree 164/00).
Antitrust limitations
From 2002 until 2010 no company can sell in the national gas
network in Italy, directly or through companies belonging to the
same group, gas exceeding 75% of the national gas consumption
per year. The quota is limited by two percentage points per year
following 2002 up to a limit of 61% (art. 19, decree 164/00).
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Natural gas trading takes place in two different forms: i) by bilateral
agreements; or ii) in a centralised way. The regulation concerns the
second hypothesis.
Art. 13, of AEEG resolution 137/02 states that the trading of the gas
put in the national pipelines network is carried out according to the
procedures set by the Authority.
The Authority, by resolution 22/04, has decided that the regulated
market for gas trading shall be defined through the following steps:
procedures for trading the capacity and the natural gas
through an IT platform;
definition of a standard agreement for gas trading;
introduction of a daily market for balance and determination
of the price for balance service based on the daily price of the
gas; and
introduction of a centralised market for natural gas,
independently managed, based on an automatic system for
matching supply and demand, which allows to set up the
official price as reference price for the settlement of the
transactions.
The Authority has approved the regulation of the market “System
for exchanges or trading of gas at the Virtual Trading Point (PSV)”,
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Italy
set up by Snam Rete Gas and contained in the respective Scheme of
Contract, and has qualified it as the regulated market. The last
update of the general conditions of the Contract has been approved
by AEEG resolution 124/08.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
Italy
gas commodity and the distribution thereof) be traded?
See question 6.1 above.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
Resolution AEEG 167/05 defines the criteria to guarantee the
freedom of access to the service at the same conditions, the
impartiality and neutrality of the LNG service and the duties of the
operators. However, companies which build a new LNG plant in
Italy can request, with regard to the new capacity, the exemption from
the right of access to infrastructure by third parties. The exemption
is granted by the MSE Ministry, on a case-by-case basis, after having
consulted the Authority, for a minimum period of 20 years and for
80% of the new capacity (art. 1, para. 17, law 239/2004).
LNG activity is subject to unbundling under AEEG resolution
11/07. Its management must be separated from that of other gas
activities performed by the same integrated energy group.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Pursuant to Art. 46 of decree 159/2007 (as changed by law 99/2009),
the Ministry MSE, with the agreement of Ministry of Environment
and Ministry of Transport, by a unique procedure, issues the
authorisation to build and operate an LNG plant, after the evaluation
of the impact on the environment (VIA). The maximum duration of
the procedure is 200 days from the filing of the request. The
authorisation takes place of any other licence and permit, including the
authorisation to use public areas and the permit to erect buildings.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
The Authority has the power to set up the tariffs for the use of the
terminals of LNG in order to ensure an adequate return for the
investment in the plant (art. 23, decree 164/00). The Authority has
established the parameters for the determination of the tariffs of the
LNG service by resolution 178/05.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The undertakings operating in the Italian gas market are subject to the
rules on anti-competitive agreements, abuses of dominant position
and merger operations set forth by law 10 October 1990, no. 287,
containing the Italian Competition and Fair Trade Act (art. 19, decree
164/00). The law 287/1990 appoints the Autorità Garante della
Concorrenza e del Mercato (Italian Antitrust Authority) as the
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independent agency responsible for enforcing the provisions of Law
287/1990 to safeguard the competition in the market.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
Until 31 December 2010 no one company operating in the gas
Italy
sector can:
sell, directly or through companies belonging to the same
group, to final customers more than 50% of the domestic gas
consumption per year; or
introduce in the national gas network a sale in Italy directly
or through companies belonging to the same group, more
than 75% of the domestic gas consumption per year; this
percentage is reduced by 2% each year starting from 2003
until it reaches the limit of 61% per year (art. 19, para. 3-4,
decree 164/00).
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
If an operator exceeds the limits specified in the question 8.2 above,
the Italian Antitrust Authority (art. 19, para. 7, decree 164/00 and
art. 15, law 287/1990):
sets a deadline to eliminate the infraction; in cases of serious
violation, the Antitrust Authority, by taking into account the
importance and the duration of the infraction, can impose an
economic sanction up to 10% of the revenues obtained by the
operator in the previous year;
if the operator does not comply with the order, the Antitrust
Authority imposes an economic sanction or, if it has already
done so, it doubles the previous amount, although within the
limit of 10% of the annual revenues; and
in case of repeated violations, the Antitrust Authority can
order the suspension of the company’s activity for up to 30
days.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
The regulator does not have the power to approve the merger or
changes in control over businesses in the natural gas sector.
However, mergers or transfer operations which concern companies
performing activities authorised by public entities, as Ministries,
local municipalities etc., normally require the prior authorisation of
the competent public entities. In addition, corporate operations
must respect:
a) the rules on the separation of companies set by Art. 21 of
decree 164/00, which requires that each of the activities of
gas transportation, distribution and sale must be performed
by a different company; and
b) the obligations introduced by the Consolidation Act on
Unbundling (approved by AEEG resolution 11/07), which
requires that separate managers run the activities of liquefied
natural gas (LNG) treatment, transportation, storage and
coordination of network infrastructure (dispacciamento),
carried out by the same integrated energy group.
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9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Limits apply to operations of merger or acquisitions made by
companies of EU Members States where no adequate guarantees of
reciprocity exist. Until the full realisation of the integrated gas
market in Europe, the Premier - by request of the MSE Ministry and
within 30 days from the communication of the operation to the
Antitrust Italian Authority - can set conditions and obligations to
foreign companies in order to protect the security of energy supplies
or the competition in the market (art. 1, para. 29, law. 239/2004). At
least the same conditions should apply to foreign companies having
their legal seat outside the EU.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
Italy has implemented the first European Community directive on
gas market no. 98/30/EC by decree 164 of 2000. It has applied the
second gas directive no. 2003/55/EC by the Authority resolution
11/07, which has approved the Consolidation Act on Unbundling.
As a member of the EC it will implement the third gas directive no.
2009/73/EC in the future.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Art. 2, para. 24, letter b), law 481/95 foresees that the disputes
between gas operators and customers can be settled by the
Authority at the terms and conditions specified by a government
decree. In addition, art. 35 of decree 164/00 grants the Authority
the power to solve the disputes concerning the access to the gas
system and network.
The Authority, by resolution 42/05 (modified by res. 139/06), has
approved the scheme for referring to an arbitration panel presided
by a person appointed by the Authority the disputes concerning the
gas transportation through pipelines having high pressure. This
procedure for disputes resolution is optional (not binding) and
requires the agreement of the parties.
The opposition against the deeds and the resolutions issued by the
Authority must be submitted to the Regional Administrative Court
(TAR) of the place where the Authority has its legal seat (Milan),
within 60 days. The decisions of the TAR can be appealed before
the Counsel of State, Italian supreme administrative court, within
120 days (law 1034/1971).
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Administrative procedures before the Authority
The Authority has the power to impose economic sanctions on gas
operators, from a minimum of €2,500 to a maximum of
€154,937,069, in case of violations of the duties established in its
own resolutions. In case of continuous breaches, the Authority can
suspend the activity up to 6 months or propose to the Ministry the
withdrawal of the authorisation (art. 2, para. 20, law 481/95, as
amended by law 99/2009).
The sanction is imposed after a formal investigation procedure with
the participation of the operator. During the proceedings, the
operator can submit briefs, documents and opinion and request to
participate to the final hearing before the Authority. The Authority
publishes the decision on its own internet site. The operator can file
an appeal against the decision before the Milan Administrative
Court (TAR), within 60 days.
10.2 Is Italy a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Italy signed the New York Convention of Recognition and
Enforcement of Foreign Arbitral Awards and enforced it into the
Italian legal system by law 19 January 1968, no. 62. On 9 March
1971, Italy has ratified the Convention on the Settlement of
Investment Disputes between States and Nationals of Other States
(“ICSID”).
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
No there are not.
ICLG TO: GAS REGULATION 2010
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Italy
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
The Italian legal system does not contain special provisions which
affect the possibility of foreign companies to obtain judgments or
awards against the government or other public bodies, if their
Italy
interests have been illegally damaged.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Italy.
Edison Spa, on 20 October 2009, has turned on the LNG plant of
Rovigo, the first offshore LNG plant in the world. The plant has a
capacity of 8 billion gas cubic metres per year. 80% of the capacity
has been assigned to Edison by the agreement with the joint venture
Qatar Petroleum - ExxonMobil; 10% has been awarded on May
2009, through a competitive procedure, to British Petroleum for a
period of 10 years; the residual 10% will be allocated each year
through tender procedures. The LNG plant of Rovigo will supply
10% of the country consumption by importing the gas produced in
Qatar. Thus, it will increase the security of supply of gas in Italy,
by diversifying the sources of production.
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 Studio Legale Bonora e Associati Italy

Luigi Giuri
Studio Legale Bonora e Associati
Piazzetta Umberto Giordano 4
20122 Milan
Italy

Tel: +39 02 7601 3210

Fax: +39 02 7845 10
Italy

Email: l.giuri@studiobonora.it
URL: www.librajus.eu

Practice Areas: Utilities and Energy; Renewable energy; Public

procurement contracts; Relationship with independent Authorities.
Practice Description: Compliance with domestic regulation on gas
and electricity. Implementation of unbundling in energy integrated
groups. Transactions and corporate governance for utilities
companies. Mergers and acquisitions. Assistance before Civil and
Administrative Courts.
Recent Publications and Presentations: Co-author of “Guidelines
for the unbundling of integrated undertakings in the energy sector”,
edited by Federutility, Rome, 2008. Presentations: Unbundling in
the energy sector: how to implement a model in compliance with the
rules, Milan, 2009; Natural gas contracts, Milan, 2008-2009;
Guidelines for energy unbundling plan, Milan, 2008; Energy
Conference, Milan, 2008; Course: Tenders for gas pipelines
licenses, Milan - Padova, 2008; Course: Corporate governance in
utilities sector, Milan, 2007; New rules on unbundling by Energy
Authority, Federutility, Rome, 2007.
Education & Bar Admittance: Catholic University of Milan, Law
School (J.D., 1991). Admitted to bar: Milan, Italy, 1995.
Languages: Italian (Native); English (Fluent).

Studio Legale Bonora e Associati, Milan, Italy.

Member of legal network LIBRAJUS, founded in 2006 (www.librajus.eu).
The network is formed by 4 Italian law firms:

Studio Legale Bonora e Associati in Milan

Studio Munari Maniglio Panfili in Genoa
Studio Legale Persiani-Rizzo in Rome
Studio Legale Coaccioli in Perugia.

The network is composed by almost forty professionals, expert in corporate and commercial law and able to deal with
business issues by communicating in fluent English.
The Utilities and Energy department of Studio Legale Bonora e Associati has advised many energy companies, helping
them to understand the Italian legal framework for gas and electricity activities and to take advantage of the
opportunities that arise by the current market liberalization.
It combines the understanding of the specific issues of the energy sector with an accurate knowledge of the regulations
in force in Italy, in order to assist the clients to choose the better solutions for their business needs.
For further inquires, contact:
Luigi Giuri
+ 39 02 7601 3210
l.giuri@studiobonora.it

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Chapter 17
Japan
Lovells Horitsu Jimusho Gaikokuho Kyodo Jigyo
1 Overview of Natural Gas Sector
1.1 A brief outline of Japan’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Japan lacks significant domestic sources of fossil fuel energy except
coal. Japan has virtually no domestic oil or natural gas reserves.
Japan’s scarce natural gas reserves amount to only 738 billion cubic
feet as of January 2008, located mainly in Hokkaido (the onshore
Yufutsu gas field operated by Japex) and Niigata (the offshore
Iwafune-oki oil-gas field operated by Japex and Mitsubishi
Corporation).
Japan has a high rate of energy consumption, ranking third behind
the USA and China. As for natural gas, as of January 2008, Japan
was consuming 3,500 billion cubic feet per year, meaning that 97%
of Japan’s natural gas needs are imported. Japan is the second-
largest net importer of crude oil and the largest net importer of LNG
in the world. Including nuclear power, Japan is only 16% energy
self-sufficient.
Approximately two-thirds of Japan’s natural gas consumption is for
power generation.
With a lack of international pipeline connections, Japan’s imports
take the form of LNG. Japan started importing LNG from Alaska
in 1969 to increase its imports of energy and diversify away from
oil during a period of massive economic boom and rising energy
consumption in Japan in the 1960s and 1970s. Japan currently
accounts for approximately 40% of global LNG imports.
There are currently 27 LNG re-gasification facilities in Japan with
a combined total capacity of something in the order of 200 million
tonnes per year. The terminals are owned mainly by electric and
gas utilities (see below). 5 further LNG re-gasification facilities are
set to open in 2010 (Sakaide and Nakagusuku), 2012 (Joetsu), 2014
(Naoetsu) and 2017 (Wakayama).
Japan has a very limited pipeline network, relying on regional
distribution from its various LNG re-gasification terminals. The
domestic import and distribution operations for natural gas are
handled by a large number of utility companies holding regional
monopolies, and so there is no requirement for a national pipeline
network. Instead, new LNG re-gasification terminals are located in
areas of demand. The four largest of these utility companies are
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Anthony Raven
Kenji Okura
Tokyo Gas, Osaka Gas, Toho Gas and Seibu Gas, with a market
share of the sales market of 35.9%, 24.8%, 10.8% and 2.3%
respectively.
In Japan there is limited underground storage for natural gas as
there are few places that meet the necessary geological conditions.
Japan is densely populated and suffers from earthquake risk, and so
gas storage capacity often has to be maximised on sites with very
limited space and very high safety levels, especially when LNG
terminal sites are close to residential areas.
1.2 To what extent are Japan’s energy requirements met using
natural gas (including LNG)?
14% of Japan’s energy requirements are met using natural gas. The
rest of Japan’s energy requirements are met using oil (49% - this has
declined by about 30% since the 1970s), coal (20%), nuclear (13%),
hydro (3%) and other renewable energy sources (1%).
1.3 To what extent are Japan’s natural gas requirements met
through domestic natural gas production?
Japan is reliant on imports of LNG, amounting to approximately
97% of its natural gas consumption. Of approximately 66.8 million
tonnes imported in 2007, most came from Indonesia (19.9%),
Malaysia (19.4%) and Australia (17.3%). Other significant
quantities came from Qatar (11.9%), Brunei (9.7%), the UAE
(8.2%), Oman (5.4%), Egypt (2.4%), Nigeria (1.5%), Algeria
(1.4%) and the USA (1.1%).
However, there may be an increase in domestic gas production in
the future. In the East China Sea offshore Japan there is believed to
be substantial natural gas reserves which could be the subject of
development by Japan. Disagreements between Japan and China
over boundaries have hindered any development to date, although
in June 2008 Japan and China reached agreement on the joint
development of certain fields, including the Chunxiao (Shirakaba)
field.
Furthermore, in the future, Japan intends to attempt to develop
significant methane hydrate deposits which have been identified in
its own territorial waters. According to Japan Oil, Gas and Metals
National Corporation (“JOGMEC”) (which is an organ of the
Japanese Government responsible for providing assistance to
private Japanese companies in the exploration and development of
gas resources, both domestically and overseas), methane hydrates
available within Japan’s territorial waters may have the potential to
supply the nation’s natural gas needs for several decades or more.
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1.4 To what extent is Japan’s natural gas production exported
(pipeline or LNG)?
Japan’s natural gas reserves are scarce, and so none is exported.
2 Development of Natural Gas
Japan
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The principal statutes relating to the exploration and production of
natural gas reserves are the Mining Act No. 289 of 1950 (“Mining
Act”) and the Act for the Development of Petroleum and
Combustible Natural Gas Resources No.149 of 1967 (the
“Development Act”).
The main Governmental authority responsible for the regulation of
natural gas development is the METI.
As mentioned in question 1.3 above, the Government currently has
initiatives for Japanese companies to jointly explore and develop with
China in the East China Sea, and JOGMEC is pursuing the potential
development of methane hydrate deposits in Japan’s territorial waters.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
A party seeking to be granted a mining right for “minerals” (which
includes natural gas) would first apply to the Director of the Regional
Bureau of Economy, Trade and Industry (“DRBETI”) (a local bureau
within the METI) for a prospecting right under the Mining Act, article
21. This right becomes effective upon registration in the mining
registry after approval by the DRBETI in consultation with the
governor of the relevant prefecture (Mining Act, article 60).
If the holder of the right discovers minerals during the course of
exploration, he then needs to apply to the DRBETI for a “digging
right”. This right will become effective on registration in the
mining registry after approval by the DRBETI in consultation with
the governor of the relevant prefecture (Mining Act, article 21).
Mining rights can be refused on a variety of grounds, for example
interference with cultural assets, parks, hot springs, forestry,
prejudicial to public health and safety or other industry or
agriculture (Mining Law, article 35).
Such terminology is not used, but both prospecting and digging
rights can be seen to be akin to a licence or concession, as they are
both proprietary rights.
Another type of right is a “mining lease right” (Soko-ken). This is
applied for by a third party in the situation where such third party
and the holder of a mining right agree that the third party will
develop minerals in the mining area the subject of the mining right
(Mining Act, article 6). This is also a proprietary right.
Mining rights and mining lease rights can be held only by Japanese
citizens or Japanese body corporates unless otherwise provided for
in international treaties (Mining Act, articles 17 and 87). To date
there are no such applicable treaties.
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Japan
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
As described in question 2.2 above, the mining right consists of two
stages: (1) prospecting; and (2) digging (exploitation).
In addition to the application for the prospecting right and the
digging right to the DRBETI as explained in question 2.2 above,
authorisations from the DRBETI are also required at certain other
stages or if certain events occur during the development. Examples
include the following:
1) Formulation of operations plans: Holders of prospecting and
digging rights must formulate their operations plans before
commencing activities, and submit the plans to the DRBETI
(Mining Act, articles 63(1) and 63(2)). In the case of the
digging plan, approval of the plan is required from the
DRBETI.
2) Delay of commencement of prospecting or delay of
commencement of digging: Holders of prospecting and
digging rights must commence their activities within six
months from the day of registration of creation or transfer of
the right. If there will be a delay because of unavoidable
circumstances, they must notify the DRBETI of the reason
for the delay and the anticipated period of the delay, and the
DRBETI will have discretion to approve the delay or rescind
the right (Mining Act, article 62(1)(2)).
3) Suspension of prospecting or digging activities for a period in
excess of one year: If the holder of a prospecting or digging
right intends to continue to suspend prospecting or digging
activity for a period of one year or more, they must notify the
DRBETI of the reason for the suspension and the period of the
suspension, and the DRBETI will have discretion to approve
the suspension or rescind the right (Mining Act, article 62(3)).
4) Recommencing activities after a suspension: When the
mining right holder recommences activities after a
suspension, he is required to notify the DRBETI without
delay (Mining Act 62(4)).
5) The duration of a prospecting right is two years from the date
of registration. This period can be extended twice (maximum
two years per extension) (Mining Act, article 18) provided the
holder of the right has been paying the requisite taxes and
pursuing its prospecting activities with diligence and in good
faith. There is no maximum duration for the digging right.
6) The maximum period of duration of a mining lease right is
ten years from the day of registration, and the period can be
extended with permission from the DRBETI (maximum five
years).
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
Other than having an economic interest in the development of natural
gas through the imposition of fees and taxes (see question 2.5 below),
the Government does not participate directly in natural gas production
except in cases where it might grant subsidies to a private company
developer which it may do under the Development Act.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
Companies that wish to develop natural gas must pay to the
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Lovells Horitsu Jimusho Gaikokuho Kyodo Jigyo
Government:
(1) A one-off registration tax upon registering with the DRBETI
of JPY 180,000 for the digging right, JPY 90,000 for the
prospecting right, and JPY 18,000 for the mining lease right.
(2) An annual mining area tax under the Local Tax Act No.226,
31 July 1950. For example, in the case of the Hokkaido area,
this is approximately JPY 54 for each acre of the prospecting
mining area and approximately JPY 108 for each acre of the
digging area.
(3) An annual fee (for a maximum of five years) payable only by
companies which receive subsidies from the Government
(the Development Act, article 19).
2.6 Are there any restrictions on the export of production?
No restrictions.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
Japan has no material foreign exchange restrictions.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
The transfer or disposal of mining rights or mining lease rights must
be registered with the mining registry (Mining Act, article 59(1)(i))
after approval by the DRBETI, and will not become effective unless
registered (Mining Act, article 60).
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
In order to ensure that there is compensation available should
damage be caused to the mining area, the DRBETI has the power to
order the holder of a mining right/mining lease right to provide a
deposit of up to 1% of the value of minerals mined within the
previous year in the mining areas concerned (Mining Act, article
117(3)). The deposit is returnable if damage is compensated for or
no damage is caused (Mining Act, article 119). The party can make
a deposit of cash or government bonds (Mining Act, article 117(4)).
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
As regards the mining right, the digging right (but not the prospecting
right) may be pledged for security (Mining Act, article 13).
Mining lease rights may not be pledged for security (Mining Act,
article 72).
Reserves can be booked for accounting purposes under domestic law.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
In addition to the points outlined in question 2.2 above, a company
that wishes to develop natural gas must report the proposed
development project to the METI when the company plans to build
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Japan
or refurbish certain significant facilities designated by the METI
(Mining Safety Act No.70, 16 May 1949 (“Mining Safety Act”),
article 13(1)). The company must also file a copy of its safety
guidelines (Mining Safety Act, article 19) and the names of its safety
supervisors with the METI (Mining Safety Act, article 22(4)).
In addition, an environmental impact assessment may sometimes be
necessary.
Japan
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
At any time up to five years post-abandonment/decommissioning,
the Director General of the Industrial Safety and Inspection
Department can order an ex-mining right/mining lease right holder
to build facilities for the prevention of danger or environmental
pollution caused by its mining activities (Mining Safety Act, article
39).
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
There are none.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Pursuant to the Gas Business Act, gas distribution, from the point of
production or import to the point of entry into the domestic gas
distribution/transmission network, is made through a series of
pipelines owned and operated by private utility companies. There
is no central government-owned network. (However, the
Government provides various forms of subsidies to encourage
maintenance.)
The utility companies owing and maintaining these pipelines and
associated infrastructure are categorised into two types by the Gas
Business Act:
Pipeline service providers.
General gas utilities.
Pipeline service providers supply large quantities of natural gas
from the point of upstream production (or import) to the general gas
utilities (although, in some cases, they also supply directly to large
volume consumers). For example, Japex owns a natural gas
pipeline network of approximately 826km including the Yufutsu -
Sapporo and Niigata - Sendai pipelines which transport gas from
the production fields referred to in question 1.1 above.
The general gas utilities also supply natural gas from the point of
upstream production (or import). However, they supply directly to
retail consumers, therefore please also refer to section 5 below. An
example is Tokyo Gas which owns approximately 100 km of
pipeline in and around Tokyo.
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4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
Pipeline service providers are required to file a report with the
METI. General gas utilities, however, are required to have a licence
Japan
from the METI.
In addition, appropriate notifications (for example confirming that
pipelines conform to applicable standards) must be made to the METI
for the construction of gas facilities (which includes pipelines).
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
Pipeline service providers and general gas utilities may install
pipelines on public land with permission from the relevant
administrator of the land. The administrator may charge a fee if the
installation of the pipeline impairs the usability of the land. Generally
speaking, most pipelines are installed beneath public roads.
In some cases, a utility may wish to install a pipeline on privately
held land. If this is the case, and the landowner does not wish to
grant a lease or allow his land to be used for this, then the utility
company may request the Government to exercise its power of
eminent domain. The Government will expropriate the land if it can
show a genuine public benefit and pays reasonable compensation to
the landowner (Eminent Domain Act, articles 2 and 3(xvii-2)).
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Access to natural gas transportation pipelines and associated
infrastructure is organised on a contractual basis between a party
wishing to use a pipeline and the party that owns the pipeline.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
Japan does not have a sophisticated pipeline network which is
highly integrated and interconnected.
Pipelines are interconnected on a contractual basis between pipeline
owners, but are subject to some specific regulations as explained
below.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
General gas utilities and pipeline service providers have an
obligation to grant access to their pipelines to third party gas
suppliers. Each pipeline owner is required to put in place its own
set of transportation service terms and conditions for use with any
third party requiring access. These transportation service terms and
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Japan
conditions will set out usage fees and conditions of use, they must
be applicable to all third parties equally, and they must be notified
to the METI.
Generally speaking, third party usage fees are high and so third
party usage of pipelines is not common.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Under the Gas Business Act, article 22(4), the METI has the power
to order general gas utilities and pipeline service providers to revise
their transportation service provisions (within a reasonable time
limit set by the METI) if:
(i) a party is treated in an unfair and discriminatory manner;
and/or
(ii) it is likely that consumers will experience difficulty in
receiving supply.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The domestic gas distribution and transmission network
downstream from the point of import/entry is a series of pipelines
owned and operated by the general gas utilities (such as Tokyo Gas)
referred to in question 4.1 above. There is no central government-
owned network.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
As explained in question 4.2 above, general gas utilities are
required to have a licence from the METI. In addition, appropriate
notifications (for example confirming that pipelines conform to
applicable standards) must be made to the METI for the
construction of gas facilities (which includes pipelines).
5.3 How is access to the natural gas distribution network
organised?
Access is organised on a contractual basis between a party wishing
to use a pipeline and the party that owns the pipeline. However, the
Gas Business Act article 16(1) provides that a general gas utility
must not refuse to supply gas to meet general demand in its service
area without justifiable grounds.
A general gas utility must prepare a plan for the supply of gas each
business year and file a copy of the plan with the METI prior to the
start of the business year (Gas Business Act, article 25(1)). The
METI can, should it consider it to be necessary in the public
interest, recommend that the general gas utility revise the gas
supply plan (Gas Business Act, article 25(4)).
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
As referred to in question 5.3 above, a distributor must not refuse to
meet demand for natural gas in its service area without justifiable
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Lovells Horitsu Jimusho Gaikokuho Kyodo Jigyo
grounds. This may require the distributor to grant capacity to third
parties but would not require a distributor to expand its system.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
Fees are regulated under the Gas Business Act. A general gas utility
must establish a set of terms and conditions of supply which set
rates and other conditions for the supply of gas.
These standards must treat all consumers equally, and require
approval from the METI except in the case of “Large-Volume
Supply”. At present, a consumer with over 0.1 million cubic metres
of gas supply is defined as a “Large-Volume” consumer.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
There are restrictions on the acquisition and transfer of the whole or
a part of a gas business under the Business Act. An assignment and
acceptance of the whole or a part of a General Gas Utility Business
will not be effective unless approved by the METI (Gas Business
Act 10(1)). It is also provided that a merger and demerger of a
juridical person acting as a General Gas Utility will not be effective
unless approved by the METI (Gas Business Act 10(2)).
There is another restriction for foreign companies seeking to
acquire an interest in a gas business. Such foreign companies must
notify in advance the Minister of Finance and the METI of the
business purpose, the amount, the time of making the investment,
etc. under the Foreign Exchange and Foreign Trade Act and the
Cabinet Order on Inward Direct Investment.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
As explained in section 5 above, natural gas is traded on the basis of a
contract between the consumer and the private gas company, with a
gas fee regulated by the Gas Business Act and other related laws.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Natural gas commodities are not traded in Japan.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
The 27 LNG facilities across Japan are owned by private gas
companies and private electric power companies.
Principal regulatory requirements related to LNG facilities are
provided in the Gas Business Act and the High Pressure Gas Safety
Act. In addition, as LNG facilities are usually built on harbour
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Japan
districts, it is necessary to comply with the Ports and Harbours Act
and the Act on Port Regulations in order to build and maintain the
LNG facilities.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Japan
A party who wishes to construct LNG facilities must notify the
METI of the development plan etc. under the Gas Business Act or
the High Pressure Gas Safety Act, and notify the prefectural
government under the Factory Location Act.
It is also necessary to notify the port manager if the facility is to be
built in a harbour district under the Ports and Harbours Act. The
Ports and Harbours Act also requires the approval of the port
manager to construct port facilities.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
No there is not.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
An administrative commission known as the Japan Fair Trade
Commission (“JFTC”) enforces the Act on Prohibition of Private
Monopolization and Maintenance of Fair Trade (“Antimonopoly
Act”) and its related laws. The JTFC is responsible for the regulation
of competition in all sectors, including the natural gas sector.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
Anti-competitive conduct, or “unfair trade practices”, in any sector
means any act which tends to impede fair competition and which is
designated by the JFTC as anti-competitive conduct, and which
falls under one of the heads set out in the Antimonopoly Act, article
2(9) (as subsequently clarified by the Fair Trade Commission
Public Notice No.15 of June 18, 1982). This includes conduct such
as refusal to trade, discriminatory treatment, unjust low
pricing/discriminatory pricing, unjustly inducing or coercing
customers of a competitor, dealing with another party on conditions
which will unjustly restrict its business activities, abuse of
dominant bargaining position, and unjustly interfering with a
competitor’s transaction.
The JFTC has also issued Guidelines for Proper Gas Trade on 23
March, 2000, providing guidance on what amounts to fair and
effective competition in the gas sector, specifically with respect to
the deregulated retail supply sector (large volume consumers), the
retail supply sector (other consumers), consignment supply (third
party access), the wholesale sector, and the use of LNG facilities by
third parties.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The JFTC has the power to conduct investigations, issue cautions,
issue cease-and-desist orders, and impose penalties. Parties which
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object may request a hearing before the JFTC. Decisions of such
hearings may be appealed to the Tokyo High Court.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
Japan
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
Mergers and demergers of general gas utilities and acquisitions and
disposals of the business of general gas utilities will not be effective
unless approved by the METI (Gas Business Act 10(1)(2)). Such
approval process usually takes about a month but depends on the
facts of each case.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
As referred to in question 2.2 above, mining rights and mining lease
rights can be held only by Japanese citizens or Japanese body
corporates unless otherwise provided for in international treaties (to
date there are no such applicable treaties).
However, foreigners may acquire interests in the natural gas sector
through the acquisition of shares in Japanese companies which are
participating in the natural gas sector. In such case, the foreign
investor must give advance notification to METI of certain matters
specified by Cabinet Order in regard to inward direct investment
(Foreign Exchange and Foreign Trade Act 27) including, for
example, business purpose, value of investment, proposed date of
investment etc. The METI has a discretionary power to approve or
not approve the acquisition, on the grounds of the national interests
of Japan (subject to appeal to the courts).
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
Generally, international treaties and multinational arrangements do
not affect regulatory policy of the natural gas sector in Japan.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Generally, statutes related to dispute resolution such as the Code of
Civil Procedure, the Civil Execution Act, the Civil Preservation
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Japan
Act, the Arbitration Act and the Act on Conciliation of Civil Affairs
are applied to dispute resolution in the natural gas sector.
In addition, a request for review or an objection against decisions
made by the METI and other relevant Governmental organisations
pursuant to the Gas Business Act, the Mining Act, the Development
Act etc. is possible under the Administrative Procedure Act.
There is also a specific provision regarding disputes concerning
mining pollution. According to the Mining Act, article 122, if a
dispute arises with regard to compensation for mining pollution, the
parties concerned may file an application with the DRBETI for
mediation.
10.2 Is Japan a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Japan signed and ratified the New York Convention on 10 June
1958 and 20 June 1961, respectively. The date of entry into force
was 18 September 1961. Japan will apply the Convention to
recognition and enforcement of awards made in the territory of
another contracting State on the basis of reciprocity.
Japan also signed and ratified the ICSID on 23 September 1965 and
17 August 1967, respectively. The ICSID came into force in Japan
on 16 September 1967.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
Although there are some peculiarities in litigating against the
Government or public organisations where the Administrative Case
Litigation Act applies, the basic litigation system is similar to
normal civil litigation procedure in Japan. In that sense, there is no
special treatment with regard to suing or enforcing judgments or
awards against the Government or public organisations.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
We have not found any such cases.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Japan.
Over 80% of the energy supply in Japan is dependent upon fossil
fuels, and over 97% of gas is imported from overseas. Recent
fluctuating prices of LNG have led the government to consider
developing a more self-sufficient and cost-effective energy supply
system.
Furthermore, environmental issues are becoming increasingly
important in Japan, and on 8 July 2009 the Act for Promotion of
Utilization of Non-Fossil Energy Source and Effective Utilization
of Fossil Energy Raw Materials by Energy Supply Business Act
was passed by the recent outgoing Government of the Liberal
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Lovells Horitsu Jimusho Gaikokuho Kyodo Jigyo Japan

Democratic Party. Under this new Act, general gas utilities, gas
pipeline service businesses and large-volume gas businesses (as
defined under the Gas Business Act) are deemed to be “specific
energy supply businesses” and “specific fuel product supply
businesses” which must devise plans to utilise non-fossil energy
sources pursuant to standards set by the METI.
In September 2009, new Japanese Prime Minister Yukio Hatoyama
from the recently elected Democratic Party made a further
commitment to cut Japan’s greenhouse gas emissions by 25 percent
by 2020 against 1990 levels.
Whilst these aims are admirable, it is not easy to see how these
greenhouse gas reduction targets will be met.

Japan
Anthony Raven Kenji Okura
Lovells Horitsu Jimusho Gaikokuho Kyodo Jigyo Lovells Horitsu Jimusho Gaikokuho Kyodo Jigyo
15F Daido Seimei Kasumigaseki Building, 15F Daido Seimei Kasumigaseki Building
1-4-2 Kasumigaseki, Chiyoda-ku 1-4-2 Kasumigaseki, Chiyoda-ku
Tokyo 100-0013 Tokyo 100-0013
Japan Japan

Tel: +81 3 5157 8302 Tel: +81 3 5157 8252

Fax: +81 3 5157 8210 Fax: +81 3 5157 8210
Email: anthony.raven@lovells.com Email: kenji.okura@lovells.com
URL: www.lovells.com URL: www.lovells.com
Anthony Raven is an English law qualified partner of Lovells, and Kenji Okura is an associate in Lovells’ Tokyo office. He was
heads Lovells’ Projects and Energy practice in Tokyo. He is also admitted as a lawyer in Japan in 2008, and is a member of the Dai-
registered as a Foreign Admitted Lawyer (gaikokuho jimu bengoshi) ichi Tokyo Bar Association. He earned a master’s degree in
in Japan. engineering from the School of Engineering of the University of
Anthony has wide experience in a range of upstream and Tokyo in 2000, after which he started working for Japan Telecom, a
downstream energy work (and in particular LNG), shipping and well-known communications company, as an engineer. He was
trading, and the development of major projects, including natural subsequently admitted into Waseda Law School in Tokyo and earned
gas liquefaction projects, petrochemical projects and power a Juris Doctorate degree in 2007.
projects. He has 12 years’ experience working in London and Tokyo
advising international clients including Japanese companies on
transactions in Europe, Asia, Africa, the Middle East and Latin
America, including spending a year on secondment to the Energy
Team in the Legal Department of Mitsubishi Corporation and 2 years
on secondment to the Legal Department of Mitsui & Co., Ltd.
He is described by clients as “an exceptional lawyer and invaluable
to us in getting deals done and one of the few lawyers who really
understands our business objectives” (IFLR1000, 2010).

Lovells LLP is an international law firm operating from 28 offices around the globe. The practice group Energy Natural
Resources & Infrastructure (ENRI) has a long history of acting for companies in the energy sector. Our clients include
oil and gas majors, utility companies, banks, gas and electricity transportation as well as transmission/distribution
companies, power generators and suppliers, contractors and major energy consumers. Our work in the sector covers
the complete supply chain (upstream, midstream and downstream) of crude and refined products, gas and LNG, power
generation and gas and power transportation. It involves mergers and acquisitions, joint ventures and other
transactional work as well as regulatory issues and competition and procurement expertise throughout the energy sector.
Our energy lawyers have extensive experience in “getting the deal done” quickly and commercially.

139
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 Chapter 18
Kazakhstan
Denton Wilde Sapte
1 Overview of Natural Gas Sector
1.1 A brief outline of Kazakhstan’s natural gas sector,
including a general description of: natural gas reserves;
natural gas production including the extent to which
production is associated or non-associated natural gas;
import and export of natural gas, including liquefied
natural gas (LNG) liquefaction and export facilities, and/or
receiving and re-gasification facilities (“LNG facilities”);
natural gas pipeline transportation and
distribution/transmission network; natural gas storage; and
commodity sales and trading.
Kazakhstan has world-class petroleum reserves. It is currently
ranked 12th in the world for recoverable oil and gas reserves. The
estimated gas reserves are currently estimated by the State at 3.3 -
3.7 tcm, of which 2.5 tcm are proven. Gas produced in Kazakhstan
is consumed either locally or is exported mainly to Russia (then
subsequently to Europe) and China. Certain regions of Kazakhstan
import gas from Uzbekistan and Russia in small amounts.
More than 90% of Kazakhstan’s 191 gas fields are located in the
northwest (in the Atyrau, Aktobe, West-Kazakhstan and Magistau
Oblasts). The major oil and gas fields are Tengiz, Kashagan and
Karachaganak.
From 1996 until 2008 approximately 551 mmt of oil, 203 bcm of
gas and 84 mmt of liquefied natural gas (LNG) was produced.
Despite the global economic slowdown, in 2009 Kazakhstan
produced approximately 34.3 bcm of gas and 6 mmt of LNG
(increasing the volume of production by 10% compared to 2008).
The Government plans to increase the volumes of production of gas
up to 47 bcm in 2010 and 60 bcm by 2015.
Kazakhstan’s oil and gas fields are developed by 176 companies
(including 22 joint-ventures and 64 foreign companies).
Approximately 80% of the investments into the oil and gas sector in
Kazakhstan have been made by foreign companies and joint ventures.
In 2008 90% of production volumes of oil and gas were made by 12
companies, including TengizChevroil JV (19.7 mmt of oil and 10.3
bcm of natural gas); Karachaganak Petroleum Operating B.V. (6
mmt of oil and 15 bcm of natural gas); and CNPC-Aktobemunaygas
JSC (5.8 mmt of oil and 2.5 bcm of natural gas).
The Kazakhstan Government is continually developing its gas
infrastructure. For example, there are two processing plants at the
Karachaganak and Zhanazhol fields under construction and a
petroleum gas processing plant was recently completed at the
Kumkol field. The construction of a 152 km Karachaganak - Uralsk
gas pipeline is planned to be completed by September 2010. Also,
the initial stage of a gas pipeline to China has recently been
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Marla Valdez
completed. This pipeline allows Kazakhstan to both export gas to
China and to provide gas to certain regions in Kazakhstan. It is
planned to increase the annual capacity of this pipeline up to 30
bcm of natural gas by 2012.
1.2 To what extent are Kazakhstan’s energy requirements met
using natural gas (including LNG)?
Kazakhstan mostly uses oil, gas and coal along with water to meet
the country’s energy requirements. Natural gas is often used as an
additional source as most of the electro-energy requirements are
met through coal production.
1.3 To what extent are Kazakhstan’s natural gas requirements
met through domestic natural gas production?
Kazakhstan has the capacity, but not the infrastructure, to fully meet
its natural gas requirements through domestic gas production.
Consequently, Kazakhstan purchases gas from Uzbekistan, Russia
and Turkmenistan to meet the requirements of certain regions that
are close to the Kazakhstan borders.
Kazakhstan imports approximately 1.4 bcm from Uzbekistan and
1.2 bcm from Russia to provide gas to the south-eastern and
northern regions of Kazakhstan, respectively.
1.4 To what extent is Kazakhstan’s natural gas production
exported (pipeline or LNG)?
The Government plans on exporting approximately 30 bcm of natural
gas annually to each of Russia and China by gas pipelines by 2015.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The principal legislation for the development of natural gas reserves
consists of the 1995 Petroleum Law and the 1996 Subsurface Law.
The Subsurface Law governs the rights and obligations of
subsurface users to engage in all activities related to the subsurface,
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Denton Wilde Sapte
including hydrocarbons and mining. The Petroleum Law
specifically regulates petroleum operations. Activities covered by
both laws range from exploration and production to transportation
and processing of hydrocarbons to abandonment and reclamation of
subsurface operation areas. A new Subsurface Law is under
consideration, which will combine the main terms and conditions of
the current Subsurface Law and the Petroleum Law.
Under the Kazakhstan Constitution, the subsurface and minerals in
situ are owned by the State. The government is responsible for the
development and implementation of the State’s general policy for
subsurface use. The Ministry of Energy and Mineral Resources of
Kazakhstan (MEMR) is the “Competent Authority” for subsurface
use. It enjoys a comprehensive scope of regulatory functions,
including the right to represent the State in all subsurface use
contracts. As the Competent Authority, MEMR prepares tenders for
granting subsurface use rights; conducts negotiations and signs
contracts, approves work programmes and assignments of rights.
Local authorities (Akimats) are responsible for granting land use
rights and for control and supervision over the use and protection of
the subsurface.
A number of legislation amendments have been adopted over the
past few years to tighten the control of the Government over the use
of the State’s mineral resources. Such initiatives include granting
the government greater authority to require amendments to
contracts, control over transfers of interests in companies holding
direct or indirect subsurface use rights, and elimination of tax
stability for contracts.
Specifically with respect to gas, the government is considering new
legislation to address some of the practical consideration related to
gas flaring. Generally, it is prohibited to conduct industrial
development of hydrocarbon fields without utilisation of natural
and/or associated gas. There are several exceptions, such as flaring
during well testing, trial production, and in emergency situations. It
is expected that the new Subsurface Law contain some new
provisions, such as requirements on mandatory measurement of
flared gas; allowance to conduct unavoidable process-related
flaring at permanent facilities for primary processing of
hydrocarbons; and broadening options for gas utilisation by means
of re-injection for purposes of reservoir management and gas
storage.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
Subsurface use rights are granted based on the results of a tender or
by direct negotiation. Direct negotiations are only possible in
limited cases where a company made a commercial discovery under
an exploration contract, or for blocks designated for the national
company JSC KazMunayGas (KMG). Subsurface use rights are
secured by executing a contract with MEMR. A subsurface use
contract can take the form of a concession contract or a service
contract. Production sharing agreements (PSAs) are no longer
recognised as a form of subsurface contract under the Subsurface
Law, and the law regulating PSAs was repealed in 2009. The Tax
Code however continues to recognise PSAs entered into prior to
2009. Before September 1999, Kazakhstan also had a licensing
regime. Licences that were issued before the abolition of the
licensing regime continue to remain valid.
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Kazakhstan
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
Kazakhstan
Subsurface use contracts can be for exploration, production, or
combined exploration and production (E&P). An exploration
contract allows for any type of exploration activity (seismic, drilling,
appraisal, test production) and may be granted for up to 6 years with
the possibility of two extensions for up to 2 years each. Once a
commercial discovery is made, the subsurface user has the exclusive
right to negotiate a production contract. A production contract grants
rights to develop and produce hydrocarbons from the contract area.
A production contract may be granted for up to 25 years, or up to 45
years for deposits with recoverable reserves of more than 100 NMT
of crude oil and/or 100 bcm of natural gas. An E&P contract may be
obtained for periods covering the exploration and production
periods. It is anticipated that under the new Subsurface Law (i) E&P
contracts will not be allowed, (ii) exploration contracts will for a 6
year term without any rights to extend, except for appraisal of a
discovery, and (iii) the term for production contracts will be
determined based upon agreed production rates and the volumes of
recoverable reserves. In each case, the contractor is required to meet
specific financial and work programme obligations, to invest in the
local communities, to create a liquidation fund, to use local products
and services and to hire and train local personnel.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
Government Resolution no. 708 dated 29 June 2002 authorises
KMG to represent the State's interests in petroleum contracts
through a mandatory share, which shall not be less than 50%, unless
otherwise provided for by Government resolution or international
agreement.
KMG’s subsidiary, KazMunayTeniz, is responsible for offshore
development and operations. Resolution 708 provides that KMG
will appoint the operator for each PSA in which KMG (or its
subsidiary) has an obligatory share, subject to the approval of
MEMR. The Petroleum Law provides that KMG shall own a
minimum of 50% of the charter capital of the operator at the time
of the creation of the operator.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
The State derives value from natural gas development both through
receiving a share of production and taxes and other obligatory
payments to the budget. A new Tax Code was adopted in 2009,
which requires subsurface users to pay: (i) a signature bonus; (ii) a
commercial discovery bonus; (iii) payment for reimbursement of
historical costs; (iv) mineral production tax; (v) excess profits tax;
and (vi) rent tax on exports, as well as other general taxes, such as
corporate income tax and VAT.
2.6 Are there any restrictions on the export of production?
There are no direct restrictions on the export of produced natural
gas. According to a 2000 Government Resolution, MEMR is
required to include provisions in hydrocarbon contracts requiring
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 Denton Wilde Sapte
contractors to supply oil to domestic oil refineries. In addition, the
Petroleum Products Law of 2003, gives the Government the right to
regulate the supply of oil (including natural gas) and/or condensate
in the domestic market. This right, together with the authority
given to the Government under the Petroleum Law to establish
Kazakhstan
export quotas for crude oil, provides the basis for the Government
to ensure the supply of crude oil to local refineries.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
There are no significant restrictions on the repatriation of the capital
and distribution of earnings from production out of Kazakhstan.
Based on recent amendments to currency regulation law the
President of Kazakhstan has the right to establish a special currency
regime if there is a threat to the economic safety and stability of the
financial system of Kazakhstan. During the special currency
regime, various restrictions may be imposed on parties involved in
currency operations.
Export transactions need to be registered with or notified to the
national bank, depending on the value of the transaction.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
Any transfer or disposal of subsurface use rights or shares in an entity
holding subsurface use rights requires MEMR’s consent. Any transfer
of subsurface use rights without MEMR’s consent shall be invalid.
The law also imposes a two year moratorium on the transfer of a
subsurface use right after the date of its signing, except mainly for
enforcement on pledges, and transfers by KMG or its subsidiaries.
In addition, the transfer of subsurface use right is subject to the
State’s waiver of its priority right to purchase. The State has a
priority right to purchase any subsurface use right or any direct or
indirect interest in (or right to exert influence on) a subsurface user
that is being alienated. The only exception is for companies whose
main assets are not located in Kazakhstan. The priority right to
purchase must be on terms no worse than those proposed by other
buyers. If a transaction occurs without first obtaining the State’s
waiver, MEMR may unilaterally terminate the underlying
subsurface use contract.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
There is no specific requirement in Kazakhstan law requiring
security or guarantees for natural gas development. MEMR,
however, has the right to request such security or guarantees.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Subsurface users are permitted to pledge their subsurface use rights
only in order to obtain additional funds for carrying out subsurface
use operations. Any pledge over the subsurface use rights requires
MEMR’s consent.
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Kazakhstan
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Negotiations for subsurface contracts are carried out by a working
group of MEMR, with the obligatory participation of representatives
of the interested ministries and agencies. The contract is also subject
to obligatory examination by the Ministry of Finance, the Ministry of
Economy and Budget Planning, and the Ministry of Justice. In
addition, the draft contract must be approved by the Ministry of
Environmental Protection, the Geology Committee of MEMR, the
Ministry of Health and the Ministry on Emergency Situations.
Rights to conduct petroleum operations are subject to obtaining
‘operational’ licences, permits, and other authorisations (licences),
including for the use of certain equipment or materials. Some of
these licences may be held by third party service providers, such as
drilling companies. The legislation also requires various
environmental, safety, sanitary, and other types of permits/
authorisations in order to be able to perform specific
operations/actions/activities.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
The Subsurface Law, the Petroleum Law, the Environmental Code,
and a specific government resolution 53 contain provisions relating
to the abandonment and decommissioning of wells and other
facilities used during subsurface use operations.
Subsurface users are required to create an abandonment (liquidation)
fund, which amounts are established by contract. Money in the
abandonment fund may be used only with MEMR’s permit and the
approval of the territorial department of the Geology Committee.
Upon termination of operations, the facilities must be promptly
abandoned or decommissioned, based on approved programmes.
The contract area must also be restored to a condition which is safe
for public health, lives and the environment, in accordance with
approved programmes.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Natural gas may be freely exported, subject to certain limitations
discussed in question 2.6. Kazakhstan has strict transfer pricing
legislation. Both gas export sales and domestic markets sales
directly relating to international transactions, fall under the purview
of the transfer pricing legislation, regardless of whether the
transaction is between related parties. If the authorities discover a
deviation from an acceptable market price range, they have the right
to adjust the tax base accordingly.
Under the tax code, gas exports are subject to a rent tax. Rent tax
on exports is set at a rate ranging from 0% to 32%, depending on
the market price for gas, without taking into consideration
transportation costs or other deductions. In addition, export
transactions must be registered with or notified to the National
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Denton Wilde Sapte
Bank. Currently customs export duties are assessed at a zero rate.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Kazakhstan has a traditional gas infrastructure, which includes
pipelines, underground gas storage facilities, and compressor
stations. Currently Kazakhstan is considering construction of
modern high-technology gas processing facilities.
Gas pipelines in Kazakhstan are classified into main pipelines and
gas distribution pipelines. Both types of pipelines are regulated by
the monopoly legislation.
KazTransGas, a wholly-owned subsidiary of KMG, is the main
transport company, which owns and operates a majority of the gas
pipelines in Kazakhstan. KazTransGas is a registered natural
monopoly.
Tariffs for gas pipelines are established by the pipeline operator, but
must be approved by the Natural Monopolies Agency (NMA) and
MEMR. Gas pipelines are required to be open access. NMA also
regulates the monopoly’s costs and rate of return. Natural
monopolies are prohibited from rendering services or conducting
other activities that do not fall within the scope prescribed for the
natural monopoly. Pipelines built by a company exclusively for its
own use are permitted and are exempt from the natural monopoly
regulation. The CPC Pipeline (cross-border pipeline) is also an
exception to this regulation by virtue of special decrees of the
Russian and Kazakhstan governments.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The legislation on licensing is complex and comprehensive.
Licences are required for the design, construction and operations of
natural gas transportation pipelines, gas processing plants and
underground gas storage and other facilities. Such licences are
issued by MEMR, NMA and local (oblast) executive bodies.
Any pipeline or infrastructure project will also require a host of
other licences, authorisations and approvals, including from the
Ministry of Environmental Protection, the sanitary-and-
epidemiological service bodies, and the industrial safety bodies.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access
Generally, land required for the construction of gas pipelines or
associated facilities are either purchased or leased. State-owned land
may be purchased under an act of a local executive authority or under
a written agreement. Land plots may be leased from the State for a
short-term (up to 5 years) or a long-term (from 5 to 49 years).
Land rights may also be obtained by virtue of an easement. An
easement can be obtained for the term agreed by the parties. The
State, acting through local authorities, has the right to acquire land
required by pipelines and associate infrastructure by eminent domain.
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4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Access to a natural gas pipeline is determined by the rules discussed
in question 4.6 below.
Kazakhstan
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
Most of the gas pipelines in Kazakhstan were constructed during
the Soviet area and operate as a single, integrated system. There are
no special laws regulating the relations between different
transportation systems although, with limited exceptions, all main
gas pipelines are regulated by the NMA.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Kazakhstan’s legislation is based on the principle of equal rights to
regulated transportation and associated infrastructure. Access to
pipelines and associated infrastructure is governed by the rules
adopted by the Natural Monopoly Agency (NMA) on granting
equal conditions for access to regulated services (goods, work) in
the sphere of gas or gas condensate storage and transportation
through main and/or distribution pipelines, and operation of gas-
distribution units and associated gas-distribution pipelines.
A request for access to regulated services on transporting gas or gas
condensate through pipelines must be accepted by the operator of the
gas-transportation system on equal terms, regardless of the requested
volumes or other terms of the use of the regulated services.
If there is insufficient capacity, priority access to such regulated
services is given to those customers who supply gas or gas
condensate to:
1) domestic consumers;
2) utility facilities;
3) customers using gas or gas condensate as raw material or fuel
for the manufacture of products with a continuous work
cycle; and
4) power plants and industrial enterprises, the gas supply to
which during spring/winter period is to be regulated by a
partial or full transit to the reserve types of fuel in a manner
established by law.
Similar rules are in effect for the storage of gas and in the area of
operation of gas-distribution plants and associated gas-distribution
pipelines.
When the customer has its own gas infrastructure, the operator must
provide such user with information on technical conditions required
to connect such user’s infrastructure to the trunk pipeline.
Shippers or state bodies are not entitled to require owners of pipelines
and associated infrastructure to expand production facilities. Even if
the shipper and pipeline owner agree on the expansion of production
facilities on a contractual basis, gas transportation will be conducted
at fixed tariffs and under general access rules as set out above.
Exception is for state-approved investment projects that allows for
special preferential investment tariffs.
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4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Parties to an agreement are not free to determine the price and other
terms for transportation of natural gas. Tariffs are approved on an
Kazakhstan
annual basis, based upon approved rates of recovery by the
operator. In entering into agreements, the pipeline operator is
obliged to follow a model agreement and the access rules.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
Most transportation systems in Kazakhstan are state-owned.
Transportation and sale of gas is regulated by the Rules of Supply,
Transportation and Sale of Natural Gas approved by a 2003
Government Decree. Gas supplies are carried out on the basis of
gas supply agreements, concluded between the supplier and the
consumer. The conditions for the transmission of natural gas must
be in compliance with a government-approved model agreement.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
In order to operate a distribution network a licence must be obtained
by MEMR. To obtain a licence, certain qualification requirements
must be met, which include obtaining permits from different
governmental authorities (see question 4.2). Depending on the
type, permits are issued by the Ministry of Emergency Situations,
the Ministry of Environment, the fire service, the sanitary-and-
epidemiological service, and others.
5.3 How is access to the natural gas distribution network
organised?
Access of a gas supplier to the natural gas distribution network is
governed under the rules discussed in question 4.6 above.
Access of a consumer to the natural gas distribution network is
governed by the Law on Natural Monopolies and the Supply Rules
discussed in question 5.1 above.
In both cases, access to the lines is made based on a model
agreement. The price for gas transportation and the price at which
gas is supplied to customers are determined by tariffs approved by
the NMA.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
The regulator may require the pipeline operator to provide access to
a third-party shipper if there is spare capacity of the pipeline.
However, if there is no spare capacity, the regulator cannot require
the distributor to expand its transportation system in order to
accommodate the needs of customer. If there is insufficient
capacity, the pipeline operator must give priority as provided in
question 4.6.
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Kazakhstan
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
A gas shipper is not required to pay for access (pipeline connection)
to the pipeline. The gas supplier only pays for gas storage services,
transportation and other associated services. Due to the fact that
this activity is classified as a natural monopoly, prices are
established by the NMA.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
Gas utilities are considered natural monopolies. Consequently, the
acquisition of more than 10% of the voting shares/interests in a gas
utility company will require notification to the NMA. The transfer
of assets owned by the gas utility will require NMA’s consent if the
transfer of assets meets specified thresholds under the NML. The
sale of assets may need to be conducted by a tender.
The acquisition of an interest in a gas utility and the transfer of
assets forming part of the distribution network may also require
approval from the Government and the waiver from the State of its
priority right for the transfer, if the company’s assets are considered
to be strategic assets. If the transfer results in an economic
concentration as defined under the Competition Law, antimonopoly
consent may also be required.
Thirteen main gas pipelines owned by state-owned companies and
2 sections of a main gas pipeline (Zhanazhol-Aktobe) owned by a
private company are recognised as strategic objects.
Under Kazakhstan legislation, “a strategic object” is defined as
property having social-and-economic significance for the
sustainable development of the Kazakhstan society the possession
and/or use, and/or disposition of which would influence the national
security interests of the country. Strategic objects are defined
broadly and may include main gas pipelines as well as interest in
companies that own strategic objects.
Transactions involving strategic objects are made on the basis of
special rules. Strategic objects may be encumbered or alienated
only on the basis of a decision of the Government. If a strategic
object is privately owned, the Government and the national
management holding company have a priority right to buy the
strategic object at its market value. Any transaction in violation of
this requirement shall be invalid.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Gas trading is regulated by the Transfer Pricing Law, the NML and
supply rules as described in questions 3.1 and 5.1.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
The range of gas commodities that can be traded in Kazakhstan
includes natural gas, liquefied natural gas, natural gas condensate
and compressed natural gas. There is no requirement for trading of
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Denton Wilde Sapte
only bundled gas products.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
There are no specific laws regulating LNG facilities. LNG facilities
have the same ownership, organisational and regulatory framework
as a pipeline and its infrastructure (please see question 4.1).
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
See response to question 7.1.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
See question 7.1.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The two main agencies charged with the regulation and
enforcement of the legislation covering unfair competition,
monopolies and other anti-trust issues are the Natural Monopoly
Agency (NMA) and the Agency for the Protection of Competition,
frequently referred to as the Antimonopoly Agency or AMA.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The NML contains a list of activities that are automatically
considered to be natural monopolies, among which are storage and
transportation of gas or gas condensate by pipelines. All activities
of a natural monopoly are subject to the natural monopoly
regulations.
The Competition Law establishes limits for the following types of the
monopolistic activities: (i) anticompetitive agreements of market
entities (e.g., agreements on establishing and/or sustaining
coordinated prices, or other conditions of purchase of selling of
goods; agreements on division of commodity markets on a territorial
basis, by assortment of goods, by circle of sellers or buyers, or other
parameters); (ii) anticompetitive concurrent actions of the market
entities (e.g., actions with respect to unreasonable restriction of
manufacture or sales of goods, including establishing quotas or
unreasonable refusal from conclusion of agreements with certain
sellers or buyers); and (iii) abuse of a predominant or monopoly
status (e.g., establishing or sustaining monopoly high (low) prices or
application of different prices, or different conditions to similar
agreements with entities without reasonably justifiable causes).
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The NMA has enforcement powers over natural monopolies. The
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Kazakhstan
NMA, inter alia, has the power to require amendments to executed
contracts, to reorganise or liquidate natural monopolies, to bring
court actions against violators of the NML and to review
administrative law cases related to violation of legislation in the
sphere of natural monopolies.
Kazakhstan
Under the Competition Law, the AMA is authorised, inter alia, to
introduce obligatory injunctions on restraint or elimination of
violations, to seek termination of certain contracts that are not in
compliance with the competition legislation, to review cases on
administrative violations in the sphere of protection of competition,
and to bring court actions against violators of the competition
legislation.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
Both the AMA and the NMA have power to approve mergers or
other changes in control over businesses in the natural gas sector, or
proposed acquisitions of development assets, transportation or
associated infrastructure or distribution assets.
The NMA’s notification is required for the acquisition of more than
10% of the participating interests/shares in entities that are classified
as natural monopolies. The detailed procedure for filing an
application with the list of required documents are provided in the
NML and the subordinate regulations. In general it takes a few
months to complete the procedure.
The AMA’s consent is generally required for any transaction
resulting in an “economic concentration” which includes the
reorganisation of a market entity by merger or acquisition;
acquisition of shares amounting to 25% or more in a market entity;
acquisition of the main production assets/ intangible assets of
another market entity where the balance sheet value of the assets
exceeds 10% of the balance sheet value of the main production
assets and intangible assets of the market entity that is
selling/transferring the assets; and participation of the same
individuals in the executive bodies of two or more market entities.
The detailed procedure for filing the application and list of
supporting documents are provided in the Competition Law and
subsequent regulations. In general, it takes a few months to obtain
such consent.
At least 2 months before the sale or transfer of the respective
shares/interests, the buyer should apply for AMA approval.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
No. There are no requirements or limitations on acquisitions of
interests in the natural gas sector by foreign companies.
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9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
According to the Kazakhstan Constitution, international agreements
have priority over the laws of the Republic of Kazakhstan. Bilateral
Kazakhstan
Investment Treaties (BITs) provide investment protection to foreign
investors covered by such BIT. A typical BIT would include
provisions about compensation for expropriation, repatriation of
profits, dispute settlement procedures (usually through a neutral
forum), national treatment requirements, “most favoured nation”
requirements, and the free transfer of assets. Most of these treaties
create more favourable rights than those provided for by domestic
law, especially as to what constitutes an “investment” or “investor”,
as well as dispute resolution and expropriation.
Kazakhstan’s regulatory policy in respect to the natural gas sector is
influenced by obligations undertaken by Kazakhstan pursuant to
international agreements with CIS countries and China.
Kazakhstan is also a member of the Energy Charter Treaty, it has
“observer” status with the World Trade Organisation (to which it
has applied for full membership) and it has ratified the Kyoto
Protocol, which includes the Framework Convention of the United
Nations on Climate Change.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Generally, parties to a dispute are entitled to choose state courts or
arbitration for resolution of their disputes. International arbitration
is available for disputes involving foreign investors.
10.2 Is Kazakhstan a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Kazakhstan is a signatory to the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards and
ICSID. Kazakhstan Parliament ratified ICSID in 2004.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
The Kazakhstan judicial system is not fully independent. As such
the courts, and especially the regional courts, are generally reluctant
to issue rulings against state and local authorities.
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Kazakhstan
Awards by Kazakhstan courts and local arbitration courts are
enforceable; however, decisions by local arbitration courts are not
considered final and may be appealed to the local courts
Kazakhstan is not a party to any multilateral or bilateral treaties for
the mutual enforcement of court judgments, except for those
entered into within the CIS. As such, judgments by foreign courts
outside the CIS are not likely to be given direct effect in Kazakhstan
courts. As a signatory to the NY Convention, however,
international arbitration awards are enforceable.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
Foreign companies involved in the oil and gas industry have
successfully obtained judgments and awards against the state
authorities before domestic courts. For example, foreign companies
have been successful in disputes involving taxes, payment of duties,
claims against imposed fines and other issues concerning
implementation of subsurface use contracts.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Kazakhstan.
Gas regulation in Kazakhstan is evolving. While wishing to remain
competitive, Kazakhstan is tightening its control over the oil and
gas industry. This is evidenced by a number of new laws, including
the 2009 Tax Code, which was designed to shift a greater tax burden
to the mineral industry in order to support the development of other
gas industries. Tax stabilisation was also eliminated, with limited
exceptions.
As discussed in section 2, a new Subsurface Law is being prepared.
The main purpose of the new law is to consolidate the existing
Subsurface and Petroleum Laws. However, it is expected that this
law will include provisions giving the State greater control over the
industry. Proposed changes include elimination of a combined
exploration and production contracts, as well as introduction of
shorter exploration periods. International arbitration may also be
eliminated as a forum for resolving disputes with the Government.
A key focus of the Government is local content. In continuing
efforts to support local industries, especially oil and gas services,
the legislation places strict requirements with respect to the
procurement of local goods, works and services (GWS), including
requirements with respect to procurement procedures, mandatory
purchasing of local GWS and mandatory hiring and training of
Kazakhstan personnel. In an effort to support the financial sector,
there is a discussion about adopting a law requiring subsurface use
companies to keep a portion of their revenues in local banks.
Kazakhstan has legitimate reasons for passing legislation to support
its population and national interests. Balancing support of its
citizens and keeping Kazakhstan competitive for inward
investments will be a crucial challenge for the future.
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Denton Wilde Sapte Kazakhstan

Marla Valdez
Denton Wilde Sapte Kazakhstan Limited
Ken Dala Business Centre, 8th Floor
38 Dostyk Avenue, Almaty, 050010
Republic of Kazakhstan

Kazakhstan
Tel: +7 727 258 1950
Fax: +7 727 258 1905
Email: marla.valdez@dentonwildesapte.com
URL: www.dentonwildesapte.com

Marla is the Managing Partner and founder of Denton Wilde Sapte’s

Central Asia Practice. Marla is recognised as an oil and gas
specialist. For the past several years, she has been named in both
the Oil & Gas and Mining sections of Who’s Who Legal and has been
identified as a top energy expert by Expert Guides to the World’s
Leading Lawyers - Best of the Best 2008. Chambers Global
regularly recognises her as “one of the Kazakhstan’s leading energy
and natural resources lawyers”.

Denton Wilde Sapte is an international law firm with 60 years of experience and a worldwide reputation in energy and
infrastructure. Denton Wilde Sapte has over 15 years’ experience in Central Asia. In Kazakhstan Denton Wilde Sapte’s
energy practice is regularly recognised as a leader in the field. Chambers Global legal directory appraised the firm as:
“an especially strong and dominant player in energy work”.

147
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 Chapter 19
Malaysia
Azmi & Associates
1 Overview of Natural Gas Sector
1.1 A brief outline of Malaysia’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; importation and
exportation of natural gas, including liquefied natural gas
(LNG) liquefaction and export facilities, and/or receiving
and re-gasification facilities (“LNG facilities”); natural gas
pipeline transportation and distribution/transmission
network; natural gas storage; and commodity sales and
trading.
Malaysia is a country located in Southeast Asia that consists of
thirteen states and three Federal Territories with a total landmass of
329,847 square kilometres (127,355 square miles). The Federal
Government manages the country from Putrajaya, a territory not far
from the capital of Kuala Lumpur. With the support of its policies
to reduce dependence on oil and maintaining a cleaner
environment, the Malaysian gas industry has grown significantly to
meet our national energy objectives as well as the needs of the
Malaysian economy as a whole. Without the government’s careful
planning to facilitate the timely development of the country’s gas
resources, we would not have achieved such a level of success.
The Company
Petroliam Nasional Berhad (“Petronas”), a company limited by
shares wholly-owned by the Federal Government, is the most
dominant company in the Malaysian oil and gas industry having a
monopoly on every upstream natural gas developments, and has a
major role in downstream developments and trading of liquefied
natural gas (“LNG”).
Reserves
Malaysia is blessed with a significant amount of natural gas
reserves, which is three times the size of our oil reserves. Having
the 14th largest gas reserves in the world as of 2009, most of our
reserves are located offshore in the Peninsular (39%), Sarawak
(43%), Sabah (8%), and the Malaysia-Thailand Joint Development
Area (10%). Malaysia has an amount of 2.4 trillion cubic metres of
proven natural gas resources according to the Malaysian Gas
Association (2.35 trillion cubic metres (1 January 2009 est.)
according to Central Intelligence Agency - The World Factbook;
and 83.0 trillion cubic feet (Tcf) of proven natural gas reserves as of
January 2009 according to Oil & Gas Journal), distributed almost
equally within Peninsular Malaysia in the east and between Sabah
and Sarawak in the west. At the current rate of production,
assuming there are no more new reserves to be found, Malaysia
expects its gas reserves to last for another 34 years.
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Mohd Rasheed Khan
Azmi Mohd Ali
Production
In 2008, Malaysia produced 57.3 billion cubic metres of natural
gas. Some of the major gas fields in Malaysia are Bedong, Bintang,
Damar, Jerneh, Laho, Lawit, Noring, Pilong, Resak, Teloka and
Tujoh. The major ports involved with oil and gas are Kerteh, Johor,
Sepangar Bay, Bintulu, Kuching and Miri.
In West Malaysia, five gas fields, four in the north of the Malay
basin and one (Duyong) in the south east, produce through pipelines
to Kerteh where the Peninsula Malaysia’s gas processing facilities
and the Terengganu oil terminal are located. Gas exploitation is
proceeding in the Malaysia-Thailand Joint Development Area
(JDA), located in the lower part of the Gulf of Thailand and
governed by the Malaysia-Thailand Joint Authority (MTJA). The
JDA covers blocks A-18, B-17 and C-19. The Petroleum Authority
of Thailand and Petronas agreed in 1999 to build a gas pipeline
from the JDA to a processing plant in Songkla, Thailand, and a
pipeline linking to the Thai and Malaysian gas grids.
Another recent project in the oil and gas industry is the joint venture
between Shell - Petronas Carigali - Conoco Phillips that has made
its fourth discovery of oil and gas with their recent Pisagan - 1A
exploration well in Deepwater Block G in waters offshore,
northwest of Sabah. Furthermore, Exxon Mobil Exploration and
Production Malaysia Inc have installed the Guntong E gas
compression platform in the South China Sea. Exxon Mobil also
produces about 335 million cubic feet per day (Mmcf/d) at its
offshore Bintang natural gas field in the South China Sea, which
contains about 1 Tcf of proven reserves. Commercial production at
Bintang began in February 2003.
Malaysia LNG
Malaysia has expanded its Bintulu LNG complex in Sarawak,
constructing the Malaysia LNG Tiga (3), essentially the third
facility with two trains having a total capacity of 7.6 million tonnes
of LNG annually, requiring 10.5 billion cubic metres per year of
gas. Natural gas is supplied to the plants from the gas fields in the
Central Luconia area located between 125km and 275 km offshore
Bintulu, Sarawak. Covering an area of about 223 hectares, the LNG
complex is located north of Tanjung Kidurong, about 20km from
Bintulu town. Completed in April 2003, Bintulu is the largest LNG
plant in the world, with a total capacity of 23 million tonnes per
year (requiring 32 billion cubic metres of gas). Natural gas
resources found onshore in Sarawak are harnessed to produce LNG
to be exported overseas.
Exports and Imports
Malaysia is one of the major net exporters of natural gas, mainly in
the form of LNG. Malaysia accounted for approximately 13% of
total world LNG exports in 2007. We supply most of our LNG to
Japan, South Korea, and Taiwan.
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Azmi & Associates
LNG is primarily transported by Malaysia International Shipping
Corporation, which owns and operates twenty-three LNG tankers, the
single largest LNG tanker fleet in the world by volume of LNG
carried. Most of the production from the new LNG trains will be sold
under term contracts to utility companies in Japan. Tokyo Electric
Power, Tokyo Gas, and Chubu Electric all import LNG from the
Bintulu LNG Complex. British Gas signed a contract in August 2004
for supplies over a 15-year period to the United Kingdom, which
began sometime between 2007 and 2008. Shell brought two
additional fields online in 2004, Jintan in March, and Serai in
September, both of which feed into the Bintulu export terminal. The
two fields added over 1 Mmcf/d to Malaysia’s gas production.
In addition to LNG, Malaysia exports 150 Mmcf/d to Singapore via
pipeline for the consumption of the electricity generator in
Singapore. Surprisingly, Malaysia also is an importer of gas from
Indonesia. Petronas signed an agreement in April 2001 with
Indonesia state oil and gas company Pertamina for the import of gas
from Conoco’s West Natuna offshore field in Indonesian waters.
The move is being seen as part of a Malaysian strategy to become a
hub for Southeast Asian natural gas integration. Deliveries from the
pipeline commenced in mid-2003. The pipeline connects to an
existing pipeline from the shore to Malaysia’s offshore Duyong
field, helped to minimise construction costs.
Pipelines
Malaysia has one of the most extensive natural gas pipeline
networks in Asia, owing to the multi-phased Peninsular Gas
Utilization (PGU) project that was completed in 1998. The goal of
the PGU was to expand natural gas transmission infrastructure on
Peninsular Malaysia. The PGU system spans more than 880 miles
and has the capacity to transport 2 billion cubic feet per day of
natural gas. Not only has the PGU initiative helped boost domestic
natural gas consumption, it has also helped expand regional natural
gas trade. Malaysia already trades small amounts of piped natural
gas with Singapore and Indonesia; and Petronas reports that, in
2006, construction was completed on the Trans-Thailand-Malaysia
Gas Pipeline System, which allows Malaysia to pipe natural gas
from the Malaysia-Thailand JDA to its domestic pipeline system.
This linkage marks a significant step toward the realization of the
proposed “Trans-ASEAN Gas Pipeline” (TAGP) system, which
envisions the establishment of a transnational pipeline network
linking the major natural gas producers and consumers in Southeast
Asia. On account of Malaysia’s extensive natural gas infrastructure
and its location, the country is a natural candidate to serve as a hub
in the proposed TAGP project.
1.2 To what extent are Malaysia’s energy requirements met
using natural gas (including LNG)?
Natural gas is a commodity with a significant contribution in creating
energy for Malaysia. Natural gas is mainly utilised for the generation
of electricity by Tenaga National Berhad in Peninsular Malaysia,
Sarawak Electricity Company, Public Works Department Sarawak and
in the Malaysian petrochemical industry. Compressed Natural Gas is
famous in Malaysia for its use in Natural Gas Vehicles or many other
activities in commerce and industry. The total annual energy
consumption in Malaysia as of 2004 is estimated to be 2.5 quadrillion
British Thermal Unit (Btu), which is met by the use of natural gas
(49%), oil (41%), coal (8%), Hydroelectric (2%), Nuclear (0%) and
minimal contribution from other renewable sources (0%).
1.3 To what extent are Malaysia’s natural gas requirements
met through domestic natural gas production?
Based on an estimate in 2007 by Energy Information
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Malaysia
Administration in the United States, Malaysia’s capacity to produce
its own natural gas will satisfy nearly twice the size of its energy
requirement. The nation produces 2.3 Tcf while consuming only
1.2 Tcf annually. However, it is also estimated that production will
reach its peak by the year 2020, leaving a potential decrease in the
surplus for exports as a result of increase in population. Since it is
Malaysia
a world producer, Malaysia imports only minimal amount of natural
gas from Indonesia. In 2001, Petronas signed an agreement with
Pertamina, for the import of 1.5 trillion standard cubic feet of gas
over a period of 20 years.
1.4 To what extent is Malaysia’s natural gas production
exported (pipeline or LNG)?
Malaysia accounted for approximately 13% of total world LNG
exports in 2007. As per estimation in 2005, Malaysia exports almost
half of its total production (1.03 billion cubic feet) of LNG to countries
such as Japan (62%), South Korea (22%), Taiwan (14%), the United
States (1%) and Spain (1%). Malaysia also exports small amounts of
piped natural gas to its neighbouring country, Singapore.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The Government has enacted two main acts to promote and regulate
the development of oil and gas industry in Malaysia; namely: (a)
Petroleum Development Act, 1974, and (b) Gas Supply Act, 1993.
Petroleum Development Act, 1974
The Petroleum Development Act, 1974 came into force on 1
October 1974. The purpose of the Petroleum Development Act,
1974 is to regulate the petroleum and petrochemical industries. The
power to regulate all activities in the upstream petroleum sector is
vested in Petronas. It comes under the direct purview of the Prime
Minister and is responsible for its planning, investment and
regulation of all up-stream activities.
Petroleum shall include “any mineral oil or relative hydrocarbon
and natural gas existing in its natural condition and casinghead
petroleum spirit including bituminous shales and other stratified
deposits from which oil can be extracted.”
The Petroleum Regulations 1974, which were amended on 14
January 1991, vested powers to the Ministry of Domestic Trade and
Consumer Affairs (MDTCA) and the Ministry of International
Trade and Industry (MITI) to regulate all activities in the
downstream sector of the petroleum industry.
MDTCA have been given the powers to issue licences for the
marketing and the distribution of petroleum and petrochemical
products. MDTCA is in charge of the rules and regulation for:
a) commencement or continuation of any business of
processing or refining of petroleum or manufacturing of
petrochemical products from petroleum;
b) commencement or continuation of any business of marketing
or distributing of petroleum or petrochemical products; and
c) prices of certain petroleum products such as petrol and
diesel.
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MITI has been vested with the powers to issue licences for the
processing and refining of petroleum, as well as the manufacture of
petrochemical products.
Gas Supply Act, 1993
The Gas Supply Act, 1993 was gazetted on 4 February 1993 to
safeguard the interests of consumers supplied with gas through
Malaysia
pipelines and from storage tanks or cylinders specifically used for
reticulation of gas. Gas was reticulated to commercial and
industrial outlets as well as residential consumers.
The Gas Supply Act, 1993 came into effect simultaneously with the
gazetting of the Gas Supply Regulations 1997 on 17 July 1997. The
Gas Supply Regulations 1997 include procedures for the issuance
of a licence to supply, installation of gas pipelines, inspection, tests
and maintenance of gas installations as well as the certification and
registration of competent persons to undertake the relevant work in
such a manner as to ensure public safety.
With the gazetting of the Gas Supply Act, 1993, the relevant
sections in the Petroleum Development Act, 1974, pertaining to the
gas reticulation process, have also been amended to prevent
duplications between the two Acts. This is to ensure that all gas
reticulation and related transmission and supply activities will be
conducted in accordance with the Gas Supply Regulations 1997.
The Gas Supply Act, 1993 was amended in September 2001, and
the Energy Commission was established to replace the Department
of the Electricity and Gas Supply. The Energy Commission, among
others, is responsible for the gas reticulation industry.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
Subsequent to the passing of the Petroleum Development Act, 1974,
there is no system of concession anymore. Through the Petroleum
Development Act, 1974, The Federal Government vested all
petroleum resource of Malaysia to Petronas. All petroleum
companies wanting to acquire such rights to explore, and develop
the resources must sign a Production Sharing Agreement with
Petronas. Petronas is also responsible for its planning, investment
and regulation of all up-stream activities. Licences will have to be
obtained from the relevant Government Bodies such as MITI,
Ministry of Domestic Trade (MDT) or even directly from Petronas.
All other activities in the downstream industry (including
production and exploration) shall require approval from MDT.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration or production
arrangements), please specify those authorisations and
briefly summarise the most important (standard) terms
(such as term/duration, scope of rights, expenditure
obligations).
Most of the upstream industries are regulated by Petronas. MITI is
responsible for the issuance of licences for the processing and
refining of petroleum and the manufacture of petrochemical
products, whilst MDT issue licences for the marketing and
distribution of petroleum products.
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2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
The development of natural gas reserves is solely given to Petronas
(“the Corporation”) as a matter of law based on Section 2 of the
Petroleum Development Act, 1974:
“(1) The entire ownership in, and the exclusive rights, powers,
liberties and privileges of exploring, exploiting, winning and
obtaining petroleum whether onshore or offshore of Malaysia shall
be vested in a Corporation to be incorporated under the Companies
Act 1965 or under the law relating to incorporation of companies.”
And
“(3) The ownership and the exclusive rights, powers, liberties and
privileges so vested shall be irrevocable and shall ensure for the
benefit of the Corporation and its successor.”
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
Section 4 of the Petroleum Development Act, 1974 states that “In
return for the ownership and the rights, powers, liberties and
privileges vested in it by virtue of this Act, the Corporation shall
make to the Government of the Federation and the Government of
any relevant State such cash payment as may be agreed between the
parties concerned”.
The Malaysian Government collects royalties from Petronas and the
(production sharing) contractor, of which 5% of total gross
production are passed to the State Governments and another 5% of
total gross production retained by the Federal Government; 30%
shall cover the cost of production of the contractor, while the
remainder (60%) shall be split equally as profits to Petronas and the
contractors. In March 2009, Petronas through its operations as a
whole, contributed RM67.8 billion in taxes, royalties and dividends
to the Federal Government, which worked out to be 44.9% of the
Federal Government’s revenue. In view of the sharp fall in oil price
in 2009, the said contribution from Petronas to the Federal
Government will be considerably lower in 2010.
With regards to income tax, all the following are subject to
petroleum income tax: (a) Petronas; (b) MTJA; or c) any other
person carrying on petroleum operations under a production sharing
contract entered into with either Petronas or MTJA.
In addition, the Petroleum (Income Tax) Act 1967 was amended in
1976 to bring the structure in line with the production sharing
contracts signed between Petronas and the various oil companies.
Effective from the year of assessment 1998, income tax on the
petroleum industry was reduced from 40% to 38% while the export
duty for crude oil and condensate was reduced from 20% to 10%
with effect from 1 January 1998.
In March 2009, Petronas said that payments up to date to the
Federal Government comprised (a) royalty: RM6.2 billion; (b)
dividends: RM30.0 billion; (c) taxes: RM29.4 billion; and (d)
export duties: RM2.2 billion.
2.6 Are there any restrictions on the export of production?
Generally, there are none except for export duties. Almost half of
our production in excess of national consumption is exported.
Since the price of natural gas in Malaysia is under subsidy, more
exports will mean more revenue to Petronas and the Malaysian
Government as well as the production sharing contractors.
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2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
No there are not.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
As for Petronas, Section 2(3) of the Petroleum Development Act,
1974 states that “The ownership and the exclusive rights, powers,
liberties and privileges so vested shall be irrevocable and shall
ensure for the benefit of the Corporation (Petronas) and its
successor.” It may not be disposed of to any person without
restraint, since sale of gas by Petronas and the production sharing
contractor is usually done on a joint-dedicated basis through long-
term contracts. Disposal of such rights are subject to the buyer and
off taker of gas being identified. Any such transfer or disposal shall
require the approval of Petronas which participates in the sale
process as co-seller.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
Petronas, in approving natural gas development, will impose
minimum expenditure requirements which have to be guaranteed by
the relevant company undertaking the said development.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
It can be pledged with the consent of Petronas.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
There may be authorisations or approval of equipment required
from the Ministry of Natural Resources and Environment. There
are some legislation and guidelines that must be followed, such as
the Occupational Safety and Health Act 1994, Petroleum (Safety
Measures) Act 1984 and Environmental Quality Act 1974.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
Currently, there is no specific Malaysian law in respect of such
abandonment or decommissioning of physical structures used in
natural gas development. Technically, such physical structures are
owned by Petronas under the Production Sharing Contracts (“PSC”)
entered into between Petronas and the PSC Contractors. The PSCs
contain provisions for abandonment work programme in the
respective areas of operations of the PSC Contractors. The PSC
Contractors are required to make a payment known as
Abandonment Cess to Petronas which will be used by Petronas to
undertake abandonment operations.
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3 Importation / Exportation
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Malaysia
The owners of natural gas, including LNG, may conduct cross-
boarder sales or deliveries subject to approvals from the Customs
and Excise Department.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Currently, Petronas Gas (a subsidiary of Petronas) operates the
transportation pipelines and associated infrastructure after the point
of sale by the gas producer being Petronas and the production
sharing contractor(s). Other companies, such as Shell and Exxon,
do not own natural gas processing and storage facilities, unless they
participate as off taker of the upstream gas but that would be in
different capacity. Upstream gas facilities are owned by Petronas,
but the cost of which would be recovered by the production sharing
contractor(s) via cost gas mechanism under the PSC regime.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The operators will require approvals from MITI, Department of
Environment and the local authorities.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
The operators of the pipelines can request the State Governments,
which have the power of compulsory acquisition of land to facilitate
land access, provided the operation is for public benefit.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Currently, there is no regulation which provide for access
agreements, but parties may apply to Petronas and/or the
Government to seek such access.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
Currently, only Petronas Gas and state utility companies operate the
gas transportation pipelines.
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4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
Malaysia
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Petronas, being the regulator of the upstream sector, is able to
coordinate the process by assisting and persuading to develop the
sharing of transportation infrastructure, especially for upstream
operators. The economics of sharing would render the sharing of
the transportation infrastructure to be desirable as it would
invariably reduce the cost, hence the profit component for the
production sharing contractors will be increased. For the
downstream, the transportation infrastructure for gas is owned by
Petronas Gas who purchases natural gas from upstream producers
and supply to the downstream users, including industrial customers.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Yes, the parties are free to negotiate.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The national gas transmission/distribution network is connected to
industries, power plants, and some households. The ownership and
the regulatory framework are as per questions 4.4 and 4.5.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
The operators will require approvals from MITI, Department of
Environment and the local authorities.
5.3 How is access to the natural gas distribution network
organised?
Currently there is no regulation which provide for access
agreements, but parties may apply to the government to seek such
access.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
The granting of capacity is dependent on the available capacity of
the gas distributor and the economics of the expansion. Generally,
the distributor would be prepared to expand capacity and to
accommodate new customers if there are available capacity and the
pricing structure is correct. Given that the price for gas for
downstream consumers has been fixed by the Government,
Petronas Gas is absorbing the difference between the downstream
price and upstream price.
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Malaysia
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
Currently, there is no regulation which provide for access agreements,
but parties may apply to the government to seek such access.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
The operators will require approvals from MITI and where relevant
the foreign investment committee within the Prime Minister’s
Department.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Generally, there is no restriction in natural gas trading, as long as
the trader has access to natural gas.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Most of the trading is for bundled products. Some users of gas do
import natural gas products for industrial use.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
Malaysia LNG Sdn. Bhd. (MLNG) is one of the subsidiary
companies of Petronas. Incorporated in 1978 (first successful
delivery in 1983), it is currently the largest LNG manufacturing
complex (as of 2007).
Situated at the once fishing town called Bintulu, in the Malaysian state
of Sarawak, MLNG acquires its gas from 125 kilometres (80 mi) to
225 kilometres (140 mi) offshore of Bintulu from its partners Petronas
Carigali and Shell. Production is done on eight trains in which three
belonged to MLNG Satu (the first joint venture), three on MLNG
DUA and two for the most current MLNG 3. Besides Petronas, Shell,
Mitsubishi and the Sarawak Government hold a minority stake.
Petronas acts de facto as the Malaysian energy ministry and regulator.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Petronas, MITI, Department of Environment, Department of
Occupational Safety and Health and the local authorities.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
No there is not.
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8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
MDTCA and Ministry of Energy, Water and Communications.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
Domestic natural gas is subsidised by the Government, and,
therefore, the Government will have to ensure that there is adequate
supplies to meet the current demand.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
Currently, there is no anti-competition law. The licence authorities
will use its regulatory discretion to minimise anti-competition
practices.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
Yes. The agencies involved will be MITI, MDT, Petronas and the
Economic Planning Unit of the Prime Minister’s Office. The
approval process may take between 6-12 months depending on the
complexities of the transactions.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Yes, there are special requirements in such acquisitions by foreign
companies. However, as a matter of practice, any change of interest
in natural gas sector, if approved by Petronas, should be considered
as acceptable to the Government.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
Malaysia is a party to many international treaties and, therefore,
matters relating to safeguarding foreign interest, dispute resolution
and WTO obligations.
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Malaysia
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
Malaysia
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Most government contracts will provide for arbitration for
resolution of disputes between the Malaysian Government agencies
and foreign companies. Such arbitration will be held under the
rules of Kuala Lumpur Regional Centre of Arbitration which
follows the UNCITRAL Rules established under the endorsement
of the United Nation.
10.2 Is Malaysia a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Yes, Malaysia has ratified both into its domestic legislation.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
There is no such difficulty. Malaysian Government will honour any
judgment given against it by the courts or arbitration.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
There had not been any such instances. But as a policy, the
Government authorities and State organs will comply with any
judgment issued against them by the domestic courts.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Malaysia.
As at July 2009, Petronas sells gas to domestic industry at RM10.70
per million metric Btu.
Petronas has been subsidising almost RM50 billion in the last 10
years for gas. As at March 2009, increases in domestic regulated
price were lower than that of the market price for gas and thus it had
resulted in Petronas incurring a lower subsidy to the nation’s gas
sector. Petronas’ subsidy to the gas sector declined to RM19.5
billion, down by a modest 1% from RM19.7 billion previously. This
brought the cumulative gas subsidy to RM97.4 billion since 1997.
In view of the structure in which Malaysia is in, no new industry or
customers will be considered for any gas supply arrangements in
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the Peninsular, unless its for export in Sabah and Sarawak.
In view of the current political climate, where the Federal
Government has only a simple majority in Parliament and lost 4
states to the opposition, it is unlikely that there will be change in the
price mechanism.
Therefore, there is uncertainty in the gas development in Malaysia,
Malaysia
The Malaysian Government has recently decided to proceed with
the plan to build a 500km pipeline from Kimanis, Sabah to
Sarawak’s MLNG in Bintulu at a cost of RM3 billion. It was
highlighted by the Prime Minister that there will be enough gas
allocation for Sabah and that only the remainder will be processed
in Bintulu to be exported overseas. It is estimated that the cost will

be much cheaper than constructing a whole new LNG facility in

particularly in the Peninsular for the next 5 years.
Sabah.

Mohd Rasheed Khan Azmi Mohd Ali

Azmi & Associates, Advocates & Solicitors Azmi & Associates, Advocates & Solicitors
14th Floor Menara Keck Seng 14th Floor Menara Keck Seng
203 Jalan Bukit Bintang 203 Jalan Bukit Bintang
55100 Kuala Lumpur 55100 Kuala Lumpur
Malaysia Malaysia

Tel: +603 2118 5026 Tel: +603 2118 5001

Fax: +603 2118 5111
Email: rasheedkhan@azmilaw.com
URL: www.azmilaw.com
Rasheed Khan, graduated from the Inns School of Law, London. He
became a member of the Honourable Society of Lincoln’s Inn and
was admitted as a barrister-in-law in July 1978. In May 1979, he
joined the Malaysian Judicial and Legal Service and served for 4
years as Magistrate, Deputy Public Prosecutor and Senior Assistant
Registrar of the High Court. In May 1983, he joined Shell Malaysia
as its Legal Adviser and worked under various portfolios in its Legal
Department.
Rasheed Khan also worked in the offices of Shell International,
London and The Hague where he gained valuable international
exposure. He was Legal Adviser of Sarawak Shell Berhad and Sabah
Shell Petroleum Company Limited that are both Shells’ upstream
companies engaged in exploration and production of oil and gas.
Rasheed Khan is an accredited arbitrator with the Swiss Arbitration
Association and a panellist with the Kuala Lumpur Regional Centre
of Arbitration.
Fax: +603 2118 5111
Email: azmi@azmilaw.com
URL: www.azmilaw.com
Azmi Mohd Ali is the Senior Partner of Azmi & Associates and began
his career as an E&P lawyer with PETRONAS, the Malaysian
National Oil Company. He was involved in project of national
importance for Malaysia such as Gas Sales Agreement, Production
Sharing Contracts, Joint Development Authorities and Petrochemical
Projects. With extensive expertise in oil and gas, mergers and
acquisitions, corporate restructurings and energy, Azmi has attended
to various high profile assignments.
He has represented Malaysian multinational companies in cross-
border transactions involving the US, West European countries,
Saudi Arabia, Japan, ASEAN and Australia and other countries. His
vast skills and experience in the areas of corporate law are well-
noted and acknowledged by various international publications
including the Asia Law Profiles. Legal 500 for the past several years
recognised him as a leading corporate lawyer.
Azmi Mohd Ali was also recently identified by Asian Legal Business
as one of the 100 hottest lawyers in Asia and Asia Leading Lawyers
(Euromonies Publication) for 2007 and 2009.

Azmi & Associates is a full-service corporate & commercial law firm which operates on the basis of delivering prompt,
high-quality and cost-effective services to our clientele. Our emphasis on client service and proactive commitment to
excellence have enabled us to build and maintain long-term relationships with local, regional and international
businesses, institutions and individuals that depend upon our innovative and practical solutions for both everyday and
complex matters.
As leading practitioners in our respective fields, and as partners to our clients, we leverage technical, industry, and legal
knowledge and hands-on experience to serve a diverse client base, from Global MNCs to emerging growth entities,
spanning a broad range of industries.
The firm is reputably known as one of Malaysia’s leading firms in the areas of Mergers & Acquisitions, Capital & Debt
Markets, Corporate & Commercial, Oil and Gas, Islamic Finance, Energy & Utilities, Restructuring, Projects,
Construction, Privatisation and Financing, Litigation and Arbitration and Intellectual Property and Information
Technology.

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Chapter 20

Mexico Alejandro Loera Aguilar.

Aguilar, Loera, Cortina & Martínez Mario del Bosque M.

1 Overview of Natural Gas Sector process for the issuance of permits for the distribution and
transportation of natural gas in Mexicali, Chihuahua, Hermosillo,
Toluca, Rio Pánuco (Tampico, CD. Madero y Altamira), Norte de
1.1 A brief outline of Mexico’s natural gas sector, including a Tamaulipas (Matamoros, Reynosa y Valle Hermoso), Monterrey,
general description of: natural gas reserves; natural gas
Distrito Federal, Valle Cuatitlan-Texcoco, Querétaro, San Juan del
production including the extent to which production is
Rio, el Bajío, La Laguna-Durango, Bajío Norte, Puebla-Tlaxcala,
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG) Guadalajara and Veracruz, among others.
liquefaction and export facilities, and/or receiving and re- On October 30, 2007 the CRE issued a permit to Almacenamiento
gasification facilities (“LNG facilities”); natural gas pipeline Subterraneo del Istmo, S.A. de C.V. for the subterranean storage of
transportation and distribution/transmission network; natural gas. This is the only permit issued for subterranean storage
natural gas storage; and commodity sales and trading. of natural gas.
VII. Trading of Natural Gas.
I. Consumption of Natural Gas.
The Mexican Derivatives Market (“MexDer”) entered into a
Despite the international financial crisis, the consumption of natural
licensing agreement with the New York Mercantile Exchange
gas has increased in recent years. The consumption of natural gas
(“NYMEX”) in order to predict the future of natural gas in Mexico.
increased 3.3% in 2008 compared to 2007. In 2008 the
consumption of natural gas reached an average of 7,204 millions of The quotes in the MexDer are referenced to the Henry Hub Index.
cubic feet daily (“dmcf”). The agreement offered in MexDer is for 1,000 million British
II. Natural Gas Reserves. Thermal Units representing 10% of the specified volume of the
licensing agreement entered with NYMEX.
The total natural gas reserves increased to 60,374.3 million of cubic
feet (“tmcf”) as of January 2009. Pursuant to the location of the gas
fields, the Northern region of the country has 60.5% of the total 1.2 To what extent are Mexico’s energy requirements met
natural reserves, the Southwest sea region 15.9%, the South sea using natural gas (including LNG)?
region 15.6% and the Northeast sea region 8.1%.
The following charts show the demand of different types of energy
III. Production.
consumed by both the public and private sector.
In 2008, the production of natural gas was 6,919 dmcf, 14.2% increase
with respect to the previous year. For associated gas Mexico reached
4,319.8 dmcf, which represented an increase of 25.4%, mainly by the
production of gas fields near the transition zone of the Northeast sea
region known as “Activo Integral Cantarell”. For non-associated gas
Mexico reached the production of 2,598.8 dmcf, which represented a
slight decrease in connection with 2007.
IV. Imports and exports of Natural Gas.
Mexico is expected to continue to have a deficit in the international
trade of natural gas until 2024. In 2011 the expected exports will
be of 899 dmcf and the imports are expected to be of 2,514 dmcf.
The imports of natural gas will be obtained mainly from three
facilities of LNG re-gasification, in addition to the imports obtained
from the United States by pipelines.
V. Re-gasification facilities.
With the establishment of the Ensenada facility in Mexico during 2008,
the North American region has 10 re-gasification facilities, 8 located in
the United States and 2 in Mexico (Altamira and Ensenada).
VI. Transportation, distribution and storage.
Since 1996 the Power Regulatory Commission (“Comisión
Reguladora de Energía”) (“CRE”) has carried out a bidding
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 Aguilar, Loera, Cortina & Martínez Mexico

CRE. Such governmental entity is specifically governed by the

Law of the CRE.
The main law governing the natural gas industry including,
transportation, distribution and storage of natural gas, Regulations
of Natural Gas published on November 8, 1995 in the Official
Federal Gazette.
Mexico

It is important to mention that pursuant to article 4 of the

1.3 To what extent are Mexico’s natural gas requirements met
through domestic natural gas production?
The total consumption of natural gas in 2008 was of 7,204 dmcf,
which was compounded by a total amount of 1,339 dmcf in imports
and national production of 5,865 dmcf.
1.4 To what extent is Mexico’s natural gas production exported
(pipeline or LNG)?
In 2008 the exports were carried out by interconnected pipelines
located on the border with the United States (Gulf, Terra, Kinder
Morgan, Tetco and Tennessee); in the amount of 750 dmcf of
natural gas to the southern part of the United States.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
Reglamentary Law of Article 27 of the Constitution relating to the
oil sector, Petroleos Mexicanos (“PEMEX”) is the exclusive
decentralised public entity authorised to explore and exploit oil and
its derivatives in our country, nevertheless, the transportation,
storage and distribution of natural gas may be carried out, upon
permit issued by the CRE, by third private parties.
III. First Hand Sale (“FHS”)
The FHS is an exclusive activity reserved to the State through
PEMEX and their affiliates and subsidiaries. FHS is defined as the
first sale of gas carried out by PEMEX to a third party for its
delivery in Mexico. The FHS are activities regulated by the CRE
in connection with the price, and sales conditions.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
Pursuant to article 7 of the Reglamentary Mining Law related to
associated gas of the fields of carbon mining related to associated
gas of the fields of carbon mining, the permit holder may obtain a
permit from the Ministry of Energy (CRE) in order to use and
recover natural gas, deliver said gas to PEMEX or use said gas for
its own purposes; however, it is prohibited to the permit holder
commercialise natural gas.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).

Pursuant to the Regulations of Natural Gas, the relevant permits

I. The main legal framework governing the natural gas industry in
Mexico is the following:
Political Constitution of the Mexican
United States
Reglamentary Law of Article 27 of the
Constitution relating to the oil sector
Reglamentary Mining Law related to
associated gas of the fields of carbon
mining
Regulations of Natural Gas
Law of the Power Regulatory
Commission
(“Constituciòn Política de los Estados
Unidos Mexicanos”)
(“Ley Reglamentaria del Articulo 27
Constitucional en el ramo del Petroleo”)
(“Reglamento de la Ley Minera en mate-
ria de gas asociado a los yacimientos de
carbon mineral”)
(“Reglamento de Gas Natural”)
(“Ley de la Comisión Reguladora de
Energía”)
issued by the CRE, are the following:
Transportation.
Distribution.
Storage.
It is important to mention that one person cannot hold all permits
within a certain geographical area. The CRE may authorise exceptions
to this prohibition in the understanding that: (i) it results in a profitable
and efficient service; and (ii) it is strictly necessary in the case there is
no infrastructure to develop in a certain geographical area.
Furthermore, the Regulations of Natural Gas establishes that the
permit shall have a term of thirty years counted as of the issuance
day; and shall be renewable for an additional term of fifteen years.

Directives issued by the CRE (“Directivas”)

Official Mexican Standards (“Normalización”)
II. Government Authority, exploration and exploitation of natural gas.
The governmental authority that regulates all activities in
connection with the gas sector is the Ministry of Energy through the
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2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
As mentioned before, PEMEX is the exclusive decentralised public
entity authorised to explore and exploit oil and its derivatives in our
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Aguilar, Loera, Cortina & Martínez
country, natural gas is included, nevertheless, the transportation,
storage and distribution of natural gas may be carried out, upon
permit issued by the CRE, by third private parties.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
The state obtains income from the following concepts:
1. FHS.
2. Governmental fees charged to the concessionaires for the
issuance and maintenance in effect of the relevant permits.
3. Taxes incurred by third parties (withholding income tax and
value added tax, derived from the business operations of
natural gas).
2.6 Are there any restrictions on the export of production?
Pursuant to the Tariffs of the General Import and Export Tax Law
(Tarifa de Ley de Impuestos Generales de Importación y
Exportación) there are no restrictions to export natural gas;
however, the Foreign Trade Law (Ley de Comercio Exterior)
establishes that measures of regulation and restrictions can be
established to regulate and control non-renewable natural resources
of the country in connection with the needs of the internal market
and the conditions of international markets.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
In accordance with the Monetary Law (Ley Monetaria), there are no
exchange restrictions.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
In accordance with the Regulations of Natural Gas it is possible to
assign the permits to a third party, subject to the previous approval
by the CRE and the fulfilment of said third party to its obligations
and requirements to become a permit holder.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
In accordance with the Regulations of Natural Gas, the permit
holder carrying out transportation, storage and distribution of
natural gas may be required by the CRE to provide the collateral or
guarantees to secure all their obligations under the relevant permits.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
In accordance with the Regulations of Natural Gas a permit holder
may create a security interest on the permit and on the rights of the
permit and the natural gas system (assets) to secure financial
obligations related to the natural gas activities.
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Mexico
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Mexico
Among others, following is a list of the permits and authorisations
that are required to be obtained to conduct the referred activities:
Environmental impact assessment is issued by the Ministry
of Environment.
Zoning permit (land use permits of the properties) is issued
by the corresponding municipal authority or Ministry of
Urban Development.
Construction licences permit issued by the corresponding
municipal authority or Ministry of Urban Development.
Feasibility studies carried out by the corresponding
municipal authority in connection with the Land.
Operation licences, if required issued by the corresponding
municipal authority or Ministry of Urban Development.
Sanitary licences, if required issued by the corresponding
municipal authority or Ministry of Urban Development.
Certificate of reception from the corresponding municipality.
Official communication providing for alignment and official
street number (alineamiento y número official), issued by the
corresponding municipal authority or Ministry of Urban
Development.
Analysis of mechanical soils issued by the corresponding
municipal authority or Ministry of Urban Development.
Depending on the State where the transportation, distribution and
storage of natural gas activities will be developed, other specific
requirements should be met.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
Pursuant to Regulations of Natural Gas, a service is abandoned if
the permit holder fails to grant the service and no early termination
or cancellation of the permit is granted by CRE. In such case, the
relevant permit may be revoked by the CRE.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Pursuant to the Tariffs of the General Import and Export Tax Law
(Tarifa de Ley de Impuestos Generales de Importación y
Exportación) there are no restrictions to export natural gas;
however, the Foreign Trade Law (Ley de Comercio Exterior)
establishes that measures of regulation and restrictions can be
established to regulate and control non-renewable natural resources
of the country in connection with the needs of internal market and
the conditions of international markets.
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4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Mexico
I. National Pipelines System.
The infrastructure of transportation of natural gas is carried out
through pipelines extended to all of the Mexican territory. The
main system in which these pipelines are interconnected is the
National Pipelines System (“NPS”) and the Naco-Hermosillo
system, both are owned by PEMEX, as well as borderline pipelines
which are interconnected with the southern part of the United
States, some of them are connected to the NPS, other pipelines are
owned by private parties.
The NPS begins in Chiapas (Southeast part of Mexico), and passes
through Tabasco, Veracruz and Tamaulipas (Northeast part of
Mexico) with lines of 24, 36 and 48 inches of diameter; subsequently,
the NPS passes through Nuevo Leon, Coahuila, Durango and
Chihuahua, with lines of 24 and 36 inches of diameter. Also in
Mexico there are three important lines of 18, 24 and 36 inches of
diameter that passes through the centre of the country, Veracruz,
Puebla, Tlaxcala, Hidalgo, Mexico, city, Estado de México,
Queretaro, Guanajuato, San Luis Potosi, Michoacan and Jalisco.
Ten compressor stations are located within the extension of the
pipelines, some that are operated by PEMEX, said compressor
stations increase the pressure and keep natural gas in an operative
condition when arriving at its final destination. These compressor
stations transport and distribute natural gas with no interruptions 24
hours a day, 365 days a year.
The NPS has an extension of 9,343 km wide crossing 18 states of
the country, while the Naco Hermosillo system has an extension of
339.7 km and it is connection ends in the State of Arizona, USA.
Entities authorised by CRE to distribute natural gas within
geographical zones have their own pipelines. Additionally some
transporters of open access had interconnected to the NPS,
commercialising the gas that passes through its pipelines.
II. Facilities.
In Mexico there are two facilities of natural gas re-gasification.
One is located in Altamira, Tamaulipas and the other facility is
located in Ensenada, Baja California.
In Mexico there are 10 processing facilities of natural gas. Eight are
located in the southeast part of the country (Chiapas, Tabasco and
Veracruz) and two in the northeast part of the country (Tamaulipas).
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
Environmental impact assessment.
Zoning permit (land use permits of the properties).
Construction licences.
Operation licences, if required.
Sanitary licences, if required.
Certificate of reception from the corresponding municipality.
Analysis of mechanical soils.
Authorisations of right of way.
Depending on the State where the transportation of natural gas
activities will be developed, other specific requirements should be met.
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Mexico
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
Pursuant to the Regulations of Natural Gas the permits for the
transportation of natural gas will imply an official declaration by
the authority that the construction of the pipelines are considered as
public utility in public, social and private properties; in connection
with the Law of the CRE and its regulations.
Easements would need to be established in order to construct a
pipeline on a third party property, to such end, the negotiations of
said easement must be agreed by the parties involved (owner of the
property and participant). The government does not participate in
said negotiations. The regulations of easements are located in
Section Six of the Federal Civil Code.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Pursuant to the Regulations of Natural Gas, the permit holder may
grant access to the users in an indiscriminate manner to their
respective systems, in connection with the following:
1. Open access is limited to the available capacity of the
pipelines of the permit holders.
2. Open access to the services of the permit holders may be
used by the user upon the execution of the corresponding
service agreement.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
The Regulations of Natural Gas and the directives govern the
interconnection between the pipelines. The interconnection are
achieve among the parties after executing an interconnection
agreement and a metering agreement.
Please refer to our response in question 4.1 which describe the
interconnection of the NPS.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Pursuant to the Regulations of Natural Gas, participants with a
permit to transport natural gas will have the obligation to extend
their system upon written request from or by a user provided that
the service is economically feasible and the parties involved
execute an agreement to cover the costs for the construction of
pipelines and ancillary facilities.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Parties are free to agree on specific terms and conditions such as
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payment terms and volume of gas to be delivered. The tariff is
regulated; however, the parties may agree on a conventional tariff
under certain circumstances. The general conditions of the permit
holder which are part of the permit provide for the rights and
obligations of the parties applicable to their transportation
agreements.
The regulated tariffs are governed by certain directives issued by
the CRE.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
Similar to companies which deal with transportation, a natural gas
distribution company has the obligation of having a minimum
capital stock equivalent to 10% of the proposed investment for the
project.
As to the organisational and regulatory framework Regulations of
Natural Gas establishes specific provisions for the distribution
relating to how distribution permits are granted considering factors
such as financial and operation feasibility, as well as, the Urban
Development permits.
Please note that the first permit of distribution for certain
geographical area may be granted through a public bid in terms of
the section sixth of the Regulations of Natural Gas. Such permit
shall grant an exclusivity of twelve years over the construction of
the distribution facilities system, reception, conduction and delivery
of gas upon certain geographical area.
As of today, CRE has granted 22 distribution permits located in
more than 166 cities, 18 estates and 16 counties of the Federal
District. With this in mind, there are more than 10 million users
over Mexican territory.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
The Government authorisations required are:
Environmental impact assessment.
Zoning permit (land use permits of the properties).
Construction licences.
Operation licences, if required.
Sanitary licences, if required.
Certificate of reception from the corresponding municipality.
Official communication providing for alignment and official
street number.
Analysis of mechanical soils.
Depending on the State where the distribution of natural gas activities
will be developed, other specific requirements should be met.
5.3 How is access to the natural gas distribution network
organised?
All permits of distribution shall be granted for a specific
geographical zone, i.e. the same that would be determined by the
efficient development of the distribution system, and the
development plans approved by the corresponding authorities.
Please note that the distribution network is already organised and it
is not expected to be amended in the near future.
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Mexico
The first permit to distribute for a geographical zone may (i) be
granted through a bid process and (ii) confer an exclusivity of 12
years over the construction of the distribution system, reception,
transportation and delivery of natural gas in said geographical zone.
The distribution service includes the commercialisation and
delivery of natural gas by the distributor to an end user within the
Mexico
geographical zone or the reception of natural gas in the point or
points of reception of the distribution system and the delivery of a
similar amount of gas in different point of the same system.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
Yes, the regulator has the authority to require any distributor to
extend its capacity in order to meet customer demand according to
the Regulations of Natural Gas which establish the following:
“distributors will extend or ample their systems within its
geographical zone upon written request by an user (not permit
holder), provided that such service is to be feasible”.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
Similar to the transportation activities, the tariff for the distribution
services are regulated by the Regulations of Natural Gas and a
specific directive and approved by the CRE; however, the parties
may agree on a conventional tariff under certain circumstances.
The components of the tariff are the following:
(i) charge of interconnection, which is a percentage of the tariff
based on a fixed amount of the interconnection to the system
and shall be paid in one or more exhibitions;
(ii) charge of capacity; which is a percentage of the tariff based
on the reserved capacity for each user to satisfy maximum
demand for a determined period; and
(iii) charge of use, which is a percentage of the tariff based on the
rendered services.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
Yes, pursuant to the Regulations of Natural Gas the assignment of
the permit shall only be prior authorisation of the Commission. The
acquiring company shall comply with all the requirements to
qualify as a permit holder.
Further the distribution system cannot be transferred without the
permit.
In addition, in any acquisition transaction an authorisation under the
Federal Antitrust Law may be required.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
The trading of natural gas is not regulated in Mexico; however, as
explained before, FHS are regulated by the CRE.
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6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
See question 1.1, point VII.
7 Liquefied Natural Gas
Mexico
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
The legal framework of the Natural Gas described in question 2.1
hereof, is applicable as well to the LNG. The conduction of storage
activities of LNG requires the issuance of a permit by the CRE. The
permit holder shall comply with the minimum capital stock
equivalent to 10% of the proposed investment for the project.
The following NOMS are applicable to the LNG:
NOM-005-SECRE-1997 - LNG - Facilities of Service
(DOF 28/01/98).
NOM-013-SECRE-2004 - Security requirements for the
design, construction, operation and maintenance of LNG
storage facilities including systems, equipment, reception
facilities, conduction, vaporisation and delivery of natural gas.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
The government authorisations required are:
Environmental impact assessment.
Zoning permit (land use permits of the properties).
Construction licences.
Operation licences, if required.
Sanitary licences, if required.
Certificate of reception from the corresponding municipality.
Official communication providing for alignment and official
street number.
Analysis of mechanical soils.
Depending on the State where the storage facility would be located,
other specific requirements should be met.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
The same principles applicable to natural gas are applicable to LNG.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The Federal Antitrust Commission is the authority in charge of
overseeing competition matters. Moreover, the Regulations of
Natural Gas establishes the effective competition and provides that
if the Federal Antitrust Commission deems convenient the FHS and
gas prices may be freely determined.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The Federal Antitrust Law provides the guidelines that the Antitrust
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Mexico
Commission shall take into account whether or not a conduct is
considered as practice that diminishes or damages or restricts
competition. The Federal Antitrust Law includes the following
criteria monopolistic practices, relative monopolistic practice,
substantial power in the relevant market and concentration.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The regulator has the authority to (i) impose fines to the parties
breaching the provisions of the law, (ii) order the de-concentration
of the relevant transactions taken against the law and (iii) estimate
the indemnification to be paid by third parties for the damage
suffered derived from monopolistic practice.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
As we mentioned above, the Antitrust Commission is the entity
entrusted with the authority to approve or disapprove acquisitions,
mergers and other changes in control over the business of natural
gas sector. The approval or disapproval process followed by the
Antitrust Commission usually takes two months. The law provides
certain thresholds; in the event these are exceeded, they would
require the approval of the Antitrust Commission.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Foreign investment is permitted to participate up to 100% in the
corporate capital of Mexican companies holders of permits for the
conduction of transportation, distribution and storage of natural gas.
However, as discussed before, exploration and exploitation
activities are reserved to PEMEX.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
To no extent.
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10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
The Law of the CRE provides for the alternatives to be followed in
resolving disputes between permit holders and users. The parties
may freely adopt the dispute resolution procedure. Arbitration or
judicial courts may be elected by the parties or proposed by the
permit holder. Disputes between permit holders and the regulator
are normally solved by an administrative trial followed by the CRE.
Legal actions may be pursued before judicial courts after such
administrative trial fails to solve the dispute between the CRE and
the permit holder.
10.2 Is Mexico a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Yes, on April 14, 1971, Mexico ratified the New York Convention
on the Recognition and Enforcement of Foreign Arbitral Awards.
As to the OCSID, Mexico is not a party of such convention.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
Given that Mexico has executed several international treaties
regarding the enforcement of arbitral awards decisions and has
adopted such treaties into domestic legislation, in general terms,
litigation and judgment enforcement have become a straightforward
procedure; nevertheless, sometimes the procedure may suffer
delays due to the tropicalisation of certain legal figure depending on
the jurisdiction.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
Yes, recently the American firm KBR, Inc. through its subsidiary in
Mexico has been awarded, at the International Chamber of
Commerce, an amount of USD$350 million dollars against Pemex
Exploración y Producción.
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Mexico
KBR subsidiary entered into a construction agreement with Pemex
Exploración y Producción for the development of two oilrigs
located in Campeche, Mexico.
11 Updates
Mexico
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Mexico.
The Regulations of Natural Gas is the most comprehensive law in
Mexico governing the natural gas activities. The law was enacted
in 1995 to provide a new legal framework to regulate a new
industry that was open to the private and foreign investment at that
time. Notwithstanding the specialty of the law, the same provides
for flexibility as it includes the possibility for the issuance of
Directives by the CRE to go over more specific aspects of the
industry.
There are certain Directives already issued by the CRE. The most
important of which is entrusted to determine the tariffs to be
charged by the permit holders to their clients. This original
Directive was issued by the CRE in 1996. In December 28, 2007
this Directive was replaced by a new Directive (Directiva sobre la
Determinación de Tarifas y el Traslado de Precios para las
Actividades Reguladas en Materia de Gas Natural). The new
Directive is still in process of implementation in the natural gas
sector.
The Directive represents an important advance and enhancement of
a material aspect of the industry since it relates to the tariffs of the
permit holders. New concepts have been introduced based on the
experience of the previous Directive which, in certain matters, was
not clear to the industry.
The new Directive has been expected to provide more certainty to
the permit holders of the regulated activities (transportation, storage
and distribution) in the determination of the income for future
activities undertaken in Mexico.
Acknowledgment
The authors would like to acknowledge the assistance of their
colleague Javier Gómez Haro L. in the preparation of this chapter.
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Alejandro Loera Aguilar Mario del Bosque M.

Aguilar, Loera, Cortina & Martinez Aguilar, Loera, Cortina & Martinez
Guillermo Gonzalez Camarena No. 1200 4th floor Guillermo Gonzalez Camarena No. 1200 4th floor
Santa Fe, 01210 Santa Fe, 01210
Mexico, Distrito Federal Mexico, Distrito Federal

Tel: +52 55 3330 3400 Tel: +52 55 3330 3400

Mexico

Fax: +52 55 3330 3400 Fax: +52 55 3330 3400

Email: aloera@alcm.com.mx Email: mdelbosque@alcm.com.mx
URL: www.alcm.com.mx URL: www.alcm.com.mx

Alejandro Loera Aguilar, born in Mexico City, 1970. Education:
Universidad Nacional Autónoma de México (Law Degree, 1993).
Work Experience: Santamarina y Steta, S.C., Associate (1992-
2002). Foreign Associate, Morgan, Lewis & Bockius, New York
(1999-2000). Publications: “Foreign Commercial Companies under
Mexican Law” (1995). Languages: Spanish (native) and English
(fluent).
Main Areas of Practice: Corporate and Project Finance, Banking,
Securities, Corporate Law, Energy (electricity, LPG and natural gas),
Mergers and Acquisitions, Antitrust and International Business
Transactions.
Mario del Bosque Martínez, born in Orizaba, Veracruz, Mexico,
1980. Education: Universidad Iberoamericana (Law Degree,
2005). Universidad Iberoamericana, Diploma on finance (2006)
Instituto Autónomo de México, Diploma on Tax Law (2007).
Northwestern University School of Law, Master in Laws (2009)
Kellogg School of Management, Certificate in Business
Administration (2009). Languages: Spanish (native) and English
(fluent).
Main Areas of Practice: Corporate Law, Finance, Securities, Mergers
and Acquisitions, Real Estate, Business Law, Civil Aviation and
Contracts.

Aguilar, Loera, Cortina & Martinez is a firm providing legal services since 1996. We are a firm of Mexican and foreign
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Chapter 21
Netherlands
Loyens & Loeff N.V.
1 Overview of Natural Gas Sector
1.1 A brief outline of The Netherlands natural gas sector,
including a general description of: natural gas reserves;
natural gas production including the extent to which
production is associated or non-associated natural gas;
import and export of natural gas, including liquefied
natural gas (LNG) liquefaction and export facilities, and/or
receiving and re-gasification facilities (“LNG facilities”);
natural gas pipeline transportation and
distribution/transmission network; natural gas storage; and
commodity sales and trading.
Following the discovery in the early 1960s of the “Groningen” field in
the north of the Netherlands - one of the largest reservoirs in
continental Europe - the Netherlands has grown to be one of the major
gas countries in Europe. Broadly 29% of all the European natural gas
reserves are located in the Netherlands, accounting at the end of 2006
for 0.7% of the global natural gas reserves in the world.
The system in which the Dutch gas sector is organised is often
referred to as the ‘Gas Building’ (Gasgebouw). The Gas Building
was erected following the discovery of the Groningen field and the
appreciation of its magnitude. A production licence for the
Groningen field was granted to Nederlandse Aardolie Maatschappij
(NAM), a 50/50 joint venture of Shell and ExxonMobil, under the
condition that NAM would enter into a general partnership (the
Maatschap Groningen) with a state owned holding company,
currently named Energie Beheer Nederland (EBN). In this
partnership, the State has a 40% financial share and NAM 60%,
although the voting rights are 50/50. The Maatschap Groningen
entered into a gas sales agreement with N.V. Nederlandse Gasunie,
another joint venture of Shell and ExxonMobil (each 25%) and the
Dutch State (10% + 40% via EBN) for the entire gas production from
the Groningen field. N.V. Nederlandse Gasunie was made
responsible for the marketing and distribution of the gas. This way,
production and marketing of the Groningen gas was coordinated to
the maximum extent. This public/private system of central marketing
is being applied ever since to gas production in the Netherlands.
The size of the Groningen field drew the attention of the worldwide
oil-industry which came to the Netherlands to search for gas. This
development urged the government to create a new policy for the
development of gas reserves. In 1965, new legislation introduced a
model, similar to the Groniningen model described above, under
which exploration and production licences would be granted. A
production license was granted provided that the licensee would
enter into an Agreement of Cooperation with EBN, granting EBN a
40% share in the gas. N.V. Nederlandse Gasunie would market the
gas downstream.
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Roland W. de Vlam
Marc Custers
At the end of the 1970s, the first outlines became visible of what
would later become the Small Field Policy (kleine veldenbeleid or
planmatig beheer). The Small Field Policy (SFP) became the
regulatory framework, to optimise production from the ‘small
fields’ (i.e. smaller than the Groningen field) and to maintain the
valuable aspects of the Groningen field as long as possible.
The SFP consists of three key elements:
1. Guaranteed sale of produced gas to N.V. Nederlandse
Gasunie.
2. Guaranteed market-based price for the field lifetime.
3. Use of “Groningen” field as a swing field to balance seasonal
fluctuations in supply so that production from the small
fields could always be taken at a high load factor.
The SFP hereby guaranteed producers that their gas would be
purchased directly by a creditworthy party against market based
prices. The SFP has proven to be highly successful.
In 2005, the activities of N.V. Nederlandse Gasunie have been split
up. The trading activities have been transferred to a new company
GasTerra in which the Dutch State (50%) and Shell and
ExxonMobil (each 25%) are the shareholders. High pressure gas
transmission is the statutory responsibility of Gas Transport
Services (GTS) a subsidiary of 100% state-owned Gasunie.
The legal framework for the SFP has been laid down in Section 54
of the Gas Act. GasTerra exclusively takes all gas produced from
the Groningen field taking into account production from the small
fields. Furthermore, GasTerra must at the request of the holders of
a Dutch production licence, purchase gas produced from the small
fields against reasonable conditions and against payment of a
market based compensation. The market based compensation that
GasTerra is required to pay is reflected in the so-called Normative
Buying Price (Norm Inkoop Prijs or “NIP”). Conceptually, the NIP
gas price mechanism attempts to provide a proxy for GasTerra’s end
user market by deriving a price based on competitive fuel in the
industrial sector (heavy fuel oil) and residential market (gasoil) in
both the domestic (Rotterdam pricing point) and export markets. In
recent years, Zeebrugge, NBP and TTF-prices have also become a
factor in the NIP-formula.
The Dutch Ministry of Economic Affairs (MEA), in cooperation
with the Dutch Institute for Applicable Geosciences ‘TNO’ and
State Supervision of Mines, publishes a yearly report on gas and oil
in the Netherlands. As of 1 January 2009, the total natural gas
reserves were assessed at 1,346 bcm; 1,033 bcm is attributable to
the Groningen reservoir, 130 bcm to other onshore reservoirs and
183 bcm to the Continental Shelf. Natural gas produced in the
Netherlands is to a large extent non-associated gas.
In 2008 the gross natural gas production from the Dutch gas fields
amounted to 80.0 bcm; 36.5 bcm of which was produced from the
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‘small fields’ (i.e. not Groningen); 25.2 bcm was produced off
shore. This reflects an increase of 17% compared to 2007; the
production from the territory decreased by 7.8% and production
from the Continental Shelf decreased by 1.5%. Production from
Groningen increased by 42% compared with 2007.
Netherlands
The Netherlands has 420 discovered reservoirs, of which 234 are
being developed and 4 are used as storage facility. Production from
61 fields was (temporarily) stopped, 53 are expected to start
producing within 5 years and of 72 reservoirs it is uncertain if and
when these will be developed.
The total import of natural gas in the Netherlands decreased from
24.4 bcm in 2007 to 24.0 bcm in 2008. The total export of natural
gas increased from 52.8 bcm in 2007 to 58.5 bcm in 2008.
The development of liquefied natural gas (LNG) facilities is
accelerating. Vopak and Gasunie are in the process of building an
LNG terminal at the Maasvlakte in Rotterdam (Gate-terminal) which
is planned to be operational in 2011. The terminal will have an initial
throughput capacity of 12 bcm per annum and will consist of three
storage tanks and two jettys. Annual throughput capacity can be
increased to 16 bcm. 4Gas is developing an LNG terminal at the
Maasvlakte in Rotterdam (Liongas-terminal) which is planned to be
operational during 2012 with an initial capacity of 9 bcm. Annual
throughput capacity can be increased to 16 bcm. TAQA Energy B.V.
is planning to build an offshore LNG terminal with a capacity of 12
bcm at the Dutch coast near Rotterdam and Essent, Vopak and
GasTerra are planning an LNG-terminal in the Eems harbour.
The Dutch pipeline transportation and distribution networks are
well developed. The high pressure transportation network is owned
and operated by Gas Transport Services (GTS). The transportation
network is interconnected with Germany and Belgium and via the
BBL interconnector (Bacton-Balgzand Line) with the UK.
A statutory distinction is made between transportation pipelines and
production pipelines, the latter being the pipelines that form a part of
the production installations and that are used for the transportation to
a processing plant, storage facility or landing facility. A licence of the
MEA is required for the laying of production pipelines and the
installation of platforms; the application requirements are stipulated
in the Mining Act, the Mining Decree and the Mining Regulation,
effective as of 1 January 2003.
The Netherlands has three operational underground gas storages.
Norg UGS and Grijpskerk UGS are owned by NAM; Alkmaar Peak
Gas Installation (PGI) is owned by the Bergen concessionaries
TAQA, Dyas and Petro Canada. In 2007, the MEA has awarded
one storage licence to TAQA Energy for the Bergermeer area. An
application for a new storage licence near Waalwijk was filed by
Northern Petroleum and is still pending. Chevron filed an
application for an off-shore gas storage licence in July 2008. Four
underground gas storages are being built for VOF Zuidwending, a
joint venture between Nuon and GTS. Work on the first
underground gas storage began in June 2007. The storage facility
is expected to be operational in 2010. In 2007 underground gas
storage in salt caverns has become operational in Epe, Germany,
with capacity solely for the Dutch market. Dutch energy companies
Nuon and Essent each control a number of caverns and the two
projects are directly connected to the GTS transmission system.
1.2 To what extent are The Netherlands energy requirements
met using natural gas (including LNG)?
Approximately 43.6% of the Dutch energy requirements are met
using natural gas.
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1.3 To what extent are The Netherlands natural gas
requirements met through domestic natural gas
production?
Although domestic gas production (80.0 bcm) could easily cover
the national gas requirements (45.9 bcm), only 46.8% of the Dutch
natural gas requirements is met through domestic natural gas
production as a result of the large exports.
1.4 To what extent is The Netherlands natural gas production
exported (pipeline or LNG)?
Approximately 58.5 bcm of 80.0 bcm natural gas produced is
exported.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The Mining Act, effective as of 1 January 2003, forms the legal
basis for exploration and production activities relating to minerals
in the Netherlands (including the Dutch part of the Continental
Shelf). The Mining Act is complemented by the Mining Decree
and the Mining Regulation. The act imposes State participation
through EBN in exploration and production licences.
Minerals under the surface of The Netherlands (including the
continental shelf) are owned by the Dutch state. Ownership of the
minerals is transferred to the licence-holder(s) at the production of the
minerals under a production licence issued by MEA. A production
licence will be granted if the minerals within the area for which the
licence will apply, are deemed economically producible. The licence
will specify the validity period and the applicable period. The
delineation of this area is indicated on the surface in Blocks and is done
in such a manner that the activities can be carried out in the optimum
possible manner from a technical and economical point of view.
Authorisation by the MEA is required to transfer, merge or de-
merge a licence.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
The MEA may grant a licence for exploration, production or storage.
Licence requirements for exploration are, amongst others, financial
and technical capabilities and a development plan satisfactory to the
MEA. If the holder of an exploration licence demonstrates the
commerciality of a gas reservoir, he may apply for a production
permit, which in most cases will be automatically granted to him as the
current holder of the exploration licence for the area concerned.
Upon the granting of a production licence, a licence holder is
exclusively entitled to production in the licence area. Ownership of
the gas transfers from the State to the licence-holder at the well
head.
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2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
Separate licences are granted by the MEA for exploration,
production and storage. The licence will stipulate the activity, the
mineral, the term and the area concerned. The exploration licence
contains a certain date prior to which the exploration activities are
to be conducted. The MEA may stipulate specific conditions in the
licence. The application of a license is published in the Dutch State
Gazette and in the Official Journal of the European Union. During
a period of thirteen weeks other parties are entitled to submit an
application for a license in that same area. If more than one person
applies for a licence, they are considered as joint applicants and
when the licence is granted, they will jointly hold the licence. One
of the licensees will be designated the operator. The decision to
grant a licence is published in the State Gazette.
A bill to amend the Mining Act to encourage optimisation of the
natural gas production from the (off shore) small fields, will empower
the MEA to change the delineation of licence areas in which no
significant exploration and production activities have taken place for
a period of two years. Such decision shall be based on an annual
inventory of the activities in all licence areas. Other parties may apply
for a new licence on the partitions previously left unused. The
minister and market parties are involved in ongoing negotiations on a
covenant on this subject. The covenant must provide for procedural
arrangements whereby co-licensees of a licence undertake to engage
in activities (even with third parties) in those segments of the licence
area in which no significant activity has hitherto taken place. The
signing and execution of the covenant will lead to a situation in which
the minister has no reason to reduce the licence area, since the licence
holders are demonstrably actively engaged in investigating the
possibilities of production in all segments of the licence area.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
The Mining Act prescribes Dutch State participation in offshore
exploration licences for 40% via its 100% state-owned participation
vehicle EBN. Licensees are obligated to enter into an agreement of
cooperation with EBN that stipulates the allocation of rights and
obligations and the attribution of costs in accordance with the
respective interests.
Except in the event that State may conclude that participation in a
production licence may inflict a financial loss, the State will
participate via EBN in all offshore and onshore production licences.
The statutory duties of EBN have been expanded as a result of an
amendment of the Mining Act in 2008. Pursuant to this amendment
the MEA may instruct EBN to perform other activities in the
general energy policy interest. Alternatively, EBN may request
MEA’s permission to perform other activities provided that they are
closely related to and will not jeopardise the statutory duties and
serve the general energy policy interest. For such other activities,
EBN is obligated to maintain ring-fenced accounts.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
Apart form corporate income tax, the State charges certain taxes
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Netherlands
directly to the licence holder, such as surface duties (offshore
exploration licence or production licence), royalties relating to the
amount of natural gas produced (production licence) and the 50%
State Profit Share (production licence).
Furthermore, the State derives value through its indirect
Netherlands
participation (via EBN) in the production licences, through its 50%
stake in GasTerra and through its 100% subsidiary GTS.
2.6 Are there any restrictions on the export of production?
There is no explicit restriction on the export of production.
Currently, a production ceiling of 44.3 bcm per year is applicable to
the Groningen reservoir, which production restriction indirectly
restricts available volumes of L-gas for exports.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
There are no currency exchange restrictions, except that the MEA
may require security for covering the liability of the holder of an
onshore licence for potential damage that is reasonably estimated to
result from soil movement following production activities.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
As mentioned above, transfers of licences require the prior written
approval of the MEA. The Mining Act does not require such
consent in the event of an indirect transfer through a change of
control of the licence holder. However, the MEA may withdraw a
licence under certain circumstances, such as incorrect information
provided at the application, the licensee not acting in conformity
with the licence or in the event that the operator does not comply
with the applicable rules. Therefore, the transfer of a licence via a
change of control is often notified to the MEA.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
The MEA may require security for covering the liability of the
holder of an onshore licence for potential damage that is reasonably
estimated to result from soil movement following production
activities. The MEA may also require security for the discharge of
payments if there would be any doubt as to whether the payment
obligations (rental, excise, State Profit Share) to the State under the
terms of the Mining Act will be fulfilled.
Furthermore, the MEA may require security for any and all that
shall become due in case it uses administrative enforcement of the
obligations for the licensee (and/or the manager of a cable or
pipeline) to remove or leave behind, or, after decommissioning, to
remove or reuse the mining installation (and/or the cables or
pipelines) located on the Continental Shelf.
In the case a licence is held by more than one licensees, the operator
is required to provide such security for the joint account.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
The mining legislation contains no restrictions on the creation of a
pledge on such rights. However, if the licence is granted to more than
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one entity, the co-licensees of the licence can be regarded as a
community (gemeenschap) and the gas reserves belong upon its
production to the co-licensees jointly. Each of the co-licensees may
in principle dispose of its share in the gas reserves, including
encumbrance of its share, unless the contractual relationship between
Netherlands
the co-licensees requires otherwise. Therefore, the applicable joint
operating agreement needs to be reviewed to determine whether a co-
licensee may dispose (or encumber) its share in the gas reserves.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Without the prior written approval of the MEA, a licence holder
cannot transfer or divide his licence or join two or more licences. A
change of operator and a change in the production plan also require
prior consent by the MEA.
The installation or maintenance of an offshore mining installation is
prohibited without an environmental mining permit. The MEA may
only refuse such permit in the interest of the environment. It is also
prohibited to lay a production pipeline without a permit from the
MEA and the pipeline may only be taken into operation with the
approval of the MEA. Furthermore a planning permit is required
for the development of works for onshore mining.
As the exploration for and production of gas emits CO2 and/or
NOx, the licence holder or the operator of the installation used for
exploration and/or production need to apply for an emission permit
from the Netherlands Emission Authority.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
The Mining Act stipulates that a mining installation that is
decommissioned, including any related material in the surrounding
area, must be removed. The MEA may impose a date prior to which
such removal has to be completed.
3 Import / Export of Natural Gas including
LNG
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
The transmission of gas from entry to exit points is currently
organised by means of contracts between GTS and shippers but this
system will be in 2010 by a new balancing regime (see section 11
below). Similar agreements are concluded with the parties that
supply gas to the Netherlands from foreign sources. Transmission
across border points is organised through contracts with the
network operators in neighbouring countries. In 2007,
simultaneously with the expansion in physical capacity, GTS and
Gasunie Deutschland (formerly BEB) developed EUCABO to
further increase the utilisation of existing bidirectional capacity.
Imported gas flows have to comply with the national balancing
regime and are subject to quality conversion tariffs (the latter
currently being the subject of legal debate).
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4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
The national high pressure transmission network is owned and
operated by GTS, a subsidiary of 100% state-owned N.V.
Nederlandse Gasunie, following its unbundling and separation from
GasTerra in 2005. Regional gas networks are operated by 12
regional network operators. Third party access to the networks is
regulated in the Gas Act.
Most of the infrastructure in the Netherlands is related to the
transport and distribution of low calorific gas (L-gas) produced
from the Groningen field, but there is also infrastructure for the
production, transport and distribution of high calorific gas (H-gas)
from small fields and from abroad.
The shares in regional network operator companies are mostly held
by the original energy distribution companies. The shares in the
original energy distribution companies are held by regional
authorities (provinces and municipalities) except for Nuon and
Essent that were acquired by Vattenfall and RWE respectively in
2009. As a result of the required legal unbundling before the sale
of Nuon and Essent, shareholders in their former network operators,
Alliander and Enexis, are directly held by provinces and
municipalities. As of 1 January 2011, all network operator
companies must be legally split off from the energy group of
companies active in the field of the production, trade and supply of
energy in the Netherlands. Privatisation of the network operator
companies is not allowed.
As from 1 January 2006 the Gas Act demands regulated third party
access for all customers on downstream gas networks and
transportation pipelines. Production pipelines are not regulated in
this Act and are subject to negotiated third party access.
For GTS, the designated national high pressure network operator,
specific public tasks are imposed in the Gas Act to facilitate ‘small
fields’ connection and access to the downstream sector.
A storage company with a dominant market position must publish
every year before 1 October, an indication of the tariffs and
conditions that it intends to apply in the following calendar year for
gas storage activities (and ancillary services). They must negotiate
with third parities on the basis of these indicative tariffs and apply
reasonable, transparent and non-discriminatory conditions. The
regulator may impose binding instructions upon the gas storage
company with respect to the indicative tariffs and conditions.
LNG companies must offer LNG activities upon request against
reasonable, transparent and non-discriminatory conditions. The
Gate terminal (Vopak and GasTerra) was granted an exemption of
the third-party-access regime of the Gas Act.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
Under the Gas Act no specific licence is required to build a gas
network. Nevertheless, the operation of such networks is restricted
to statutory network operators, unless the owner was granted an
exemption from the obligation to appoint a network operator.
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4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
Gas networks constructed by network operators are, under the Gas
Act, deemed works of public interest. Pursuant to the Public Works
Act (Belemmeringenwet Privaatrecht) the Minister of Transport can
at the request of the network operator impose the obligation on the
property owner to facilitate access for the gas pipeline if no
agreement with the relevant owners of property can be reached,
subject to the right of the property owner to be compensated for
damages by the network operator. This priority right does not apply
to networks constructed by others than network operators unless
they obtain a concession from the authorities.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
For GTS, the designated national high pressure network operator,
specific public tasks are imposed in the Gas Act to facilitate “small
fields” connection and access to the downstream system. GTS
offers access to independent transmission services on the basis of
regulated tariffs.
The Dutch regulator has far reaching regulatory powers, amongst
others determining conditions and tariffs for transport as well as the
discount factor X for stimulating efficiency and the quality factor Q
for quality of network services.
For large new investments an exemption may be granted from the
regulatory regime. In order to provide a more efficient procedure
for realising an energy infrastructure the State Coordination Decree
on Energy Infrastructure projects (Rijkscoördinatieregeling op
energie-infrastructuurprojecten), was implemented in the
Electricity Act, Mining Act and Gas Act.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
The existing networks in the Netherlands are integrated and
interconnected with up stream production pipelines, as well as
foreign transmission networks in Germany, Belgium and the UK.
Network operators, gas storage companies and LNG companies
must provide to system users all relevant information required for
the safe and efficient transport or storage. The network operator
also has the statutory task to connect its network with the network
of other network operators and to provide information about
connections between networks, the use of the networks and the
allocation of transport capacity. Network operators, gas storage
companies and LNG companies must refrain from any form of
discrimination among the system users.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Third party access to Dutch transport and distribution networks is
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regulated and supervised by the regulator NMa (Energy Chamber).
The statutory tasks of network operators include providing for
adequate capacity and quality of transport services and related
services. The network operator may only refuse if the required
capacity is not available or if it cannot reasonably be required to
Netherlands
provide all the capacity requested. The MEA may order the
network operator to take the necessary measures in order to fulfil its
statutory tasks. If the network operator does not take the required
measures the network operator may loose its ministerial approval.
Alternatively in the event of serious neglect of the network operator
the MEA may decide that the network operator should be placed
under the supervision of a designated representative who may give
binding orders.
The regulatory regime for the maximum tariffs of the network
operators’ transport services is based on the principle that the
allowed revenues reflect the (economic efficient) costs, including
costs of capital and depreciation of network assets and a reasonable
return on investment.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Network operators are subject to regulated terms and maximum
tariffs (CPI - X) set by the regulator, NMa. Gas storage companies
and LNG companies must provide to system users all relevant
information required for the safe and efficient transport or storage.
Further, the network operators, gas storage companies and LNG
companies must provide the necessary information for efficient
network access. The network operator further has the statutory task
to connect its network with the network of other network operators
and to provide information about connections between networks, the
use of the networks and the allocation of transport capacity. Network
operators, gas storage companies and LNG companies must refrain
from any form of discrimination among the system users.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The Gas Act outlines how the gas is to be transported and requires
the legal unbundling of former distribution companies in order to
ensure non-discriminatory third party access. Under a system of
regulated third party access, transmission and network operators are
obliged to carry out the transmission and transportation of gas on
behalf of third parties.
The Gas Act requires the ownership unbundling of networks. The
owner of a network operator may not engage in any activity in the
Netherlands with regard to the trade or supply or production of energy.
Furthermore it provides that as per 1 January 2011, producers, traders
or suppliers of gas active in the Netherlands (or group companies of
these producers, traders or suppliers) may not hold shares in a network
operator (and vice versa). In view of this unbundling obligation and
of the anticipated sale of their commercial activities in 2009, both
Nuon and Essent unbundled their respective network companies,
Alliander and Enexis, into legal independent network operators.
GTS owns and operates the national high-pressure transmission
network. The subsequent regional transport of gas is provided by
regional network operators. All network companies are owned
(directly or indirectly) by provinces and municipalities and may not
be transferred to a non-public entity.
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5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
The owner of a distribution network must designate a network
Netherlands
operator. The designation of a network operator requires the
approval of the MEA. The MEA may withhold his approval (or
may grant his approval subject to conditions), for example if the
appointed network manager will not be in a position to carry out its
statutory obligations. It is example to apply for an exemption by the
MEA from this obligation under inter alia the condition of third
party access in conformity with the Citiworks-judgment by the
European Court of Justice.
5.3 How is access to the natural gas distribution network
organised?
Access to the natural gas distribution network is based on the
system of regulated third party access. Tariff structures, conditions
and maximum tariffs are set by the regulator.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
The regulator can require from a distributor to grant capacity or
expand its system in order to accommodate new customers.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
For each year maximum transport tariffs are set by the regulator.
These maximum tariffs are based on the maximum tariffs for the
previous years, adjusted for the rate of inflation, an efficiency factor
(x) and a quality factor (q). Maximum tariffs may vary between
network managers.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
All changes to the ownership of a gas distribution network or to the
shares of a network manager require the approval of the MEA.
Under the current Gas Act, the MEA withholds his approval if the
ownership of a gas distribution network or the shares of a network
operator is to be transferred to a non-public entity.
The Gas Act does not provide for any limitations with respect to
privatisation of companies active in the field of the production,
trade and supply of gas.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
The Title Transfer Facility (TTF) is a virtual market place at which
gas on the Dutch network can be traded. Currently two companies
have been appointed by the MEA as gas exchanges for the Dutch
gas market: APX Gas NL B.V. for short-term products and ENDEX
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N.V. for long-term products, with delivery on TTF. Future contracts
are traded on ENDEX, also with delivery on TTF. As a
consequence of the developments in quality conversion it is
expected that the use of quality labels at the TTF could be dispensed
with as of 1 January 2009.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Four gas quality categories are traded (H, L, G, and G+) on the TTF.
It concerns gas that has already entered the network of GTS, the
operator of the national high pressure transmission network (“entry-
paid gas”). Gas trading is completely liberalised. Futures and
derivatives and comparable financial instruments may fall within the
scope of the regulatory framework of the Financial Instruments Act.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
Under the Gas Act, the owner of an LNG facility must appoint a
facility manager. The appointment of a facility manager does not
require the approval of the MEA. The facility manager must carry
out certain statutory obligations, but these are mostly of a general
nature (such as the obligation to operate, maintain and develop its
LNG installation subject to economic criteria, in a manner that
ensures the safety, efficiency and reliability of the installation and
safeguards the environment). LNG companies must offer LNG
activities upon request against reasonable, transparent and non-
discriminatory conditions.
LNG terminals are subject to Third Party Access (r-TPA). An
exemption of r-TPA is possible when the requirements set out in
Article 18h of the Gas Act are met.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Under the Gas Act, no governmental authorisations are required to
construct and operate LNG facilities. Construction Permits and
permits under the Zoning Act and the Environmental Management
Act may be required.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
An LNG company is obliged to determine (on an annual basis) the
calculation method for the tariffs and the conditions that it will
apply for access to its LNG facility in the following year. The
calculation method and conditions require the approval of the
regulator. Furthermore, conditions must be reasonable, transparent
and non-discriminatory.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
On the basis of the (Dutch) Competition Act (Mededingingswet), the
Dutch Competition Authority (Nederlandse Mededingingsautoriteit)
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is responsible for the supervision of competition aspects, or anti-
competitive practices, in all economic sectors, including the natural
gas distribution sector (Energy Chamber) as well as the exploration
and production sector, the latter on the basis of an arrangement of
cooperation with State Supervision of Mines.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The Competition Act prohibits agreements which restrict
competition in the Netherlands (or part thereof) and abuses of a
dominant position. The relevant provisions are almost identical to
Articles 81 and 82 of the EC Treaty, and the decision practice of the
European Commission and the case law of the Court of Justice and
the Court of First Instance of the European Communities serve as
an important guideline for the Dutch Competition Authority.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The Dutch Competition Authority can prohibit practices which are
contrary to the Competition Act, and impose an order sanctioned
with periodic penalty payments. It can also issue interim measures
and impose fines with a maximum of 10% of the annual
consolidated turnover of the undertakings concerned. Also the
Competition Authority may impose fines with a maximum of
€450,000 to the persons effectively in charge of the anti-
competitive practises. Furthermore, the Gas Act provides for sector
specific regulations regarding effective competition.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
The Competition Act provides for a mandatory merger control
regime which is largely modelled after the EC merger control
regime and equally applicable to the gas sector. Mergers, i.e.
changes in the control of an undertaking, require prior notification
to and clearance from the Dutch Competition Authority if: (1) the
combined worldwide (group) turnover of the undertakings involved
exceeds EUR 113.45 million; (2) the individual (group) turnover in
the Netherlands of at least two undertakings involved exceeds EUR
30 million; and (3) the EC merger control regime does not apply.
During a first phase investigation, the Dutch Competition Authority
will investigate if the merger may lead to a significant impediment
of competition in the Netherlands, in particular as a result of the
creation or the strengthening of a dominant position. A decision
must in principle be taken within four weeks from the date of
notification. In case of doubt, the Dutch Competition Authority will
decide that a licence is required. If so, the Dutch Competition
Authority will investigate during a second phase investigation if the
merger will indeed lead to a significant impediment of competition.
A decision must be taken within thirteen weeks from the date of the
request for a licence.
Under the Gas Act, the acquisition of ownership of a gas
distribution network or of shares of a network operator by non-
public entities is not allowed.
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Netherlands
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
Netherlands
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Apart from the limitations regarding the acquisition of ownership of
a gas distribution network or of shares of a network operator, there
are no statutory requirements or limitations on acquisitions of
interests in the natural gas sector by foreign companies.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
Regulatory policy in respect of the natural gas sector is largely
influenced by the policy defined and the legislation adopted at the
level of the European Union.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Any party having a dispute with a network operator or an LNG
company with respect to the fulfilment of its statutory duties may
file a complaint with the regulator. In principle, the regulator takes
a decision within two months following receipt of the complaint.
This is without prejudice to any other possible legal means,
including a civil court procedure, the complainant may have.
Under the Gas Act and the General Administrative Act, a decision
of the MEA and of the regulator on the basis of the Gas Act (or
secondary legislation) can be objected to by the parties to whom the
decision is directed and by any other parties that are directly and
individually affected. These objections must be filed with the
administrative body issuing the decision (i.e. the MEA or the
regulator).
Subsequent decisions of the MEA and regulator can be challenged
before the Trade and Industry Appeal Court (College van Beroep
voor het Bedrijfsleven), particularly on the basis of violation of the
Gas Act (and secondary legislation) or the so-called general
principles of law, such as the principles of proportionality and legal
certainty. In case of urgency, it is possible to file a request for
provisional measures with the President of the Trade and Industry
Appeal Court.
Decisions of the regulator on the basis of the Competition Act can
be challenged before the Rotterdam Tribunal Court and in appeal
before the Trade and Industry Appeal Court.
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10.2 Is the Netherlands a signatory to, and has it duly ratified
into domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Netherlands
In March 2009, the MEA send a bill to Parliament to amend the Gas
Act in order to remove barriers to entry on the Dutch gas market
and to facilitate market integration with gas markets in North-
western Europe. The MEA intends to improve the gas market’s
liquidity in view of the policy intention for the Netherlands to

function as the gas roundabout North-western Europe. The

The Netherlands is a signatory to, and has duly ratified into
domestic legislation, both the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards and the
Convention on the Settlement of Investment Disputes between
States and Nationals of Other States.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
There is no special difficulty in litigating, or seeking to enforce
judgments or awards, against Government authorities or State organs.
It is not possible to seize goods that are destined for the public service.
Furthermore, seizure of claims and goods that are under the State or a
public body requires a specific description of these claims or goods.
In summary proceedings, the State or public body can ask for the
immediate lifting of the seizure for reasons of public interest.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
To the best of our knowledge, there have been no instances in the
natural gas sector where foreign corporations have successfully
obtained judgments or awards against Government authorities or
State organs pursuant to litigation before domestic courts.
proposed amendment focuses on three key elements: (1) unitising
the separated national gas markets for low calorific and high-
calorific gas; (2) creation of a new balancing regime; and (3)
enabling purchasers of gas to resell any gas not used.
With respect to the unitisation of the two gas qualities, a new
regulated tariff for quality conversion services by GTS has been
introduced on all entry and exit points on the GTS transmission
network. The tariff is currently being contested as it charges quality
conversion charges to end users who only use high calorific gas and
therefore do not profit from quality conversion services. Border-to-
border transfers are subject to the tariff as well. The tariff therefore
arguably is in violation of European law and regulations.
A new balancing regime based on the legislative proposal is under
construction by GTS. The new balancing regime introduces
programme responsibility for gas programmes submitted by both
suppliers and buyers of gas in order to book entry, respectively, exit
capacity on the GTS transmission network. Programme
responsibility will transfer from seller to buyer at a virtual point in
the system. Individual deviations from the submitted programme
will only lead to unbalance charges by GTS when the system in
aggregate is out of balance. The new balancing regime is expected
to enter into force April 2011 after a six-month start up phase.
Since the programme responsibility will transfer from the in-
feeding party (seller) to the extracting party (buyer) and both parties
are responsible themselves for the respective capacity bookings, the
buyer will no longer be limited by the capacity bookings by the
shipper that effectively preclude him from onward sales of gas.
This is expected to improve market liquidity.

11 Updates

11.1 Please provide, in no more than 300 words, a summary of

any new cases, trends and developments in Gas
Regulation Law in the Netherlands.

In 2009, the two largest distribution companies in the Netherlands,

Nuon and Essent, were acquired by Swedish Vattenfall,
respectively, German RWE. As a result of the ban on privatisation
of the network operators, the acquisitions effectively had as a
condition precedent to these acquisitions the ownership unbundling
from their network operators. The third largest company, Eneco,
has indicated that its shareholders (various municipalities including
Rotterdam) do not wish to sell their shares. Eneco is currently
working on its unbundling plan with respect to its network operator
Stedin to comply with the unbundling provisions.

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Loyens & Loeff N.V. Netherlands

Roland de Vlam Marc Custers

Loyens & Loeff N.V. Loyens & Loeff N.V.
Fred. Roeskestraat 100 Fred. Roeskestraat 100
1076 ED Amsterdam 1076 ED Amsterdam
The Netherlands The Netherlands

Netherlands
Tel: +31 20 578 5517 Tel: +31 20 578 5892
Fax: +31 20 578 5862 Fax: +31 20 578 5862
Email: roland.de.vlam@loyensloeff.com Email: marc.custers@loyensloeff.com
URL: www.loyensloeff.com URL: www.loyensloeff.com

Roland W. de Vlam (1971), attorney, is a member of the
Competition & Regulatory practice group. He specialises in EU law,
competition and regulatory law, and particularly energy law. He
advises energy companies and other market parties on regulatory
aspects of transactions and represents his clients in court
proceedings as well as in litigation before the Office of Energy
Regulation of the Dutch Competition Authority. The scope of his
work extends across the entire energy chain: gas (E&P, storage,
LNG, transport and supply), power (generation, transport and
supply), renewables, heat and CO2.
Roland is a member of the Dutch Energy Law Association and the
Dutch European Law Society.
Education
Civil law and Tax law, University of Amsterdam, 1998.
Grotius Academie, Dutch and EC Competition Law, 2002.
Marc Custers (1965), attorney, is a member of the Competition &
Regulatory practice group. He specialises in EU law, competition
law (merger control, anti-trust and state aid) and energy law. He
has experience in proceedings before the European and Dutch
courts, the Dutch Competition Authority and the Dutch Energy
Regulator.
Marc is a member of the Netherlands Association for European
Law, the Netherlands Association for Competition Law and the
Netherlands Association for Energy Law. He has published various
articles on competition law and energy law.
Education
French language and literature, Radboud University Nijmegen,
1987.
Studies in the field of international and EU law, LUISS University
Rome, 1991/1992.
Dutch law, Radboud University Nijmegen, 1992.
Grotius Academy corporate law, 1996.

Our Energy & Utilities practice has been advising our clients on legal and tax issues in the Netherlands energy sector
for over 20 years. Our in-depth know how and experience, both on taxation and legal matters, in respect of all sub
sectors in the entire energy supply chain makes our practice unique in the Netherlands.
Max Oosterhuis heads the corporate and regulatory practice of the Energy team, which combines the transaction skills
and expertise of all relevant fields of the law that apply to the energy sector. The tax practice of our Energy team is
headed by Waldo Kapoen.
The two groups work closely together. The focus within the Energy (E&P) group is on all legal and tax issues in relation
to upstream activities in the field of exploration and production of oil and gas. The activities in the field of trade,
transportation and supply of gas and power and related products and services have been allocated to the Energy
(Network & Supply) group.
In total, more than 30 attorneys, tax lawyers and civil notaries are intensively involved with transactions, litigation and
other developments related to the energy sector.

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 Chapter 22
New Zealand
Bell Gully
1 Overview of Natural Gas Sector
1.1 A brief outline of New Zealand’s natural gas sector,
including a general description of: natural gas reserves;
natural gas production including the extent to which
production is associated or non-associated natural gas;
import and export of natural gas, including liquefied
natural gas (LNG) liquefaction and export facilities, and/or
receiving and re-gasification facilities (“LNG facilities”);
natural gas pipeline transportation and
distribution/transmission network; natural gas storage; and
commodity sales and trading.
New Zealand’s natural gas market is very small by international
standards, with 155 PJ (net) produced in 2008. Nevertheless, natural
gas is an important source of primary energy, providing
approximately 21% of New Zealand’s total primary energy supply.
While direct consumption of natural gas is low, the industry plays an
important role in the New Zealand economy, providing fuel for
electricity generation and primary fuel for industry. In 2008, 20% of
natural gas was used in the industrial sector, 54% was used for
electricity generation and 19% was used in the petrochemical sector.
New Zealand’s natural gas is entirely indigenous and is sourced
from the Taranaki region, and in particular from the Pohokura and
Maui fields.
Natural gas is transported through more than 3,400 km of high
pressure pipes to feed in excess of 2,800 km of intermediate,
medium and low pressure distribution networks throughout the
North Island. The high pressure networks are owned by Maui
Development Limited (MDL) (being the owner of the Maui
Pipeline) and Vector Gas Limited (Vector) (being the owner of the
Vector Pipeline). These pipelines connect the gas fields of Taranaki
to the major load centres of the North Island.
1.2 To what extent are New Zealand’s energy requirements
met using natural gas (including LNG)?
Natural gas has traditionally played an important role in New
Zealand’s primary energy supply. The Ministry of Economic
Development’s Energy Data File 2009 breaks down the primary
energy supply (gross) into seven categories:
Oil: 281 PJ (36.7%).
Gas: 160 PJ (20.9%).
Coal: 83 PJ (10.1%).
Geothermal: 113 PJ (14.8%).
Hydro: 80 PJ (10.5%).
Other renewables: 47 PJ (6.2%).
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David Coull
Angela Bamford
Waste heat: 1 PJ (0.2%).
New Zealand does not currently import LNG. Genesis Energy (a
state owned enterprise) and Contact Energy are partners in a joint
venture known as Gasbridge, which had planned to make
preparations for a LNG import terminal at Port Taranaki. The
partners have publicly stated that the importation of LNG may not
be required until mid or late next decade.
The newly elected National-led Government has stated its belief
that gas is a critical aspect of New Zealand’s energy mix and has
expressed its commitment to support continued growth in the gas
industry. It has repealed the Electricity (Renewable Preference)
Amendment Act 2008 which placed a 10-year restriction on new
fossil-fuelled electricity generation thereby recognising the
importance of natural gas in ensuring security of supply and
affordable electricity.
1.3 To what extent are New Zealand’s natural gas
requirements met through domestic natural gas
production?
Natural gas used in New Zealand is entirely indigenous. Some LPG
is imported.
1.4 To what extent is New Zealand’s natural gas production
exported (pipeline or LNG)?
New Zealand does not export natural gas.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The exploration and development of the New Zealand gas resource
is governed by the Petroleum Act 1937, the Crown Minerals Act
1991 and the Minerals Programme for Petroleum 2005 (issued
under the Crown Minerals Act). While those Acts state the law
relating to the management of Crown owned minerals, the Minerals
Programme for Petroleum is prepared by the Minister of Energy
and contains the policies and procedures governing the
development of all petroleum resources (including gas).
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Responsibility for giving effect to both instruments lies with Crown
Minerals, an office of the Ministry of Economic Development.
The Minerals Programme for Petroleum includes a range of
Government exploration incentives, based around royalty
concessions and the funding of seismic acquisition. Other recent
Government initiatives include:
a seismic data acquisition project, which involved
purchasing seismic data over the Northland Basin, the
deepwater Taranaki Basin, the Great South Basin and the
East Coast and Raukumara Basins. This data was offered
freely to explorers and has led to the award of several
exploration permits; and
the announcement of the Government’s intention to extend,
until 2014, the current tax exemption on the profits of non-
resident operators of offshore rigs and seismic vessels (which
was set to expire on 31 December 2009).
As noted above (question 1.2) the Government has also recently
repealed the Electricity (Renewable Preference) Amendment Act
2008 which placed a restriction on new fossil-fuelled electricity
generation.
The Gas Act 1992 outlines the responsibilities of gas operators and
owners of gas fittings, and provides for a co-regulatory model of
gas governance. Under this system, an ‘industry body’ may
recommend regulations and rules to the Minister in the areas of
wholesaling, processing, transmission and distribution of gas. The
Gas Industry Company (GIC) is the industry body approved
pursuant to the Gas Act and has, since its approval in late 2004,
made several recommendations. The GIC is required to have regard
to the objectives and outcomes set out in the Government Policy
Statement on Gas Governance 2008 when making such
recommendations.
Despite promoting industry-led solutions and light-handed
regulation, the Government has maintained oversight of the process
and has reserved the right to regulate unilaterally where industry
solutions are not considered appropriate. The Government has also
indicated its intention to establish a regulatory authority of its own
if the GIC does not deliver the required outcomes.
The Resource Management Act 1991, the Hazardous Substances
and New Organisms Act 2004, and the Maritime Transport Act
1994 also play important roles in any natural gas development. Due
to the time-consuming nature of the resource consent process, the
Minister for the Environment may use a ‘call-in’ process (on a case
by case basis) to streamline the appeals process and decrease
consent timeframes.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
All gas in its natural state is property of the Crown. Property in the
gas will pass to a permit holder who has obtained the gas lawfully
and in the course of activities authorised by a permit.
As described below, three types of permits are available under the
Crown Minerals Act: prospecting; exploration; and mining permits.
While prospecting rights are non-exclusive and do not imply
subsequent rights, exploration and mining rights are exclusive.
Further, an exploration permit generally gives a subsequent right to
apply for a mining permit.
In addition, some licences continue to exist under the Petroleum Act
1937.
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New Zealand
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
New Zealand
Three types of permits are granted by the Minister of Energy:
prospecting; exploration; and mining.
Prospecting permits allow for reconnaissance of prospective gas
fields, typically by the collection of geological and geophysical
data. Such permits are allocated on a non-competitive basis, may
be non-exclusive when granted and are valid for up to one year.
Exploration permits allow for physical surveying, appraisal drilling and
testing of petroleum discoveries. Many exploration permits originate
with the Minister of Energy issuing a Petroleum Exploration Permit
Blocks Offer (Blocks Offer). The winning tenderer in the offer process
is afforded exclusive exploration rights, as well as subsequent rights to
apply for a mining permit. Exploration permits run for up to five years,
a renewal for five years is available over no more than 50% of the area
and appraisal extensions may be granted in some circumstances.
‘Priority in time’ applications are also used to obtain an exploration
permit where explorers wish to start an immediate and extensive
effort over a certain area without waiting for a Blocks Offer.
Certain criteria must be fulfilled, including a commitment to a strict
minimum work programme.
Mining permits are normally granted to exploration permit holders
who have discovered a petroleum field in the area of their permit.
In evaluating a mining permit application, the Minister must be
convinced of the viability of the field, that the applicant’s work
programme complies with good mining and exploration practice
and of the technical and financial capability of the applicant.
Mining permits allow for operations relevant to the extraction,
separation, treatment and processing of petroleum. A mining
permit’s duration will depend on the size of the discovery and rate
of production, and may be granted for up to 40 years.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
The State does not currently seek to develop gas reserves itself.
However, the State Owned Enterprise, Genesis Energy, (100% owned
by the Crown) has equity interests in the natural gas sector (including
a 31% interest in the Kupe Gas Project) but has recently announced it
is scaling back its upstream involvements. In addition, Mighty River
Power (another State Owned Enterprise) has natural gas interests,
including a 30% interest in PEP 51149, one of the nine exploration
permits granted in the 2008 Offshore Taranaki Blocks Offer.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
A hybrid royalties regime applies to petroleum permits, comprising
of an ad valorem royalty and an accounting profit royalty. For
mining permits where the net sales revenue has not exceeded NZ$1
million in one reporting period, only the ad valorem royalty is
payable. If the net sales revenue exceeds this amount the permit
holder must calculate both the ad valorem and accounting profit
royalties and pay whichever is the higher.
As part of the Government’s current incentives package, the ad
valorem royalty has been reduced from 5% to 1% of the net sales
revenue for gas discoveries made during the period 30 June 2004 -
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31 December 2009; similarly, the accounting profit royalty has been
reduced from 20% to 15% for the first $750 million gross offshore
sales and the first $250 million onshore sales.
For any discoveries made after 31 December 2009, the ad valorem
royalty will be 5% of the net sales revenue for gas discoveries and
New Zealand
the accounting profit royalty will be 20% of accounting profits.
2.6 Are there any restrictions on the export of production?
This issue has not yet arisen in the gas industry. Nevertheless,
section 45(2) of the Crown Minerals Act 1991 provides that the
Minister may direct, in certain circumstances, that petroleum be
refined in New Zealand.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
There are no such restrictions.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
Transferability of permits is limited; bids will not generally be
accepted where the bidder’s intention is to trade the permit. The
Crown Minerals Act 1991 provides for the assignment of a permit
interest to allow for risk sharing, and for the transfer of permits as
part of commercial transactions. However, transactions are subject
to the consent of the Minister of Energy (section 41 of the Crown
Minerals Act and section 23 of the Petroleum Act 1937 for licences
granted under that Act).
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
Participants must make commitments contained in the work
programmes that must be furnished to the Minister. In addition, on
the transfer or grant of a permit or permit interest, the Minister may
require parent company guarantees or support for lowly capitalised
subsidiaries.
Under the Petroleum Act 1937 licence holders were required to
lodge a deposit or bond, to be returned when the licence has expired
or ceased.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
A security interest may be granted over a licence or permit granted
under the Petroleum Act 1937 or the Crown Minerals Act 1991.
However, the transfer restrictions in section 23 of the Petroleum Act
and section 41 of the Crown Minerals Act apply upon the exercise
of any such security interest (as above, question 2.8).
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Development of the gas resource may require resource consents,
building consents, permits and compliance plans under the
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following Acts: the Resource Management Act 1991; the Building
Act 2004; the Maritime Transport Act 1994; the Hazardous
Substances and New Organisms Act 2004; and, the Overseas
Investment Act 2005. Further, the Health and Safety in
Employment Act 1992 (and relevant regulations under that Act)
requires compliance with certain workplace safety standards.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
Decommissioning and abandonment procedures typically constitute
part of the work programme included as part of a permit granted
under the Crown Minerals Act 1991. Further, the requirements of
the Resource Management Act 1991, the Health and Safety in
Employment Act 1992, the Maritime Transport Act 1994, and the
Hazardous Substances and New Organisms Act 2004 will have to
be observed.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Due to the entirely indigenous supply of natural gas in New
Zealand, and the absence of exports, no specific regime exists. If
New Zealand were to import LNG, for example, companies would
need to comply with the environmental and safety provisions of
Maritime Transport Act 1994 and the Hazardous Substances and
New Organisms Act 2004.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
New Zealand’s high-pressure gas network is owned by two entities:
Vector, which runs pipes to primary load centres; and MDL, which
operates the Maui high-pressure pipeline. The Vector network is
also a welded party to the Maui pipeline.
The Maui Pipeline Operating Code (MPOC) provides the regime
that governs parties shipping gas through the Maui pipeline. The
Vector Transmission Code (VTC) provides for non-discriminatory
access to the Vector network for users, as well as minimum
standards of conduct and disclosure on behalf of the pipeline owner.
There are also specific regulatory requirements for gas pipelines
and gas processing facilities under the Commerce Act 1986 and the
Gas Act 1992.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
Resource and building consents will be required under the Resource
Management Act 1991 and Building Act 2004 respectively.
Consent and approval may be required under the Hazardous
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Substances and New Organisms Act 2004 to transport a potentially
dangerous substance such as natural gas. There are also requirements
relating to land access in the Crown Minerals Act 1991.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
There is no longer any presumption in favour of permit holders having
access rights to land: companies must privately negotiate agreements
to either purchase land, lease land or obtain a pipeline easement.
Under the Resource Management Act 1991 a network utility
operator may apply to be deemed a “requiring authority”. If such
application is granted, the operator may be able to designate land
for laying pipeline, a status which suspends the normal provisions
of the district plan over the designated route.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Both Vector and MDL operate under “open access” regimes as
outlined in question 4.1 above. See further, below, question 4.6.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
Injection points along the high-pressure network introduce gas from
producers, whilst delivery points distribute gas to facilities and
local distribution networks. Access is governed by the MPOC (for
the Maui Pipeline) and the VTC (for the Vector pipeline). Aside
from the open access agreements, co-operation is governed by
private contracts.
Three major types of agreement operate: Transmission Services
Agreements between the pipeline owner and the shipper (a retailer
or direct purchaser of gas) (TSAs); Interconnection Agreements
between the pipeline owner and welded parties (parties who have
physical assets connected to the transmission pipelines) (ICAs); and
Gas Supply Agreements between the producer (seller of gas) and
the shipper (GSAs).
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
As noted above at questions 4.1 and 4.5, two regimes govern third
party access to the high-pressure transportation system in New
Zealand, the MPOC and the VTC.
The MPOC provides third parties with non-discriminatory, transparent
access to the Maui pipeline. As part of this regime MDL publishes the
MPOC on its website. Further, all ICAs and TSAs that MDL enters
into incorporate the MPOC into the agreement.
Similarly, the VTC is designed to ensure transparency and open
access to the Vector pipeline. There is a movement toward all the
shippers on the Vector network falling under TSAs that incorporate
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the VTC, however, it is unclear whether all of the relevant shippers
have adopted these standard TSAs at this stage.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
New Zealand
which may be charged) regulated?
Generally parties are free to agree the price of transport of gas
within the confines of the MPOC and VTC. In addition, the
provisions of the Commerce Act 1986 (see, generally, section 8
below) and the Gas Act 1992 are potentially relevant.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
GSAs operate between the producer and retailer, and the retailer and
end-user. Further, the retailer will contract with the distributor in the
area under a Distribution Services Agreement (DSA). The main
distribution networks are operated by Vector and Powerco.
Despite being historically regarded as geographically distinct natural
monopolies, distribution networks are subject to effective
competition in certain areas: in Auckland, Wellington and the
Hawke’s Bay, Nova Gas has launched networks by-passing the
incumbent distributors.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
Distributors must comply with the requirements of the Gas Act
1992 and the Regulations pursuant to that Act. Compliance by way
of consents or permits may also be required under the Resource
Management Act 1991, the Building Act 2004 and the Hazardous
Substances and New Organisms Act 2004.
5.3 How is access to the natural gas distribution network
organised?
The owner of the local distribution network will contract with the
retailer by way of a DSA. Although there are significant emerging
pockets of competition, many local distribution networks are
discrete to each area and unchallenged in their location.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
Generally no.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
Until recently, parties have been free to agree fees for accessing the
distribution network, subject only to generic competition laws.
However, in October 2008, the Commerce Commission released
the Authorisation for the Control of Supply of Natural Gas
Distribution Services by Vector and Powerco Ltd, requiring average
price reductions for both companies (due to last until July 2012).
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5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
New Zealand
Generally, the Commerce Act 1986 prohibits agreements or
business acquisitions that substantially lessen competition (see
below, question 8.2). Aside from the Commerce Act, investors may
be required to comply with the Overseas Investment Act 2005 if the
transaction involves sensitive land or a significant business asset
under that Act (see below, question 9.1).
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
In the wholesale market, GSAs are used to transfer gas from
producers to wholesale market participants such as retailers,
electricity generators and wholesale end-users. TSAs are also
required with the pipeline owner for the purposes of delivery.
Retailers enter into DSAs with local distribution network owners
and supply gas to end-users of all types (industrial, commercial, and
residential) under gas supply agreements.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Although there is typically only one distributor in any given area
(and therefore options are limited), and bundled products do exist,
there are no requirements to purchase bundled products in New
Zealand.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
No LNG facilities currently exist in New Zealand.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Although no such facilities currently exist, development of LNG
facilities would require resource consents, building consents,
permits and compliance plans under the following Acts
respectively: the Resource Management Act 1991, the Building Act
2004, the Maritime Transport Act 1994, and the Hazardous
Substances and New Organisms Act 2004. Overseas Investment
Act 2005 clearance may also be required (see, below, question 9.1).
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
No LNG facilities exist in New Zealand (see question 7.1, above).
However, if LNG became a significant component of the New
Zealand market, controls could potentially be exercised under the
Commerce Act 1986.
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8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The Commerce Act 1986 prohibits anti-competitive practices and
allows for goods and services to be subject to price control. The
Commerce Commission is responsible for administering the
Commerce Act.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
Under the Commerce Act the following are prohibited: any
agreement containing a provision that substantially lessens
competition in a market (section 27); arrangements to exclude
competitors (section 29); agreements to fix prices (section 30);
taking advantage of substantial market power to prevent
competition (section 36); and resale price maintenance (sections 37
and 38).
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The Commerce Commission may:
seek a Cease and Desist Order from a Cease and Desist
Commissioner;
seek an injunction from the High Court under section 81 of
the Commerce Act; or
take a private civil prosecution to seek a pecuniary penalty
and damages for breach.
If the Court finds that a person has breached the Commerce Act, it
may impose pecuniary penalties on businesses that must not exceed
the greater of:
$10 million; or
either:
three times the value of any commercial gain or
expected commercial gain resulting from the breach; or
if commercial gain is not known, 10% of the turnover
of the business and all of its interconnected businesses
(if any).
The Commerce Act also creates personal liability for anti-
competitive conduct. While pecuniary penalties may not exceed
$500,000 for an individual, the Court may also order that the
individual concerned be excluded from the management of a body
corporate for up to five years. Moreover, companies may not
indemnify individuals involved in price-fixing.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
The Commerce Act prohibits mergers and acquisitions that have the
effect or likely effect of substantially lessening competition in a
market. This Act provides a voluntary pre-acquisition notification
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regime whereby companies may apply for either clearance or
authorisation of proposed mergers or acquisitions. The
Commission must grant clearances where it is satisfied a transaction
is unlikely to substantially lessen competition, and authorisations
for transactions that, although lessening competition, would
provide public benefits outweighing the detriment caused.
While the Commission might apply to a Cease and Desist
Commissioner for an order to stop a transaction, ultimate authority
lies with the courts and their jurisdiction to hear judicial review and
appeals of Commission decisions as well as claims by third parties.
As noted at questions 5.6 and 9.1, Overseas Investment Office
(OIO) clearance may also be required and may take from three to
four months to obtain. A similar timeframe can be expected for
gaining approval for the transfer of permits under the Crown
Minerals Act (as noted at question 2.8, above).
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
In broad terms, potential overseas investors must obtain the consent
of the OIO in two situations: when making a significant investment
in a New Zealand business or asset, and when purchasing, directly
or indirectly, “sensitive land”.
Consent of the OIO will be required when the overseas person
(together with its associates) wishes to invest more than NZ$100
million in an asset or business or where the overseas person
(together with its associates) acquires a 25% or more interest in a
company where:
the consideration provided exceeds $100 million; or
the assets of the company and certain subsidiaries exceed
$100 million; or
the company holds or controls sensitive land.
While investors may not purchase seabed, it is possible that an
onshore area might, in certain cases, constitute sensitive land (by
virtue of size and rural location, or proximity to features such as
conservation areas, waterways or parks). Applications relating to
land assets are assessed by the Minister of Finance and the Minister
of Land Information. The potential investor must demonstrate
business experience and acumen relevant to the investment,
financial commitment to the investment and their good character.
In addition, in the case of sensitive land, the OIO must be satisfied
the overseas person is ordinarily resident in New Zealand or is
intending to reside in New Zealand, or, the overseas investment
will, or is likely to, benefit New Zealand.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
The Government’s energy policy is influenced by the Kyoto
Protocol and New Zealand’s obligations under that Protocol have
been implemented through the Climate Change Response Act 2002
and the Climate Change Response (Emissions Trading)
Amendment Act 2008. The Climate Change Response Act is
currently under review and it is possible the Government may
introduce measures to provide greater financial protection for
business under the Emissions Trading Scheme created by the Act.
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New Zealand
Despite this commitment to the Kyoto Protocol, the Government
recently repealed the Electricity (Renewable Preference)
Amendment Act 2008, which, among other things, imposed a ten-
year moratorium on new thermal generation of electricity.
Nonetheless, the Government has indicated that it intends to retain
New Zealand
a target to reach 90% of electricity from renewable sources by 2025
provided this goal does not impact security of supply.
The Government is also currently reviewing the New Zealand
Energy Strategy and the New Zealand Energy Efficiency and
Conservation Strategy. The redraft is likely to refocus the emphasis
from the energy sector’s response to climate change to climate
change being a source of New Zealand’s competitive advantage.
New Zealand has ratified the United Nations Convention on the
Law of the Sea. Although this treaty mentions the development of
gas reserves, it does not directly affect regulatory policy in respect
of natural gas.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
No compulsory dispute resolution procedures are mandated between
supply-side participants such as regulators, producers and retailers.
However, the Electricity and Gas Complaints Commission provides a
binding disputes resolution service for consumers who have had
disputes with their retail provider. Companies signed up to the
Complaints Commission include Contact Energy, Vector, Genesis
Energy and Meridian Energy.
10.2 Is New Zealand a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
The Arbitration Act 1996 ratifies the New York Convention in New
Zealand; the Arbitration (International Investment Disputes) Act
1979 provides that articles 18, 20 to 24, and chapters II to VII of the
ICSID have the force of law in New Zealand.
In addition, the GIC has certain dispute resolution functions under the
VTC and the MPOC in respect of the pipelines covered by those
codes.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
No difficulty in taking legal action has been experienced.
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10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
New Zealand
The industry has recently seen the release of new customer
switching and downstream rules and the development of critical
contingency regulations, which are considered to be important for a
well functioning retail market and robust gas network. Specific gas
safety regulations are currently being drafted and an Infrastructure

Yes. Foreign corporations have used the normal litigation process
to seek to enforce certain rights in relation to petroleum permits
against the Crown.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in New Zealand.
As previously indicated the newly elected Government has
expressed its belief that gas has an important part to play in New
Zealand’s energy environment, and it is committed to support and
encourage the continued growth of the gas industry.
Bill has also been announced, which will amend several Acts,
including the Gas Act, to facilitate infrastructure development by
removing unnecessary barriers and improving consistency of
regulatory arrangements.
In addition, on 18 November 2009, the Government announced its
proposed action plan with the aim of maximising the gains from
New Zealand’s oil and gas resources. The action plan will support
the Government’s overarching strategic objective to ensure New
Zealand is a highly attractive global destination for oil and gas
exploration and production investment, and has several proposed
core work streams to be undertaken during 2010.

David Coull Angela Bamford

Bell Gully Bell Gully
171 Featherston Street 171 Featherston Street
Wellington Wellington
New Zealand New Zealand

Tel: +64 4 915 6863 Tel: +64 4 915 6794

Fax: +64 4 915 6810 Fax: +64 4 915 6810
Email: david.coull@bellgully.com Email: angela.bamford@bellgully.com
URL: www.bellgully.com URL: www.bellgully.com

David specialises in corporate, securities and energy law. He
advises on M&A transactions, securities offerings and the
negotiation of commercial contracts and joint ventures. He has a
particular focus on the oil and gas industry and regularly acts as a
specialist advisor to participants in the industry.
His recent experience includes advising in relation to the acquisition
of permit interests, JVOAs and farm-ins, and permit-related
obligations (including royalty and work programme obligations).
David’s international experience comprises a three-year period in the
New York and London offices of Cravath, Swaine & Moore LLP. He
also holds an LLM from Cambridge University, United Kingdom.
Angela works in Bell Gully’s corporate department with a particular
focus on the oil and gas and electricity sectors.
She has experience in advising clients regarding general corporate
and commercial matters, including drafting and negotiating
commercial contracts, and regularly advises on upstream and
downstream oil and gas activities, including in relation to joint
ventures, farm-ins, JVOAs, gas transmission and gas sales
agreements.
Angela holds an LL.B (Hons) and B.Com (Economics) and is an
executive committee member of the Law and Economics Association
of New Zealand.

Bell Gully is New Zealand’s leading commercial law firm, offering innovative legal solutions to domestic and
international clients, delivered by 46 partners and 190 legal staff. Internationally, we work with prestigious
multinational clients and maintain strong links with leading law firms in Australia, Asia, Europe and the US.
We assist business and government achieve successful outcomes in challenging market conditions. Our lawyers
consistently deliver practical solutions to everyday and unique problems with a constant focus on achieving the best
result possible.
Our 10-partner energy practice has been actively involved in advising clients in every aspect of the industry for over
two decades. During this time we have worked on many of the most significant transactions and projects within the
oil and gas industry and broader energy sector in New Zealand.
The team has leading upstream expertise in: permitting activities; M&A transactions; drafting and negotiation of JVOAs
and farm-out agreements; operatorship issues; operator contracts and arrangements; regulatory matters; transmission
and interconnection contracts; land acquisition and land access arrangements; petroleum sales and marketing
arrangements; and litigation and dispute resolution.

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Chapter 23
Nigeria
ÆLEX
1 Overview of Natural Gas Sector
1.1 A brief outline of Nigeria’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Nigeria has abundant gas resources. As the world’s seventh largest
and Africa’s largest deposit of natural gas with current reserve at
over 185TCF, it is described as a gas province with some oil in it.
Nigeria’s natural gas reserves are largely unexploited. However,
large quantities of associated gas are flared in the process of oil
production. The Federal Government of Nigeria is currently
implementing policies to reduce gas flaring by stimulating domestic
gas utilisation.
The major export gas in Nigeria is LNG. Nigerian Liquefied
Natural Gas Company Limited (NLNG) (Nigeria’s only operating
LNG company), has six trains and is building the seventh. Other
major LNG projects in different stages of development include the
US$ 3.5 billion Brass LNG and the US$ 7 billion OKLNG project.
Recently, a number of floating LNG projects has been proposed.
Apart from the export of LNG, pipeline gas will, from 2009, be
exported through the West African Gas Pipeline (WAGP) to
countries in West Africa such as Togo, Benin Republic and Ghana.
The Nigerian Gas Company (NGC), a subsidiary of the Nigerian
National Petroleum Corporation (NNPC), is responsible for gas
transmission in Nigeria through an unintegrated gas pipeline
network. Current pipeline infrastructure comprises basically of two
unintegrated pipeline networks totalling approximately 1,100
kilometres: the Alakiri-Obigbo-Ikot Abasi Pipeline, (the Eastern
network), and the Escravos-Lagos Pipeline System (ELPS), (the
Western network), and dedicated pipeline infrastructure owned by
the NLNG and the NNPC/SPDC/Total joint venture. There are
local distribution companies such as Gaslink Limited and Shell
Nigeria Gas which distribute natural gas to major industrial areas in
the western and eastern parts of Nigeria.
The government has recently developed and is promoting the
Nigerian Gas Master Plan (NGMP) which is expected to underpin
the development of gas infrastructure including central processing
facilities and transmission pipelines in Nigeria.
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Adegbite Adeniji
Sina Sipasi
1.2 To what extent are Nigeria’s energy requirements met
using natural gas (including LNG)?
A mix of energy sources is used to meet Nigeria’s energy needs.
They include firewood (used predominantly as cooking fuel in the
rural areas), hydro energy, refined petroleum products and natural
gas. Nigeria’s energy requirements are met through oil (64%),
natural gas (27%) and hydro-electricity (8%). It is estimated that
about 80% of natural gas utilised in Nigeria is used for power
generation. The remaining 20% is utilised as industrial fuel in the
cement, fertiliser, rubber, manufacturing, aluminium and steel
industries. LNG is not used in Nigeria.
1.3 To what extent are Nigeria’s natural gas requirements met
through domestic natural gas production?
Nigeria’s natural gas requirements are met entirely by local
production. Previously, LPG was imported from Cotonou, Benin
Republic. However, due to the fact that all the volumes of LPG
consumed in the country are largely from the NLNG facility and
Nigeria’s six off-takers supply 90% of LPG in Nigeria today, there
has been no cause to import any significant volumes.
1.4 To what extent is Nigeria’s natural gas production exported
(pipeline or LNG)?
Nigeria currently exports 22 million tonnes of LNG to Italy, Spain,
Belgium Portugal, U.S.A. and Mexico. Natural gas is currently
being supplied through the WAGP to Ghana at a steady rate of
approximately 30 million standard cubic feet per day. It is expected
that by the end of 2009, export of natural gas through the WAGP to
Ghana will increase to 120 million standard cubic feet and export of
natural gas to Benin Republic and Togo will commence.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The Constitution of the Federal Republic of Nigeria 1999 vests the
Federal Government with title over all petroleum, which includes
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gas, under or upon any land in Nigeria, its territorial waters and its
exclusive economic zone. The principal legislation regulating the
exploration, production and distribution of natural gas in Nigeria is
the Petroleum Act. The Petroleum Act vests in the Federal
Government, the ownership of petroleum resources in Nigeria.
Petroleum is defined in the Act to include natural gas. Under the
Act, prospecting, exploration, production and distribution of
Nigeria
petroleum (including natural gas) may only be done with the
consent of the minister in charge of petroleum (Minister). The Act
gives the minister power to issue necessary regulations necessary
for the discharge of its duties under the Act. The Petroleum Drilling
and Production Regulations is a subsidiary legislation made
pursuant to the Petroleum Act and it regulates in detail natural gas
exploration and production activities.
The Oil Pipelines Act and the Oil Pipelines Regulations govern the
licensing and permitting processes for the construction, operation
and maintenance of gas pipelines. The Petroleum Profits Tax Act
and the Companies Income Tax Act regulate the taxation of profits
made from the production and distribution of natural gas
respectively. The National Environmental Standards and
Regulations Enforcement Agency Act (NESREA), Environmental
Impact Assessment Act (EIA) and the Environmental Guidelines
and Standards for the Petroleum Industry in Nigeria (EGASPIN)
prescribe environmental and emission standards applicable to
natural gas activities in Nigeria.
The government recently approved the Nigerian Gas Master Plan
(NGMP), which is comprised of three main sections. The first is the
Gas Pricing Policy, which provides a framework for establishing
the minimum gas price that any category of gas buyer can be
charged. The second is the Domestic Gas Supply Obligation, which
assures gas availability for critical domestic gas utilisation projects
that will advance the economic growth in Nigeria. The third, the
Gas Infrastructure Blueprint, provides for the establishment of three
gas gathering and processing facilities, a network of gas
transmission lines, which will result in a reduced cost of gas supply
from Nigeria. Pursuant to the NGMP, the minister has issued the
National Gas Supply and Pricing Regulations to regulate the supply
of gas to the domestic sector.
The Department of Petroleum Resources (DPR) regulates gas
activities in Nigeria. The Department of Gas established under the
National Gas Supply and Pricing Regulations, is expected to ensure
the availability of gas supply to the domestic market.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
The rights to win and carry away petroleum, including natural gas,
in Nigeria are granted to investors by the Minister through the Oil
Prospecting Licence (OPL) and the Oil Mining Lease (OML). An
OPL or OML is held by companies either in joint venture with the
Nigerian National Oil Corporation (NNPC) or as a sole risk
operation. Since the early nineties, the government has shown
preference for PSCs, which allow investors to bear exploration and
production risks in return for cost oil and part of profit oil. The
PSCs do not however grant investors a right to gas. Under PSCs,
investors may only develop gas reserves and share in gas produced
under a gas development agreement to be agreed between the
NNPC and respective investors.
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2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
The term/duration and the scope of rights differ according to the
respective licence. An Oil Exploration Licence (OEL) has a one
year term; it terminates on the 31st of December following the date
of the grant, and can be renewed for one further year. An Oil
Prospecting Licence (OPL) has a duration of not more than five
years including any renewals while an OML has a duration of not
more than 20 years. The rights conferred by these licences are
slightly different. An OEL confers a non-exclusive right to explore
for petroleum, while for both an OPL and OML, an exclusive right
to explore, carry away and dispose of petroleum.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
Section 1 (1) of the Petroleum Act vests the entire ownership and
control of petroleum, which includes natural gas, in the State. In
addition, by virtue of paragraph 35 (b) (i) of the First Schedule of
the Petroleum Act, the government has the right to take associated
gas produced by the licensee or lessee free of cost at the flare or at
an agreed cost and without payment of royalty.
The state participates through the NNPC in exploration and
production by entering into joint ventures with private investors,
and lately, by signing PSCs with contractors. The joint venture and
PSC structure entitles the state to share in production.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
Nigeria derives value from natural gas development from royalty,
taxes and share of production.
Royalties for offshore fields is 5% and for onshore fields is 7% of
the natural gas production. Taxes include the petroleum profits tax
of 85% on chargeable profits from exploration and production; the
companies income tax of 30% on the total profits of a company
derived from gas supply and distribution; education tax of 2% on
the profits of all Nigerian companies; and the Niger-Delta
Development Commission (NDDC) levy of 3% of the total annual
budget of any oil producing company operating offshore and
onshore of the Niger Delta area. Gas processing companies are also
subject to this tax.
Royalty and petroleum profits tax are not applicable to gas
transferred from a natural gas liquid facility to a gas-to-liquid
facility.
Revenue accruing to NNPC under its joint ventures and PSCs is
paid into the Federation Account.
2.6 Are there any restrictions on the export of production?
Under the National Gas Supply and Pricing Regulations, gas
producers are restricted from exporting gas except they meet their
domestic gas supply obligation.
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2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
No, there are no currency exchange restrictions or restrictions on
the transfer of funds derived from production out of Nigeria.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
Under the OPL and the OML, disposal or transfer of gas
development rights may only be done with the consent of the
Minister.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
Participants are not obliged to provide any security or guarantees in
relation to natural gas development. However, in order to qualify
for participation, they are to provide evidence of financial
resources, technical capability.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
The rights to develop natural gas reserves are granted as OPL or
OML in Nigeria. These rights cannot be pledged as security. This
is because it will amount to an assignment which cannot be validly
made without the Minister’s consent. There is no restriction on
booking the rights for accounting purposes.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
During exploration and production, several permits are to be
obtained from the DPR and the Federal Ministry of Environment,
Housing and Urban Development (FMEHUD). The work
obligations have to be approved by the DPR. Safety standards and
environmental permits for the different stages of operation are
obtainable from the DPR and the FMEHUD respectively.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
Abandonment is regulated by the Petroleum (Drilling &
Production) Regulations. The plugging or abandonment of a well
may only be done with the written permission of the Director of
DPR. The Director of DPR may direct that no borehole or well may
be plugged, or no work may be executed, except in the presence of
an officer of the minister in charge of mines. An abandoned
borehole or well may only be re-drilled with the written permission
of the Director of DPR.
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3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Nigeria
There are currently no specific rules that apply to cross border sales
or deliveries of natural gas. Such activities are regulated by
contract between the parties. An export permit issued by the
Ministry of commerce is however required to export natural gas.
The recently issued National Domestic Gas Supply and Pricing
Regulations, however, impose some limitations on cross-border
sales of natural gas. Under these regulations, the proposed
Department of Gas would have powers to impose domestic gas
supply obligation on every gas producer. This obligation would
require each gas producer to dedicate a specified volume of its gas
to the domestic market. The supply of gas to any export projects is
subject to compliance by the supplier of gas with its reserves
obligation as may be specified by the Department.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
The transportation pipelines, gas processing facilities and other
associated infrastructure are currently owned by individual upstream
gas producers and are dedicated to their respective operations.
In order to enable flexible deployment of gas to domestic and export
markets, the Ministry of Energy has developed a Gas Master Plan
Infrastructure Blueprint. This includes a network of gas hubs which
will comprise of secondary gas gathering facilities from designated
nodes of the upstream gas producers to a network of gas processing
facilities where gas will be processed to a national specification and
evacuated via transmission pipelines. Under this framework,
transportation pipelines from the well heads to the designated nodes
will be owned and operated by the gas producers while pipelines for
the transportation of gas from the designated nodes to the transmission
pipelines will be owned and operated by the hub operator.
The Oil Pipelines Act, 1956 regulates the construction, operation
and maintenance of gas pipelines and associated infrastructure and
the Petroleum Act. These laws are implemented by the DPR, a
department under the Ministry of Energy.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The governmental authorisations required are a permit to survey a
route for a proposed gas pipeline and an oil pipeline licence both
issued under the Oil Pipelines Act. The oil pipeline licence confers
on the holder the right to construct, maintain and operate a gas
pipeline. It also confers the right to construct, maintain and operate
installations that are ancillary to the construction, maintenance and
operation of such pipeline, such as pumping stations, storage tanks
and loading terminals. A licence to construct and operate a refinery
issued under the Petroleum Act is required to construct and operate
gas processing facilities.
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An environmental impact assessment approved by the FMEHUD is
required for the construction and operation of any natural gas
transportation and storage facilities.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
Nigeria
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
By virtue of the Land Use Act, 1978, the use of land for the
construction of gas pipelines constitutes an overriding public
interest for which the government may compulsorily acquire land.
Such acquisition is subject to the payment of compensation to the
owner/occupier of the land.
The right to use land for the purposes of a gas pipeline is inherent
in the grant of an oil pipeline licence as the licence confers on the
holder the right to enter upon, take possession of or use a strip of
land of such width as may be specified in the licence upon the route
specified in the licence.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Any person that requires access to a gas pipeline may make an
application to the Minister who would consider the application in
consultation with the applicant and the owner of the pipeline. The
Minister would grant the application if he is satisfied that the pipeline
can conveniently convey the substance which the applicant desires to
convey. The terms and conditions of access are to be determined by
agreement between the parties and failing such agreement, shall be
determined by the Minister. The Minister may impose such
requirements as he thinks necessary for the purpose of securing the
access right of the applicant and regulating the access charge.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
The transportation pipelines are currently not interconnected.
However, upon the implementation of the gas infrastructure blue
print, it is expected that transportation pipelines will be
interconnected.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Refer to question 4.4.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Parties are free to determine the terms upon which natural gas is to
be transported. However, government has fixed the tariff for the
transportation of gas to government owned power plants.
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5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The main pipeline transmission system in Nigeria is owned and
operated by the Nigerian Gas Company (NGC), a subsidiary of
NNPC. This comprises of the Escravos-Lagos Pipeline System
(ELPS), also known as the Western Network, and the Alakiri-
Obigbo-Ikot Abasi Pipeline, also known as the Eastern Network.
The NGC has granted distribution licences to local distribution
companies.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
Refer to question 4.2.
5.3 How is access to the natural gas distribution network
organised?
Refer to question 4.3.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
Under the existing legal framework, the Minister cannot require a
distributor to grant capacity or expand its system to accommodate
new customers.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
The access charges may be determined by the parties but are subject
to the approval of the Minister. The Minister may determine this
fee in the event that the parties fail to agree.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
There are no restrictions or limitations that apply to the acquisition
of interest in a gas utility or the transfer of assets that form part of
a distribution network.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Currently, natural gas trading is being undertaken by the NGC,
which, because of its ownership of transmission infrastructure acts
as a gas merchant in Nigeria. The NGC created local distribution
zones and grants franchises to private companies for the distribution
of gas within the local distribution zones.
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Recently, the government issued the National Gas Supply and
Pricing Policy which provides a pricing framework for gas supplied
to different sectors in the domestic market. It also issued the
National Gas Supply and Pricing Regulations which establishes the
Gas Department, provides for the formation of a Domestic Gas
Aggregator and imposes domestic supply obligations on natural gas
producers. The policy and the regulations will underpin domestic
natural gas trading in Nigeria, from 2008. The fulfilment of
domestic obligation is a prerequisite for export gas project.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Natural gas commodities are majorly traded as bundled products in
Nigeria. However, the National Gas Policy contains a framework
for the unbundling of natural gas trade. Pursuant to the National
Gas Policy, regulations are being developed to separate supply,
transmission, distribution, pipeline ownership and network
operation activities. When the regulations are enacted gas
commodities will trade as separate products.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
The Nigerian Liquefied Natural Gas Company (NLNG) is the only
company that produces liquefied natural gas in Nigeria. It is jointly
owned by NNPC, Shell, Total and Eni.
LNG activities are regulated under the Petroleum Act and its
subsidiary regulations which include, Petroleum Refining
Regulations. LNG export is regulated by the Oil Terminals Act,
Crude Oil (Transportation and Shipment) Regulations, Nigerian
Ports Authority Act, Pre-shipment Inspection of Export Act,
Customs and Excise Act, Foreign Exchange (Monitoring &
Miscellaneous Provisions) Act, and the Foreign Exchange Manual
(issued by the Central Bank of Nigeria).
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Environmental Impact Assessment is mandatory for the
construction of LNG facilities. This is issued by the FMEHUD.
Licence to establish/construct an LNG plant is issued by the
Minister upon DPR recommendation. Licence to operate an LNG
plant is issued by the Minister upon DPR recommendation.
Approval for plant design specifications, purpose and location is
granted by the Minister upon DPR recommendation.
Permit to survey a gas pipeline route is issued by DPR. Licence to
construct and operate a Gas Pipeline is issued by DPR. Licence to
establish Oil Terminal at site is issued by the Minister of Petroleum.
Licence to store LNG at site is to be obtained from the Minister.
Industrial Waste discharge/disposal permit is issued by DPR.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
There is no regulation of the price or terms of service in the LNG
sector.
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8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
Nigeria
There is no competition law in Nigeria that is applicable to the gas
sector.
The Securities and Exchange Commission (SEC), however, has
powers under the Investment and Securities Act, 2007 to order the
break up of the company into separate entities where it determined
that the business practices of a company substantially prevents or
lessens competition.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
See question 8.1.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
See question 8.1.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
The Securities and Exchange Commission (SEC) has the
responsibility of regulating mergers. Section 118 the Investment
and Securities Act, 2007 provides that notwithstanding anything to
the contrary contained in the enactment, every merger, acquisition
or business combination between or among companies shall be
subject to the prior review and approval of SEC. SEC has specific
guidelines and rules to be followed to ensure that the public and
national economy are protected against monopolies. These
guidelines apply to every sector including the natural gas sector.
In addition, the approval of the Minister will be required where any
mergers or changes in control results in the direct or indirect
assignment of an OPL or OML.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Save for the requirement to incorporate a subsidiary in Nigeria,
there are no special requirements for foreign companies who wish
to acquire interests in the natural gas sector.
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9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
Only to the extent that such treaties and multinational agreements
have been passed into law by the National Assembly of Nigeria.
Nigeria
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
No, there have not.

10 Dispute Resolution 11 Updates

10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Disputes arising between the Minister and the holder of an oil
mining lease or oil prospecting licence in connection with any such
lease or licence are required to be settled by arbitration in
accordance with the Arbitration and Conciliation Act. This Act
adopts the UNICITRAL Arbitration Rules.
Disputes arising from a domestic gas sales and purchase transaction
are to be referred to the Department of Gas for resolution.
10.2 Is Nigeria a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Yes it is.
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Nigeria.
The government recently approved the Nigerian Gas Master Plan
(NGMP), which is comprised of three main sections. The first is the
Gas Pricing Policy, which does not fix gas prices but provides a
framework for establishing the minimum gas price that any
category of gas buyer can be charged. The second is the Domestic
Gas Supply Obligation Regulation, which assures gas availability
for critical domestic gas utilisation projects that will advance the
economic growth in Nigeria. The third, the Gas Infrastructure
Blueprint, specifically provides for the establishment of three gas
gathering and processing facilities, a network of gas transmission
lines, which will result in a reduced cost of gas supply from Nigeria.
Pursuant to the NGMP the minister has issued the National Gas
Supply and Pricing Regulations to regulate the supply of gas to the
domestic sector.
The recently issued National Domestic Gas Supply and Pricing
Regulations however impose some limitations on cross border sales
of natural gas. Under these regulations, the proposed Department
of Gas would have powers to impose reserves obligation on every
gas producers. This obligation would require them to dedicate a
specified volume of their gas to the domestic market. The supply
of gas to any export projects shall be subject to compliance by the
supplier of gas with its reserves obligation as may be specified by
the Department.

10.3 Is there any special difficulty (whether as a matter of law

or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?

Most government authorities require a pre-action notice at least one

month before the commencement of the suit. In most cases the suits
most be instituted within 12 months from the date of the act, neglect
or default complained of. There is usually a restriction on the
execution of judgments against the property of such government
authorities.

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ÆLEX Nigeria

Adegbite Adeniji Sina Sipasi

ÆLEX - Legal Practitioners & Arbitrators ÆLEX - Legal Practitioners & Arbitrators
7th Floor, Marble House 7th Floor, Marble House
1 Kingsway Road 1 Kingsway Road
Ikoyi, Lagos Ikoyi, Lagos
Nigeria Nigeria

Nigeria
Tel: +234 1 473 6296 Tel: +234 1 473 6296
Fax: +234 1 269 2072 Fax: +234 1 269 2072
Email: aeadeniji@aelex.com Email: osipasi@aelex.com
URL: www.aelex.com URL: www.aelex.com
Adegbite holds a Bachelor of Laws Degree [LL.B.] from the Sina is a senior associate in the energy and natural resources
University of London, a Master of Laws Degree [LL.M.] from practice of ÆLEX. He regularly advises multinational oil companies
Georgetown University Law Centre, Washington DC and a and project developers on diverse contractual and regulatory issues
Certificate of Studies in Natural Resources and Environmental Law including the acquisition of interests in petroleum concessions, gas,
& Policy from the University of Denver Sturm College Of Law. sales and transportation agreements, establishment of LNG facilities
He was admitted to practice law [BL] in Nigeria in 1987. and environmental obligations associated with project development
Adegbite’s main areas of practice are Oil, Gas and Mining Law, and operations.
Infrastructure development, Corporate and Commercial Law and Sina has recently been involved in the preparation of the National
Environmental Law. Gas Supply and Pricing Regulations and he is a part of the legal
He is a prominent solicitor in the energy and natural resources team advising the federal government and industry on the National
sectors of Nigeria. Formerly Senior Consultant at the World Bank Gas Masterplan. In this capacity, he has been involved in advising
[Oil, Gas, Chemicals & Mining Department] in Washington, DC and on the establishment of a domestic gas aggregator, drafting a
member of the team assembled by the World Bank for the template gas sale agreement and related escrow agreement imp
development of a Strategic Gas Plan required for facilitating major respect of wholesale gas transactions in the domestic sector.
private sector investment into the Nigerian natural gas sector. Sina holds a Bachelor of Laws Degree (LL.B.) from the Lagos State
Adegbite has advised public and private sector clients on various University in 1997 and he qualified to practice law in Nigeria in
legal, policy and fiscal issues in electricity, natural gas, crude oil 1999.
development and mining Projects. He is counsel to a number of
sponsors of gas gathering and gas processing, gas transmission,
LNG, methanol, electric power and other infrastructure projects. He
has also facilitated private investment into Nigeria’s solid minerals
sector and regularly advises Australian, Canadian, Chinese, Russian,
UK, Ukrainian and US interests on gold, coal, iron ore, lead zinc and
other mineral exploration projects in Nigeria.
As Consultant, he has assisted the Nigerian Government on a variety
of notable energy and mineral law and policy matters. He advised the
Federal Government on mining policy between 2003 - 2005 and
prepared the draft of the recently enacted Minerals and Mining Act.
He also prepared the National Gas Policy document, a Downstream
Gas Bill, the National Domestic Gas Supply and Pricing Policy and the
National Domestic Gas Supply and Pricing Regulations.
In his capacity as the Lead Legal Consultant on the National Gas
Masterplan, he is currently advising the industry on the key issues
arising from the proposed establishment of a Domestic Gas
Aggregator. He also preparing a template Gas Sale Agreement and
related Escrow Agreement in respect of wholesale gas transactions
in the Nigerian domestic gas sector.

ÆLEX is the recognised leader in providing legal services to meet the expanding and increasingly complex requirements
of the gas sector. Our participation in some of Nigeria’s major gas projects has equipped us with a wealth of knowledge
and experience of issues that confront governments and private sector participants.
Our gas practice is unique due to the firm’s involvement in the design of the emerging legal, regulatory, policy and
commercial landscape for the sector. Through a number of assignments on behalf of Government on the Strategic Gas
Plan for Nigeria (Gas Master Plan) spanning a period of seven years, the leader of our Gas practice has gained
recognition as the architect of the emerging legal, regulatory and policy framework for the sector. The in-depth
understanding of Nigeria’s natural resources policies and regulatory framework thus gained by the firm has given us
unique insights into how best to meet our clients’ needs.

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 Chapter 24
Norway
Haavind
1 Overview of Natural Gas Sector
1.1 A brief outline of Norway’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Natural Gas
The Norwegian Continental Shelf (“NCS”) is an important supplier
of gas, mainly to the Western European Countries but also with some
export to the US (LNG). Gas from the NCS accounts for 16 per cent
of the total European gas consumption and is the second largest gas
exporter to Europe after Russia and third largest on a world basis.
Norway’s gas export represents approximately 2 per cent of the
world consumption. The export from the NCS has shown a steady
rise during the years and in 2008 it was 96.1 billion standard cubic
metres (“bcm”) (an increase from 86.7 bcm in 2007). This rise in
export is expected to continue for the next decade perhaps peaking
at an export level as high as 140 bcm of natural gas per year.
Major fields producing gas today are (total remaining production of
natural gas resources in brackets as of 31 December 2007) Ekofisk
(26.9 bcm), Gullfaks Sør (22.3 bcm), Heidrun (30.7 bcm), Kristin
(23 bcm), Kvitebjørn (63.3), Oseberg (91 bcm), Sleipner Vest/Øst
(39.7), Snøhvit (160.4), Statfjord (23.2 bcm), Visund (47.7 bcm),
Åsgard (118 bcm) and of course Ormen Lange (392.1 bcm) and
Troll (1024.7 bcm).
Major fields with recent production start or production start in the
near future are (recoverable resources of natural gas in brackets)
Gjøa (32.6 bcm) and Skarv (41.5 bcm).
As of 31 December 2008, the Norwegian proven reserves of natural
gas was estimated to be 2211.1 bcm gas (down from 2313 bcm) and
120 million tonnes NGL (down from 123 million tonnes).
Contingent resources are estimated to be approximately 648 bcm
gas. Undiscovered resources are unchanged from 2007 and are
estimated at 1875 bcm gas.
Since 2002 Norwegian gas has been sold individually by the
different producers.
Gas transportation
Norwegian gas is either transported to continental Europe or the
United Kingdom directly through pipelines, or by vessels after
processing on the Norwegian mainland. The gas from the NCS is
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Rune Omdahl
Ian Anders Tobiassen
piped through the world’s largest offshore gas transport system,
extending about 7800 kilometres from the shelf to mainland
Norway, UK and continental Europe. The transportation system
(95% of the pipelines on the NCS) is mainly owned by the Gassled
partnership and new pipelines and facilities are intended to be
merged into the Gassled ownership. Consequently, on 1st
September 2007 the Langeled pipeline extending from Nyhamna to
Easington in the UK was included in the Gassled transportation
system. The Gassled transportation system is operated by Gassco, a
100 per cent owned state entity.
Gassled consist of 11 pipelines connecting Norway to: Zeebrugge,
Belgium; Emden, Germany; Dornum, Germany; St Fergus,
Skottland; Easington, England; and Dunkerque, France.
The gas processing plants at Kollsnes and Kårstø form an integral
part of the Gassled transportation system.
LNG
Norway’s first LNG liquefaction plant was StatoilHydro’s mini
LNG plant situated at Tjeldbergodden. The plant is designed to
produces approximately 23,000 tonnes LNG annually. The LNG is
transported by truck and used locally in the Trondheim area.
Snøhvit, Norway’s first LNG project came on stream in 2007. The
Snøhvit area consists of the fields Snøhvit, Askeladd and Albatross
some 143 kilometres offshore from Hammerfest. The project is the
first offshore development in the Barents Sea and have no surface
installations. The production comes from subsea production facilities
on the seabed, in water depths of 250-345 metres and are piped to the
onshore liquefaction facility at Melkøya for liquefaction and export.
Melkøya is the first plant of its kind in Europe and the world’s
northernmost liquefied natural gas facility. The bulk of the produced
LNG (approximately 2.4 bcm) is intended for the US gas market
(Cove Point, Maryland). Total and Gas de France has chosen to take
their own volumes, most likely for the French market. The Snøhvit
project is a phased project with the last part of the development
scheduled to come on stream in 2014-15. The plant is estimated to
deliver approximately 4 million tonnes LNG annually.
In addition to these two liquefaction plant two more mini LNG
plants have been established; one at Kollsnes (Bergen) and one at
Karmøy (Haugesund) respectively. Both are owned by Gasnor.
The total output from these plants are approximately 140,000
tonnes LNG annually.
Nordic LNG, a company partly owned by Lyse, is building a
liquefaction plant at Risavika (Stavanger) with production capacity
of more than 300,000 tonnes of LNG annually. The plant is
estimated to be completed in 2010. The feed stock will come from
the processing plant at Kårstø through a 50 km high-pressure
pipeline to the LNG plant.
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Storage
Most of the gas storage facilities in Norway are connected to the
production of natural gas products. Natural gas is to some extent
stored at e.g. Kårstø, where significant amount of propane, ethane,
butane, naphtha and stabilised condensate are stored in tanks. At
Sture and Mongstad LPG is stored in rock caverns.
Minor storage facilities have been constructed around the country
for the local storage of LNG transported by truck or by ship.
Distribution/transmission
There are two main distribution systems in Norway; Gasnor has
established a low pressure gas distribution grid of approximately
100 km of pipeline to serve the area of Karmøy and Haugesund in
the western part of Norway. The main competitor, Lyse, has in the
same vicinity built a gas distribution network consisting of
approximately 440 kilometres of pipeline connecting various areas
in the western part of Norway including some islands.
In addition distribution of CNG and LNG is made by truck to
various customers around the country from more than 30 minor
storage areas.
A domestic transportation pipeline from Kårstø to the Grenland area
(in the southeast of Norway) was being planned, but is currently put
on hold.
1.2 To what extent are Norway’s energy requirements met
using natural gas (including LNG)?
Only a fraction of Norway’s energy requirement is met using
natural gas (including LNG). The main energy source in Norway is
Hydro power covering the bulk of Norway’s energy requirements.
However, although almost insignificant in the total energy
consumption, the use of natural gas has increased in the industry
and shipping.
1.3 To what extent are Norway’s natural gas requirements met
through domestic natural gas production?
Almost 100% of Norway’s natural gas requirements are met by
domestic gas production. However, due to the increased demand
for LNG some LNG has been imported. E.g. in 2008 Gasnor
entered into a 100 MUSD deal with Spanish supplier Iberdrola for
delivery of LNG from Huelva, Spain.
1.4 To what extent is Norway’s natural gas production
exported (pipeline or LNG)?
Approximately 99% of the natural gas produced from the NCS, is
exported. The main exporting countries are Germany (25.4 bcm),
the UK (29.7 bcm) and France(14.5 bcm). Other countries such as
the Netherlands (8.6 bcm), Belgium (6.0 bcm), Italy (5.7 bcm),
Spain (3.5 bcm), Czech Republic (3.1 bcm), Austria (1.3 bcm),
Denmark (1.3 bcm) and Switzerland (0.1 bcm) are also recipients of
gas from the NCS.
The remaining 1% of natural gas produced is used primarily on, or
nearby, land facilities in Norway, such as Kollsnes, Kaarstø and the
methanol plant on Tjelbergodden (Norways largest domestic buyer
of natural gas).
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2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
Norway
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The principal legislation for the exploration and production of
petroleum is the Petroleum Activities Act of 29 November 1996 No.
72 with pertaining regulations; most notably the regulation for
petroleum activities issued by Royal Decree of 27 June 1997. Several
other acts and regulations are also relevant to the petroleum activities
on the NCS. Neither the Petroleum Activities Act 1996 nor the
Petroleum Regulation separates between gas and oil. In addition,
there are several other regulations relevant for the petroleum activities
relating to issues such as Health, Environment and Safety.
The proprietary right to subsea petroleum deposits on the NCS is
vested in the Norwegian State with exclusive right to exploration,
development and production.
The Norwegian Parliament (Stortinget) determines the framework
for petroleum operations in Norway. In addition to being the
legislative assembly, the parliament considers and approves major
policy developments and matters of principle.
The Ministry of Petroleum and Energy (“MPE”) has the
administrative responsibility for petroleum activity on the NCS. The
MPE shall see to it that this activity is carried out in accordance with
guidelines laid down by the parliament. The Norwegian Petroleum
Directorate (“NPD”) is administratively subordinated to the MPE.
The Ministry of Labour and Social affairs (“MLS”) is responsible
for the working environment, emergency response and safety
aspects in the petroleum sector. The Petroleum Safety Authority
Norway (“PSA”) is administratively subordinated to the MLS.
There are currently two major political issues relating to the natural
gas development. One is whether Norway shall increase domestic
use of natural gas, hereunder gas-fuelled power plants. The other
issue is to what extent the Barent Sea and the Norwegian Sea shall
be open to Petroleum activity.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
The Petroleum Activities Act 1996 empowers the MPE, as the
representative of the Norwegian state as owner of the natural
resources, to grant production licences (“PL”) to explore for,
develop and produce petroleum. Before a PL can be granted the
area in question must have been opened up for petroleum activities.
The PL are usually granted in bi-annual licensing rounds when a
large number of blocks are made available for application. The bi-
annual licensing rounds, the ordinary licensing rounds, usually
includes blocks in immature areas of the NCS. As of 31 December
2008 the 20th licensing round application has been handed in for
evaluation by the MPE.
There are also annual licensing rounds in more mature areas of the
NCS; the “application for predefined areas” - “APA”. “Mature Areas”
are defined as areas with known geology, infrastructure, decline in
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production and increased unit costs. The APA round is established to
encourage exploration activities in mature areas where smaller
discoveries can be exploited by using infrastructure already in place.
A PL can be granted to one or more licensees. The MPE is
authorised to decide on the composition of each PL group, but the
applicants may apply for one or more licences as a predefined
Norway
group. Where a PL is granted to more than one licensee the licence
is held collectively by the licensees, with each licensee being jointly
and severally liable in respect of obligations arising under, or
operations conducted pursuant to, the PL.
The PL regulates the rights and duties of licensees in relation to the
State. By doing so, the PL supplements the provisions of the
Petroleum Act, and specifies detailed terms for each licence. A PL
gives an exclusive right to explore for and produce petroleum
within its specified geographical area. Once the petroleum is
produced, its ownership rests with the licensees.
The PL is initially granted for a period of 10 years. However,
licensees that have completed the initial work obligation may apply
for an extension of the PL for an additional period of 20 years, up
to 30 years and in special cases for as long as total of 50 years. The
extension is usually granted for half the acreage of the initial PL.
It is conditional that all the licensees in each PL enter into an
Agreement Concerning Petroleum Activities (“ACPA”). The
ACPA is attached to the PL and forms an integral part of the PL.
The ACPA consists of three parts: the special conditions, setting out
provision of a special nature such as the voting rules; the Joint
Operating Agreement (“JOA”) enclosed as Attachment A; and the
Accounting Agreement enclosed as Attachment B.
The JOA sets out the rules and regulates for the relationship
between the licensees, hereunder the organisation and operating of
the licence. The licensees are for instance required to establish a
management committee as their ultimate decision-making body.
The Accounting Agreement contains detailed provisions on the
accounting and financial aspects of the partnership.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration, appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
The MPE may grant exploration licences that give the right to
explore for petroleum within limited areas of the seabed or its
subsoil. The licences are granted for a period of three years. An
exploration licence does not give an exclusive right to exploration
in the areas covered by the licence, or any preferential right when
production licences are granted.
The King in council grants Production Licences. This gives the
licensee an exclusive right to exploration, exploration drilling and
production of petroleum in the area(s) covered by the licence. Once
the petroleum is produced, the licensees become its owner. The PL
is normally granted for 10 years, with the possibility of extension
up to 30 or in special cases 50 years. The extension however,
depends on the fulfilment of a work obligation. Some of the
recently granted PL’s also has a so called drill-or-drop clause.
The construction of pipelines need special consent from the MPE in
accordance with provisions in the Petroleum Activities Act 1996.
On shore facilities need consent from the Plan and Construction
authorities, a discharge permit, granted by the Norwegian Pollution
Control Authority, may also be relevant in some cases and the fire and
explosion authorities must agree to tanks, piping etc. Pipelines for
petroleum products, insofar they are laid in the sea, is exempted from
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the authority of the Plan and Construction authorities. Permission
from the coastal authorities may also be needed in some instances.
Although the relevant licences have been acquired, activities to be
performed in accordance with the provisions of the licences granted
may still need specific permits or consents from the authorities, e.g.
drilling permits or approval of a plan for development and
operations (“PDO”).
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
The Petroleum Activities Act 1996 establishes the Norwegian
State’s right to participate in the petroleum activities by taking a
share of the PL granted. The State has a right, not an obligation to
participate and elects in its sole discretion to what extent it would
like to participate. The States Direct Financial Interest (“SDFI”) is
managed by Petoro AS, a company fully owned by the Norwegian
State.
If the State elects to participate in a PL through Petoro, Petoro will
be granted the same rights and obligations as the other licensees,
save that they may not vote in maters relative to the election of
suppliers to the business and that they may post a veto on any
decision that will be contrary to the conditions of the PL on the
governments petroleum politic and the economical interest of the
state.
In addition to the direct participation through Petoro, the State also
participates indirectly in licences through its interest in
StatoilHydro ASA. It is an announced goal for the State to hold an
ownership share in StatoilHydro of 67%.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
The State derives value from the natural gas development through
the SDFI, share dividend through its ownership in StatoilHydro
ASA, petroleum taxation, area fee, royalty and Net Profit Interest
(“NPI”).
For the SDFI and the ownership in StatoilHydro ASA, see question
2.4 above.
The Petroleum taxation system is divided in two parts. Firstly, the
companies pay ordinary corporate tax, which is 28 per cent both
onshore and offshore. Secondly, owing to the extraordinary
profitability of petroleum production, the producers of oil and gas
pay a special petroleum tax of 50 per cent on net income. However,
when calculating taxable income for both the ordinary and the
extraordinary tax, deductions are made, e.g. for investments.
Royalty (production fee) shall only be payable on petroleum
derived from fields where a PDO was submitted and approved prior
to 1 January 1986. As of today only two fields on the NCS are still
paying royalty.
After the initial period of the PL has expired (10 years) the licensees
have to pay an area fee per square kilometre. The area fee is fixed
at 30,000 NOK for the first year, 60,000 NOK for the second year
and 120,000 NOK for the third and subsequent years. Exemption
from the area fee can be applied for if:
A PDO has been submitted; the exemption will last from the
time of application and until production ceases. The
exemption will be relative to the area included in the PDO.
A drilling campaign is commenced exemption will be given
for the area that is delineated by the drilling. Exemptions are
given for a period of two years.
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The State was in the second licensing round given a share of net
profit before taxes - net profit agreements. These agreements give
the State an economic interest in the petroleum activities. Some of
these agreements still exist.
2.6 Are there any restrictions on the export of production?
There are no legal restrictions on the export of natural gas.
However, difficulties in obtaining capacity in transport and
processing facilities may be factual barriers to the export of natural
gas production. There are also pressure restrictions that may bar
certain producers from exporting their gas to certain receiving
facilities in Europe.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
There are no currency exchange restrictions, or restrictions on the
transfer of funds derived from production out of the jurisdiction.
Please note that the Foreign Exchange Register Act demands that
information on currency exchange and the transfer of payments in
and out of Norway shall be registered.
2.8 What restrictions (if any) apply to the transfer or disposal of
natural gas development rights or interests?
Any transfer of the rights under a PL must, under the Petroleum
Activities Act 1996, be approved by the MPE. In most cases, this is
a formality. The MPE will however ensure that the new owner is
strong enough both organisationally and financially to bear the
commitments that the ownership assumes. As of 1 July 2009 the
selling party will continue to be liable for the cost of abandonment at
the time of the transaction. The liability is subsidiarily to the buyer.
A consent from the Ministry of Finance in accordance with Section 10
of the Petroleum Taxation Act 1975 is also needed for a transfer to take
place. As of 1 July 2009 the procedure in accordance with Section 10
of the Petroleum Taxation Act 1975 has been simplified by allowing
transactions complying with a set of predefined conditions to be made
without formal consent from the Ministry of Finance.
In addition, if the work obligations set out in the PL have not been
completed then consent from the partners in the PL is required, save
in the event the transfer is to an affiliated company.
Relinquishment of a PL in whole or in part can be made by the end
of each calendar year by at least three months notice to the MPE.
Such relinquishment must be approved by all licensees.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
Under the Petroleum Activities Act the MPE is empowered to
demand that a licensee, upon being granted a participating share in
a PL or at a later stage, shall provide economical security for any
liability that they may incur in the connection with the exploration
for and exploitation of subsea natural resources, including storage
and transportation by any means other than by ship. The objective
is that the company shall document its ability to handle the financial
commitments relative to the various undertakings in the PL. The
security is usually provided in the form of a parent company
guarantee. The guarantee is fairly standard and for all practical
purposes non-negotiable. The parent company undertakes financial
liability as surety for the obligations of the subsidiary in favour of
the Norwegian State, municipalities and public institutions, and in
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the event of pollution damages also in favour of private persons,
including companies. The guarantee is regulated by Norwegian law
with Oslo as venue.
In the event the licence has no parent company or the parent
company is deemed not secure enough, other means of security can
be demanded, such a insurance based schemes, irrevocable standby
Norway
letters of credit, cash deposits, on-demand performance bonds etc.
There are no specific provisions for security relative to
decommissioning costs.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Under the Petroleum Activities Act 1996 the MPE is empowered to
give consent to a licensee for the pledge of its participation share in
the PL as a mean to finance the activities in that PL. In special
circumstances the MPE is empowered to grant the right to pledge
the participation share as security for the activities in another PL
than the one that is used as security.
It is also possible to pledge the whole PL in the event the licensee
applies for it.
If the PL is acquired for consideration, the value of such
consideration can be booked.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
The NPD and the PSA has the responsibility to supervise and
regulate safety, emergency preparedness and the working
environment in the petroleum activities petroleum facilities and
connected pipeline systems. Supervision may lead to specific
demands from the PSA, demands that if they are not fulfilled may
result in production stoppage or shut-downs.
Discharge permit, granted by the Norwegian Pollution Control
Authority, may also be relevant in some cases.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
The Petroleum Activities Act 1996 with pertaining regulation sets
out the legal framework relating to the decommissioning of
physical structures used in the petroleum activity.
The Licence is committed to submit a decommission plan to the
MPE before a licence expires or is surrendered, or the use of a
facility is terminated permanently. This plan shall contain
proposals for either continued production or shutdown of
production and abandonment or disposal of facilities. The plan
shall be submitted at least two years prior to the time when the use
of the facility is expected to be terminated permanently.
The licensees cover all expenses relating to the decommissioning,
whether this implies abandonment or disposal.
The MPE makes all decisions regarding the decommissioning.
Decommissioning, removal and abandonment of onshore facilities
needs consent from the Plan and construction authorities and a
discharge permit, granted by the Norwegian Pollution Control
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Authority, may also be relevant in some cases.
Guidelines for the decommissioning of pipelines and cables can be
found in White Paper no 47 (1999-2000).
3 Import / Export of Natural Gas (including
LNG)
Norway
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Gas from the NCS may be shipped either by pipeline (dry gas) or
by ship (LNG). There is currently no cross-border transportation by
truck (LNG), although some plans have been made to transport
LNG by trucks to Russia, Finland and Sweden without these having
been crystallised.
There are no export restrictions on the sale of gas. However, there
are certain restrictions related to who can ship pipeline gas and to
where such shipment can be directed. The spare capacity in the
transportation system that are available are scarce and it may
therefore be difficult for new entrants to gain access to the export
facilities. There is also a requirement that any shipper in the
transportation system must show a reasonable substantial need for
capacity. There are also some system constrains related to pressure
from the delivery source that may deprive certain producers from
physically deliver the gas production at certain landfalls.
There are also some provisions in the general petroleum legislation
that will impact the sale, export and delivery of natural gas from the
NCS. There is under the Petroleum Activities Act 1996 an
obligation to ensure optimal production of petroleum in such a way
as to maximise value of the petroleum. This entails that the
licensees may be compelled to constrain the production of gas in
favour of the production of oil. The MPE is empowered under the
Petroleum Activities Act 1996 to decide on the volumes to be
produced and to decide in changes in the produced quantities when
this is necessary due to “weighty social reasons”. There are also
provisions to ensure deliveries for domestic use if so required.
As a signatory to the Agreement on the European Economic Area
(The “EEA Agreement”), Norway has subscribed to the principle
of free movement of goods under European law, there are therefore
no restrictions on the import of gas. However, as the worlds third
largest exporter of natural gas there is very little import of gas to
Norway for domestic consumption. On the import side it must be
noted that there is the physical constraint that few of the transport
pipeline actually can turn the gas flow for import of gas.
A brief outline of all agreements for the sale of natural gas
concluded in the period shall be submitted to the MPE with
quarterly intervals.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
The export pipelines from Norway to Germany, Belgium, France
and the UK, as well as the two export terminals at Kollsnes and
Kårsø, are organised in the transportation entity Gassled, see
question 1.1 above. Gassled is both the name of the joint venture
owning the transportation system and the transportation system.
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The relationship between the owners are regulated into the Gassled
agreement.
The operation of the transportation is done by Gassco; a 100%
owned state company. Gassco is responsible for the maintenance
(the actual maintenance work is done by service providers, who
basically are the same entities that operated the respective pipeline
prior to the merger) and access to the pipeline system. Access to the
transportation system is made on a principle of neutrality and non-
discrimination.
Pipelines and onshore facilities are approved by the MPE. This can
be done either simultaneously or subsequently to approval of
development projects. The Regulations to the Petroleum Activities
Act 1996 have complementary rules regarding third party access to
pipelines.
The traffic control centre at Bygnes is part of the Gassco head
office. It coordinates gas transport and deliveries through the
pipeline network from fields on the NCS to terminals in continental
Europe and UK.
The pipelines that are not a part of Gassled are owned and operated
by various companies and are used for transport of gas internally on
the NCS or to land based production facilities.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
A natural gas transportation pipeline may either be a part of a
planned development of a field or a separate development. In the
event the pipeline in question is part of a field development the
actual pipeline will be presented in the PDO. Such a plan shall be
submitted to the MPE for consents. A similar approach must be
followed for the construction of a separate pipeline.
If the pipeline goes onshore an application for development and
construction (“PAD”) must be issued to the planning and building
authority for approval. In addition a permit from the fire and
explosive authorities may be required. Various permits from the
safety authorities and the Norwegian Pollution Control Authority,
may also be relevant in some cases.
Construction processing plants and LNG facilities need consent
from the energy authorities as well as the planning and building
authorities. Approval from the fire and explosive authorities and
discharge permit, granted by the Norwegian Pollution Control
Authority, may be needed.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
In Norwegian territorial waters and on the NCS the MPE issues
approval for the laying of gas transportation pipelines. However
the Geneva Convention on the continental shelf gives that right to
other to lay down cables and pipelines on the continental shelf
without impediment from the host state. In the area close to shore
private ownership may apply and right to land must be negotiated
from the relevant owner. Other facilities on the NCS must be
approved by the MPE.
Licensees wishing to develop offshore gas fields in close proximity
to existing infrastructure may enter into discussion with the host
facility. The Regulation for third party access to third party
infrastructure regulates the rules and procedure for such third party
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use. The MPE is, under the Petroleum Activities Act 1996,
empowered to decide on such third party use and decide on access
to a host facility if so warranted by considerations for efficient
operation or for the benefit of society, and the Ministry deems that
such use would not constitute any unreasonable detriment of the
licensee’s own requirements or those of someone who has already
been assured the right of use.
Onshore negotiation must be undertaken with the owners of the
land in question. However, in the event such negotiation does not
lead to the desired outcome there are possibilities to acquire such
land by expropriation in accordance with the Expropriation Act
1959. The right of expropriation is initially vested in the state and
municipality but also private entities may be given such right.
Damages must be paid to the owner of the land that is expropriated.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Access to the natural gas transportation pipelines and associated
infrastructure is regulated in the Petroleum Activities Regulation
and the Act on the internal market for natural gas of 28 June 2002
(“The Natural Gas Act 2002”) and the Natural Gas regulation of
14 November 2003.
Natural gas undertakings and eligible customers domiciled in an
EEA State shall have a right of access to pipeline networks,
including facilities supplying technical services incidental to such
access.
In the Gassled upstream pipeline network, Gassco is authorised to
allocate capacity in the infrastructure in compliance with rules laid
down in the Petroleum legislation. On a regularly basis, Gassco
also determines entitlement and capacity requests.
There is also a secondary marked for capacity based on negotiation
between the parties. A model agreement for secondary capacity is
made available by Gassco. Furthermore, Gassco operates the online
secondary capacity market and invoice shippers for booked capacity.
Access to pipelines that are not a part of the Gassled transportation
system must be made on a negotiated basis, but the MPE is
authorised to grant access, see question 4.3 above.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
The export pipelines and facilities constituting the Gassled
transportation system are, to a large extent, interconnected allowing
for transport of gas from various fields to different locations in
Europe. These pipelines are all operated by Gassco.
The MPE has given Gassco extended operator responsibilities for
the overall operation of upstream pipeline network and associated
facilities. The extended operator shall carry out the overall
operation of the upstream pipeline network and the associated
facilities. The extended operator shall carry out the operations in
accordance with prudent technical and sound economic principles
and act in a neutral and non-discriminatory manner.
Some of the other natural gas pipelines that are not a part of the
Gassled transportation system are also to some degree
interconnected by entry and exit from same processing facilities
and/or connection by intra pipelines to other facilities.
Connection between pipelines of different “systems” must be
negotiated by the owners of such pipelines. This is what took place
when Langeled was merged into Gassled.
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4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
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so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Natural gas undertakings and eligible customers that have a duly
substantiated reasonable need of transportation and/or processing of
natural gas shall, on objective and non-discriminatory conditions,
have right of access to upstream pipeline networks, including facilities
supplying technical services incidental to such access. The operator
decides whether such request shall be granted or denied.
If the customer is granted upstream access, a tariff shall be paid.
This tariff consists of a capital element stipulated by the MPE and
a cost based operating element. The capital element shall give the
operator a reasonable return on the capital invested, while the
operating element shall give neither the operator nor the owner loss
or profit. The MPE stipulates which costs that shall be taken into
consideration when estimating the operating element.
Downstream, natural gas undertakings and eligible customers have
the right to negotiate access to the system on objective and non-
discriminatory terms. Negotiations take place between the owner
or the operator of the system, and the potential customer. The
customer may be denied access if the system lacks necessary
capacity. The owner or the operator of the system decides the
commercial terms that apply for access to the system.
For the regulation on access to facilities for capacity see question
4.3 above.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
The terms for natural gas transportation in Gassled, hereunder
access to the processing facilities at Kårstø and Kollsnes, is
regulated by the Gassled terms and conditions with pertaining
documents. These are standard terms and conditions that apply for
all transportation in Gassled.
The formula for the tariff regulation together with some fixed
elements are set out in the Tariff Regulation, please see question 4.6
above.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
There are two main distribution systems in Norway; Gasnor has
established a low pressure gas distribution grid of approximately
100 km of pipeline to serve the area of Karmøy and Haugesund in
the western part of Norway. The main competitor, Lyse, has in the
same vicinity built a gas distribution network consisting of
approximately 440 km of pipeline connecting various areas in the
western part of Norway including some islands.
The regulatory framework for these transmission/distribution
networks are the Natural Gas Act 2002 with pertaining legislation.
The Natural Gas Act sets out the principles for ownership,
organisation and access to the network.
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5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
Normally, the construction and operation of distribution networks
needs approval from the MPE and approval pursuant to the
planning and building legislation. However, minor facilities may
Norway
be exempted from this.
5.3 How is access to the natural gas distribution network
organised?
Access to the natural gas distribution network is made by
negotiation on a neutral and non-discriminatory basis.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
The MPE is empowered under the Natural Gas Act 2002 to grant
capacity access.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
The fees are negotiated and not yet regulated in the same way as for
the offshore transportation system.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
There are no specific restrictions or limitations in relation to
acquiring an interest in a downstream gas utility, or the transfer of
assets forming part of the distribution network. However,
acceptance for the transfer must be granted by the MPE in
accordance with the provisions of the Natural Gas Act 2002.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Historically the sale of gas from the NCS has been based on long
term contracts to dedicated customers for physical delivery at
designated delivery points. Lately an increase in short-term and
spot-market transactions have been experienced also relative to
natural gas from the NCS.
There are no regulated market in Norway for trading in natural gas
commodities and no financial products such as futures, forward and
swaps connected to the Norwegian market exists at present. A market
for electricity commodities exits through Nord Pool in Oslo, but so far
no equivalent has been established for natural gas commodities.
There is some trading in the physical market through spot contracts,
but this is not made in any organised way. A standard spot trade
agreement for trading of physical gas is available - The Nordsjø
Agreement.
However, through the Natural Gas Act 2002 with pertaining
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regulation the government has established a legal framework for the
further development of the downstream gas market in Norway that
may give rise to a organised trade in natural gas commodities.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Reference is made to question 6.1 above.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
LNG facilities can be owned by private or public companies. LNG
facilities are regulated either by the Petroleum Activities Act 1996
or the Natural Gas Act 2002.
If a LNG facility is considered to be a necessary or integral part of
production or transportation of petroleum from the NCS, the LNG
facility will be covered by the Petroleum Activities Act 1996, if not,
by the Natural Gas Act 2002.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
The construction and operation of LNG facilities requires a production
licence under the Petroleum Activities Act 1996 or alternatively, and
as a main rule, a concession under the Natural Gas Act 2002.
Concession under the Internal Market Regulation shall be granted on
a non-discriminatory, objective and transparent basis. Concession is
given for 30 years. If concession is refused, such refusal, and its
reasons, shall be notified to the EFTA Surveillance Authority.
“Smaller LNG facilities” do not require concession. The MPE has
the authority to decide what is to be considered as a “smaller LNG
facility”.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
There is no regulation of the price or terms of service in the LNG
sector. However, the Natural Gas Act 2002 provides for the terms
and conditions for the provision of such services to be established
in a neutral and non-discriminatory way. Exemptions may be
granted by the MPE.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The Norwegian Competition authority (“NCA”) is the general
authority responsible for the regulation of competition aspects, or
anti-competitive practices. The NCA is also responsible for the
enforcement of the Norwegian Competition Act in the natural gas
sector.
Complaints with respect to third party access to the upstream pipe
line network is dealt with by the MPE and third party access to the
downstream pipe line network is handled by the Norwegian Water
Resources and Energy Directorate (“NVE”).
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8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The prohibitions of the Norwegian Competition Act are identical
with Article 81 and Article 82 of the EC Treaty. This implies that
the criteria relevant under EU competition law also is relevant
under Norwegian competition law. The Act includes a general
prohibition against agreements and concerted practises restricting
competition and a prohibition against abuse of dominant position.
With respect to anti-competitive agreements and concerted practises,
the NCA will have regard for practises that have as their object or
effect the restriction of competition. Practises that have restriction of
competition as their object will always be illegal. Other practises must
be subject to concrete analysis of the relevant market and the effects
of the practise in question in the relevant market.
Concrete analysis is also required when assessing whether the
prohibition against abuse of dominant position has been infringed.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The NCA has the power to order an undertaking to terminate
infringements. This also includes the power to order divestiture.
The NCA can also fine companies for infringements of the
Competition Act or refusal to comply with decisions with respect to
termination of infringements. The fines can amount to 10% of the
annual turnover of the undertaking in question.
Breach of the Competition Act can also be subject to criminal
prosecution. Intentional and gross negligent infringements can be
sanctioned with fines and up to three years imprisonment, and six
years in aggravating circumstances.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
The Norwegian Competition Act gives the NCA the power to
intervene against mergers and concentrations that will create or
strengthen a significant restriction of competition. It may also
intervene against acquisitions of ownership shares in an
undertaking even if the acquisition does not lead to control of the
undertaking in question.
A decision to intervene is made following an assessment of whether
the concentration will result in a substantial restriction of
competition. In this respect, the relevant product markets and
geographical markets are defined. If a concentration, leads to
efficiency gains that outweigh the disadvantages of reduced
competition the concentration may nevertheless be approved.
All concentrations in which the undertakings involved have a
combined annual turnover in Norway of 50 million NOK or more,
must be notified to the NCA. However, if only one of the involved
undertakings have a turnover which exceeds 20 million NOK,
notification is not required.
Mergers and acquisitions which are required to be reported in
accordance with the Norwegian Competition Act, are prohibited
from being implemented before they have been notified to and
reviewed by the NCA.
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Further, the Petroleum Act 1996 states that assignment of a
petroleum licence, or a share in a licence, requires the approval of
the MPE. Also transfer of shares in a company that holds a licence,
or an interest in a licence, requires the approval of the MPE when
such transfer results in the acquisition of control of the company.
Norway
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
In order to acquire any interest in the natural gas sector an applicant
must be eligible as a licensee on the NCS. In order for the company
to assess their ability to participate in the petroleum activities on the
NCS, the authorities have established a process known as the pre-
qualification process. Through this process the relevant Norwegian
authorities assess the company’s technical, economical and
administrative capabilities to conduct the activity in Norway.
Any legal entity established in accordance with Norwegian law may
apply for and be granted a PL and thus become a licensee on the
NCS. Non Norwegian companies that are a party to the European
Economical Agreement may also apply for and be granted a PL.
Please note that any foreign company that will conduct petroleum
activity in Norway will be required to establish an organisation in
Norway prior to grant any unconditional approvals.
Any transfer of shares in a company holding a PL on the NCS and
any transaction of a PL on the NCS, needs approval by the MPE.
This approval can be done simultaneously with the approval of a
specific purchase, or through a so called pre-qualification process.
This is not a formality; the government considers all aspects of the
company in question, like financial strength and professional/
technical expertise. It is more difficult to be approved as an
operator than a participant/shareholder.
Foreign companies also need to locate its ownership to shares in
Production Licences in a Norwegian registered company.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
As a signatory to the EEA Agreement, all regulation in Norway is
constrained by the requirements of EEA law/EC law.
In addition several international treaties have been entered into by
Norway with various countries for e.g. the regulation of cross-
border fields and pipelines.
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10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
Norway
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
There are no compulsory dispute resolution procedures related to
the natural gas sector in general. However, with respect to third
party access to pipelines there are statutory dispute resolution
procedures.
According to the Petroleum Activities Act 1996, disputes related to
upstream pipeline networks, regarding third party access to the
network can be submitted to the MPE for decision.
According to JOA, disputes related to the PL in question shall be
resolved by arbitration in accordance with the Arbitration Act of 14
May 2004 no. 25.
Further, with respect to downstream transmission networks,
disputes regarding negotiated access to the transmission system can
also, according to the Natural Gas Act 2002, be submitted to the
MPE for decision. This authority is delegated to the NVE.
10.2 Is Norway a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Norway is a signatory to both the New York Convention and the
ICSID Convention. Both conventions have been duly ratified into
national law.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
There are no special difficulties in litigating against the Norwegian
Government or other State organs. However, one cannot enforce
judgments against the State.
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10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
There are many foreign corporations, or Norwegian legal entities
owned by foreign corporations, that successfully have obtained
judgments against the Norwegian Government.
One of the most recent examples is a case from the Norwegian
Supreme Court of 9 October 2003, where three Norwegian oil
companies and six foreign owned oil companies won a tax dispute
regarding the taxation of income from the sale of LNG. The
Supreme Court annulled a decision made by the Oil Taxation
Authority.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Norway.
The new provision in Section 5-3 of the Petroleum Activities Act on
continued liability for cost relative to removal and abandonment of
installations and fields may entail a claim for security from the
sellers. This may reduce the number of transactions and
participants on the NCS. The regulation relative to consent in
accordance with Section 10 of the Petroleum Taxation Act 1975
may reduce the transaction time when selling petroleum licences. It
is expected that the focus on emission will continue with CO2
quotas, CO2 injection and green certificates. Although it still is
debated whether Norway shall establish gas fired power plants or
not, it seems to be commonly accepted that this will not happen in
the near future. The development in exploration and production in
the Barents sea will increase and the debate on opening the areas
outside the Lofoten and Vesteraalen islands will continue, although
the re-elected Labour-led coalition has announced that it won’t
open up protected Arctic areas to oil and gas exploration before the
next election in 2013. The areas may hold about 3.5 billion barrels
of oil equivalent in crude (535 mbbl of oil) and gas (140 bm³ gas)
and are key to creating jobs and keeping up production as output
from the North Sea drops. The pressure on supply may lead to these
areas being opened for exploration sooner than the government
anticipates. Due to the current global economical distress it is
expected that the number of participants on the NCS will be
reduced through acquisitions and consolidations.
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Haavind Norway

Rune Omdahl Ian Anders Tobiassen

Haavind Haavind
Bygdøy Allè 2, P.O. Box 359 Sentrum Bygdøy Allè 2, P.O. Box 359 Sentrum
N-0101 Oslo N-0101 Oslo
Norway Norway

Tel +47 22 43 3000 Tel +47 22 43 3000

Norway
Fax +47 22 43 3001 Fax +47 22 43 3001
Email r.omdahl@haavind.no Email i.tobiassen@haavind.no
URL www.haavind.no URL www.haavind.no

Rune Omdahl is a partner in Haavind’s Energy department and heads
Haavind oil and gas team. He graduated from the University of Oslo
in 1993. After having worked in the legal department of the Coast
Directorate from1992 to 1995, he was assistance judge in 1995 -
96. He was admitted to the Norwegian Bar in 1997. He was
seconded to Total Norge AS from 1996 2001. He has then worked
with another Norwegian law firm within the oil and gas area until
joining Haavind Vislie in 2006 as a partner. Rune works within all
aspects of the oil and gas industry such as Government contact,
Licensing issues, Transportation, Financing, Insurances, Offshore and
onshore developments, Acquisitions and sale, Sale of products (Oil,
pipeline gas, LPG, LNG), maritime law and contract negotiation.
Ian Anders Tobiassen is a partner in Haavind. He graduated from
the University of Oslo in 1985. After being executive officer in the
Norwegian Ministry of Finance in 1986 - 88, he was assistance
judge in 1988 - 89. He was admitted to the Norwegian Bar in
1989. Following practise in a law firm he worked in the oil industry
in the Belgian Fina Group. First as Legal Manager in Norske Fina
AS in Norway, and thereafter as Company Lawyer in PetroFina’s
Legal Department in Brussels. He has represented Fina in the Legal
Committee of the Norwegian Petroleum Institute and in EUROPIA.
He joined Haavind Vislie in 1999 and became partner in 2001. He
has practise from both the up-stream and down-stream oil industry.

Haavind is one of Norway’s leading law firms with particular experience within the energy sector and provides
assistance to clients on all aspects of the Energy sector from inception of a project until decommissioning and
abandonment. With its approximately 110 lawyer we cover all the corporate and public aspects of the law. The firm
also has a considerable amount of litigation instructions, including before the Supreme Court.
Our services are characterised by quality, availability, speed and co-operation. In particular, we offer preventative legal
and strategic advice, and as such, our services are purpose and solution oriented. We have a corporate model that is
reflecting our ambition to create joint results. We can therefore ensure our clients that our internal procedures focus
on the best use of our resources for each case.

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 Chapter 25
Pakistan
Vellani & Vellani
1 Overview of Natural Gas Sector
1.1 A brief outline of Pakistan’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
The oil and gas sector in Pakistan has seen unprecedented growth
since the independence of Pakistan in 1947. The petroleum
industry has been a major contributor to the national development
of Pakistan as a result of the large indigenous gas discoveries. As
of 1st January 2009, the recoverable reserves of natural gas have
been estimated at 29.671 trillion cubic feet (‘tcft’) which are
adequate for meeting the gas requirement of Pakistan for 6 years at
the current rate of production. Natural gas production during July-
March 2008-09 was 3986.5 million cubic feet per day (“mmcfd”) as
compared to 3965.9 mmcfd during the corresponding period the
previous year showing an increase of 0.52% (Pakistan Economic
Survey 2008-2009, Chapter 15 Energy). Over the years the natural
gas share in primary energy supply mix has increased from 40% in
1999-2000 to over 48% in 2008 (Inter-State Gas Systems).
Currently, natural gas distribution is exclusively undertaken by two
state owned corporations, namely, Sui Southern Gas Company
Limited (“SSGCL”) and Sui Northern Gas Pipelines Limited
(“SNGPL”). The gas is supplied to consumers through 9,843
kilometres of transmission networks and 71,863 kilometres of
distribution system which is one of the largest transmission and
distribution infrastructures in the developing world (Investment
Opportunities in Pakistan Oil and Gas Sector, Ministry of
Petroleum and Natural Resources).
The present constrained demand of gas for 2008-09 is 5.28 tcft.
Pakistan’s gas demand and supply projections indicate a widening
gap of approximately 600 million cubic feet (“mmcft”) by the year
2010-11. The gap started to emerge in 2007-08 and by the year 2015
it will build up to 2,100 mmcft and 6,252 mmcft by the year 2025 as
the current gas fields gradually plateau off.
In order to bridge this widening gap the Government of Pakistan
(“GOP”) has adopted a three-fold strategy. This comprises of
maximising domestic production for which the new Petroleum Policy
2009 has been approved, importing natural gas through trans-national
pipelines and importing LNG through the private and the public sector.
While the trans-national pipelines are yet to commence operation,
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Badaruddin F. Vellani
GOP is working towards the LNG import option, which will be
quicker to put in place. For this purpose, GOP has nominated SSGCL
as the project facilitator for the establishment of 3.5 million tonnes
per annum (equivalent to 500 mmcft of gas) LNG import project with
a re-gasification facility to be located near the port city of Karachi.
The first supply of LNG is estimated for the year 2011 and the second
supply of the same quantity for the year 2013.
Pakistan Gasport Ltd is also trying to set up an LNG Floating
Terminal with a handling capacity of 3 million tonnes per annum.
The terminal is expected to be completed by the end of 2010 (Board
of Investment, GOP).
1.2 To what extent are Pakistan’s energy requirements met
using natural gas (including LNG)?
Natural gas plays a key role in Pakistan’s energy balance as it currently
accounts for more than 48% (Inter-State Gas Systems, Natural Gas
Sector Overview) of Pakistan’s primary energy supplies.
At present all local demand is met through indigenous natural gas
and the demand supply gap has been widening since 2007-2008 as
evidenced by natural gas rationing during the winter months in
certain parts of the country.
As already mentioned in question 1.1 above, Pakistan has already
taken steps towards setting up facilities for the import of LNG.
1.3 To what extent are Pakistan’s natural gas requirements
met through domestic natural gas production?
Currently, 100% of the country’s natural gas requirements are met
through local production. As mentioned in response to question 1.1
above, the GOP is working towards the LNG import option, by
facilitating the establishment of 3.5 million tonnes per annum
(equivalent to 500 mmcft of gas) LNG import project with a re-
gasification facility to be located near the port city of Karachi. The
first supply of LNG is estimated for the year 2011 and the second
supply of the same quantity for the year 2013. Additionally, Pakistan
Gasport Ltd is also trying to set up an LNG Floating Terminal with a
handling capacity of 3 million tonnes per annum. The terminal is
expected to be completed by end 2010 (Board of Investment, GOP).
1.4 To what extent is Pakistan’s natural gas production
exported (pipeline or LNG)?
At present Pakistan is not exporting natural gas or LNG. However,
as already mentioned, it is looking to import LNG for its rising
demand supply gap.
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2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The principal legislations (including government policy) relating to
natural gas are as follows:
(a) Petroleum Exploration and Production Policy 2009 (“the
Policy”). This explains GOP’s policies, procedures, tax and
pricing regime for the petroleum exploration and production
(E&P) sector. This new policy amended the 2007 policy by
revising the gas prices and by providing certain incentives in
order to promote investment and attract direct foreign
investment.
(b) Regulation of Mines and Oilfields and Mineral Development
(Government Control) Act, 1948 and the rules framed
thereunder. This is the principal statute empowering GOP to
regulate the exploration and production of petroleum.
(c) The Pakistan Onshore Petroleum (Exploration and
Production) Rules, 2009. Regulates the issuance of licences
and permits for exploration and production on-shore and the
conditions under which such activities may be undertaken.
(d) Pakistan Offshore Petroleum (Exploration and Production)
Rules, 2003. Regulates the issuance of licences and permits
for exploration and production for areas off-shore and the
conditions under which such activities may be undertaken.
(e) Oil and Gas (Safety in Drilling and Development)
Regulations, 1974. The Regulation provides detailed
requirements for health, safety and environment.
(f) Natural Gas (Price for Supplies by Purchasers) Rules, 1976:
Empowers the fixation of price for natural gas.
(g) Natural Gas Distribution (Technical Standards) Regulations,
2004. Regulates the issuance of licensees for, and the terms
on which a licensee may undertake the regulated activity of
distribution of natural gas.
(h) Natural Gas Rules, 1960: Regulates issuance of licenses,
distribution pipelines and charges.
(i) Natural Gas Regulatory Authority (Licensing) Rules, 2002.
The aim of the rule is to provide a comprehensive guideline
on issuance of licences.
(j) Natural Gas Tariff Rules, 2002. The aim of the rules is to
provide guidelines for the determination, approval,
modification or revision of the tariff charged by licensees.
All rights to petroleum and natural resources vest in the GOP
pursuant to Article 172(2) of the Constitution of Pakistan, which
provides as follows:
“all lands, minerals and other things of value within the
continental shelf or underlying the ocean within the territorial
waters of Pakistan shall vest in the Federal Government.”
Although Article 172(2) does not address minerals falling onshore
Pakistan, GOP by way of a presidential order, the Minerals
(Acquisition and Transfer) Order, 1961, has declared that all surface
and sub-surface minerals and rights thereto (including petroleum)
shall vest in the GOP. Furthermore, under the Constitution of
Pakistan, the National Assembly together with the Senate
(Parliament/Majlis-e-Shoora) has exclusive legislative authority in
matters relating to oil and natural gas.
Upstream activities in the oil and gas sector are administered and
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Pakistan
regulated through the Directorate General of Petroleum
Concessions (“DGPC”) Ministry of Petroleum and Natural
Resources.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
Pakistan
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
Licences are granted under the Regulation of Mines and Oilfields
and Mineral Development (Government Control) Act, 1948, read
with the Pakistan Onshore Petroleum (Exploration and Production)
Rules, 2009 or as the case may be, the Pakistan Offshore Petroleum
Rules, 2003.
For Onshore operations, participants are granted concessions
through a petroleum concession agreement (“PCA”) pursuant to
which exploration licences and production leases are granted.
For Offshore operations, exploration licences and production leases
are granted to Government Holdings (Private) Limited (“GHPL”)
and participants enter into a production sharing agreement (“PSA”)
with GHPL.
All local and foreign companies operating in Pakistan are eligible to
acquire such rights. Foreign companies not operating in Pakistan
may also be eligible if they are able to demonstrate technical and
financial capability. Every company interested in acquiring
petroleum rights is required to provide details of the business and
evidence of its financial and technical qualification to conduct the
relevant activities.
Any question or dispute relating to the licence is to be resolved by
arbitration in Pakistan in accordance with laws of Pakistan.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
For Onshore operations the following permits licences and
leases are granted pursuant to a PCA:
(a) Reconnaissance Permit:
This permit grants to the licensee the right to carry out geophysical,
geochemical and geological operations, including drilling of
stratigraphic wells. The maximum acreage under this permit is
unlimited in open areas and is valid for an initial term of one year
with a possible renewal for a further year.
(b) Petroleum Exploration License:
This licence grants an exclusive right for exploration, including
drilling and production. The duration of the licence is five years.
The initial term of five years is divided into two phases, Phase I
(which is for three years) and Phase II (which is for two years) with
two possible renewals of two years each for exploration.
The maximum acreage granted under this licence is 2,500 sq km
(which in a special case may be extended up to 7,500 sq km) with
a subsequent progressive area relinquishment of 30% of the original
area after Phase I, 20% of the remaining area after Phase II, and
10% of the remaining area on or before the second renewal.
(c) Petroleum and Development and Production Lease:
Upon making a commercial discovery and subject to GOP
approving a development plan prepared by the participants, GOP
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will grant to the participants a development and production lease in
respect of the discovery area. Such leases grant exclusive rights to
develop and produce hydrocarbons for up to 25 years with a
possibility of renewal for a further term of five years.
For Offshore operations, the following permits licences and
leases are granted pursuant to a PSA.
Pakistan
(a) Reconnaissance Permit:
Through this permit GHPL is allowed to carry out through the
participant’s preliminary surveys including, geophysical, geological,
geo chemical and geo technical surveys and geological information
bore hole. Such permits are granted for a term of one year, with the
possibility of a renewal for a further term of one year, subject to
fulfilment of the agreed work programme for the initial term.
(b) Petroleum Exploration Licence:
The petroleum exploration licence grants exclusive right for
exploration, including drilling and production testing. The duration
of the licence is five years, which is divided in three phases, Phase
I and II of two years each and Phase III of one year, with two
possible renewals of two years each for exploration. The maximum
acreage is 2,500 km with a subsequent area relinquishment of 30%
of the original licence area at the end of Phase I, 30% of the
remaining licence area at the end of Phase II, and 20% of the
remaining licence area at the end of the first renewal.
(c) Petroleum Development and Production Lease:
Upon completion of the agreed appraisal and evaluation and
commercialisation work and upon approval of a development plan,
GOP will grant to GHPL a lease in respect of the discovery area for
a term of 25 years with a possible renewal for a further term of five
years if commercial production is then continuing.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
Onshore areas are divided into three zones with minimum local
participation requirement for zone 1, zone 2 and zone 3 being 15%,
20% and 75% respectively. If locally incorporated exploration and
production companies (majority owned by nationals of Pakistan) do
not participate in the minimum participation requirements
mentioned above, GHPL is entitled to participate in the concession.
GHPL will not in any event act as operator.
As mentioned above, in the case of offshore operations, GHPL is
granted all licences and leases and the participants enter into a PSA
with GHPL under which the participants operate and manage the
concession and participants may recover 100% of the costs up to a
limit of 85% of gross revenues.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
GOP derives value from natural gas development through royalties
at the rate of 12.5% of the wellhead value. Tax on income is also
payable at the rate of 40% of the profits. In addition, GOP also
charges ground rent for the acreage covered by an exploration or
production licence.
2.6 Are there any restrictions on the export of production?
Subject to the Country’s internal requirements, E&P companies
incorporated outside Pakistan are allowed to export their share of
petroleum in accordance with export licences. The volumes that
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may be exported will be calculated on the basis that the gas reserves
that exceed the net proven gas reserves in Pakistan with regard to
the projected gas demand for the next 15 years can be considered
for export. PCAs and PSAs usually make provisions for GOP
assistance for export of petroleum by such E&P companies.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
All remittances out of Pakistan are subject to control of the State
Bank of Pakistan (which is the country’s central bank) under the
Foreign Exchange Regulation Act 1947. Under the Policy, foreign
companies may remit a guaranteed percentage of the sale proceeds.
This guaranteed percentage varies between 65% and 75% of the
total gross revenue depending on the licensing zone. Generally,
PCA and PSA will contain a provision under which GOP agrees to
assist in procuring SBP permission, where required, for remittance
of net sale proceeds arising in Pakistan from the sale of petroleum.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
The working interest owner cannot sell, assign, transfer, convey or
dispose of all or any part of its rights and obligations under a
licence, lease or an agreement, without the written approval of
Director General of Petroleum Concessions (“DGPC”). As regards
assignment to affiliates, PCA or PSA (as the case may be) would
need to make appropriate provisions permitting such arrangement.
The DGPC may impose such condition as he may consider
appropriate, to ensure full payment of royalty, corporate tax and
windfall levy by the assignee in respect of the interests assigned or
transferred.
If a licence holder wishes to surrender his right he will have to
provide the DGPC one month’s notice of his intention to do so and
once he has fulfilled all his obligations under the licence he may be
able to surrender all or part of his right.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
Under the Pakistan Onshore Petroleum (Exploration and
Production) Rules 2009 and the Pakistan Offshore Petroleum
(Exploration and Production) Rules 2003 once a licence is granted,
the GOP will require the participants to provide an irrevocable and
unconditional guarantee. The could be in the form of a bank
guarantee equal to 25% of the minimum financial obligation from a
bank of international repute or a parent company guarantee from a
company of international repute. In case of local production or
local assets the GOP may require security in the form of first and
preferred lien on the petroleum production or the assets as the case
may be. They may also accept deposits in an escrow account as a
guarantee.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Section 70 of the Pakistan Offshore Petroleum (Exploration and
Production) Rules, 2003 allows a company, subject to permission
and consent of the GOP, to create a security interest for obtaining
financing for petroleum operations.
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2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
An E&P company prior to commencing petroleum operations will
have to submit an environmental protection plan and a safety plan
to the GOP for approval. The various steps and measures to be
taken by an E&P company are set out in The Pakistan Onshore
Petroleum (Exploration and Production) Rules, 2009 and Pakistan
Offshore Petroleum (Exploration and Production) Rules 2003.
Furthermore, an E&P company will also have to ensure that they
follow the guidelines set out in the following:
(a) Pakistan Environmental Protection Act, 1997 and the rules
framed thereunder, which essentially requires clearance from
the Pakistan Environmental Protection Agency through the
submission of an Environmental Impact Assessment/Initial
Environmental Examination; and
(b) The Oil and Gas (Safety in Drilling and Production)
Regulations, 1974 (Safety Regulations), which contains
regulation and detailed requirements for health and safety
and the protection of the environment.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
Under section 60 of The Pakistan Onshore Petroleum (Exploration
and Production) Rules 2009 and Section 63 of the Pakistan
Offshore Petroleum (Exploration and Production) Rules, 2003,
abandonment of any area requires the prior written approval of the
DGPC. Furthermore, areas which are abandoned or relinquished
will have to be of a sufficient size to enable petroleum operations to
be carried out in the future.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Presently, Pakistan is not importing or exporting natural gas.
However, work is underway on a pipeline running over 2,775
kilometres from the Persian Gulf in Iran to a port in Karachi (the
Iran-Pakistan Pipeline). The Gas Sales and Purchase Agreement
(“GSPA”) was signed in June 2009. The first gas flow is expected
by the end of 2013.
Pakistan is also a signatory to a framework agreement between
Turkmenistan and Afghanistan, which envisages import of gas
through a 1,680 km long pipeline through Turkmenistan and
Afghanistan. This project is expected to come into effect by 2017.
In light of the above GOP has incorporated Inter-State Gas Systems
(Private) Limited (a joint venture between SSGCL and SNGL, the
two state owned utilities) to work as an interface between the GOP
and external agencies to facilitate import of natural gas.
Please refer to questions 7.1 and 7.2 below for a detailed discussion
on the import LNG.
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4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Pakistan
This area of activity is regulated by the Oil and Gas Regulatory
Authority (“OGRA”) under the Oil and Gas Regulatory Ordinance
2002 and the Natural Gas Regulatory Authority (Licensing) Rules
2002 which continue to apply notwithstanding the repeal of the
Natural Gas Regulatory Authority Ordinance 2002. At present all
natural gas transportation pipelines and associated infrastructure is
owned and controlled by two state owned corporations, namely, Sui
Southern Gas Company Limited (“SSGCL”) and Sui Northern Gas
Pipelines Limited (“SNGPL”).
SSGCL holds an exclusive distribution and sales licence in the
Southern and Western provinces of Sindh and Balochistan. SSGCL
is a public limited company which is listed on the Karachi, Lahore
and Islamabad Stock Exchanges.
SNGPL is the largest gas transmission and distribution company in
Pakistan with exclusive rights to distribute and sell natural gas to
customers in the Northern provinces of Punjab and NWFP. SNGPL
is a public listed company which is listed on the Karachi, Lahore
and Islamabad Stock Exchanges.
In addition to these OGRA has issued licences to seven additional
operators also engaged in transmission and sale of natural gas.
These contribute to approximately 20% of the total natural gas sales.
The law requires the gas companies to obtain licences for the
construction of pipelines/storage, transmission, distribution and
sales of natural gas. These licences contain the conditions upon
which such activity is to be carried out.
E&P companies operating in Pakistan are allowed to lay
transportation pipelines within their lease area (from the wellhead
to the field gate) from where the gas distribution to the (residential
and commercial) consumers is taken over by SSGCL and SNGPL.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
As stated in question 4.1 above E&P companies can only lay gas
transportation pipelines from the wellhead to the field gate. For this
purpose, E&P companies will have to submit to DGCP an
environmental management and protection plan along with a safety
plan. Furthermore, under the Environmental Protection Act 1997
an environmental impact assessment will have to be submitted to
the Federal Environmental Protection Agency.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
Land has to be acquired for laying of pipelines. Where government
land is available, whether Federal or Provincial, such land is
generally provided by the relevant government by way of lease or
by granting a right of way. If the land required is privately owned,
then the provincial government will acquire such land under the
Land Acquisition Act, 1894 through compulsory acquisition, and
will then provide such land on lease.
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Section 33 of the Oil and Gas Regulatory Authority Ordinance,
2002 authorises OGRA to certify in such manner and on such terms
and conditions, as may be prescribed in the rules, on an application
by a licensee, that the requirement of a licensee to acquire property
is for a public purpose and for the purpose of the Land Acquisition
Act, 1894, OGRA’s certificate is conclusive proof that the proposed
Pakistan
acquisition for such licensee is for a public purpose.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
As mentioned in question 4.1, all natural gas transportation pipelines
and associated infrastructure is owned and controlled by SSGCL and
SNGPL. The two companies’ core business is to buy natural gas in
bulk from E&P companies, transmit it to load centres over its high
pressure transmission system and sell it to its customers (domestic,
commercial and industrial) through its supply network.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
The gas is supplied to consumers through over 9,000 km of
transmission networks and 71,000 km of distribution system
majority of which is owned by SSGCL in Sindh and Balochistan
and SNGPL in Punjab and N.W.F.P. Both of these utilities are state
owned and are managed by a board of directors.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
All licensees are obligated under Rule 20 of the Natural Gas
Regulatory Authority (Licensing) Rules 2002:
to provide, for a fee determined by the Authority, non-
discriminatory open access to its transmission or distribution
facilities, provided spare capacity not being used by it is
available;
provide interconnection to its transmission or non-exclusive
distribution facilities on mutually agreed terms and
conditions, provided spare capacity not being used by it is
available and the interconnection is technically feasible; and
extend and expand its transmission or distribution facilities
at the request of a person provided that it is technically
feasible and apportionment of the cost is agreed.
However, no regulations have as yet been framed by OGRA in this
regard.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
All transportation terms including costs/tariffs are regulated by
OGRA through the Natural Gas Regulatory Authority (licensing)
Rules, 2002 and Natural Gas Tariff Rules 2002. The licensee is not
permitted to charge in excess of the tariff approved by OGRA. The
2002 Tariff Rules provides a procedure for petitioning OGRA to
determine or alter tariffs.
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5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
Please refer to question 4.1 above.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
Please refer to questions 4.1 and 4.2 above.
5.3 How is access to the natural gas distribution network
organised?
Please refer to question 4.1 above.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
An increase in capacity or expansion of the system is the exclusive
responsibility of the two state owned utilities.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
E&P companies operating in Pakistan cannot access the distribution
system.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
As mentioned above the transmission, transportation and
distribution of natural gas is at present exclusively carried out by
SSGCL and SNGPL. The utilities are publicly listed companies, in
which the GOP owns majority shares, over 70% and 54%,
respectively. Interest in the companies may be privately acquired to
the extent of the free float in the market.
However, by virtue of Rule (xxxi) of the Natural Gas Regulatory
Authority (Licensing) Rules 2002, a licensee may not permit any
change in its ownership or controlling interest without prior
approval of OGRA. A licensee may permit a change in security
interest over its assets to secure finances obtained in the normal
course of business, but a change on security interest in any other
case requires OGRA’s approval.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Pakistan does not engage in Natural Gas Trading.
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6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Please refer to question 6.1 above.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
There is currently no LNG facility available in Pakistan. As
mentioned in question 1.1 above, in order to bridge the widening
gap between gas demand and supply, GOP is working towards the
LNG import option. In anticipation of such, the GOP has set out the
following Policy and Rules:
(a) Liquefied Natural Gas (LNG) Policy 2006.
(b) Oil and Gas Authority (Liquefied Natural Gas) Rules, 2007
(“LNG Rules”).
(c) Pursuant to the LNG policy 2006, an LNG import project
may be structured in the following two ways:
(i) Integrated Project Structure: Under this an “LNG
Developer” which may be a private or public sector
party, joint venture or consortium would be responsible
for purchasing LNG supplies, transporting them to its
LNG import terminal (comprising receiving, storage
and re-gasification facilities) and supplying re-gasified
LNG (“RLNG”) to the domestic market. The LNG
Developer would enter into a long-term Gas and Sales
Purchase Agreement directly with a Government
designated buyer, gas utility or bulk customer.
(ii) Unbundled Project Structure: Under this project
structure LNG would be imported from another
country by a GOP designated buyer (gas utility or bulk
consumer) under a sale purchase agreement which
could be on a delivered ex-ship basis or on a free-on-
board (FOB) basis. The LNG buyer would enter into
an agreement with the LNG Terminal Owner or
Operator for the provision of LNG receiving, storage
and re-gasification services at its terminal under a
tolling agreement. For a Free-on-board purchase, the
LNG buyer would in addition, enter into an agreement
with a shipping company to transport LNG to the
receiving terminal.
The Oil and Gas Regulatory Authority is responsible for issuing
licences to LNG Developers or LNG Buyers, who will be allowed
to import LNG in accordance with applicable import laws, rules and
regulations.
The LNG Developer or Terminal Operator and/or owner is required
to obtain from OGRA a licence to design, construct, operate and
own an LNG terminal, subject to site approval and satisfaction of
technical, financial, health, safety and environmental standards.
During the operating period, OGRA will regulate access rights to
the terminals based on negotiated third party access or regulated
third party access based on objective non discriminatory tariffs.
Capacity utilisation rates and tariffs will have to be published at
regular intervals as may be determined by OGRA.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
A licence to construct own and operate LNG facilities is granted by
OGRA under the LNG Rules subject to compliance with HSE and
Technical Standards, and the other provisions of the LNG Rules.
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Pakistan
Under the 2006 LNG Policy, an LNG import project may be
structured under two alternatives, an integrated project structure or
an unbundled project structure.
Further, the LNG Developer, LNG Terminal Owner/Operator, LNG
Buyer and RLNG Buyer each require permits and licences from
Government departments such as Ministry of Defence, Naval
Pakistan
Headquarters, Port Authorities, Environmental Protection Agency,
Chief Inspector of Explosives, and provincial and local government
agencies to carry out their respective activities.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
While no regulation have so far been framed with regard to price or
terms in the LNG sector, the LNG Policy 2006 provides as follows:
(a) In the case of an integrated product structure, where RLNG
is procured by an RLNG Buyer in the public sector, the
purchase contract is expected to be for a minimum period of
20 years and LNG is procured from an LNG Developer
offering the lowest price at the designated delivery place.
(b) In case of an Unbundled Project Structure, where LNG is
procured by an LNG Buyer in the public sector the contract
shall be for a minimum period of 20 years, and the price for
RNLG will be determined by OGRA based on: (i) the LNG
purchase price; (ii) the direct and indirect costs of
transportation, storage and re-gassification incurred by the
LNG terminal operator/owner; and (iii) a reasonable return on
the investment made by the LNG terminal operator/owner.
(c) Except as mentioned above LNG Developers and LNG
Buyers may sell RLNG to end users directly based on
negotiated prices subject to approval of OGRA.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
By virtue of the provisions of section 6(2)(g) of the Oil and Gas
Regulatory Authority Ordinance 2002, OGRA has the power to
promote effective competition and efficiency in the activities within
its jurisdiction.
Additionally, the Competition Commission of Pakistan (“the
Competition Commission”) established by the Competition
Ordinance 2007 (“Competition Ordinance”), which in October 2007
replaced the erstwhile Monopoly Control Authority which had been
established by the Monopolies and Restrictive Trade Practices
(Control and Prevention) Ordinance 1970, is mandated to provide for
free competition in all spheres of commercial and economic activity in
Pakistan and to protect consumers from anti-competitive behaviour.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
All actions or matters that take place in Pakistan and distort
competition within Pakistan are prohibited. The Competition
Ordinance applies to all undertakings, which includes any natural or
legal person, government body including a regulatory authority,
body corporate, partnership, association, trust or other entity in any
way engaged, directly or indirectly, in the production, supply,
distribution of goods or provision or control of services and include
an association of undertakings.
Under section 3 of the Competition Ordinance, no person shall
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abuse dominant position, that is, a person who is in a dominant
position shall not undertake, maintain or continue a practice which
prevents, restricts, reduces or distorts competition in the relevant
market. A relevant market may be a product market or a geographic
market. Section 3(3) of the Competition Ordinance sets out
examples of practices which prevent, restrict, reduce or distort
Pakistan
competition in the relevant market.
Pursuant to section 4 of the Competition Ordinance, undertakings
are prohibited from entering into any agreement or, in the case of an
association of undertakings, prohibited from making a decision in
respect of the production, supply, distribution, acquisition or control
of goods or the provision of services which have the object or effect
of preventing, restricting or reducing competition within the
relevant market unless exempted by the Competition Commission.
Examples of prohibited agreements are set out in section 4(2) of the
Competition Ordinance.
Pursuant to section 10 of the Competition Ordinance, undertakings
are prohibited from entering into deceptive market practices.
Deceptive market practices is deemed to have occurred if an
undertaking resorts to: (a) the distribution of false or misleading
information that is capable of harming the business interests of
another undertaking; (b) the distribution of false or misleading
information to consumers, including the distribution of information
lacking a reasonable basis, related to the price, character, method or
place of production, properties, suitability for use, or quality of
goods; (c) false or misleading comparison of goods in the process
of advertising; or (d) fraudulent use of another’s trademark, firm
name, or product labelling or packaging.
Section 11 of the Competition Ordinance prohibits undertakings from
entering in a merger which substantially lessens competition by
creating or strengthening a dominant position in the relevant market.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The Competition Ordinance grants the following powers to the
Competition Commission:
(a) the power to pass one or more of the following orders
specified in section 31 of the Competition Ordinance:
(i) In the case of an abuse of dominant position, the
Competition Commission may require the undertaking
concerned to take such actions as may be necessary to
restore competition and not to repeat the prohibitions or
to engage in any practice with similar effect.
(ii) In the case of agreements entered into in contravention
of the provisions of the Competition Ordinance, such
agreements may be annulled or the undertaking
concerned may be required to amend the agreement or
related practice and not to repeat the prohibitions
specified or enter into any other agreement or engage
in any other practice with similar object or effect.
(iii) In the case of deceptive market practice require (i) the
undertaking concerned to take such actions specified
in the order as may be necessary to restore the
previous market conditions and not to repeat the
prohibitions specified in section 10; or (ii)
confiscation, forfeiture or destruction of any goods
having hazardous or harmful effect.
(iv) In the case of a merger (i) authorise the merger,
possibly subject to certain conditions; (ii) decide that
it has doubts as to the compatibility of the merger,
thereby opening a second phase review; or (iii) undo
or prohibit the merger, but only as a conclusion of the
second phase review.
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(b) the power to issue interim orders [section 32 of the
Competition Ordinance];
(c) the power to enter and search premises [section 34 of the
Competition Ordinance];
(d) the power to call for information relating to an undertaking
[section 36 of the Competition Ordinance];
(e) the power to conduct inquiries on its own in relation to any
matter for the purposes of the Competition Ordinance
[section 37 of the Competition Ordinance]; and
(f) the power to impose penalties [section 38 of the Competition
Ordinance], which could extend to Rs. 50 million or 15% of
annual turnover, and in the case of a continuing default the
Competition Commission may impose a daily fine of up to
Rs. 1 million per day.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
As mentioned in question 8.2 above, the Competition Commission
has the power to prohibit mergers which substantially lessen
competition by creating or strengthening a dominant position in the
relevant market.
Pre-merger notifications are required to be given to the Commission
under section 11(2) of the Competition Ordinance where the
undertakings concerned meet the pre-merger notification thresholds
stipulated in regulations framed by the Competition Commission
(the Competition (Merger Control) Regulations 2007), and the
approval of the Competition Commission has to be sought before
such merger may take place.
The pre-merger notification thresholds are as follows:
the value of gross assets of the undertaking, excluding value
of goodwill, is not less than three hundred million rupees, or
the combined value of the undertaking and the undertaking to
be acquired is not less than one billion rupees;
annual turn over of the undertaking, in the preceding year is
not less than five hundred million rupees or the combined
turnover of the undertaking and the undertaking to be
acquired, the shares of which are not less than one billion
rupees;
the transaction relates to acquisition of shares or assets of the
value of one hundred million rupees or more; or
in case of acquisition of shares by an undertaking, if an
acquirer acquires voting shares, which taken together with
the voting shares, held by the acquirer shall entitle the
acquirer to more than 10% voting shares.
If within 30 days the Competition Commission does not respond to
a pre-merger notification, then clearance is deemed to have been
granted. If the Competition Commission initiates a second phase
review, this review must be completed within 90 days of the receipt
by the Competition Commission of the requested information. If no
decision is rendered within the said 90 days period, it is deemed that
the Competition Commission has no objection to the merger.
The Competition Commission may grant clearance subject to such
conditions as it may determine.
Where clearance has been granted subject to conditions, then the
Competition Commission may within one year review the order of
approval on the grounds that it is satisfied that the circumstances of
the relevant market or of the undertaking have so changed as to
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warrant a review of the order.
The Competition Commission may undo the merger or modify its
order, if it is determined that the approval was granted on the basis
of false or misleading information or if the conditions specified in
the order have not been fully complied with.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
As stated in the preceding questions, all natural gas transportation
pipelines and associated infrastructure are owned by the two state
utilities, SSGCL and SNGPL.
SSGCL and SNGPL are public limited companies which are listed
on the Karachi, Lahore and Islamabad Stock Exchanges with over
70% and 54% direct share holding respectively by the Government
of Pakistan. In principle a foreign company could acquire a stake
in them, through the purchase of shares on the stock exchange.
Foreign companies not operating in Pakistan but having operated
concessions in other geographical areas of the world may only be
eligible to acquire petroleum rights subject to their financial and
technical capabilities.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
International Treaties are not by themselves applicable or
enforceable in Pakistan. All international or multinational treaties
signed by Pakistan have to be ratified by Parliament in order for
them to be binding.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Pursuant to section 6(2)(i) and (k) of the Oil and Gas Regulatory
Authority Ordinance, 2002, OGRA may resolve complaints and
other claims against licensees for contravention of the provisions of
the OGRA Ordinance, rules or regulations and resolve disputes
between licensees, and between licensees and any other person
regarding a regulated activity. Any interested person may file a
written complaint with OGRA against a licensee for contravention of
any provision of the OGRA Ordinance, or of any rule or regulation.
Any person aggrieved by any order or decision may within 30 days
of receipt of such decision or order appeal to OGRA and OGRA is
required to hear and decide the appeal within ninety days from the
date of its presentation (Sections 11 and 12 of OGRA Ordinance).
ICLG TO: GAS REGULATION 2010
© Published and reproduced with kind permission by Global Legal Group Ltd, London
Pakistan
OGRA may review, rescind, change, alter or vary any decision, or
may rehear an application before deciding it in the event of a
change in circumstances or the discovery of evidence which, in the
opinion of OGRA, could not have reasonably been discovered at
the time of the decision.
In addition to the above, Rule 74 of the Pakistan Petroleum
Pakistan
(Exploration and Production) Rules, 2001 and Rule 81 of the
Pakistan Offshore Petroleum (Exploration and Production) Rules,
2003, provide that, unless otherwise agreed, any question or dispute
regarding petroleum right or an agreement or reconnaissance
agreement shall be resolved by arbitration in Pakistan and in
accordance with Pakistani laws (Arbitration Act, 1940).
10.2 Is Pakistan a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Pakistan is a signatory to the New York convention of 1958 on
Recognition and Enforcement of Foreign Arbitral Awards and has
ratified the same by promulgating the Recognition and Enforcement
Arbitration Agreements and Foreign Arbitral Awards) Ordinance,
2007 as well as the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States (“ICSID”)
ratified by promulgating the Arbitration (International Investment
Disputes) Ordinance 2007.
Pakistan is an observer state to the Energy Charter Conference and
has signed the 1991 Energy Charter Declaration.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
Judgments may be obtained against the GOP and arbitral awards
may be enforced against the GOP. However, under the OGRA
Ordinance, OGRA does have immunity as no suit, prosecution or
other legal proceedings shall lie against the OGRA, the Chairman,
or any Member, employee, expert, consultant or adviser of OGRA
in respect of anything done or intended to be done in good faith.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
Yes, there have been.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Pakistan.
The Ministry of Petroleum and Natural Resources announced the
Petroleum Policy 2009 to ensure that the rules were in accordance
with the changing market conditions. It is focussed on attracting
foreign investment to accelerate exploitation of indigenous natural
resources and provides a higher rate of return and lucrative
incentives to E&P companies in order to attract investment. The
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 Vellani & Vellani Pakistan

Policy is to be read with the Pakistan Onshore Petroleum

(Exploration and Production) Rules 2009, which have amended the Badaruddin F. Vellani
Onshore Rules 2001 and the Pakistan Offshore Petroleum Vellani & Vellani
(Exploration and Production) Rules 2003. 148, 18th East Street, Phase 1
Defence Officers Housing Authority, Karachi
Since Pakistan’s gas demand and supply projections indicate a Pakistan
widening gap and in order to meet the rising demand, the GOP has
Pakistan

Tel: +9221 3580 1000

placed strong emphasis on importing gas. A number of LNG
Projects have been initiated by the government for this purpose.
Work has also commenced on the Iran-Pakistan Pipeline and the
first supply is expected by 2013. Furthermore GOP has set a target
of drilling 100 new oil and gas exploratory wells during the year
2009 to meet the country’s growing energy demand.
Fax: +9221 3580 2120
Email: bfv@vellani.com
URL: www.vellani.com
B.Sc. (Hons), Chem. Eng. (Loughborough),B. A. (Wales),
Barrister-at-Law, Advocate of the Supreme Court of Pakistan
Badaruddin F. Vellani is a partner of the firm and has been practicing
as an advocate at Karachi since his return in 1982 after completing
his studies abroad. In January 1984 Badaruddin F. Vellani became
a partner in the firm.
His legal practice has concentrated on commercial matters,
including corporate work, mergers, demerger, reconstructions,
acquisitions ,disinvestments, anti-trust matters and monopolies,
corporate finance, project finance, infrastructure projects, building
and construction contracts, and taxation, and has included litigation
in the courts upto the High Court.
In addition to his general legal practice, he advises on industrial
property or intellectual matters including registration assignment
and licensing of patents, trade marks, copyrights, unfair competition
licensing and franchising, and litigation in each of these specialised
areas of work.
The experience gained through his legal practice has led to his being
invited to join the boards of directors of various companies
representing the interests of foreign investors.
He has also been the chairman of a working group for the setting up
of a legal information foundation and in a project funded by the Asia
Foundation for making the country’s laws and regulations and the
decisions of the Courts in Pakistan available through the electronic
media including via the internet. He has also acted as a consultant
on an Asian Development Bank sponsored project and carried out by
the Asia Foundation for the Government of Pakistan on Pakistan
Legal and Judicial Reforms. He has also recently participated in a
Symposium organised and held in Manila in September 1999 by the
Asian Development Bank on Secured Transactions Law Reforms. He
is a member of The General Council of the Bar, Pakistan Industrial
and Intellectual Property Association, the Asian Patent and
Attorneys Association, the Pakistan National Committee of the
International Chamber of Commerce and a member of the Task
Force on Tax Administration.

Vellani & Vellani has been at the forefront of providing advice in relation to projects entailing the grant and exploitation
of government concessions in respect of oil, gas, and other minerals such as coal and copper, the exploration and
production of oil and gas, harnessing power through the setting up of hydel plants, as well as the marketing of refined
petroleum and the production and supply of natural gas and LPG in Pakistan. We have in particular drafted, reviewed
and negotiated documentation in relation thereto including Concession Agreements, Distribution and Marketing
Agreements, Novations, Transfers and Assignments as well as reviewed and advised government bodies with regard to
various legislation proposed in regard thereto including rules and regulations governing the grant and exploitation of
rights to explore and exploit such natural resources in Pakistan.
Additionally we have also advised on other related matters in respect of such projects which include providing advice
on Sale and Purchase Agreements, Deeds of Conveyance and Deeds of Assignment of Leasehold Rights as well as
capitalisation of locally incorporated companies, foreign exchange regulations, taxation and licensing requirements and
other general commercial advice in relation thereto.
Our client profile consists mostly of multinational corporations engaged in the business of exploring and exploiting for
such natural energy resources and the refinement and marketing of such resources such as oil, gas, coal, coalbed
methane, copper and other minerals.

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Chapter 26
Peru
Estudio Galvez Abogados
1 Overview of Natural Gas Sector
1.1 A brief outline of Peru’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Brief outline of Peru’s natural gas sector:
(i) Production: This stage covers the production system, the gas
basin, the processing plant and the storage. At this moment, the
most important block of natural gas under production in Peru is
Block 88 located in the Peruvian jungle. The entity in charge of this
stage is Camisea Consortium that signed the License Agreement for
the Exploitation of Hydrocarbons in Block 88 (hereinafter, the
“License Agreement”). The operator of the consortium is
Pluspetrol, a company from Argentina.
The proven gas volume is 8.7 trillion cubic feet (TCF) with an
estimated ultimate recovery of 6.8 TCF of natural gas (recovery factor:
78%) and 411 million barrels of associated liquids to natural gas
(propane, butane and condensate). It should be noted that the potential
of Block 88 is estimated at 11 TCF of natural gas (the volume of
proven gas most likely). The estimated ultimate recovery considering
the volume tested is most likely 8.24 TCF of natural gas and 482
million barrels of associated liquids. The Block 88 reserves are ten
times larger than any other natural gas reserve in Peru (source:
Supervisory Organism of the Investment in Energy and Mines -
OSINERGMIN).
(ii) Transportation: This stage covers the transportation system,
compression plants, pipelines, referrals and recompression. The
entity in charge of this stage for Block 88 is Transportadora de Gas
del Perú S.A. (hereinafter, “TGP”). This stage consists of
transferring the gas from the well to a network of high pressure
transmission. The transport phase involves the operation of two
parallel pipelines by TGP: (A) the liquids pipeline, which goes to
the fractionation plant, located on the Lobería beach in Pisco of 540
km, and (B) Dry natural gas pipeline of 700 km, which continues
along the coastal strip up to the City Gate located in Lurín. The
liquids pipeline is divided into two components: the first from
Block 88 to Pampa Rio Seco (point of referral), and the second from
Pampa Río Seco to the City Gate. Both pipelines go through the
departments of Cusco, Ayacucho, Huancavelica, Ica and Lima. The
liquids are received in the fractionation plant, which is located on
Lobería beach in Pisco.
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Francisco Gálvez D.
Carlos Raúl Vizquerra
(iii) Distribution: This stage includes the distribution systems,
networks in high, medium and low pressure, nodes and regulation
station, final consumption (industrial, residential, etc.). The entity
in charge of this stage for Lima and Callao is Gas Natural de Lima
y Callao - Cálidda. The distribution of natural gas involves the
concession for Lima and Callao and the operator receives the gas at
the City Gate of Lurín and then distributes it through a network of
high-pressure trunk pipeline that crosses the city of Lima and
reaches a terminal in Ventanilla.
(iv) Exportation: Peru LNG S.R.L. is handling the exportation
project in Peru. This project consists of two parts: (A) a liquefied
natural gas plant that includes a marine loading terminal from
which liquefied natural gas will be exported; and (B) a gas supply
pipeline connected to the existing TGP pipeline in the rainforest
section that transports the gas from this connection point to the
LNG Plant located between Cañete and Chincha. The PERU LNG
plant will have a nominal capacity of 4.45 million tonnes per year
with a daily supply of 625 million cubic feet, using a refrigerant
process that pre-cools the natural gas in a refrigeration circuit with
propane, reaching the final temperature (minus 163° Celsius) in a
mixed refrigerant circuit.
1.2 To what extent are Peru’s energy requirements met using
natural gas (including LNG)?
The matrix of gross domestic supply of primary energy in Peru is
classified as commercial in about 85% of the total offer, which is
composed by 70% of hydrocarbons (47% oil, 3% coal and 20%
natural gas and derivatives) and 15% of hydropower. The
remaining 15% is considered non-commercial.
The Ministry of Energy and Mines estimates that between 2007 and
2015, electricity demand will be increased between 5.6 and 7.4% per
year, to reach in 2030 an energy consumption per capita of 1632 Kwh
per year (in 2006 consumption was 872 Kwh per capita per year). To
meet this demand, Peru will rely on natural gas, increasing the
installed power generating capacity to 0.3 GW gas in 2002 to 6.0 GW
in 2030. In 2030, the estimation is that natural gas will represent 44%
of the installed power generating capacity.
1.3 To what extent are Peru’s natural gas requirements met
through domestic natural gas production?
Peru’s natural gas current requirements are met through domestic
natural gas production. Nevertheless, it is important to point out
that there is an unanticipated increase in the demand of natural gas
in Peru, higher than the expected at the time of issuing the rules
governing the natural gas industry. This unanticipated increase in
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the demand of natural gas has led to congestion of the infrastructure
and the temporary restriction of gas supply to the 2010 -2011 period
and therefore the Government has decided to establish a priority
order for the domestic requests of supply to be treated in this period.
In this sense, on February 19, 2009, was published the Decree of
Urgency Nº 023-2009, which is valid until December 31, 2011.
This law has prioritised the assignation of volumes of natural gas.
Peru
In order to conclude new contracts for the sale of natural gas, whose
supply is initiated during the term of this Decree of Urgency, the
allocation of volumes will follow the following order of priority: (i)
dealers of natural gas for distribution to public service; (ii) thermal
power stations of combined dual cycle that start its operations
before December 31, 2011; (iii) power stations dual open-loop
coming into operation before December 31, 2011; and (iv) other
clients. For purposes of determining the amount available to be
offered, producers shall apply the criteria of average consumption
in drought season and shall include the amounts committed for
regional pipelines and petrochemical industry in the bidding.
In accordance with this Decree of Urgency, Camisea Consortium,
which is the operator of Camisea Project, is running a public bid to
sell natural gas to the local market.
1.4 To what extent is Peru’s natural gas production exported
(pipeline or LNG)?
In Peru, the natural gas will be exported basically from Camisea
Project to Mexico. According to the License Agreement, the natural
gas produced in the area of the contract can be exported as long as
the supplying to the local market for the next 20 years is guaranteed,
according to the forecast of demand of Natural Gas, as well as the
level of proven reserves of natural gas in Peru, published in the
Referential Plan of Hydrocarbons of the Ministry of Energy and
Mines valid at the time of the signing of the contract for selling of
gas for exportation. The signing of the contract for selling of gas
for exportation took place in February 2006 between the members
of Camisea Consortium and PERÚ LNG S.R.L.
It is important to point out that the License Agreement has regulated
the export of natural gas according to the provision valid at the time
of the signing of the contract for selling of gas for exportation,
which is different from the current valid regulation.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The legal framework for the exploration and exploitation of natural
gas reserves is composed basically for the following: (i) Organic
Law for Hydrocarbons, Law N° 26221; (ii) Law to Promote the
Development of the Industry of Natural Gas, Law Nº 27133; and
(iii) Regulation of the Law to Promote the Development of the
Industry of Natural Gas, Decreto Supremo Nº 040-99-EM.
Perupetro S.A. (hereinafter, “Perupetro”) is the private law State
agency responsible for promoting the investment in hydrocarbon
exploration and exploitation activities in Peru. Perupetro negotiates
signs and supervises the License Agreements for the Exploration
and Exploitation of Hydrocarbon in Peru.
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Peru
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
The State’s rights are transferred to investors through License
Agreements for the Exploration and Exploitation of Hydrocarbons.
Under the license agreements, the contractor acquires ownership of
the hydrocarbons produced in the contracted area and pays a royalty
to the State. The contractor assumes the exploration risk and
provides all technical, economic and financial resources to carry out
the contract.
The contract term includes 2 phases: exploration; and exploitation.
For oil, the contract runs for a total of 30 years. In the case of
natural gas and condensates, the total term of the contract is 40
years.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
The first step to be able to explore or produce natural gas in Peru is
the signing of a License Agreement for the Exploration and
Exploitation of Hydrocarbons with Perupetro. The exploration
phase has a term of seven years with an eligible three-year
extension. The License Agreement may be terminated at the end of
any of the periods, depending of the results of the exploration
activities and the fulfilment of the committed minimum work
program. If during any period in the exploration phase the
contractor discovers non-associated gas or natural gas with
condensates, the contractor can request a retention period of up to
ten years in order to develop a market for those products.
The committed minimum work programme is the obligation of the
contractor during the exploration phase. The contractor shall
guarantee full compliance of each minimum work programme for
the exploration phase through a joint and several, unconditional,
irrevocable and automatically executable bank guaranty in Peru for
the amount of the minimum expenditure committed for each
exploration period.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
The State does not have an ownership interest or seek to participate
in the development of natural gas reserves.
Nevertheless, it is important to consider that Petrobras Energía Perú
S.A. and Petroperú S.A., the private law State-owned hydrocarbons
entity, have constituted an association with 50% shares each for oil
prospecting. The association is currently at the assessment stage
called also pre-exploration in the Marañon basin situated in Loreto
Department, summing up to 6 areas spread over 5,653,300 hectares.
The estimated investment amount is 120 million US dollars.
Petrobras Energía Perú S.A. was appointed at this stage as the
operator of oil potential assessment and the identification of the
zones presenting the greatest prospecting interest.
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Estudio Galvez Abogados
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
The State derives value from natural gas through the payment of a
royalty. The royalty is paid on the value of the crude oil and
condensates calculated on the basis of a basket of hydrocarbons
minus transportation and storage expenses (assuming there is a third
party transportation system). In the case of natural gas, the royalty
will be applied to the selling price less transportation and storage
expenses. However, Peruvian regulations allow Perupetro to
negotiate different royalties for cases including non-conventional
operations, or when a contract becomes unfeasible due to the lack
of infrastructure required to transport hydrocarbons.
2.6 Are there any restrictions on the export of production?
There are certain restrictions in the contracts where the rights to
exploit proven reserves of natural gas are granted. According to the
Supreme Decree Nº 079-2009-EM, for contracts where the rights to
exploit proven reserves of natural gas are granted, the contractor will
only be entitled to export natural gas after the proven reserves are
enough to cover the local market forecast of demand of natural gas
annually published in the Referential Plan of Hydrocarbons of the
Ministry of Energy and Mines. This regulation was published on
November 9, 2009 and has been in force since November 10, 2009.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
No, there are no currency exchange restrictions, or restrictions on
the transfer of funds derived from production out of the jurisdiction.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
The hydrocarbons produced and measured in the contract area
belong to the contractor. The contractor may freely sell or dispose
the production derived from the contract. There are no quotas
assigned for the domestic market in the case of hydrocarbons
discovered as consequence of the signing of a License Agreement
for the Exploration and Exploitation of Hydrocarbons in an area
where there are no proven reserves.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
Yes, the contractor of any License Agreement for the Exploration
and Exploitation of Hydrocarbons in Peru shall guarantee the full
compliance of each minimum work programme for the exploration
phase through a joint and several guaranty, which shall be
unconditional irrevocable and automatically executable in Peru.
Such guaranty shall be issued by a duly qualified entity of the
financial system domiciled in Peru and accepted by Perupetro.
In addition, before signing a License Agreement for the Exploration
and Exploitation of Hydrocarbons, Perupetro will evaluate the
technical, economic and financial capacity of the company and will
award a Qualification Certificate to start negotiations. The
qualified company shall establish a branch or a subsidiary for
purposes of singing the License Agreement for the Exploration and
Exploitation of Hydrocarbons as contractor. Such qualified
company shall also participates in the singing of a License
Agreement for the Exploration and Exploitation of Hydrocarbons to
ICLG TO: GAS REGULATION 2010
© Published and reproduced with kind permission by Global Legal Group Ltd, London
Peru
provide the corporate guaranty. The corporate guaranty is granted
in order to guarantee compliance with all the obligations assumed
by the contractor under the minimum work programme of the
contract for each one of the annual exploration programmes.
It is also important to mention that all foreign companies must
appoint a National Mandatory in Peru in order to be able to sign a
License Agreement for the Exploration and Exploitation of
Peru
Hydrocarbons. The National Mandatory has to be a Peruvian
citizen domiciled in Peru.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
No, the rights cannot be pledged for security because they are
granted to a previously qualified oil and gas company based on its
technical, economic and financial capacity. For accounting
purposes, the investment made by the contractor during the
exploration phase can be booked as an intangible.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Before entering into the area of the block, the contractor needs to
obtain the following authorisations from the General Direction of
Environmental and Energy Matters (Dirección General de Asuntos
Ambientales Energéticos): (i) approval of the Plan of the People
Participation (Plan de Participación Ciudadana), approved by
Supreme Decree Nº 012-2008-EM, which is the document that the
contractor uses to describe the actions and mechanisms for purposes
of informing the community involved in the project about it at the
time of the elaboration of the environmental studies and after the
approval of the environmental studies and during the lifetime of the
project; and (ii) prior to the beginning of hydrocarbon activities,
extension and modification of activities, the contractor shall file and
obtain the approval of the environmental study for its approval, which
shall include an environmental base line study. Hydrocarbons
activities include the exploration, exploitation, refining, processing,
storage, transportation, selling and distribution of hydrocarbons.
Also in November of each year, the companies authorised to be
engaged in the exploration, exploitation, refining, operation of
processing plants, supply plants, terminals, LPG bottling plants,
transportation by pipeline, distribution of natural gas or other
activities in which the associated risk is high in view of
OSINERGMIN (Organismo Supervisor de la Inversión en Energía y
Minería), must submit to such entity an Annual Program of Security
Activities (PAAS - Programa Anual de Actividades de Seguridad) for
the following year. Authorised Companies representing the lowest
risks are required to have a PAAS in their facilities, which must be
submitted each time OSINERGMIN requests it.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
According to the approved model of the License Agreement for the
Exploration and Exploitation of Hydrocarbons in Peru, at the
termination of the licence agreement, the contractor shall return to
the Peruvian State, through Perupetro, at no charge whatsoever to
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 Estudio Galvez Abogados
the latter, unless it does not require them, the buildings, energy
installations, encampments, communication systems, pipelines and
other production assets belonging to the contractor, which will
allow the operations to continue. Such assets must be returned in
good condition, well maintained and in working order, taking into
account fair wear and tear. If the Contractor has been using the
described assets and installations but they are not devoted
Peru
exclusively to the operations, that is, they have also been used for
operations in other areas covered by a current contract for the
Exploration and Exploitation of Hydrocarbons in Peru, the
contractor shall continue to own and make use of such assets.
If joint oil production, non-associated natural gas and/or non-
associated natural gas and condensates is taking place, at the end of
the period for the petroleum exploration phase, the contractor shall
return to the Peruvian State, through Perupetro, at no charge
whatsoever to the latter, unless it does not require them, the assets
and installations used for oil production which are not necessary for
the production of non-associated natural gas and/or non-associated
natural gas and condensates. Such assets must be returned in good
condition, well maintained and in working order, taking into
account fair wear and tear.
The assets and installations retained by the contractor for the
production of non-associated natural gas and/or non-associated natural
gas and condensates which have also been utilised in oil production,
even when these continue as the contractor’s property, shall be used in
the production of both products and an agreement shall be entered into
between the contractor and Perupetro to this effect.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
There are no limitations or rules applying in respect of cross-border
sales or deliveries of natural gas.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
The State can grant a concession to transportation pipelines to any
individual or corporation that wants to provide transportation
services. The regulatory applicable framework is described in
question 4.2 below.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
For the performance of transportation services for hydrocarbon
products through a pipeline, it is required that the Ministry of
Energy and Mines grants a concession through the Dirección
General de Hidrocarburos - DGH. The concession does not grant
its holder a geographical or territorial exclusivity. In this regard, the
State may grant other concessions for the same route, according to
the regulations.
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Peru
The concession is granted through a public bid or private party
request for a period of 20 to 60 years since the signing of the
concession agreement. The requirements for a concession
requested by a private party are the following:
(i) Work Schedule, with minimum periods for the submission of
the following documents to be approved: i) EIA (approved
by the DGH); ii) Risk Study (approved by the Osinergmin);
iii) Manual of Design (approved by the Osinergmin); iv)
proposed tariff (approved by the Osinergmin); v) easements;
and vi) execution of works of the project until its commercial
operation.
(ii) Estimated budget required for the Project.
(iii) Project Description at the level of the Technical-Economic
Profile.
(iv) Banking guarantee of validity, enforcement and compliance
of the application for grant (equivalent to 1% of the
estimated investment or 500 UITs, whichever is less).
Upon termination of the concession, its assets will be transferred or
returned to the state. It is necessary that at the time that the assets
are reverted to the State, are free from all liens and encumbrances.
It is important to point out that a concession is not required when the
transportation is made through: (i) the main pipeline, which includes
the pipe, equipment and others built by a contractor for purposes of
transportation of hydrocarbons produced and in compliance with
obligations under a License Agreement for the Exploration and
Exploitation of Hydrocarbons; (ii) the system or recollection and
injection; or (iii) the pipeline for its own use, meaning use to transport
hydrocarbons that belong to the owner of the pipeline between two
installations of the same contractor. In these cases, the authorisations
are granted by the Dirección General de Hidrocarburos - DGH.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
According to Article 83 of the Organic Law for Hydrocarbons, Law
N° 26221, it is possible to establish legal easement rights for those
cases in which it might be needed for the hydrocarbon activities
such as exploration and exploitation, construction of a pipeline and
distribution of gas natural.
In addition, Article 84 of the Organic Law for Hydrocarbons, Law
N° 26221 establishes that the interested parties duly qualified to
carry out the hydrocarbon activities such as exploration and
exploitation, construction of a pipeline and distribution of gas
natural may request the Ministry of Energy and Mines the
expropriation of private lands. The Ministry of Energy and Mines
shall study the request and, should it be declared pertinent and duly
supported, such expropriations shall be considered as matters of
national and public need and the expropriation procedures over the
area involved shall be started as per law.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
According to the Regulation of Transportation of Hydrocarbons
through Pipelines, Supreme Decree Nº 081-2007-EM, the
concessionary is obliged to allow the open access to the pipeline
without discrimination to those who require it, as long as it is
technically viable. In those cases where the concession has been
granted as a consequence of a public bid, the terms may establish
limitations to the open access for a fixed term and for purposes of
promoting the private investment.
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4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
There is no main natural gas transportation pipelines integrated or
interconnected yet because the natural gas sector in Peru still is
based mainly on Camisea Project. Nevertheless, please see our
answer in question 4.4 above.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
According to the Regulation of Transportation of Hydrocarbons
through Pipelines, Supreme Decree Nº 081-2007-EM, the
concessionary is obliged to allow the open access to the pipeline
without discrimination to those who require it, as long as it is
technically viable. In those cases where the concession has been
granted as a consequence of a public bid, the terms may establish
limitations to the open access for a fixed term and for purposes of
promoting the private investment.
The principles to administer the available capacity of the pipeline
are (i) transparency and adequate publicity, (ii) equal treatment to
the requests, (iii) free concurrency and competition among the
requests, and (iv) contractual formalisation. The concessionary
shall answer any request of service within 30 days since the
reception of the request and the rejection shall be sustained with
technical or economical reasons. If the one that requests the service
and the concessionary do not reach an agreement, the parties may
submit their differences to OSINERGMIN (Organismo Supervisor
de la Inversión en Energía y Minería).
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Any individual or corporation may operate a pipeline. The law
establishes the maximum rate that the contractor can be charged by
concessionaires. The rate takes into account operating expenses,
depreciation, an after-tax rate of return on investment and working
capital as well as the volumes to be transported in such a way as to
allow the concessionaires to recover their costs and to obtain a
reasonable profit.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The concession of natural gas distribution for Lima and Callao has
been granted in favour of the company Gas Natural de Lima y
Callao (Cálidda). The operator of the concession receives the gas
at the City Gate of Lurín and then distributes it through a network
of high-pressure trunk pipeline that crosses the city of Lima and
arrives to a terminal in Ventanilla.
The gas pipeline and its primary branches crossed fourteen districts
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Peru
of the city of Lima and Callao. Cálidda provides natural gas service
to residential, commercial, industrial and vehicular segments.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
Peru
For purposes of operating a distribution network, a concession is
required.
5.3 How is access to the natural gas distribution network
organised?
The concession to distribute natural gas in a particular area will be
exclusive to a single concessionaire and that area may not be reduced
without the authorisation of the Dirección General de Hidrocarburos
- DGH. The concession area is determined initially by the geographic
area bounded and described in the contract. After a period, which may
not be longer than twelve (12) years from the start of the commercial
operation, the areas that are not covered by the concessionary may be
requested by a third party, with a minimum length of ten (10) hectares,
having the concessionary a preferential right. If the concessionary
does not exercise that right, the concessionary will reduce and redefine
its concession area.
The concessionary may request an extension of its concession area, as
long as it complies with the requirements of the law and after
following a similar procedure to that provided for the granting of a
concession.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new customers?
Independent consumers (those who purchase natural gas directly from
producers, traders or a dealers, for a volume higher than thirty
thousand standard cubic metres per day (30,000 m3/day) and by a
contract period of not less than six (6) months), producers (contractor
under a License Agreement for the Exploration and Exploitation of
Hydrocarbons) and traders (natural or legal person that buys and sells
natural gas or transportation capacity or distribution, for himself or on
behalf of others, without being a concessionary or transport) have
open access to use the facilities of transportation and distribution
system for which they must pay the respective fees.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
There is the maximum fee that a dealer can charge for the supply of
natural gas and the services of transportation, distribution and
commercialisation. The fee shall provide the resources to the
concessionary to cover the efficient costs for providing the service.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
No, there are no restrictions or limitations in relation to acquiring an
interest in a gas utility. Nevertheless, any transfer of a concession
related to a gas utility requires the favourable opinion of the
Dirección General de Hidrocarburos - DGH and the issuance of a
Supreme Resolution that authorises it. Also, the assets forming part
of the concession shall be transferred to the State at the end of the
concession.
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6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Peru
Please see our answer in question 5.3 above.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
The contractor may freely sell or dispose the production derived
from the License Agreement for the Exploration and Exploitation of
Hydrocarbons.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
According to the Supreme Decree 031-2004-EM, Regulation of the
Law that Promotes Investment in Natural Gas Processing Plants, any
individual or corporation, domestic or foreign, may qualify as the
investor in a natural gas processing plant. The investor may act in a
consortium or through a joint venture. In case the investor is a foreign
corporation, it shall incorporate a Peruvian subsidiary or establish a
Peruvian branch. The operation of the natural gas processing plant
could be made directly by the investor or through a subcontractor.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
According to the Supreme Decree Nº 051-93-EM, the individual or
corporation interested in constructing and operating an LNG facility
shall obtain the approval from the Dirección General de
Hidrocarburos - DGH. Additionally, prior to the installation of the
LNG facility, a technical favourable report shall also be obtained
from OSINERGMIN (Organismo Supervisor de la Inversión en
Energía y Minería).
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
No, there is no regulation of the price or terms of service in the
LNG sector.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
There is no specific authority responsible for the regulation of
competition aspects, or anti-competitive practice, in the natural gas
sector. Nevertheless, there is a Specialised Public Agency, ascribed
to the Presidency of the Council of Ministers, with legal capacity in
domestic public law, named the National Institute for the Defense of
Competition and Protection of Intellectual Property - INDECOPI. Its
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functions are market promotion and protection of consumers’ rights.
In addition, it promotes fair and honest competition in Peruvian
economy, safeguarding all forms of intellectual property: from
trademarks and copyrights to patents and biotechnology.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The Defense of Free Competition Commission of INDECOPI
safeguards observance of Legislative Decree No. 1034, Law on
Overseeing of Anti-Competitive Conducts, and Law No. 26876,
Antitrust and Antioligopoly Law of the Electrical Sector with
exclusive competence.
The procedure is carried out by the Technical Secretariat and the
Free Competition Commission and is addressed at sanctioning
abuse of power, horizontal collusive practices and vertical collusive
practices, according to what is established in Legislative Decree
1034, Law on Overseeing of Anti-competitive Conducts, with the
purpose of promoting economic efficiency in the markets for well-
being of consumers.
For instance, Article 10 of Decree Law 1034 states that abuse is
considered to exist when an operator who holds a dominant position
in one market uses that position to unduly restrict competition,
obtaining benefits and harming competitors, actual or potential, direct
or indirect, which is possible because of such dominant position. The
dominance falls on a relevant market, determined by reference to a
relevant product and geographic markets previously established.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The following are the Commission’s attributions according to
Legislative Decree 1034: (i) declare the existence of an anti-
competitive conduct and impose the corresponding sanction; (ii)
announce precautionary measures; (iii) announce corrective
measures regarding anti-competitive conducts; (iv) issue
Guidelines for guiding market agents on the correct interpretation
of rules in this Law; and (v) suggest the Presidency of INDECOPI’s
Board of Directors to issue opinions, exhort or recommend
legislative, political or administrative authorities about the
implementation of measures that restore or promote free
competition, such as the elimination of barriers to entry, the
application of economic regulation to a market where competition
is not possible, among others.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
No, the regulator (or any other Government authority) does not
have the power to approve/disapprove mergers or other changes in
control over businesses in the natural gas sector, or proposed
acquisitions of development assets, transportation or associated
infrastructure or distribution assets.
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Estudio Galvez Abogados
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
There is no special requirements or limitations on acquisitions of
interests in the natural gas sector (whether development,
transportation or associated infrastructure, distribution or other) by
foreign companies other than Article 71 of the Peruvian
Constitution.
According to the second paragraph of Article 71 of the Peruvian
Constitution, within fifty kilometres of the border of Peru,
foreigners may not acquire or possess for any reason mines, lands,
forests, water, fuel or energy sources, directly or indirectly,
individually or in partnership, under penalty of forfeiture to the
State, the right thus acquired. The only exception is a case of public
necessity, declared by a Supreme Decree expressly approved by the
Cabinet in accordance with the law.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
The regulatory policy has been influenced by the international
practices and the needs of the natural gas sector according to the
current development of this sector in Peru.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
According to the approved model of the License Agreement for the
Exploration and Exploitation of Hydrocarbons in Peru, Perupetro
agrees to an arbitration clause in all of its contracts. According to
the standard arbitration clause included in the License Agreements
for the Exploration and Exploitation of Hydrocarbons in Peru, any
lawsuit, controversy, dispute or claim between the contractor and
Perupetro arising from the License Agreement or concerning the
interpretation, compliance, resolution, termination, effectiveness or
validity thereof, which cannot be resolved by mutual agreement
between the parties must be resolved through international
arbitration, in accordance with the provisions of Article 68 of Law
Nº 26221.
The parties are obliged to perform all the necessary acts for the
development of the arbitration until its culmination and execution.
The arbitration shall be managed by the International Centre for
Settlement of Investment Disputes (ICSID) in everything which is
not provided in the arbitration clause. The arbitration will be
organised and developed according the ISCID Arbitration Rules, in
force at the signing date.
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Peru
In addition to the above mention, there are License Agreements in
Peru that have a different arbitration clause and include a reference
to the International Chamber of Commerce’ Arbitration Rules in
everything which is not provided in the arbitration clause instead of
the ICSID’s rules.
10.2 Is Peru a signatory to, and has it duly ratified into
Peru
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Yes, Peru has ratified the United Nations Convention on the
recognition and enforcement of foreign arbitral awards (New York
Convention of 1958) on July 7, 1988. In addition, Peru has signed
the Convention on the Settlement of Investment Disputes between
States and Nationals of Other States on September 4, 1991 and has
ratified it on August 9, 1993.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
There is no special difficulty in litigating or seeking to enforce
judgments or awards against Government authorities in Peru.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
There haven’t been litigations before domestic courts in the natural
gas sector against Government authorities or State organs in the last
years in Peru.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Peru.
There is a debate in Peru as to whether the reserves of natural gas
in Peru are enough to cover the demand of natural gas of the local
market. In fact, the Supreme Decree Nº 079-2009-EM has changed
the previous regulation in which the guaranty to the local market
was subject to a minimum period defined in the licence agreement,
period that was determined since the time of the signing of the
contract for selling of gas for exportation. Notwithstanding this is
a more stable and predictable rule for purposes of exportation, said
Supreme Decree considers that in such mechanism there is a risk
that the real demand of natural gas in the local market is not covered
because such demand cannot be properly estimated at the time of
the signing of the contract for selling of gas for exportation.
In addition, some congressmen and politicians would like to
renegotiate the License Agreement for the Exploitation of
Hydrocarbons in Block 88 because it allows Camisea Consortium
to sell part of the gas for exportation that, apparently and from their
view exceeds the forecast of demand of natural gas to the local
market for the next 20 years, as well as the level of proven reserves
of natural gas in Peru, published in the Referential Plan of
Hydrocarbons of the Ministry of Energy and Mines valid at the time
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of the signing of the contract for selling of gas for exportation. Acknowledgment
Other important development to consider is the execution of a new The authors would like to acknowledge the assistance of their
pipeline project. The project named South Andean Pipeline colleague Luis E. Córdova in the preparation of this chapter. Mr
involves designing, constructing and operating the pipeline that will Córdova’s areas of expertise are corporate law, oil & gas and M&A.
transport natural gas from gas fields located in the Cusco region to
the cities of Cusco, Juliaca, Arequipa and Ilo Matarani. With an
approximate length of 1,085 km, the South Andean Pipeline
Peru

constitutes the backbone of socio-economic development of regions

Cusco, Arequipa, Moquegua and Puno and increases the reliability
of the national natural gas supply because it is a separate pipeline of
the existing pipeline.

Francisco Gálvez D. Carlos Raúl Vizquerra

Estudio Gálvez Abogados Estudio Gálvez Abogados
La Santa María Nº 185, San Isidro La Santa María Nº 185, San Isidro
Lima 27 Lima 27
Peru Peru

Tel: +511 440 7099 Tel: +511 440 7099

Fax: +511 442 8839 Fax: +511 442 8839
Email: fgalvez@estudiogalvez.com.pe Email: cvizquerra@estudiogalvez.com.pe
URL: www.estudiogalvez.com.pe URL: www.estudiogalvez.com.pe

Founding partner of Estudio Gálvez Abogados. Graduated in law
from Universidad Católica del Perú in 1972. He has been member
of the board of directors of many companies and today he acts as
national mandatory and advisor of oil and gas companies that
execute exploration and exploitation activities of hydrocarbons in
Peru.
His areas of expertise are administrative law, public law, and oil &
gas.
Graduated in law from Universidad de Lima in 1994. He has joined
Estudio Gálvez Abogados as senior partner in October 2008, after
14 years in Estudio Muñiz, Ramírez, Pérez-Taiman & Luna-Victoria,
where he occupied the position of senior partner also. He worked
in 2007-2008 in Sullivan & Cromwell LLP in New York. He has
been appointed member of board of directors in some companies as
independent director.
His areas of expertise are corporate law, foreign investment, M&A,
and oil & gas.

Estudio Gálvez Abogados was founded on April 2, 1984 by Francisco Gálvez D. to provide a personal legal service
highly specialised.
The law firm is recognised as a boutique legal firm focused in the areas of oil & gas, corporate law, and M&A. Estudio
Gálvez Abogados has the support of lawyers specialised in other areas of law. The law firm has a limited number of
clients in order to always provide legal services at the highest professional quality and value added to its clients.
2010 Chambers Latin America has recognised Francisco Gálvez D. in Band 1 and Estudio Gálvez Abogados in Band 2
in the Energy & Natural Resources: Oil & Gas chapter.
The law firm’s principles are excellency, professionalism, efficiency and loyalty.

212
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Chapter 27
Poland
Wardynski & Partners
1 Overview of Natural Gas Sector
1.1 A brief outline of Poland natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
The gas sector consists of companies active in: exploration;
production; transportation; transmission; distribution; supply; and
storage. Due to EU legal requirements, network activities
(transmission and distribution) are legally separated from the others.
Grupa Kapitalowa Polskie Górnictwo Naftowe i Gazownictwo S.A.
(GK PGNiG S.A.), hereinafter also ‘PGNiG.’, is a key market player.
PGNiG is a joint stock company that is 73.13% State-owned.
Import of natural gas represented 71.3% of its overall delivery in
2008. Overall gas consumption in 2008 amounted to 14,338.1
million BCM out of which PGNiG supplied 13,862.1 million BCM.
Total exploitation of natural gas in Poland was 4,282.7 million
BCM, calculated in relation to highly methanised gas (highly
methanised gas - 1,691.7 million BCM, nitrogenised gas - 2,392.3
million BCM and demethanised gas from mines - 198.7 million
BCM). New exploration possibilities were developed (incl.: shale
and tight gas). Natural gas reserves eligible for extraction
amounted to 99.8 billion BCM on December 31, 2007. There were
378 licences for exploration, development and exploitation of
natural gas reserves issued by the Ministry of Environment in 2008.
According to data from December 31, 2007, Poland has 264 gas
deposits out of which 182 have already been exploited.
Importation amounted to 10,618.7 million BCM (71.3% of
domestic supply) in 2008 (for details see question 1.3). The
greatest part (9,759.8 million BCM) was imported through the
‘Jamal-Europe’ gas pipeline in execution of a long-term contract
between OAO Gazprom Export and PGNiG.
Transit and transmission of natural gas is carried out by System
Gazociagów Tranzytowych EuRoPol Gaz S.A., hereinafter also
‘EuRoPol Gaz’. It controls the Polish part of the ‘Jamal-Europe’
gas pipeline (685 km). It is a joint stock company controlled by
three entities: PGNiG (48%); OAO Gazprom (48%); and Gaz-
Trading S.A. (4%).
Natural gas is transmitted by the Operator Gazociagów
Przesylowych Gaz-System S.A., hereinafter also ‘Gaz-System’. It
is a strategic company for Poland (the State owns 100% of stock).
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Weronika Pelc
Robert Zajdler
The Chairman of the Energy Regulatory Office (hereinafter the
‘ERO Chairman’) nominated it as the Transmission System
Operator (hereinafter the ‘TSO’). It is responsible for the
functioning of 9,675 km of pipelines with 973 entry points and non-
discriminatory access to these grids.
Six companies owned by PGNiG provide distribution services. The
ERO Chairman nominated them as Distribution System Operators
(hereinafter also: ‘DSO’). In total, they control approximately
106,700 km of grids providing non-discriminatory distribution
services.
Poland has 1,660.17 million BCM of storage capacity located at six
sites (Wierzchowice, Brzeznica, Strachocina, Swarów, Husów and
Mogilno). All facilities are owned by a legal entity dependent upon
PGNiG. The ERO Chairman nominated it (on December 31, 2008)
as the Storage System Operator (hereinafter also: ‘SSO’). It is
responsible for non-discriminatory access to the storage system.
A number of companies supply natural gas. Their activity is based
on licences issued by the ERO Chairman. There were 75 licences
for supply and 20 for import-export supply in force in 2008.
However, PGNiG supplied most gas on the basis of long-term
contracts. There is no gas exchange or hubs exchange of gas.
PGNiG controls wholesale and detail markets. Other companies act
as intermediaries. A small amount of gas is sold as LNG.
Presently, the construction of the first LNG terminal in Swinoujscie
(northwest Poland) is underway. Total re-gasification capacity in
three tanks will be 7.5 billion BCM. Storage capacity of each tank
will be 160,000 BCM. It will be in operation from mid-2014.
1.2 To what extent are Poland’s energy requirements met
using natural gas (including LNG)?
In 2008, natural gas represented 12.84% of primary energy
consumption following hard coal and lignite. The majority of gas is
consumed by industry, mainly chemical and petrochemical. The
household consumption represents approximately 30% of the total.
Electricity generation is based primarily on hard coal and lignite.
According to predictions, these energy sources will safeguard their
position. Gas-fired power plants represented 2.4% of total electrical
power capacity installed in Poland (850.4 MW of 35 377.8 MW).
1.3 To what extent are Poland’s natural gas requirements met
through domestic natural gas production?
Domestic natural gas production was 4,282.7 million BCM
(28.7%). Importation amounting to 10,618.7 million BCM (71.3%)
originated from: (1) the Russian Federation - 7,377.8 million BCM;
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 Wardynski & Partners
(2) Turkmenistan - 2,377.2 million BCM; (3) other eastern suppliers
- 858,9 million BCM; (4) Germany - 858.7 million BCM; (5)
Ukraine - 4.8 million BCM; and (6) the Czech Republic - 0.3
million BCM.
In 2008, natural gas consumption reached 14.2 billion BCM out of
which approximately 4.28 billion BCM originated from domestic
Poland
sources. According to predictions, demand for natural gas in Poland
will steadily increase to 16.2 BCM in 2015 and 17.9 BCM until 2020.
1.4 To what extent is Poland natural gas production exported
(pipeline or LNG)?
In 2008, 36.9 million BCM of natural gas was exported to Germany
(0.3% of total sales). It was transported through the pipeline
system, excluding transit from the Russian Federation to Germany
by the ‘Jamal-Europe’ pipeline.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
Development of natural gas reserves is principally regulated by: (1)
the Mining and Geological Law; and (2) the Environmental
Protection Law.
Ownership rights of natural deposits (incl. natural gas deposits)
within land and maritime territory are accorded to the State. It may
grant permission for mining usufruct.
The State grants licences for: (1) exploration and development; and
(2) exploitation of gas reserves. Several legal requirements must be
fulfilled in order to receive a licence, incl.: environmental; land use;
and construction requirements. The Minister of Environmental
Protection issues licences. Until December 31, 2008, the Minister
issued 378 licences (132 for exploration and development, 21 for
exploration, development and exploitation, and 225 for
exploitation). Licences regulate all aspects of exploration,
development and exploitation of natural gas.
According to Minister of Environment policy: “Directions of
studies in the area of raw material geology for 2009-2015” dated
February 20, 2009, the state has interests in: (1) accelerating
documentation of new gas reserves; (2) promotion of new
exploration technologies; (3) simplification of legal requirements;
(4) simplification for invertors in obtaining maps and technical
details; and (5) effective updating of geological data.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
Generally, the State grants permission for development of natural
gas reserves (‘mining usufruct’) by which the State’s mineral rights
are transferred to investors through a public tender. The bidder
proposes a mining usufruct fee and on this basis an offer is accepted.
A public tender is not obligatory if: (1) a previous tender for the
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Poland
same reserve was not successful; or (2) the area is on a list published
in the EU Official Journal. Priority is always given to an investor
who found and documented a reserve. The State also issues licences
for: (1) exploration and development; and (2) exploitation.
Rights derived under these licences are transferable to other
investors if not contrary to the public interest or an important
national economic interest. Mining usufruct is transferable only
with the licence on the conditions stated therein.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
There are separate licences for: (1) exploration and development;
and (2) exploitation. An investor may apply for them separately or
jointly. There are certain particularities as far as maritime gas
reserves are concerned.
An exploration and development license is issued by the Minister of
Environmental Protection upon approval of the Minister of the
Economy. In maritime areas, the minister responsible for maritime
issues prior approval. In the case of land areas, a local authority
must issue non-binding prior approval. Exploitation of reserves
requires another licence. Formalities are almost equal. Licences in
detail regulate the rights and obligations of an investor, the
territorial validity of a license as well as its duration. For
expenditure obligations, see question 2.5.
An investor must draft a Mining Activity Plan. The plan requires
approval by the mining authority of Poland following consultation
with a local authority.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
The State is the sole owner of all gas reserves within the land and
maritime territory of Poland. It does not directly participate in
development of natural gas reserves. These activities are undertaken
by investors on a market basis. Poland has strategic and economic
interests in the development of domestic gas reserve that secure
energy supply. Additional financial benefits are provided through the
imposition of mining usufruct fee, fees and taxes. Public policy in
this regard aims to ensure a sustainable exploration policy.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
Independently of all corporate taxes and social insurance
contributions that a legal entity must pay in Poland, an investor is
obliged to pay an annual mining usufruct fee, an annual licence fee
which depends on the area covered by the licence as well as an
exploitation fee which depends on the amount of gas exploited.
The amount eligible for mining usufruct depends on an investor
offer made in a public tender or signed agreement. Other fees are
regulated by law. In the case of exploitation, the law regulates the
minimum and maximum amount due quarterly. An investor must
pay this amount to the National Environmental Protection and
Water Management Fund and an appropriate local authority. The
amount depends on the quality of gas (highly methanised and other
types) as well as the amount of exploited gas.
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2.6 Are there any restrictions on the export of production?
There are no special restrictions related to the export of gas from
Poland other than general customs and tax requirements. A legal
entity importing and exporting gas from Poland must apply for a
licence for foreign trade in gas.
Additional legal requirements are imposed for the import of natural
gas. A legal entity importing natural gas from a non-EU country
must fulfil certain diversification requirements. The amount of
natural gas imported from one destination cannot exceed a certain
value (for example, 70% from one destination from 2010 to 2014).
Additionally, under the Mandatory Reserves Act, it must store a
certain amount of natural gas in Poland in proportion to the level of
import.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
There are no restrictions on currency exchange or transfer of funds
derived from production out of jurisdiction.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
Rights derived from these licences may be transferred to other
investors if not contrary to the public interest or important interest
of the national economy. The Minister of Environmental Protection
who issued the licence may decide to transfer all its rights and
obligations to another legal entity upon approval of the licensee.
The new licensee must, inter alia, prove that he has appropriate
rights to land, geological documentation on reserves at stake and
that he is capable of fulfilling all requirements derived from the
licence. In case of licence transfer, the licensor may change
financial safeguards concerning future claims connected to this
activity. An agreement on a change in content or transfer of mining
usufruct should be in writing in order to be valid. Mining usufruct
expires in the event of expiry or withdrawal of licence.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
When issuing a licence, the licensor may require financial
safeguards concerning future claims connected to the licensed
activity. Fulfilling this condition qualifies for receipt of a licence.
Additionally, see question 2.12.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
It may be possible with mining usufruct, but is not possible with
regard to a licence.
2.11 In addition to those rights/authorisations required to
explore or produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Exploration and production of natural gas is regulated and
controlled through the terms of a licence. On the top of it, there are
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several statutory controls concerning different aspects of its activity,
such as environmental or infrastructural authorisations depending
on the specific area of exploration ad production.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
Poland
principal features/requirements of the legislation?
A licensee must create a Mining Plant Liquidation Fund into which
he must pay between 3% and 10% depreciation deductions from
mining plant assets. Expenditures from this fund take place under
a decision from an appropriate State entity.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Import and export of natural gas takes place through 11 gas
interconnectors with neighbouring countries. There are several
additional gas interconnectors planned. Construction of the first
LNG terminal in Swinoujscie is underway.
As for legal requirements concerning cross-border sale, see
question 2.6.
In the case of transmission, a legal entity operating interconnectors
must hold a licence for the transmission of natural gas issued by the
ERO Chairman. Gas interconnectors are subject to the third party
access rights under the Energy Act. Each gas interconnector has an
international agreement associated with its operation. It is signed
by Transmission System Operators of neighbouring countries. This
agreement clarifies the legal, technical, safety and financial aspects
of its operation.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Transportation of natural gas consists of grid infrastructure and
storage facilities. Pipelines eligible for transportation are managed
by Gaz-System and EuRoPol Gaz. Storage infrastructure is
managed by OSM. (See question 1.1.) Formally, the TPA rule
applies to pipelines operated by Gaz-System and EuRoPol Gaz.
Licenses and tariffs regulate all conditions of access to
transportation service and associated infrastructure.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
Investment in natural gas transportation pipelines and associated
infrastructure is regulated by a number of legal acts: (1) the Energy
Law; (2) the Construction Law; (3) the Urban and Land
Development law; (4) the Land Management law; (5) the Law on
Protection of Agricultural and Forest Areas; (6) Ordinance of the
Ministry of Economy on technical requirements of gas
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infrastructure; and (7) several other environmental regulations.
Public authorisation is required for: (1) inclusion of investment in the
Local Zoning Plan; (2) approval of investment environmental impact;
(3) approval of urban and land use; (4) construction; (5) approval of
completed construction; (6) licence for the transmission and
distribution of natural gas; and (7) transmission and distribution tariff.
Poland
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
An investor must acquire land or obtain rights to land from a land
owner on a contractual basis. Expropriation is possible under
certain conditions. First, it can only take place for public purposes
stipulated in law. Secondly, it can take place for State or local
authority benefit. Thirdly, appropriate compensation must be paid.
A local governor is empowered in the case of expropriation.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Access to natural gas transportation pipelines and associated
infrastructure is regulated by the Third Party Access (TPA) rule. A
company seeking access must apply to a grid operator for the Terms
of Connection. They regulate all requirements to be fulfilled. All
costs, including costs of interconnection, capacity reservation or
facility expansions are calculated therein. If Terms are met, an
agreement is signed and access is open. The grid operator is
obligated to issue these Terms. If an entity does not agree with Terms
or a grid operator refused to grant access, the grid operator notifies
the ERO Chairman. He has the right to issue a decision on terms of
access. The Chairman’s decision may be appealed in court.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
Poland has interconnections with Germany, the Czech Republic,
Ukraine and Belarus with total transmission capacity of 18,057
MCM on 10 ‘entry’ points. Interconnections are operated by
ONTRANS (Germany), Severomoravske plynarenske (Czech
Republic), Ukrtransgaz (Ukraine), Bieltransgaz (Belarus), EuRoPol
GAZ SA (Poland). Presently, the level of cooperation between
different systems is low. Transmission capacity is generally booked
by PGNiG. TSO may give access to transmission capacity to other
entities, but certain legal conditions must be fulfilled (compulsory
storage, diversification requirements). In 2008, only one gas
importer managed to obtain access to the entry point in Lasów in
the quantity of 25 BCM/h.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
For general information, see question 4.4.
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A grid operator may refuse TPA if a company fails to fulfil terms of
services. Additionally, a grid operator may refuse to provide grid
access if it may: (1) decrease gas delivery liability; (2) lower the
quality of gas below the level set in the Instruction of Transmission
Grid Movement and Exploitation; (3) unfavourably change prices
and fees; (4) unfavourably change conditions of supply to final
consumers connected to the transmission grid; or (5) render it
impossible for a grid operator to fulfil his obligation concerning
consumer and environmental protection. The grid operator may
refuse to provide grid access for gas originating from a country not
obeying the TPA rule or if the customer is not eligible to benefit
from the TPA rule.
The TSO may give access to capacity reserved for other entity if
reserved capacity is not used and only limits access to other users.
Terms and conditions are regulated in the Instruction on
Transmission Grid Movement and Exploitation, part 2.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Terms and conditions of grid access are regulated in Instruction on
Transmission Grid Movement and Exploitation drafted by a grid
operator and annually approved by the ERO Chairman. All costs
and fees related to this activity are listed in the Tariff, approved
annually by the ERO Chairman.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
Natural gas is transmitted by Gaz-System being the TSO. Transit
and transmission is also undertaken by EuRoPol Gaz, which owns
the Polish part of the ‘Jamal-Europe’ gas pipeline. There are also
six DSO (see question 1.1). There are 43 entities that obtained
transmission licences from the ERO Chairman and 20 entities that
obtained distribution licences. There is one TSO and 6 DSOs.
Transmission and distribution activities are regulated by a number
of legal acts, generally the Energy law and related acts. Rules on
the functioning of transmission and distribution networks are also
enclosed in Instructions of Transmission/Distribution Grid
Movement and Exploitation.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
Operation of a distribution network requires a distribution licence
granted by the ERO Chairman. The ERO Chairman issues a
decision based on the Energy Law by nominating an entity as the
DSO. EU rules apply, especially as far as unbundling and TPA are
concerned.
5.3 How is access to the natural gas distribution network
organised?
The general rule is that access takes place at existing ‘entry/exit’
points. If not possible, the DSO issues terms and conditions of
connection at other points. The access procedure consists of stages:
(1) application for terms and conditions of connection; (2)
determination of terms and conditions of connection by the DSO;
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(3) signing of agreement; and (4) execution of connection. Based
on provided documents, the DSO estimates whether access is
possible. Refusal is under the scrutiny of the ERO Chairman.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
Access to natural gas distribution pipelines is regulated by the Third
Party Access (TPA) rule. A grid operator must provide access to all
entities eligible by law to such access in a non-discriminatory
manner. In order to gain access, an entity must fulfil all conditions
required by Terms of Distribution Grid Movement and Operation.
If a distribution grid operator refuses to provide access, the ERO
Chairman in Poland has the right to issue a decision in this regard.
This decision may be appealed in court.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
All fees charged for connection to a grid and for access to a
distribution network are regulated by Tariffs for Gas Distribution
Services. The ERO Chairman must annually approve these Tariffs.
Tariffs regulate: (1) fees for distribution services; (2) standing
charges; (3) fees for connection to a grid; (4) discounts for
substandard services; (5) discounts for limitations or discontinuity
of services; (6) penalties for excess of reserved power, illegal
consumption of gas or maladjustment to limitations enforced; and
(7) manner of estimation of additional fees.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
Generally, there are no legal restrictions. For certain restrictions
concerning gas utility see question 9.1. Major gas distribution
companies are presently owned by PGNiG. Due to its strategic
position, DSO will be always fully State-owned.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
All conditions are regulated in the Energy Law and related legal
acts. Generally, an entity must apply for a supply licence issued by
the ERO Chairman. Presently, there are 75 licences issued.
However, the wholesale supply of natural gas is dominated by
PGNiG. Other companies are generally not active in this part of the
market. The wholesale supply of gas is based on long-term
contracts. There is no gas exchange or other market mechanism.
The retail market is also dominated by PGNiG. Other companies
generally resell gas acquired from PGNiG. Their overall share in
the market amounted to 2% in 2008.
Efforts of the government and ERO Chairman concentrate on
enhancement of competition in this part of the market. They seek
to make the change of supplier easier and more popular.
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Poland
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
There is a legal requirement to separate the distribution and supply
of natural gas in order to avoid cross subsidies. Gas as a
commodity, transmission and distribution capacity, as well as
Poland
balancing services can be traded.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
There are no LNG facilities in Poland at the moment. There is an
LNG terminal under construction in Swinoujscie. It has the status
of strategic investment for diversification and security of supply. A
consortium consisting of four entities is constructing the terminal.
It will be operated by ‘Polskie LNG’ sp. z o.o. which is 100%
controlled by Gaz-System. The legal basis for this investment was
the Act on investment in a re-gasification of liquefied natural gas
terminal in Swinoujscie, which modified and simplified certain
legal requirements necessary to make this investment.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
The construction and operation of LNG facilities requires
compliance with relevant regulatory, environmental, planning,
health and safety, land use and construction requirements. Most
requirements must be met before a construction permit is issued.
The ERO Chairman issues a licence for liquefaction and
gasification.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
An entity must apply for the licence to the ERO Chairman. The
prices are regulated by tariffs.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The Chairman of the Office of Competition and Consumer Protection
(hereinafter the “OCCP”) is primarily responsible for competition
protection in Poland. Therefore, all competition aspects of the
functioning of gas market are under his supervision. Since Poland’s
accession to the European Union the OCCP Chairman has been able
to directly implement provisions of the EC Treaty. This means that
the Chairman may initiate anti-trust proceedings under EU law and
impose fines on European enterprises violating these regulations if
illegal practices affect trade between Member States. The OCCP
Chairman also operates within the European Competition Network
(ECN) constituting a cooperation platform between the European
Commission and all Member States.
However, the ERO Chairman is responsible for promotion of
competition in the energy sector as well as regulation in this regard.
In order to fulfil his duties in this respect, he cooperates with the
OCCP Chairman.
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8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
Both European Union and Polish law prohibit agreements,
concerted actions, business practices or behaviour that may affect
competition between member states and within Poland. Anti-
Poland
competitive practices may take place between enterprises or in
relations between the State and an enterprise (state aid). All criteria
that the OCCP should consider are stipulated in EC law and Polish
Competition and Consumer Protection law. Generally, it forbids
illegal competition-restricting agreements and abusing a dominant
market position. It also forbids illegal state aid.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The OCCP may conduct administrative (anti-trust) proceedings
against undertakings violating competition rules. It may request
information and documents, interview individuals and conduct
unannounced ‘dawn raids’. It may impose interim measures, issue
a decision demanding discontinuation of unlawful activities or
impose a fine up to 10% of the undertaking’s previous year
revenues. The OCCP is able to directly implement provisions of the
EC Treaty. This means that it may initiate anti-trust proceedings
under EU law and impose fines on European enterprises violating
these regulations if illegal practices affect trade between Member
States.
The ERO Chairman may impose penalties for i.a. not fulfilling the
licence requirements (TPA, prices, information requirements) up to
15% of the undertaking’s previous year revenues.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
The OCCP approves merges having influence on the Polish market.
An entity must report a merger if overall global turnover of merged
companies in the previous year exceeded EUR 1 billion or overall
turnover in Poland of the merged companies in the previous year
exceeded EUR 50 million.
There is also the ‘de minimis’ rule. A planned merger does not
require notification if (1) overall turnover of the acquired company
did not exceed EUR 10 million/annually in the previous two years,
or (2) the merger takes place within the same holding.
Approval for a merger may be unconditional or conditional. Under
certain conditions a merger negatively influencing the market may
be approved if (1) it allows for better market development, (2)
technical improvements or (3) it positively influences the Polish
economy.
If a company fails to report a merger to the OCCP, the latter may
take legal action aiming to, for example: (1) split the company; (2)
resell shares; and (3) impose a financial penalty up to 10% of the
previous year’s revenues. The procedure before the OCCP may last
up to two months.
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9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Due to legal requirements, the government annually prepares a list
of companies important for the public interest and public security.
There is a limitation on acquisition of these companies. Presently,
there are 10 companies on this list, two from the gas sector: PGNiG;
and Gaz-System.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
All regulations in Poland are constrained by EC law requirements.
In the case of the gas sector, it is particularly important as far as
competition, environment, safety requirements are concerned.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
An investor may sue Poland before international courts and
arbitration tribunals based on relevant international agreements or
treaties. According to the Polish Civil Procedure Code,
international judgements or awards are enforceable under certain
condition in Poland. The State may be sued before civil and
administrative courts depending on a disputed matter. Civil matters
in this regard generally concern compensation for damages.
Administrative matters concern decisions made by administrative
entities in individual cases.
There is a special procedure for review of decisions made by the
ERO Chairman within his authority. According to the Polish Civil
Procedure Code, the District Court in Warsaw - Competition and
Consumer Protection Court may overturn a decision.
10.2 Is Poland a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Poland ratified the New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards on July 19, 1961, which
entered into force on October 3, 1961.
Poland did not ratify the ICSID, but dispute resolution mechanisms
based on the ICSID are included in over 50 Bilateral Investment
Treaties signed by Poland.
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10.3 Is there any special difficulty (whether as a matter of law 11 Updates

or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
There is no particular difficulty in litigating or seeking to enforce
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Poland.

Poland
judgments or awards against government authorities or the State.
Public bodies enjoy no immunity against litigation and are subject In November 2009, the government signed the Poland’s Energy
to the rule of law on the same basis as other legal entities. Policy 2030, which regulates all important future developments in
the gas sector. There are a number of infrastructural investments
planned in gas networks, interconnectors, and storage as well as
10.4 Have there been instances in the natural gas sector when upstream. Acquisition of certain companies that are active in this
foreign corporations have successfully obtained judgments
sector is planned. In order to implement EU law, new legislation
or awards against Government authorities or State organs
will enter into force. It will strengthen the position of the ERO
pursuant to litigation before domestic courts?
Chairman and enforce market mechanisms. The Energy Law was
considerably amended last year. Its entry into force depends on the
One feature of arbitration proceedings, highly respectable in
Presidential signature and official publication.
Poland, is confidentiality. Therefore, there are not many cases
revealed to the public in which foreign investors obtained
judgments or awards against Poland, especially in the gas sector.
However, there have been many cases raised against Poland in other
sectors of the economy (construction, telecommunications or
insurance) in which investors were partially or fully successful.
There are several cases pending in which the State is the
respondent. There is also one case based on the Energy Charter
Treaty.
There are several examples in which foreign corporations were
successful in litigation before domestic courts. In 2009, a Polish
corporation (100% foreign investor dependent) active on the oil
market won a dispute before the Supreme Administrative Court
concerning mandatory oil reserves. Two corporations won disputes
before administrative courts against the ERO Chairman in disputes
concerning electricity tariffs.
Poland has created a special legal office, the State Treasury
Solicitor’s Office, which represents the State in all arbitration
proceedings and in cases raised before domestic civil courts where
the value of a dispute exceeds PLN 75,000 (c. GBP 16,000).

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 Wardynski & Partners Poland

Weronika Pelc Robert Zajdler

Wardynski & Partners Wardynski & Partners
Aleje Ujazdowskie 10 Aleje Ujazdowskie 10
00-487 Warsaw 00-487 Warsaw
Poland Poland

Tel: +48 22 437 8200 Tel: +48 22 437 8200

Poland

Fax: +48 22 437 8201 Fax: +48 22 437 8201

Email: weronika.pelc@wardynski.com.pl Email: robert.zajdler@wardynski.com.pl
URL: www.wardynski.com.pl URL: www.wardynski.com.pl

Weronika Pelc is a legal adviser and a partner at Wardynski &
Partners, where she heads of the Energy Sector Practice Group.
She advises entrepreneurs in the energy sector, particularly in
relation to renewable energy. This advice covers matters pertaining
to transactions, corporate affairs, contracts, trade in energy,
regulatory issues as well as ensured legal title to held infrastructure.
She has extensive experience in corporate law and in mergers &
acquisitions. She specialises in transaction consulting, particularly
as concerns restructuring corporate holdings: mergers;
transformations; and divisions.
From 1991 she worked as a lawyer and then became a partner in
the law firm of Kubiak, Lukowicz, Zielinski, subsequently Lukowicz
& Partners. From 2002, she was a partner in the law firm of
Wasylkowski & Partners associated with Deloitte in Poland. She has
been a partner in the law firm of Wardynski & Partners since 2004.
Robert Zajdler, PhD, is a legal adviser at Wardynski & Partners.
He specialises in the broad area of energy market issues, in
particular relating to electricity and gas market regulation.
Earlier, working for the State Treasury Solicitors’ Office, he was
engaged in commercial and investment arbitration based on
UNCITRAL, FIDIC, and SCC regulations and the Energy Charter
Treaty. Whilst working for the Office of the Committee for European
Integration (UKIE), he was involved in accession negotiations and in
the adaptation of Polish law to European Union law in such areas
as: energy, environmental protection, competition and the internal
market. He also has extensive experience in technical consultations
and negotiations with the European Commission. He has, in
addition, worked for the European Commission’s Directorate-
General for Energy and Transport.
He participated on a pro publico bono basis in observer missions
organised by the European Commission (Directorate-General for
External Relations) and the Organisation for Security and
Cooperation in Europe (OSCE).

Wardynski & Partners is one of Poland’s largest independent law firms, operating since since 1992.
Currently we have 23 partners and 115 associates, providing a broad spectrum of legal services to Polish and
international businesses, and with offices in Warsaw, Poznan, Wroclaw (Poland) and Brussels (Belgium). The firm has
been awarded the PN-EN ISO 9001:2001 certificate.
Wardynski & Partners has a dedicated Energy Group for assisting companies in the energy sector. We provide advice
on most areas of law pertaining to the sector and on all aspects regulated by energy law.
Our services cover issues concerning: energy law requirements, consumer and competition protection, proceedings
before the President of the Energy Regulatory Office (licensing, tariffs and disputes), state aid and environmental
protection.
We monitor legal changes in the highly regulated energy environment and the policies of domestic and EU authorities,
enabling us to predict the direction of changes in the sector.
Contact Weronika Pelc, Head of the Energy Sector Practice Group:
Tel: +48 22 437 82 00, Email: weronika.pelc@wardynski.com.pl

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Chapter 28
Portugal
Garrigues
1 Overview of Natural Gas Sector
1.1 A brief outline of Portugal natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
The Portuguese Natural Gas System (“Sistema Nacional de Gás
Natural” hereinafter referred to as “SNGN”) organisation relies on
the operation of the natural gas public system, consisting of:
(i) a terminal for liquefied natural gas (LNG) reception, storage
and re-gasification, operated by REN Atlântico, S.A.;
(ii) underground natural gas storage facilities, operated by REN
Armazenagem S.A. and Transgás Armazenagem, S.A.;
(iii) a natural gas transportation system, operated by REN
Gasodutos, S.A.; and
(iv) a natural gas distribution and commercialisation system,
operated by Galp Energia Group, Portgás - Sociedade de
Produção e Distribuição de Gás, S.A. and Dourogás -
Companhia Produtora e Distribuidora de Gás, S.A.
As there is no natural gas production in Portugal, duly authorised
operators of the SNGN import the totality of the natural gas supply
of the country from foreign gas-producing countries.
Currently, natural gas is imported by Galp Gás Natural, S.A. by
means of long-term natural gas supply agreements with Algeria and
Nigeria natural gas producers. Natural Gas arrives from Algeria
through Maghreb - Europe’s pipeline (entering the country at the
location of Campo Maior, and from Nigeria, as liquefied natural
gas, through ships arriving at the LNG terminal located at Sines).
Additionally, in August 14, 2009 a new Community Directive for
Natural Gas was published (Directive no. 2009/73/EC of the
European Parliament and of the Council).
New Regulations were also published concerning natural gas
transportation networks (Regulation (EC) no. 715/2009 of the
European Parliament and of the Council of 13 July 2009) and to the
establishment of an Agency for the Cooperation of Energy
Regulators (Regulation (EC) 713/2009 of the European Parliament
and of the Council of 13 July 2009).
The major innovations conferred by the abovementioned
community legislation to the natural gas sector are the following:
full separation (effective unbundling) of network (transport)
activities from supply and production activities;
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João Rosado Correia
Sara Castelo Branco
creation of an European Network of Transmission System
Operators for Gas;
reinforcement of the European Regulators general powers;
measures relating to solidarity and promotion of the regional
cooperation; and
incentive of the implementation of an intelligent measuring
system.
For pursuant innovative projects and investments in the natural gas
sector please see question 11.1.
1.2 To what extent are Portugal’s energy requirements met
using natural gas (including LNG)?
According to recent statistics of the Ministry of Economy and
Innovation, natural gas accounts for approximately 13% of total
primary energy consumption in Portugal.
Crude oil remains the largest primary energy source in Portugal
with a share of approximately 54%. Coal has a market share of
approximately 15%, while renewal energy sources ascend to 17.1%
of total primary energy consumption.
Regarding the latest statistics published by the Directorate General
for Energy and Geology, at the beginning of last year, the average
natural gas consumption was approximately 4,317 million
m³/month.
1.3 To what extent are Portugal’s natural gas requirements
met through domestic natural gas production?
As stated above, Portugal does not dispose of known natural gas
resources and, therefore, is not a natural gas producer. Thus, as
there is no domestic natural gas production, natural gas
requirements ought to be fulfilled by means of importation.
In fact, all natural gas supplied is currently imported by a duly
qualified and authorised entity (Galp Gás Natural, S.A.) in foreign
gas-producing countries, such as Nigeria (by LNG Ships) and
Algeria (by pipeline).
1.4 To what extent is Portugal’s natural gas production
exported (pipeline or LNG)?
As stated in our previous response, Portugal is not a natural gas
production country and does not export natural gas.
However, since the LGN Terminal in Sines operated by REN
Atlântico, is currently over an expansion process - which will allow
it to increase its storage capability by almost 40% - it is expected
that Portugal will become a natural gas exporter, despite not being
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a producer. If that happens, Portugal can export natural gas by LNG 2.8 What restrictions (if any) apply to the transfer or disposal
ships and also through the pipeline that enters into Spain in Badajoz of natural gas development rights or interests?
and Tui.
See question 2.1 above.

2 Development of Natural Gas

2.9 Are participants obliged to provide any security or
Portugal

guarantees in relation to natural gas development?

2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production See question 2.1 above.
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities 2.10 Can rights to develop natural gas reserves granted to a
responsible for the regulation of natural gas development; participant be pledged for security, or booked for
and current major initiatives or policies of the Government accounting purposes under domestic law?
(if any) in relation to natural gas development.
See question 2.1 above.
As mentioned above, Portugal does not produce natural gas, but
imports such product from natural gas producer countries. No
2.11 In addition to those rights/authorisations required to
known natural gas resources are available, and, thus, no activities
explore for and produce natural gas, what other principal
such as gas exploration and production are held in Portugal. See Government authorisations are required to develop natural
also question 1.4 above. gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract, See question 2.1 above.
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
2.12 Is there any legislation or framework relating to the
under domestic law?
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
See question 2.1 above. principal features/requirements of the legislation?

2.3 If different authorisations are issued in respect of different See question 2.1 above.
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important 3 Import / Export of Natural Gas (including
(standard) terms (such as term/duration, scope of rights, LNG)
expenditure obligations).

See question 2.1 above. 3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of As mentioned above, Portugal does not export natural gas.
natural gas reserves (whether as a matter of law or However see question 1.4 above.
policy)?
As to the importation of natural gas, under the applicable
legislation, importers of natural gas into the national natural gas
See question 2.1 above.
market for uninterrupted consumption are responsible for the
creation and preservation of natural gas reserves, which shall be
2.5 How does the State derive value from natural gas permanently available and susceptible of being duly identified,
development (e.g. royalty, share of production, taxes)? measured and controllable previously by the SNGN Global
Technical Manager (Transportation Operator) and subsequently by
See question 2.1 above. the authorities.
Natural gas reserves shall, by principle and without prejudice of any
2.6 Are there any restrictions on the export of production? exceptions authorised by the Government, be kept in natural gas
storage facilities located inside the Portuguese territory and shall
See question 2.1 above. comply with the mandatory amounts established by law. Any
associated costs shall belong to the importation entities.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?

See question 2.1 above.

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4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
The transportation network (RNTGN) is included in the transport,
storage infra-structures and LGN terminals national network
(“RNTIAT”) which comprehends the activities of transportation,
underground storage, reception, storage and regasification of LNG
in LNG terminals.
The Natural gas transportation activity includes: (i) the reception,
transport, system services, and the delivery of natural gas through
high pressure pipelines; and (ii) the construction, maintenance and
operation of all connected infra-structures and support stations,
dispatch and maintenance centres.
Natural gas transport activity involves the maintenance and
expansion of a high pressure natural gas network and its
interconnections with other networks and is legally unbundled from
the other activities developed within the SNGN.
Currently, transport infra-structures are operated by REN
Gasodutos, S.A., by means of a public-service concession of the
high-pressure grid. Pursuant to its obligations as transportation
system operator (TSO), REN Gasodutos must separate its activities,
i.e. natural gas transportation, SNGN Global Technical
Management and Access to the National System of Natural Gas
Transmission (RNTGN), and shall provide the access of all market
players to such infra-structures in a transparent non-discriminatory
way.
Underground storage is currently held by REN Armazenagem, S.A.
and Transgás Armazenagem, S.A., holders of the natural gas
underground storage concessions. As natural gas underground
storage operators, such entities are liable for the operation, ensuring
the technical integrity and maintenance of the underground storage
infra-structure. They must also manage natural gas injection,
storage and extraction, according to the requests of market players,
securing their inter-operability with the transmission grid to which
they are connected, in the framework of the SNGN Global
Technical Management.
Underground storage operators also have the responsibility of
allowing all market players to access the underground storage infra-
structures - in a transparent non-discriminatory way.
Finally, the reception, storage and regasification of LNG in LNG
terminals is operated by REN Atlântico, terminal de GNL, S.A.,
which holds the LNG reception, storage and regasification
concession. The LNG reception, storage and regasification
terminal operator has the responsibility of operating and
maintaining the terminal and the storage capacity. The activity of
LNG Reception, Storage and Regasification makes it necessary to
manage natural gas flows at the terminal and the storage facilities,
securing their inter-operability with the transmission grid to which
they are connected, in the framework of the SNGN Global
Technical Management.
The LNG reception, storage and regasification terminal operator
also has the responsibility of allowing all market players to access
the infra-structures of the LNG Terminal - in a transparent non-
discriminatory way.
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Portugal
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The activities comprehended in the national transportation network
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shall be duly authorised, by means of public-service concessions.
The assignment of public-service concessions obey to specific
public contracting procedures. In fact, by principle, such
concessions shall be awarded by means of public tender procedures,
unless if awarded to entities under state control.
The assignment of such public-service concessions is approved by
means of a resolution of the Council of Ministers and are
established by means of formal agreements, which shall remain in
force for the period established therein, which shall, in principle,
not exceed 40 years.
The construction and operation of gas transportation, regasification,
storage and distribution facilities, shall depend on the issuance of
the respective Environmental Impact Assessment, and licences
related to the building construction itself and land rights, as well as
to the activities to be carried out within the building construction.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
Decree-Law n.º 30/2006, of February 15, provides a general
recognition of public interest for all the infra-structures of the
natural gas public network.
Therefore, land can be obtained through: (i) the agreement of a right
attribution by the land owner; (ii) expropriation; (iii) the use of the
State’s or other public entity’s public or private assets; and (iv)
public utility servitude.
The transportation operator is the only entity responsible for the
payment of the indemnity legally credited to the owner of the
expropriated land or under public utility servitude.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
The conditions of the network access are established in the ERSE
Network, Infra-structures and Connections Regulation, (RARII).
The access to the network is operated by meaning of the conclusion
of transportation’s network use agreement to be celebrated between
the operator of the transportation network and the market players.
The capacity in the transportation network is calculated by a
programming procedure which is a process of periodic information.
Through this process all the market players send to the
transportation operator the capacity they intend to use.
In case of an infeasible programming procedure, creating a
congestion of the transportation network facilities, the attribution of
the capacity, during such congestion, is made through an auction,
organised by the Technical System Manager (REN Gasodutos).
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
The concessionaire of the transportation network, which acts as a
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manager of the whole system, is responsible for the connections of
all SNGN infrastructures. By this meaning, the concessionaire is
responsible for the planning of the connection capacity’s expansion.
The natural gas transportation network operator is obliged to
guarantee the connection of the remaining infrastructures, being
this namely the client’s facilities, the reception, storage or LNG
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regasification terminals or the natural gas storage facilities.
Besides this, the transportation network operator and the
distribution network operators should establish the necessary
connections between the networks.
The operators of the infrastructures should present to ERSE the
investment projects they pretend to execute and their executions´
schedule. Besides this, the different operators should establish
adequate information mechanisms between them, in order to assure
the investments’ coherence.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Operators of natural gas transportation network are obliged to
provide for third-party access in a non-discriminatory way and not
more unfavourable terms than those applied by transportation
operators in similar cases for services provided to their own
affiliated or associated companies.
A request should be made to the network operator, with the
objective to celebrate a transportation network utility contract.
The connection to the network can evoke the following costs
respecting:
the network to being constructed;
distribution pipes; and
modification of existing connections.
The expenses related to the network to be constructed and the
modification of the existing connections are supported by the
borrower. On the other hand, the expenses related to the
construction of the new network distribution pipelines are
supported network operator.
Being in discussion the connection to the network of clients with an
annual consumption equivalent or inferior to 10,000 m3, the
construction of the networks necessary elements is the
responsibility of the network operator.
The operators can refuse the access to the infrastructures based on
the lack of capacity or if the access obstructs the compliance of the
public-service obligations. Also, it could be refused based on
economical and financial difficulties concerning “take or pay”
contract obligations.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
The tariffs upon which natural gas is to be transported are
determined by ERSE, taking into account the normative about
tariffs that sets the criteria and methods to be used to calculate and
set-up the tariffs.
The user tariff of the transportation network consists of: (I) the
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prices of the used capacity defined in euros for kWh/day; and (II)
the energy prices, differencing between busy and non-busy hour, in
Euros for kWh.
To obtain the tariff for the access to the high pressure network, this
network use tariff is complemented with a global system use tariff.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The natural gas distribution activity comprehends (i) the reception,
convoy and delivery of natural gas to final customers through high
and low pressure grids, (ii) in cases of major consumption centres,
it involves the reception, storage, regasification of liquefied natural
gas in the autonomous units for natural gas regasification, its means
of transport and delivery to final customers through the respective
grids, and (iii) the construction, maintenance, operation and
expansion of all infra-structures of such network and of the
connections to the grids and infra-structures to which they are
connected, as well as of any facilities required for its operation.
The National Natural Gas Distribution Network (“NGDN”) is
composed by average pressure pipelines (between 4 and 20 bar), by
local low pressure grids (between 1 and 4 bar) and by small
branches (inferior to 1 bar). The grid is mostly provided to supply
natural gas to the residential, commercial, small and medium
industry sectors.
The natural gas distribution is a regulated activity ensured by the
respective operators, which shall be holders of:
a concession, based on exclusive dedicated operation and
under a public-service regime;
a local distribution licences, based on exclusive dedicated
operation and under a public-service regime;
a distribution licence for the private use of natural gas; or
filling station exploration licence.
The natural gas distribution activity is unbundled from the other
activities, such as natural gas transport activity, not connected with the
distribution. This requirement is not necessary when the distribution
operators only provide supply to less than 100,000 customers.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
See the response to question 4.2 above.
5.3 How is access to the natural gas distribution network
organised?
Operators of the natural distribution network are obliged to provide
the access to the respective grids to interested parties on a non-
discriminatory transparent way, applying equal tariffs to all clients,
under the applicable regulations established by the Portuguese
regulatory entity for the energy sector.
The access to the network is officialised by the meanings of a specific
distribution’s network use contract, of which general conditions were
approved by the National Energy Regulator (ERSE).
The access to the network can be denied in the following cases: (i)
lack of capacity; (ii) if the access blocks the compliance of the
public-service obligations; or (iii) economical and financial
difficulties concerning the “take or pay” contracts.
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5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
The connection to the network, in the scope of their intervention area,
constitutes an obligation of the concessionaires and licencers, once the
mandatory technical and legal requirements are accomplished.
Operators of the Natural Gas National Distribution Network
(RNDGN) must provide the necessary long-term capacity offer of
the respective distribution grid, thus contributing for the general
security of the system. Moreover, such operators shall provide
adequate planning, expansion and technical management of the
respective distribution grid, in order to allow access by interested
third parties in a non-discriminatory way. For this meaning, the
distribution network operators are obligated to present development
and network investment projects, in coordination with the
transportation network operator.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
The tariffs for the use of the distribution grids are determined by
ERSE.
The tariffs for the use of the distribution network comprehend the
following prices:
Prices of the used capacity defined in Euros for kWh/day.
Energy prices, differing between busy and non-busy hours,
in Euros for kWh.
Fixed term prices defined in Euros per month.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
Without a prior authorisation issued by the competent entity,
distribution operators are not allowed to transfer in any way, partly
or totally, their concessions or take any action that could have the
same result. All actions taken out by the operator without the
referred authorisation are null and may imply the termination of the
respective concession contracts.
Additional restrictions are imposed as to taxation matters and
transfer of assets comprehended in the concession, as to taxation on
the transmission of the concessionaire’s shares, and as to any
management resolutions which imply an amendment to the
operator’s activities, its legal status, its merger, its demerger or its
dissolution, or even the subscription of any auxiliary agreements.
Local distribution licences may be transferred if such transfer is
dully authorised by the competent entity.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Natural gas trading activities are regulated by the Decree-Law no.
140/2006.
The referred Decree-law establishes that the natural gas trading
activity is liberally, nevertheless being conditioned to the prior
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obtaining of an administrative authorisation.
The traders are allowed to purchase and sell freely natural gas. For
this meaning, and trough the payment of a regulated fee, they have
access to the storage and LNG facilities and the transport and
distribution network.
The free trade exercise of natural gas is prone to the transitional
Portugal
regime reputable to the gradual opening of the market, having in
attention the statue of the emerging market.
The ultimate resource traders have to obtain a licence and they are
obligated to offer their gas services universally by supplying gas to
all customers that solicits its supply.
In accordance with Decree-Law no. 140/2006, the ultimate resource
licences are adjudicated to the following entities:
(I) One entity property of TRANSGÁS, in a total control
regime.
(II) Entities depending on their foundation, with initial low control;
regional distribution concessionaries or local distribution
licence owners with more or less then 100,000 clients.
The ultimate resource licences are valid during the period
corresponding to the concession contracts or the distribution
licences.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
No, traders could purchase the following services separately from
different providers:
purchase of natural gas;
transportation services;
storage services; or
distribution services.
The different services are traded separately and not as a “bundled
product”.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
As mentioned before, because of the inexistence of natural gas
reserves, all of Portugal gas supply has to be imported from Algeria
and Nigeria.
In the year 2006, 66% of the total natural gas import is provided by
Nigeria. In fact, three contracts for the acquisition of liquefied
natural gas have been signed with Nigerian LNG, Limited (NLNG)
- NLNG I, NLNG II and NLNG Plus. These contracts have been
signed for a period of 20 years, with year make-up period.
Nigerian natural gas is imported and enters the country through
ships arriving at the LNG terminal located at Sines as liquefied
natural gas, once it is delivered to regasification plants by liquefied
natural gas carriers, put into liquefied storage tanks, vaporised
through regasification installations and injected in gaseous form
into the transport pipeline network.
In fact, Sines’ terminal proceeds to the reception of the natural
liquefied gas transported by sea, as well as the respective storage,
regasification and transportation into the transportation network,
having a maximum LNG storage capacity of 240,000 m3GNL, a
rated capacity of injection into the transportation grid of 600,000
m3(n)/h and a maximum injection capacity of 900,000 m3(n)/h.
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In 2006 the number of liquefied natural gas carriers received and
unloaded increased by approximately 22% versus 2005. As a result
of this growth, total liquefied natural gas unloaded at the terminal
increased by 21% versus 2005. In 2006 the tank truck fill-up
activity continued to represent only 2.1% of total liquefied natural
gas processed at Sines’ Terminal, in spite of a very significant
Portugal
growth of the number of fill-ups recorded in 2006 versus 2005.
The LNG terminal operator is legally independent from the other
activities.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
See the response to question 4.2 above.
On this matter, it should be pointed out that the terminal operator is
the concessionaire entity of the terminal in question.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
The tariffs for the use of the reception terminal, the storage and the
LNG regasification are composed by the following prices:
prices of the monthly used regasification capacity, fixed in
Euros for kWh/day;
energy price, fixed in Euros for kWh;
daily price of the storage energy, fixed in Euros for kWh; and
fixed-term prices for the charge of the cistern trucks, fixed in
Euros per month.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The mechanism for prior competition control as to the acquisition
of assets through company’s concentrations in the natural gas sector
is submitted to the general Portuguese competition rules and
controlled by the national competition protection authorities.
Whenever an acquisition of assets fills the legal concept of a
concentration operation, it shall be submitted to prior and
mandatory notification to the Competition Regulatory Authority,
which will proceed with an analysis of such operation and will
decide its approval or rejection.
In these cases, advice given by the Competition Regulatory
Authority must be prepared in the light of its legal obligations of co-
operation and co-ordination with the regulatory authority
responsible for the sector. Therefore the regulatory entity shall be
called upon to issue its formal advice on all notification cases
involving entities from the energy sector.
The Competition Regulatory Authority shall approve such
operations whenever it considers that it shall not increase a
dominant position susceptible of creating free competition
obstructions.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
When determining whether a conduct is anti-competitive, the
competent authorities apply the criteria sculpted in Articles 81 and
82 of the EC Treaty.
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8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
A concentration operation subject to the prior and mandatory
notification to the Competition Regulatory Authority not noticed to
such entity, is considered an infraction punished with a fine which
may not exceed, for each company, 1% of the total revenue of the
precedent year. Additional punishments may be determined.
However, those shall never exceed 5% of the daily average rate of
the precedent year’s revenue, for each day passed the time limit
imposed for such notice.
The breach of any decision issued by the Competition Regulatory
Authority which determines the prohibition of a concentration
operation, which imposes special requirements to any operation, or
which imposes the adoption of adequate measures in order to re-
establish real competition implies the consideration of previous
agreements for such aim as null and void.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
Yes, the Competition Regulatory Authority has decision-making
and sanctioning powers in merger control matters.
Under the applicable legislation, company concentration operations
are subject to prior notice to the Competition Regulatory Authority
whenever:
As a consequence of such operations the reinforcement or the
creation of a market share higher then 30% in the internal
market occurs, as to a certain asset or service, or as to a
substantial part of assets of services.
The union of the participant entities in such concentration
operations has caused in the Portuguese market, and in the
precedent financial year, a turnover higher then 150 million
Euros, after directly related taxation, in case the turnover
individually verified in Portugal of, at least, 2 of those
entities, is higher then 2 million Euros.
Such concentration operations shall be noticed to the Competition
Authority within 7 working days counting from the agreements or,
if applicable, from the notice of the public announcement for a
public takeover offer, or from the Exchange or notice of a public
offer as to a control share purchase in a company with regulated
share market sale.
The decision of the Competition Regulatory Authority on a noticed
concentration operation must be issued within the 30 working days
subsequent to the day of effectiveness of such notice.
However, the Competition Regulatory Authority may determined
the necessity of an investigation, in which case, the time limit for
the issuance of a final decision is extended in a maximum period of
90 additional working days.
Such time limits may, however, be suspended whenever additional
information is required.
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9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
There are no special requirements or limitations on acquisitions of
interests in the natural gas sector by foreign companies.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
Most part of the regulatory policy of the natural gas sector in
Portugal is influenced and affected by the European Community
arrangements and solutions on this matter.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Any dispute between Government and concessionaires and between
concessionaires and other players of the natural gas system may be
submitted to an arbitral court.
For this purpose, the Government and the concessionary and the
concessionaries and the other operators and users may set up arbitral
conventions to solve any questions arising from their contracts.
If parts haven’t renounce it, arbitral court decisions can be appealed
before the administrative appeal court (Tribunal Central
Administrativo) or before the civil appeal court (Tribunal da
Relação), depending on the public or private regime applicable.
The Government, through ERSE, should try to promote arbitral
agreements as a common form of solving conflicts between agents
and clients.
If there is no arbitral convention, the responsible courts for the
solution of disputes urged between the Government and the entities
that operate in the gas sector are the Administrative and Fiscal Courts.
The conflicts between operators, vendors and customers are, in
principle, solved by the Civil Courts, unless they are based on
administrative contracts relative to a concrete concession, in which
case, the conflict must be solved by Administrative and Fiscal Courts.
10.2 Is Portugal a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Portugal is a signatory to the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards since
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Portugal
January 1995 and is a signatory to the Convention on the Settlement
of Investment Disputes between States and Nationals of Other
States since 1984.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
Portugal
or awards, against Government authorities or State organs
(including any immunity)?
There is no particular difficulty in litigating or seeking to enforce
judgments or awards against Government authorities or State
organs.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
According to our best knowledge, there have been no such
instances.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Portugal.
The authorities of the Autonomous Region of Madeira have planned
and announced the investment of 130 million Euros as to the
construction of a LNG terminal located at the Portuguese island of
Madeira, for the production of electric energy and, consequent
diminution of fuel oil dependency. Such plan includes the supply
of the region with natural gas as of the year 2011.
Additionally, the REN group foresees an investment plan of 330
million Euros into the gas sector until the year 2012. In fact, REN
already pursues subterranean natural gas storage caverns at Carriço,
being one of the new investment goals the construction of
additional caverns, in order to increase the strategic gas reserves
and to assure the safety of the supply.
REN Atlântico, S.A. has awarded to the consortium constituted by
Somague Engenharia S.A. and TGE Gas Engineering GmbH, the
EPC Contract for the construction works for the expansion of the
storage capacity of the GNL Terminal located at Sines (previewed for
2012). This project will comprehend an investment in the amount of
almost 160 million Euros, resulting in the expansion of the emission
capacity of the Terminal into 1,350,000 m3/h, and of the storage
capacity by means of the construction of a new storage tank.
According to the Energy Services Regulatory Authority (“Entidade
Reguladora dos Serviços Energéticos” hereinafter referred to as
“ERSE”) legal regulation, Galp Gas Natural S.A. has promoted a
electronic auction for the sail of 300 million m3 to be delivered
between July 1st 2009 and June 30 of 2010. The participation was
opened to the market regime commercial agents and eligible clients
(with an annual consumption superior to 10,000 m3).
This auction represented the milestone through the liberalisation of
the national natural gas market.
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 Garrigues Portugal

João Rosado Correia Sara Castelo Branco

Garrigues Portugal S.L. Garrigues Portugal S.L.
Av. Engº Duarte Pacheco Av. Engº Duarte Pacheco
Amoreiras, Torre 1, 15º, 1070-101 Lisbon Amoreiras, Torre 1, 15º, 1070-101 Lisbon
Portugal Portugal
Portugal

Tel: +351 213 821 200 Tel: +351 213 821 200
Fax: +351 213 821 290 Fax: +351 213 821 290
Email: joao.rosado.correia@garrigues.com Email: sara.castelo.branco@garrigues.com
URL: www.garrigues.com URL: www.garrigues.com

João Rosado Correia is Head of the Public Law, Energy and
Environmental Department of Garrigues Portugal. He is graduated
in Law at Faculty, of Law of the University of Lisbon, in 1985. He
has a postgraduate degree in Accounting and Finance (Catholic
University, Lisbon, 2002) and held the Specialization in Public Law
(Lusíada University, Lisbon, 1996).
His activity is carried out in the field of Public Law with special
emphasis on energy law, public procurement and project financing.
In particular, he has participated in the general legal advisory
service to various public and private organisations in the areas of
public law and litigation. He also advised the Portuguese State in
the drawing up of various legislations for the energy sector.
João has also organised various conferences and delivered courses,
seminars and trainings on topics related to construction law and
public procurement.
Sara Castelo Branco is an associate in the Public Law, Energy and
Environmental Department of Garrigues Portugal. She graduated in
Law at Faculty of Law of the Catholic University, in Lisbon, in 1998.
She has a postgraduate degree in Administrative-Juridical Sciences
(Lisbon University, 2000) and held the Specialization in
Expropriation Law (Catholic University, Lisbon, 1999).
Her activity is carried out in the field of Public Law, with special
emphasis on public procurement, construction and expropriations.
In particular, she has participated in the general legal advisory
service to various public and private organisations in the areas of
public law and litigation. She also advised the Portuguese state in
the drawing up of various legislations for the energy sector.

Garrigues is a full service independent law firm, with offices in 29 cities of Portugal and Spain. It excels in virtually
every area of practice such as M&A, commercial, arbitration and litigation, labour, tax, IP&IT, antitrust, environmental
law, real estate and planning, public law and energy.
Garrigues has always shown a particularly strong international mind, with overseas offices in New York, Brussels,
Casablanca, London, Shanghai, Tangiers, Warsaw and Bucharest.
Garrigues is a founding member of Taxand, the first global network of independent tax advisors, with over 300 tax
partners in 42 countries and more than 2,000 professionals serving the global marketplace (www.taxand.com).
Additionally, the firm enjoys absolute leadership of the Latin American legal market through Affinitas
(www.affinitas.com).

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Chapter 29
Romania
Pachiu & Associates
1 Overview of Natural Gas Sector
1.1 A brief outline of Romania’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Romania’s primary reserves of natural gas are estimated at 1,630
billion cubic metres. The identified natural gas reserves, consisting
in approximately 150 billion cubic metres, are estimated to cover
domestic consumption for a period of approximately 15 to 20 years.
As regards further details of Romania’s gas reserves, please be
informed that all information related hereto are deemed as classified
and consequently, the holders of approvals and permits must
observe the confidentiality of such. Please also note that according
to Law No. 238/2004 (“Oil Law”), natural gas is construed as a
form of oil.
The natural gas production is estimated at approximately 13 billion
cubic metres, Romania ranking first among the natural gas
producers in Central Europe. The domestic production of
associated natural gas represents 10% of the overall production.
Imports of natural gas provide 30% of the necessary domestic
consumption. Imports are made mainly from the Russian
Federation through the national transportation network. At present,
Romania is not included in the list of natural gas exporters.
Romania does not benefit from liquefaction and re-gasification
facilities for LNG.
The transportation activity represents a service of national public
interest, is property of the Romanian State and is considered as a
strategic activity. Transportation of natural gas is performed
through the National Transportation Network (“NTN”), which is
public property.
Natural gas distribution represents a service of national public
interest that may be subject to concession, in accordance with the
legislation in force.
The activity of natural gas storage is a service of national public
interest and the storage of natural gas is qualified as a natural State
monopoly.
Natural gas sales can be performed under supplier and/or sale-
purchase agreements concluded between the supplier and the
consumers or clients. The following agreements may be concluded
for the purpose of selling natural gas:
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Delia Vasiliu
Florin Dobre
natural gas supply agreements concluded with captive
consumers;
sale-purchase agreements concluded with eligible
consumers; and
sale-purchase agreements concluded with another supplier,
both on or out of the stock exchange.
1.2 To what extent are Romania’s energy requirements met
using natural gas (including LNG)?
At present, natural gas represents approximately 40% of the overall
power reserves consumed in Romania.
1.3 To what extent are Romania’s natural gas requirements
met through domestic natural gas production?
The internal natural gas production covers the domestic
consumption by approximately 70%. In order to fully cover the
above-mentioned consumption, natural gas importation is
performed by Romania mainly from the Russian Federation
(approximately 30%).
1.4 To what extent is Romania’s natural gas production
exported (pipeline or LNG)?
At present, the natural gas production of Romania is not exported
(please see question 1.1 above).
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The legal framework regarding natural gas reserves is mainly
represented by: i) the Oil Law; ii) Law No. 351/2004 (“Natural
Gas Law”); and iii) Government Resolution No. 2075/2004
approving the implementation rules of the Oil Law (“GR
2075/2004”).
According to Oil Law, the natural gas deposits are the exclusive
public property of the Romanian State.
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The Romanian State exercises such right through its competent
authority, i.e. the National Agency for Mineral Resources
(“NAMR”), an expert body of the central public administration
with juridical personality, controlled by the Government and
authorised to apply the provisions of the Oil Law.
NAMR issues the mandatory rules and technical instructions for
Romania
compliance with the provisions of the main legislation applicable to
natural gas storage.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
According to the Romanian legislative provisions, exploration
and/or production operations of subsoil minerals may be awarded to
private entities only following a bidding procedure (public offer
request) organised by NAMR, while the conditions under which the
public request for bids is organised, the evaluation criteria, as well
as other elements, are established by special Government
regulations, derogating from the standard regulations applicable to
the concessions regime.
With a view on performing natural gas exploration or production
activities, a private entity must conclude with the NAMR an
agreement, named “oil agreement” or “petroleum agreement”. The
scope of such agreement consists in the performance of petroleum
operations (including exploration, development and exploitation)
and the concession of the assets required for performing such
operations. The oil agreement must be concluded in written and
enters into force after the approving of such by the Romanian
Government.
The oil agreement may have as scope: (i) the concession oil
agreements for exploration-development-exploitation; (ii) the
concession oil agreements for development-exploitation; or (iii) the
concession oil agreements for exploitation. The oil agreements are
concluded in a written form and enter into force after the approval
of the Romanian Government. The applicable rules of the
concession regime in the oil field are provided by Oil Law and GR
2075/2004.
The oil agreements for the concession of development and/or
exploitation of natural gas reserves are concluded for a period of
maximum thirty (30) years, with a potential extension of up to
fifteen (15) years.
The entity part of an oil agreement, having the right to perform oil
exploration operations, including experimental exploitation, shall
pay oil royalties, in accordance with the applicable legal provisions.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
The right to perform exploration/exploitation activities is granted
by NAMR under the oil agreement, and oil operations are
commenced based on authorisations issued by NAMR.
The oil agreement shall be concluded only following a public offer
procedure, similar to a public tender procedure. The applicable
legislation provides for the criteria that must be considered by
NAMR for the selection of the winner. The oil royalty to be paid
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by the entity which concluded an oil agreement, shall be determined
as a percentage from the gross production extracted as a result of
the exploitation operations of the natural gas reserves.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
The Romanian State is the owner of the natural gas reserves. A real
competition market exists in exploitation as a result of the
involvement in oil operations of both Romanian State and private
companies, as well as of foreign companies.
There is no real competition market in the field of production and
there are only two major producers: Petrom S.A., owned with
51.01% by OMV (Austria), the Romanian Ministry of Economy
with 20.64%, the State Property Fund S.A. with 20.11% and the
European Bank for Reconstruction and Development with 2.03%,
while an other important player in the oil and gas production
industry is the National Company of Natural Gas - Romgaz S.A,
such being the largest gas producer in Romania. The shareholders
of Romgaz S.A. are the Romanian Ministry of Economy with
85.01% of the shares and the State Property Fund S.A. holding
14.99% of the shares.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
The Romanian State derives value from natural gas development by
charging oil tariffs and oil royalties due by the private entities,
signatories of petroleum agreements. For the production
operations, the royalty is determined considering a percentage
quota of the value of the gross production extracted, ranging from
3.5% for the natural gas ores with low productivity and up to 13.5%
for the natural gas ores with high productivity.
In compliance with the provisions of the Romanian Fiscal Code
(Law No. 571/2003), delivery of natural gas is subject to VAT
payment.
2.6 Are there any restrictions on the export of production?
In compliance with the provisions of Oil Law, the holder of a
petroleum agreement has the right to dispose of the amounts of
natural gas to which it is entitled, including exporting such
amounts, upon observance of the terms and conditions stipulated by
the oil agreement.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
There are no special legal provisions on currency exchange
restrictions or restrictions on the transfer of funds derived from the
production of the natural gas. In compliance with the general
applicable rules issued by the Romanian National Bank, no such
restrictions are applicable. Romania concluded with other countries
bilateral agreements providing for the non-restrictive character of
the transfer of funds from one jurisdiction to another.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
The holder of an oil agreement may transfer to another legal entity
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its acquired rights only under the prior written approval issued by
NAMR. In the absence of a prior written approval from NAMR,
any transfer of rights or interests shall be null. NAMR grants the
approval of the transfer of such rights only if such rights are
transferred to a legal entity which may prove its technical and
financial capacity required to perform oil operations in compliance
with the terms set forth by the oil agreement.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
Any participant must include within its offer for concluding an oil
agreement, a bank creditworthiness letter, attesting its solvability
and global liquidity levels, gross profit margin, and financial
profitability. Moreover, the holder of an oil agreement is compelled
to register in its accounting books and to deduct the provision for
abandonment, environmental recovery and restoration to the
agricultural or forest circuit. Such provision is deemed as the
amount registered in the accounting books and annually deducted
upon the calculation of the tax on profit, in compliance with the
legal provisions in force.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
The natural gas exploitation and public services operation rights
may be pledged in compliance with Law No. 99/1999 regarding
acceleration of economic reform.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
The following main authorisations are required for conducting
exploration/production activities:
environmental permit issued by the competent public
territorial environmental protection authority in whose
jurisdiction the exploitation area is located;
authorisation of personnel by the State Inspection for Kettles,
Pressure Containers and Lifting Equipment (“SIKPCLE”)
and the Romanian Office of Legal Metrology (“ROLM”);
and
authorisation for fire prevention issued by the military fire
brigades and squads.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
Oil Law establishes the necessity of drafting a certain plan for the
abandonment of physical structures used in the exploitation of
natural gas, consisting of a complex technical, economic, social and
environmental documentation justifying the closing of the plant and
provides for the necessary actions to ensure financing and the
effective fulfilment of the measures for cessation of activity.
The abandonment plan shall be endorsed by NAMR. The
exploitation rights may be abandoned only if measures to protect
the reserves and the ground are taken.
The holders of the oil agreement must register in their accounting
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Romania
books and deduct the provision for abandonment, environmental
recovery and restoration to the agricultural or forest circuit, if
applicable.
3 Import / Export of Natural Gas (including
LNG)
Romania
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
In compliance with the applicable laws, no specific requirements,
terms, limitations or rules apply in respect of cross-border sales or
deliveries of natural gas or LNG.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Natural gas transport is governed by the Natural Gas Law, the Oil
Law, Government Resolution No. 784/2000 approving the Rules for
granting approvals and permits in the natural gas sector (“GR
784/2000”) and the Commercial Rules regarding the natural gas
market issued by Romanian Energy Regulatory Authority
(“RERA”), former National Regulating Authority for Natural Gas.
Under Romanian legislation, the activity of natural gas
transportation represents a service of national public interest, is part
of the State property and is regarded as a strategic activity. The
works for execution, restoration, modernisation, exploitation and
maintenance of the natural gas transportation objectives/networks
are works of public utility.
The national transportation network (“NTN”) is public property.
The activity of natural gas transport requires the independence of
the transport operator, the legal entity holding the transport licence.
The law provides for concession of the activity of transport to any
Romanian or foreign legal entity complying with the terms
provided by the Natural Gas Law.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The construction of natural gas transportation pipelines is preceded
by a first step, represented by the projection of the work, thus being
attributed by RERA to a company after an auction and is performed
based on a projection authorisation issued by RERA. After
obtaining such projection authorisation, a permit and further
approvals are to be obtained from the pipeline operator.
The second step, the construction of natural gas transportation
pipelines, requires an authorisation for the execution of such works,
issued by RERA, as well as an authorisation for establishment,
representing a technical and legal document issued by RERA, under
which permission is granted to a legal entity, either Romanian or
foreign, to establish transportation facilities. Further on, a building
permit, and if the case may be, a modification authorisation,
representing a technical and legal document issued by RERA, under
which permission is granted to a legal entity to modernise, improve
technology, develop and restore a transport objective, as well as for
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capital repairs of the same, following which the technical features
making the object of the authorisation are changed, are required.
For the operation of natural gas transportation pipelines, a natural
gas transportation licence, representing a technical and legal
document issued by RERA, under which permission is granted to a
legal entity, either Romanian or foreign, to render services in
Romania
connection with one or several transport functions, is required.
Further on, an operating permit, representing a technical and legal
document issued by RERA attesting to the commissioning of new
transportation systems, under which permission is granted to a legal
entity, either Romanian or foreign, to establish transportation
facilities, and an environmental permit, are needed.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
The right to use the land in order to conduct oil activities shall be
acquired in compliance with the legislation, by:
purchasing the land and, if applicable, the buildings located
on such land, at the price agreed by the parties;
exchanging the land, accompanied by the transfer of the
involved owner and reconstruction of the buildings on the
newly granted land, at the expense of the holder benefiting
from the released land, in compliance with the parties’
agreement;
leasing the land for a determined term, based on agreements
concluded between the parties;
concession of land; and
concluding a partnership agreement between the owner of
the land and holder of the agreement.
As far as the infrastructural work for the development of the gas
network has been declared to be of public interest, the Government
and county councils or the Bucharest Municipality Local Council
are entitled to expropriate the necessary land.
The competent court of law does not have the right to censor the
necessity to declare a land as being of public interest. The court of
law may only verify if the legal requirements for the expropriation
were observed.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Access to natural gas transportation pipelines is governed by the
decisions issued by RERA and by the principles of non-
discriminatory access of third parties to the national transportation
network. Access to the NTN represents the right of a producer,
distributor, storage operator, supplier, consumer and/or investor to
use the transportation network, paying tariffs and meeting the
obligations for its use.
Access to the NTN implies three stages:
a request of information from the NTN operator regarding
the possibility to access the NTN in the area in which the
objective is located;
the reservation of facilities in the NTN for the applicant/user,
by drafting the access approval; and
connection to NTN.
Access to storage facilities is the right of a producer, supplier,
transporter, eligible consumer and/or foreign legal entity benefiting
from the transit in the territory of Romania to use such storage
facilities.
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At the request of entities in the priority rank, RERA shall approve
the amounts of natural gas allotted to them.
Access to storage facilities shall be granted based on a written
request accompanied by justifying documents. The storage
facilities operators shall make public the available capacities,
respectively the Initial List of Available Capacities to store natural
gas (“ILAC”) for each storage facility. Storage capacities shall be
allotted by the operators of storage facilities. Access to the allotted
capacity is materialised by concluding a storage agreement, in
compliance with the frame agreement for storage of natural gas,
issued by RERA.
The transporter/operator of storage facilities may decline access of
third parties to the network/storage facilities only in the situations
explicitly provided by the law: e.g. insufficient facilities, or if the
quality standards of the natural gas to be used in the network and/or
in storage facilities does not comply with the minimal requirements
regarding safety operation and environmental protection in
compliance with the applicable law.
The Natural Gas Law provides that the new important
infrastructures for natural gas, respectively the interconnection
between the EU Member States, the installations for liquefied
natural gas and storage facilities may be exempted by RERA, upon
request, from the provisions of the legislation in force regarding
both the access of third parties to the transportation, distribution,
storage and upstream pipes and the applicable methodologies of
tariffs, subject to the following conditions:
the investment reinforces the competition in natural gas
supplying field and increases the security of supply;
the investment may not be performed without such
exemption, due to its degree of risk;
the infrastructure has to be owned by a legal entity which is
separate (at least, as regards its legal form) from the
operators system in whose systems the infrastructures shall
be built;
tariffs are collected for the users of the respective
infrastructure; and
such exemption does not influence in a negative manner the
competition, the efficient functioning of the domestic natural
gas market or the efficient functioning of the regulated
system to which the infrastructure is connected.
The exemptions may be applicable as well to the significant
increase of the capacity of the existing infrastructures and to the
modifications of such infrastructures which allow the development
of new sources of natural gas supply.
RERA may impose conditions regarding the duration of the
exemption and the non-discriminating access to the interconnection
pipe. In case of an interconnection pipe, any decision of granting
an exemption is made upon consultation with the other member
states or, as the case may be, with the regulatory authorities. Such
decision shall be immediately communicated by RERA to the
European Commission together with all relevant information.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
Romania benefits from only one transportation network exclusively
operated by Transgaz S.A. The interconnection pipes are those
pipes that cross a frontier between countries, their sole purpose
being connecting the national transport system of the respective
states. The Natural Gas Law aims to ensure the legal framework for
interconnection of NTN to the European systems.
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4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
RERA has the right to compel the licensed operator to finance the
required works, if such works are economically justified, with a
view to grant access to those requesting it, if the transport operator
declines access due to lack of facilities or lack of components of the
network to which connection is intended.
If the new investments are not economically justified for the
licensed operator, a new client has the right to participate, in
collaboration with the licensed operator, in financing new
investments, provided that an agreement is executed.
Under such agreement, the licensed operator is granted permission
by the client to take over the investments in its patrimony, at the
date of their commissioning, while the client shall be able to recover
its investment as provided by law.
RERA has the competence to settle disputes in case of an
ungrounded access refusal by the licensed operator.
The applicant shall forward to RERA a petition and RERA, through
its Commission for the settlement of the refusal to access the
transport network, (which is in the subordination of RERA), shall
issue a decision within sixty (60) days as of receipt of such petition.
The decision of the Commission shall be final, but subject to appeal
with the Bucharest Court of Appeal.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
In Romania, the natural gas market has two segments:
the regulated segment, for activities with a legal and/or
natural monopoly nature; and
the negotiated segment.
Transport of natural gas is performed on the regulated segment of
the market. The terms and conditions of the transportation
agreements shall be governed by the decisions issued by RERA.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
Under the Romanian legislation, the natural gas distribution
network is public property and is considered as being of national
strategic importance. In this legal context, all investments and
developments of the network performed by the distribution network
operators are public property.
The operators of the gas distribution networks perform their activity
based on a distribution licence issued by RERA under fulfilment of
special conditions, and taking into consideration that they perform
a service of public interest, they have to assure the continuity of
their activity and the access of third parties to the distribution
network.
The natural gas distribution operators have the following main
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obligations: (i) to operate, to maintain and develop the distribution
network under safe conditions, with economically efficiency and
protecting the environment; (ii) to provide the eligible consumers
the natural gas quantities as mentioned in the sale-purchase
agreements concluded between the eligible consumers and the
natural gas suppliers; and (iii) to use the distribution network in
Romania
equal and non discriminatory conditions and to provide all required
information to the other distribution network operators and the
competent authority.
A current major initiative of the Romanian Government is the
modernisation of the pipeline network, which implies replacement
of existing steel pipes with polyethylene ones that ensure a longer
lifetime. The rehabilitation and expansion of the gas distribution
network shall be executed between 2006 and 2010.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
In compliance with the Romanian applicable legal provisions, for
the operation of a distribution network, a licence for natural gas
distribution is required. Further on, additional permits and
authorisations are required in order to operate a distribution
network, these being similar to the authorisations required to
construct and operate natural gas transportation pipelines (please
see question 4.2 above).
5.3 How is access to the natural gas distribution network
organised?
Under the Romanian legislation, access to the distribution network
represents the right of a producer, supplier and/or end-user to
connect to the network. The access to the natural gas distribution
network is governed by RERA.
The Natural Gas Law provides the conditions on the distribution
operators aiming to avoid non-discriminatory practices. The natural
gas distribution is a national public interest service. Concession of the
natural gas distribution is performed by the Ministry of Economy and
Commerce, with the endorsement of RERA, such being exclusive as
regards the delimited areas for which it is granted.
Access to the distribution network of an applicant/user implies the
following stages:
reservation of facilities for an applicant/user; and
connection to the distribution network.
The distribution operators must make public the procedures for the
organisation of their own business for the stages of granting access
to the network. Refusal to grant access to the distribution network
to third parties can be expressed in the same situations as in the case
of the transporters’ refusal (see question 4.4 above).
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
RERA may require a distributor to grant capacity or expand its
system in order to accommodate new customers, under the same
terms as described in question 4.6 above.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
Natural gas distribution is part of the regulated sector of the market.
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Prices and tariffs are established by RERA based on its own
methods drafted for such purpose.
In order to determine the tariffs due to RERA, the distribution
operators must draft an annual programme of development
regarding their natural gas distribution network, and shall request
the regulating authority to endorse the investment programme for
Romania
each regulated period for which regulated tariffs and prices are
established.
The endorsement by RERA of the investment programme shall be
granted for the purpose of determining costs and corroborating such
with the approved tariffs and prices.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
The operators of the assets in the distribution network are not
permitted to make such network subject to concession, and as
regards their alienation, there are limits provided in the privatisation
agreements or in the licences, the latter covering only core assets.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Natural gas trading is governed by the provisions of the Natural Gas
Law and the rules issued by RERA.
The domestic natural gas market consists of:
a competition segment, including natural gas trading
between suppliers and between suppliers and eligible
consumers. In the competition segment, prices are freely
formed based on demand and offer, as a result of competition
mechanisms; and
a regulated segment, including activities with a natural
monopoly nature and supply at regulated prices and based on
framework agreements. In the regulated segment of the
market, prices and tariffs are set forth by RERA based on its
own methods drafted for such purpose.
The eligible consumers have the right to directly negotiate sale-
purchase agreements with the licensed suppliers.
An eligible consumer is the consumer who may choose its supplier,
while a captive consumer is the consumer who cannot choose its
supplier in compliance with the regulations. The eligibility criteria
are established by RERA.
The opening degree of the natural gas market is considered
depending on the number of existing eligible consumers who may
freely negotiate their purchase price for natural gas.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
The Natural Gas Law reflects the provisions of the EU legislation
and provides the separation of supply activities from distribution
activities. As regards the transport operator, the legislation in this
field does not allow its direct or indirect involvement in the
exploitation, extraction, distribution and supply of natural gas to
consumers, including the holding of shares or stock or under
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management agreements in which the legal entities conducting such
business are involved.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
The LNG facilities are governed by the Natural Gas Law and the
LNG Technical Code issued by the RERA. A relevant department
under RERA monitors compliance with the provisions regarding the
LNG.
The applicable legislation provides for the technical requirements in
the basic activities regarding the LNG storage, transport,
distribution and use of the LNG infrastructure, transfer of
information flows from the holder of the permits/licences to the
competent authorities, as well as the methods to exercise control
and inspections.
The LNG facilities may be in the property of Romanian or foreign
legal entities which conduct LNG storage, transportation and
distribution activities in Romania.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
The following authorisations and permits issued by the RERA are
required in order to construct and operate LNG facilities:
authorisation to construct new objectives related to the LNG
storage activity;
authorisation for LNG storage and trading activities;
authorisation of natural persons operating the objectives
related to the LNG storage; and
permission granted to entities to conduct LNG commercial
storage and trading activities.
For the operation of LNG facilities, it is mandatory to obtain in
advance, operating approvals from the ISCIR for equipment
working under pressure, as well as operating approvals from the
military fire brigade and squads. It is also mandatory to obtain the
specific environmental permits from the territorial competent
public environmental authority for designing, constructing and
operating LNG facilities.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
There are no legal provisions regarding criteria to establish LNG
tariffs. The applicable legislation does not provide for terms of
service in the LNG sector.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The competent authority responsible for the regulation of
competition aspects and anti-competitive practices is the
Competition Council, an autonomous administrative authority with
legal personality established in compliance with Law No. 21/1996
regarding competition (the “Competition Law”).
RERA, as the competent authority in the natural gas sector, holds
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responsibilities regarding competition on the relevant market and
anti-competitive practices in this sector. In this regard, RERA
drafts and promotes the rules regarding prevention of abuse of
dominant positions on the domestic market of natural gas and
promotes and ensures competition on the natural gas market. This
authority plays the main role to prevent anti-competitive practices,
and when identifying a potential abuse of dominant position, it
notifies such to the Competition Council together with justifying
documents, for the purpose of implementation of the required legal
measures.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
In compliance with the Competition Law, the anti-competitive
practices cover economic concentration, abuse of dominant
positions and any concerted practices that may result in a limitation,
prevention or distortion of competition in the market or a part of it.
The Competition Law does not allow economic concentrations
having as their purpose the acquisition and consolidation of a
dominant position that results or may result in a significant
limitation, removal or distortion of competition in the Romanian
natural gas market or a part of it.
The criteria, under which economic concentrations are appraised,
are the following:
the market share held by the involved entities, their
economic and financial power;
the available alternatives for suppliers and users, their access
to markets and supply resources, as well as any limitations
set forth by legal provisions or regulations upon access on
the market;
the trend of the demand and offer for the relevant goods and
services;
the extent to which interests of the beneficiaries and
consumers are affected;
contribution to technical and economic progress; and
the need to maintain and develop competition on the
Romanian market, considering the structure of all the
relevant markets and the existing or potential competition
among entities headquartered in Romania or abroad.
The rules issued by the RERA specify the facts qualified as abuse
of a dominant position. Such anti-competitive practice is defined
by law as the act performed by a legal entity holding a dominant
position, which aims to maintain or improve the company’s market
position, and which influences the economic activity and harms the
consumers.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
In case RERA identifies a potential abuse of dominant position, the
authority must notify the same to the Competition Council together
with justifying documents, for the purpose of having the required
legal measures applied by the Competition Council.
In case of breach of the legal provisions, the Competition Council,
upon investigations, may order cessation of the identified anti-
competitive practices, may provide recommendations, may impose
special terms or other obligations to the parties and may apply fines.
If in the specific case the situation cannot be improved and
recurrence of the abuse cannot be prevented, the Competition
Council, on grounds of seriously affecting a major public interest,
may request the Bucharest Court of Appeal to order appropriate
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measures for the purpose of ceasing the dominant position on the
market.
The Bucharest Court of Appeal may order the following, as
applicable:
invalidation of agreements or clauses of agreements under
which the dominant position is abusively exercised;
Romania
invalidation of the documents which constitute the basis of
the concentration that resulted in the dominant position, even
if under the relevant legal document or documents a new
legal entity was established;
limitation of or interdiction for access on the market;
sale of assets; and
restructuring by way of split of the entity.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
Economic concentrations presumably leading to significant
limitation, removal or distortion of competition on the natural gas
market or on a part of it, may be authorised if the parties involved
in the concentration attest to the cumulative compliance with the
following conditions:
the economic concentration shall contribute to a better
economic efficiency, improvement of production,
distribution and technical progress or a higher competition in
exports;
favourable effects of the economic concentration compensate
the unfavourable effects of competition limitation; and
consumers would benefit to a reasonable extent from the
advantages of the economic concentration, especially as a
result of lower prices.
Economic concentrations exceeding the turnover value limit
established by the Competition Council are subject to control by
and have to be notified to the Competition Council.
The procedure for authorisation of economic concentrations
involves the following stages:
(i) Brief information of the Competition Council by the legal
entities within seven (7) days as of the date on which the
event subject to the Competition Law occurs.
(ii) Notification of the Competition Council by the legal entities
shall be performed within thirty (30) days as of the date on
which the situation governed by the legal provisions occurs.
Such term may be prolonged by the Competition Council upon
the parties’ request with a maximum term of fifteen (15) days.
The notification shall become effective as of its registration
with the Competition Council, except for situations in which
the data in the notification are inaccurate or incomplete. In
such situation, the Competition Council shall request in
writing within twenty (20) days the amendment of the
notification and shall establish a deadline for submitting the
requested information. The deadline shall be established
depending on the nature of the requested information, but such
may not exceed fifteen (15) days as of the date of request.
(iii) The Competition Council shall issue a decision within thirty
(30) days as of notification date, for:
non-intervention, if the notified economic
concentration does not fall within the scope of the
Competition Law;
no objection on economic concentration, if there is no
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ground for refusal although the notified economic
concentration is governed by the law; and
the decision to commence an investigation if the
economic concentration casts serious doubts on the
compatibility with a regular competition environment.
Within five (5) months as of the date when the
Romania
notification become effective, the Competition
Council may issue a decision of:
a) refusal;
b) authorisation; and
c) conditioned authorisation.
(iv) The decisions taken by the Competition Council regarding
the economic concentration may be challenged within thirty
(30) days as of notification, with the Bucharest Court of
Appeal.
Consequently, the standard term for the approval or rejection of a
transaction is up to sixty (60) days, to which additional terms of up
to twenty (20) days should be considered if the Competition
Council sends written request, to supplement the notification.
However, notice should be made that in cases explicitly provided by
law, parties may benefit from a simplified notification procedure.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
The specific law applicable in the natural gas sector does not
include discriminatory provisions regarding acquisitions of
interests in the natural gas sector (whether development,
transportation or associated infrastructure, distribution or other) by
foreign companies.
Foreign investors benefit from an equal treatment with Romanian
investors, provided that the foreign legal entities establish and
maintain a branch or subsidiary headquartered in Romania.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
Harmonisation of the domestic law with the EC law was considered
in the adoption of the laws applicable to the natural gas sector for
the purpose of Romania’s integration in the European Union.
The provisions of the Natural Gas Law were harmonised with the
European Directive on Gas No. 2003/55/CE, upon observance of
the principle of subsidiary.
The RERA is involved in the observance of the provisions of the
Complementary Position Document promoting the laws complying
with the EC acquis in the matter, i.e.:
the LNG technical code;
the rules regarding access to underground natural gas storage
facilities;
the rules regarding abuse of a dominant position;
the rules regarding access to the NTN for natural gas; and
the rules regarding access to the natural gas distribution
networks.
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10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
In the regulated segment of the natural gas market, the commercial
agreements are concluded based on framework agreements
imposed by RERA. In case of pre-contractual disputes between
participants in the natural gas sector with regard to commercial
agreements concluded based on the framework agreements, RERA
through a Conciliation Committee, is authorised to settle such
disputes.
The disputes may concern the following aspects of the commercial
agreements concluded based on the framework agreements:
negotiable clauses;
new clauses that parties intend to include in the agreements;
and/or
mandatory clauses of the framework agreements that are
interpreted differently by parties.
The resolution of the Conciliation Committee with regard to the
pre-contractual disputes is not binding on parties. Thus, parties
may conclude the commercial agreements with observations as
regards the clauses of the commercial agreements under disputes.
In case the parties do not amicably reach an understanding within
thirty (30) days as of the conclusion of the agreement, the disputes
between parties will be solved according to the ordinary procedure.
In other situations, the parties may agree to the agreement if the
competence to settle the disputes that may arise in connection with
performance of contractual obligations belongs to ordinary courts
of law or arbitration courts.
10.2 Is Romania a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Romania is part of the New York Convention on the Recognition
and Enforcement of Foreign Arbitral Awards, which was ratified in
1961, under the Decree No. 186/1961.
Romania is also part of ICSID which was ratified in 1975, under the
Decree No. 62/1975.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
As a matter of law or practice, under the Romanian jurisdiction, no
special difficulty occurs in litigating, or seeking to enforce
judgments or awards, against Government authorities or State
organs. Such State authorities do not enjoy any immunity in this
respect, except for their assets, which are in the State’s public
property.
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10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
To date, to the best of our knowledge, no foreign corporations have
successfully obtained judgments or awards against the Government
authorities or State organs pursuant to litigation before domestic
courts in the natural gas sector.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Romania.
A new case of major importance is represented by the construction
of the Nabucco pipeline on the Romanian territory. On July 1st,
2008, the Romanian competent regulatory authority approved the
request of Nabucco Gas Pipeline International GmbH Austria,
regarding the excluding of the construction and the operation of the
Romanian part of the Nabucco pipeline, from the Romanian
applicable legislation regarding the access of third parties to the
pipeline and also the exception from the application of the
Romanian tariffs methodologies.
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Romania
Further on, it is important to mention that at the beginning of the
current year, Romania has gain access to a significant quantity of oil
and natural gas resources within the Black Sea continental plateau,
following the successful litigation vs. Ukraine. The International
Court of Justice has awarded on February 3rd, 2009, to Romania
80% of the litigious surface. This could bring to the State budget,
Romania
petroleum royalties of approximate EUR 1 billion, and such would
further reduce Romania’s dependence from imports.
In numbers, the International Court of Justice recognises the
sovereignty of Romania over 9,700 km2, and the area is assessed to
contain around 70 billion m3 of natural gas and 12 million tonnes
of oil.
Shortly after the issuance of the Resolution of the International
Court of Justice, the President of NAMR stated that NAMR shall
organise public bids with a view to concession the new oil and
natural gas fields, and major international players are expected to
participate. At the moment, the only company that performs oil and
natural gas production operations within the Black Sea continental
plateau is Petrom SA.
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 Pachiu & Associates Romania

Delia Vasiliu Florin Dobre

Pachiu & Associates Pachiu & Associates
4-10 Muntii Tatra Street, 5th floor 4-10 Muntii Tatra Street, 5th floor
Bucharest 1, RO 011022 Bucharest 1, RO 011022
Romania Romania
Romania

Tel: +4021 312 1008 Tel: +4021 312 1008

Fax: +4021 312 1009 Fax: +4021 312 1009
Email: delia.vasiliu@pachiu.com Email: florin.dobre@pachiu.com
URL: www.pachiu.com URL: www.pachiu.com

Delia Vasiliu is a partner of Pachiu & Associates and her main Florin Dobre is a member of the public law department of Pachiu &
responsibilities involve the heading of the firm’s public law Associates and provides legal assistance to clients of the law firm,
department including Energy, Gas, Infrastructure and Public interested in the gas and energy sectors. He graduated the Law
Procurement practice areas, with the main focus on the energy School of Transilvania University in Brasov. Between 2006 and
sector. Based on her experience of coordinating and developing 2007, he attended and completed the Human Resources and
projects in these fields, and taking into consideration the area of Leadership Courses held in Florida, USA and is a Master of
high interest for the nowadays trends of the business, she offers Financial, Banking and Insurance Law with Bucharest Law School
legal advice to investors interested in the Romanian energy market of “Nicolae Titulescu” University.
and provides legal support needed in relation to the development of Florin Dobre is a junior member of the Bucharest Bar Association
renewable energy projects, supporting the clients during the entire and a member of the National Romanian Bars Association. He
process of planning, implementation and operation of energy constantly advises clients in matters related to energy and
projects within the Romanian territory. The energy department of commercial law. Florin Dobre is fluent in Romanian and English,
the law firm is further on assisting clients in matters related to the and conversant in French.
energy market, such as the performance of energy trading activities
or legal assistance on regulatory aspects and procedures.
The educational background of Delia Vasiliu includes a BA at the
Law School of the West University and a Master of International
Business Law, currently being a Ph.D. candidate in International
Commercial Law. She is senior member of the Bucharest Bar
Association and a member of the National Romanian Bars
Association and is a regular contributor to several reviews and law
publications specialised in public law. Delia Vasiliu is fluent in
Romanian, German and English and conversant in Italian.

Pachiu & Associates is a Bucharest based business law firm established by Romanian attorneys. The firm currently
consists of 21 lawyers plus additional staff comprising paralegals, authorised translators and supportive staff. The
lawyers of the firm are all graduates of leading universities in Romania or abroad. All lawyers are fluent in Romanian
and English, and some are fluent in German, French or Spanish. The firm provides for a full range of commercial and
corporate legal advice from its main office in Bucharest and its secondary office in Cluj-Napoca (west of Romania).
The firm has extensive expertise in matters related to public law, public acquisitions, procurement, corporate
governance, corporate disputes, securities, mergers and acquisitions, insolvency, commercial contracts, offshore and
tax structures, labour law, real estate, anti-trust law, intellectual property, banking and project financing, secured
transactions, cross-border transactions and litigation.
Pachiu & Associates maintains a close relationship with some leading multinational law firms and other small and
medium-sized law firms from abroad, so as to ensure efficient liaison with important foreign business centres and
jurisdictions.

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Chapter 30
Serbia
Jankovic, Popovic & Mitic, Belgrade
1 Overview of Natural Gas Sector
1.1 A brief outline of Serbia’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
The Natural Gas Sector is an integral part of the Energetic Sector of
Serbia which, apart from the Gas Sector, also includes the following
sectors: Oil Sector; Carbon Sector; Electro energetic Sector; Urban
Heating Facilities Sector; and Industrial Energetic Sector.
The Gas Sector in Serbia is comprised of the exploitation of
domestic reserves of natural gas, import of natural gas, primary
processing of the natural gas, collection of natural gas, natural gas
transportation and distribution of natural gas to the final users.
Structure of energetic reserves and resources of Serbia is very
unfavourable. Namely, the reserves of the natural gas are rather
symbolic, representing less than 9% of the overall energetic
reserves of the country. Taking into consideration the subject facts,
required quantity of natural gas is provided primarily through
import of the natural gas. At the time being, Serbia imports the
natural gas solely from the Russian Federation.
According to the data published in the Government’s Resolution on
determination of the national energy development strategy of Serbia
by 2015 dated 2005, estimation of the needs, production, import
and final consummation of the natural gas are as follows:
YEAR 2009 2012 2015
NEEDS 3138 Mm3 3495 Mm3 4039 Mm3
PRODUCTION 444 Mm3 495 Mm3 495 Mm3
IMPORT 2694 Mm3 3000 Mm3 3444 Mm3
Serbian Oil Industry (“NIS AD”) is the sole producer of natural gas
as well as LPG (Liquid Petroleum Gas) in the territory of Serbia.
The total production of the natural gas is performed on more than
100 boreholes, mainly located in the Northern part of Serbia in the
Autonomous Province of Vojvodina. On the other hand, LPG
production is being performed in the refineries located in cities of
Pancevo, Novi Sad and Elemir, and quality of LPG is being fully in
compliance with the international standards and regulations.
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Jelena S. Gazivoda
Marija M. Kostic
The main gas pipeline system in Serbia is of the current length of
400km and connects the border of Serbia with Hungary, as import
delivery station, with the city of Nis. The overall transmission
capacity is 6,100 mil m3 per year; the maximum working pressure
is approximately 50 bars; the total length of high pressure pipeline
is 2,135km and the average age of the pipeline is 20 years. The
main gas pipeline is connected to significant number of distribution
networks up enabling the regular gas supplies to final consumers.
As of the end of 2009, there were approximately 1,000 industrial
consumers and more than 168,000 households connected to the gas
pipeline network.
Energy activities related to natural gas are being regulated under the
Energy Law and are performed only and solely upon the mandatory
issuance of the energy licences by the Energy Agency of Serbia
(hereinafter referred to as: Agency). By the end of 2009, the
Agency has issued an overall number of 127 licences as follows:
(i) 2 licences for the energy activity transport of natural gas;
(ii) 1 licence for the operation of transportation system of
natural gas; (iii) 1 licence for storage of the natural gas; (iv)
1 licence for operation of natural gas storage; (v) 36 licences
for natural gas distribution; (vi) 36 licences for operation of
natural gas distribution system; (vii) 36 licences for natural
gas retail for needs of tariff purchasers; (viii) 2 licences for
natural gas trade for supply of the tariff purchasers; (ix) 12
licences for free market natural gas sale.
Based on the above data taken from the Registry of issued licences
for performance of the energy activities, the state owned company
is the sole holder of title of the licences for the energetic activities
of natural gas storage and operation of natural gas storage.
Currently the storage of natural gas is being performed in the
natural exploited underground gas storage deposit (facility) in
Banatski Dvor. Banatski Dvor storage currently provides the
storage for 25-30% of annual gas consumption in Serbia.
In the territory of Serbia, there are several other natural exploited
underground gas storage deposits (facilities) which shall be subject
to future projects enabling energetic stability in the country.
In Serbia, the natural gas trade is performed on three separated
markets regulated by the Energy Law: natural gas retail for needs of
tariff purchasers; natural gas trade for supply of the tariff
purchasers; and free market natural gas sale. Traders of the natural
gas on these markets are both state owned and the private owned
companies. The prices for the natural gas for tariff purchasers are
being regulated by the Agency.
With respect to the significant planned projects with respect to the
natural gas development please address our answer to question 2.1.
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1.2 To what extent are Serbia’s energy requirements met using
natural gas (including LNG)?
Approximately 20% of Serbia’s energy requirements were met
using natural gas in the last few years. The electric power meets the
country’s energy requirements with approximately 30%. The
outstanding 50% of Serbia’s energy requirements are met using the
Serbia
lignite.
1.3 To what extent are Serbia’s natural gas requirements met
through domestic natural gas production?
Domestic production of natural gas meets approximately 7% of the
needs for the natural gas. Hence, the outstanding approximately
93% of the needs are met through the import of natural gas
primarily from the Russian Federation.
1.4 To what extent is Serbia’s natural gas production exported
(pipeline or LNG)?
Serbia does not export either natural gas or LNG.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The Law on Geological Exploration (“Official Gazette of Serbia”
no. 44/95 and 101/2005) is the principal legislation governing the
conditions and a procedure related to discovery and determination
of the quantity and quality of the carbohydrates including oil and
natural gas.
The principal legislation with respect to the exploitation of the
natural gas as well as with respect to the construction, usage and
maintenance of the mining facilities (including among others the oil
and gas facilities for exploration, exploitation and transportation
located on the exploitation fields) as well as facilities for
underground natural gas storage and raw oil on the exploitation
fields is the Mining Law, published in the “Official Gazette of
Serbia” no. 44/95, 101/2005, 85/2005 and 34/2006.
All mineral raw materials are in the ownership of Serbia,
represented by the respective ministry in charge - Ministry of
Mining and Energy (hereinafter referred to as: Ministry).
National Energy Development Strategy is being adopted by the
Parliament upon the proposal of the Government, while the
development programme has been passed by the Government upon
the proposal of the Ministry. The state regulatory body in charge of
providing the energetic stability in the country and fixing the prices
is the Agency.
There are two major projects of national interest related to the
development of the natural sector - reconstruction of the
underground gas storage facility in Banatski Dvor (to be completed
by 2012, the value of the project is approximately EUR 90 million)
and construction of the Serbian section of the South Stream Project
(to be completed by 2015, the value of the project is approximately
EUR 900 million).
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2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
Exploration and production of the natural gas is performed upon
meeting the certain conditions in several stages as explained below.
The first stage is obtaining the approval for geological exploration.
Geological exploration is comprehended as the discovery and
determination of the quantity and quality of the carbohydrates
including oil and natural gas. The approval for geological
exploration is issued by the Ministry of Mining and Energy. The
issued approval contains: (i) data regarding the company being
issued with the approval; (ii) subject of the research and nature of
exploration works; (iii) exploration area; (iv) scope and
specification of works to be conducted; (v) the quantity of mineral
raw materials which could be explored for the purpose of
determination of their quality and technological characteristics; (vi)
deadline, within which the company is obliged to submit the reports
to the ministry on the progress in exploration works and the
findings of its exploration research; and (vii) deadline within which
the company must commence with the exploration and exploration
validity period.
Approval for geological exploration is revoked if the company does
not commence with the geological exploration within the dead line
specified in the approval. Additionally, if the commenced
exploration works are not performed in the period of six months due
to the negligence of the company, the Ministry is entitled to annul
the issued approval, upon its investigation proceedings.
Upon performed exploration works, and determination of the
qualities and quantities of the raw material, the company can submit
the request for issuance of the approval for exploitation of mineral
raw materials.
The issuance of the approval for exploitation is also in the
competence of the Ministry of Mining and Energy. The approval
contains: (i) specification of the mineral raw material subject to
exploitation; (ii) production capacity as per reserves balance sheet;
(iii) the position and exact borders of exploitation field; (iv) the
deadline within which the company must complete the preparation
works and commence the exploitation which deadline in any case
can not be shorter than 6 months; and (v) the deadline within which
the mineral raw material is to be used.
The Ministry and the company assigned with the exploitation
approval execute the agreement stipulating the terms and conditions
of exploitation process, rights and obligations related to the
measures of the procurement the security, environmental protection
and other measures depending on the nature of the mineral raw
material.
Commencement of natural gas production is further conditioned by
obtaining the licences for performance of the mining works (all the
works on the exploitation field related to the exploration of mineral
raw materials and their exploitation on the exploitation field). The
issuance of these licences is at the moment in the competence of the
Ministry of Mining and Energy, since the Mining Agency provided
under the Mining Law has not been established yet.
In addition to the above procedure, taking into consideration that
the mineral raw materials represent the state wealth, we would like
to address the specific provisions of the Concession Law (“Official
Gazette of Serbia no. 55/2003”) which stipulates the possibility that
the exploration and exploitation of all mineral raw materials as well
as, among others, the construction and reconstruction of pipelines,
gas storages and gas transport and gas distribution facilities could
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also be subject of the concession based on concession deed issued
by the Government and the concession agreement executed
between the Government and the awarded concessionaire. The
concession period is determined by both the concession act and the
concession agreement and is limited to period of 30 years.
Besides, according to the Law on State Owned Companies and
Performance of Business Operations of the General Interest
(“Official Gazette of Serbia” no. 25/2000, 25/2002, 107/2005,
108/2005 and 123/2007) activities being considered as business
operations within the general interest could be assigned to a
company by execution of the Assignment agreement.
Licences and approvals are acts issued in the administrative
proceedings, where the licensee is obliged to meet the criteria for
their issuance during the entire validity period; they are subject to
withdrawal and are not transmissible. On the other hand, the
concession agreement is a contract, and therefore subject to the
general contractual standards.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
Please address our answer to question 2.2.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
Since, the ownership interests are vested in the state, Serbia has
proclaimed the energetic sector as the sector of outmost state
interest, and in 2005 the State Parliament has adopted the Energy
Development Strategy for the period of 10 years upon the proposal
of the Government.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
The companies performing the exploitation of the mineral raw
materials pay the commission for usage of the mineral raw materials
in accordance with the Mining Law. The commission to be paid
represents 3% of the overall revenues of the company. The funds
collected from the paid commissions for usage of the mineral raw
materials are considered to be the revenues of Serbia in percentage of
50%, while the outstanding 50% represents the revenues of the
municipality on the territory of which the exploitation is conducted.
The companies acting in the natural gas sector are obliged to pay
the ordinary taxes, as any other company, including but not limited
to the tax on profit (10%) and VAT (8%).
2.6 Are there any restrictions on the export of production?
There are no explicit restrictions on the exports of production, other
than the general restrictions stipulated by the Law on Foreign Trade
Operations, where it has been stipulated that the Government, upon
the proposal of the relevant ministry, can proclaim the restrictions
on the quantity export only in case of critical shortage of the
products for the basic needs, for protection of non-renewable
natural wealth.
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Serbia
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
There are no restrictions on the currency exchange or on the transfer
of funds from production out of jurisdiction.
Serbia
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
Natural gas development rights are not transferable since they are
based upon the approvals issued in the administrative proceedings
in the course of which it has been determined that that particular
entity being issued an approval, has met all the pre-conditions and
requirements stipulated by the legislation in force.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
The Regulation on Conditions regarding the Personnel and Manner
on Issuance and Withdrawal of Licenses for Performance of
Energetic Operations (“Official Gazette of Serbia”, no. 117/2005,
40/2006 and 44/2006), as a secondary legislation to the Energy Law,
stipulates the obligation of the entity interested in obtaining of the
energetic licence to provide the Energetic Agency with the
confirmation issued by the bank that the entity interested in
conducting of an energetic operation possesses adequate financial
means for performing of such an energetic operation or a proof that
it can obtain these financial means. It can additionally be required
to provide the balance sheets and income statements for the last two
years, initial balance sheet for the newly incorporated entity,
confirmations on its financial status issued or verified by respective
governmental authorities in charge. The entity which is for the first
time applying for the energetic licence and is newly incorporated is
required to provide the Agency with the confirmations by the bank
on the pecuniary capital contributions, financial or other guarantees,
surety or other security in the value of the planned activities. On the
other hand, there are no specific provisions requiring providing of
any securities or guarantees provided related to the production of the
natural gas under Mining Law or Law on Geological Explorations.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
The rights to develop natural gas reserves are acquired on the basis
of the procedure in which it has been determined that that particular
entity meets all criteria, conditions and requirements prescribed by
the legislation in force. These rights are attached to the profile of
particular entity and are connected to its technical and personnel
qualifications determined in restrictive proceedings. Pledging over
the subject rights would, in fact, enable the transfer of the rights
from the subject that has proven to be qualified to perform
particular activities, to another entity that might not meet the same
criteria, conditions and requirements, what would, in the final
instance lead to the misuse of the law.
Approvals and licences related to the natural gas sector are not
booked for the accounting purposes under the domestic law.
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2.11 In addition to those rights/authorisations required exploring
for and producing natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Serbia
The Mining Law stipulates the list of the documentation that
mandatorily accompanies the request for the issuance of approval for
exploitation, as follows: (i) submission of the resolution of the
respective governmental authority on the harmonisation of the project
of exploitation of mineral raw materials with the respective urbanistic
plan; (ii) submission of the consent of the Ministry of Agriculture,
Forestry and Water Management (if the exploitation is performed on
the agricultural of forestry land as well as if the exploitation of the
mineral raw materials affects the water system); and (iii) submission
of the consent of the Ministry of Environment and Space Planning.
The subject documentation accompanies the request for issuance of
the approval for exploitation which is issued by the Ministry.
Besides, the Energy Law and the Regulation on conditions
regarding the personnel and manner on issuance and withdrawal of
licences for performance of energetic operations (“Official Gazette
of Serbia”, no. 117/2005, 40/2006 and 44/2006) also stipulate the
list of documents that should accompany the request for issuance of
the energetic licence such as the report of the respective inspector
in charge, confirming that all energetic objects, premises, devices
and installations necessary for conducting of the energetic
operations meet all the terms and conditions related to the technical
requirements, energetic efficiency requirements, regulation on
environmental protection.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
The abandonment or decommissioning of physical structures used
in natural gas development is not specifically regulated under the
legislation in force. However, several laws, included but not
limited to the Mining Law, Law on Agricultural Land, Law on
Space Plan, Law on Nature Protection and Law on Environmental
Protection, regulate the obligation of re-cultivation of the land
following the abandonment, decommissioning and/or completion of
exploitation of mineral raw materials. Namely, the Law on
Agricultural Land prescribes that the agricultural land which has
been used for the exploitation of mineral raw materials or similar
purpose of non-permanent nature, should retrieve its purpose under
the project of re-cultivation which includes the process of taking
out, preservation and taking over of the humus layer of the land,
technical restoration of the land, hydro-technical works on
retrieving of the conditions of the land preceding the performance
of exploitation of mineral raw materials, preparation of the land for
agricultural usage, investigation on the presence of dangerous
materials in the re-cultivated land, etc. Similarly, the Law on Space
Plan stipulates that the company is obliged to conduct the re-
cultivation of the land during the process of exploitation of mineral
raw material, or within maximum one year of their completion.
Subject re-cultivation relates to the land, as well as taking of
measures of restoration of waters and environment.
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3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
As mentioned above, under question 1.4, Serbia does not export either
natural gas or LNG. Currently, the needed quantities of natural gas for
the consummation in Serbia are obtained through the importation of
natural gas from the Russian Federation through Ukraine and
Hungary. The importation of natural gas to Serbia is performed
through gas interconnector. Gas interconnector has a treaty associated
to it. The subject treaty elaborates various legal, technical and safety
issues related to the interconnection and importation of natural gas.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
According to the Energy Law, the natural gas transportation system
comprises of the networks of transportation pipelines,
accompanying transportation infrastructure, telecommunication
and information system and other infrastructure necessary for the
transportation of the natural gas with the working pressure
exceeding 16 bars. The natural gas transportation system can also
includes some networks of pipelines and other energetic devices
having the working pressure of natural gas between 6 and 16 bars.
Energetic subject performing the energetic operation of
transportation of natural gas is liable for the safe transportation of
natural gas from the transportation system’s entry point until the
point of delivery of natural gas to the energetic subject in charge for
the distribution of natural gas, as well as to the point of delivery of
natural gas to the purchaser connected to the transportation system.
It is also liable for the functioning, maintenance and development
of natural gas transportation system, all in compliance the technical
standards and requirements regarding the environmental protection.
The entity entitled to perform the energetic operation of
transportation of natural gas is obliged to prepare the development
plans for the construction or reconstruction of the existing natural
gas transportation system for the period of 5 years, and it is liable
for the implementation of the development plan.
The energetic operation of transportation of natural gas in Serbia is
currently performed only by two companies - one of which being a
state owned company, which is the only company which also holds the
energetic licence for operating the natural gas transportation system.
The assets used by the state owned company, including but not limited
to the natural gas transportation system, are in the ownership of Serbia.
On the other hand, a small section of natural gas transportation system
in the region of city of Nis is owned by the private company.
It should be noted that apart from the natural gas transportation
performed for the needs of Serbia within its pipeline networks,
particular quantities of natural gas are transported through the
territory of Serbia and its distribution system to Bosnia and
Herzegovina (natural gas transit).
Additionally, it should be mentioned that there are two major
projects, of utmost national interest, related to the natural gas
industry currently in the first stage of implementation: (1)
construction of the Underground Gas Storage Facility in Banatski
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Dvor; and (2) construction of the Serbian section of South Stream
Gas Pipeline being a transnational gas pipeline system going from
the Russian Federation, across the Black Sea and throughout
Bulgaria, Serbia, Hungary, Austria, Greece to Italy (or other transit
host countries). Both projects are performed in compliance with the
Accord for cooperation in the oil and the gas industry executed on
January 25th 2008 between the Government of the Russian
Federation and the Government of Serbia, which accord has been
ratified by the Parliament of Serbia on September 9th 2008. The
deadlines for the mentioned projects and their values have been
mentioned above under question 2.1.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The construction of natural gas transportation pipelines and
associated infrastructure is regulated by the Energy Law. Energetic
permit is issued for the construction of gas pipelines, infrastructure
necessary for transportation and distribution of natural gas,
infrastructure for natural gas storage and storage of LNG.
The permit could be issued if the infrastructure premises being
subject to a request, correspond to, as to their nature and purpose, the
National Energy Development Strategy and Programme. The permit
is issued by the Ministry with the validity period of 2 years and it
could be extended for an additional 1 year. Domestic and foreign
companies are subjects to equal treatment in the procedure of
issuance of the subject permits under the proviso that they meet the
following conditions and criteria: (i) providing of safe and non-
interrupted functioning of energetic system; (ii) meeting of the
requested criteria as to the location and prescribed usage purpose of
the land; (iii) safeguarding of the adequate environmental protection;
(iv) safeguarding of protection of health of the citizens and security
of the property; (v) providing of continued energetic efficiency; and
(vi) meeting of criteria regarding the technical equipment and
financial capability of the petitioner to run and complete
construction of particular energetic infrastructure premise.
The construction of energetic infrastructure premise, aimed to
provide the safe and permanent supply of energy, could be approved
upon the completion of public tender procedure. The Government,
upon the proposal of the Ministry, decides on initiation of procedure
of public tender if the system of issuance of energetic permits does
not enable the realisation of the planned dynamics of construction
of energetic infrastructure in Serbia. The public tender procedure is
organised and called by the Ministry or the respective
municipalities, all in accordance with the Government’s resolution.
The energetic permit is not required for the construction of
energetic infrastructure subject to the concession agreement, as well
as for the reconstruction of already existing energetic infrastructure.
Upon the issuance of the energetic permits, the energetic
infrastructure premises are constructed in accordance with the Law
on Planning and Construction (“Official Gazette of Serbia”, no.
72/2009 and 81/2009).
The legislator has devoted a special attention to the measures of
protection of health of the citizens and security of the property
stipulating the set of measures related to fire protection, measures
for protection against the risk of explosion, and various incidents
threatening the citizens and property.
As to the operation of natural gas transportation system, it should be
noted that subject activity is considered to be the energetic operation
under the Energy Law. Performing any energetic operation is subject
to obtaining an energetic licence. An energetic licence is issued by
the Agency with the validity period of 10 years and it can be
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Serbia
extended. The subject energetic licence is issued if the following
documentation has been provided: (i) report by the respective
inspector in charge that the petitioner meets the preconditions
regarding its personnel (who have passes the required exams and are
skilled and experiences in the subject industry); (ii) extract from the
domestic registry of companies accompanied with the concession
agreement or agreement on assignment of performance of energetic
Serbia
operation; (iii) report by the respective inspector that the energetic
infrastructure meets all the preconditions regarding the technical
standards, energetic efficiency, fire and explosion protection and
environmental protection; (iv) confirmation by the bank proving that
the petitioner possesses adequate financial means necessary for
performing of the energetic operation or that it can provide them,
based on the statements of the banks on the payment transactions and
average daily balances on the banks accounts for the previous two
years (the subject proof is also accompanied by the submission of the
financial reports for the last two years and reports on liquidity,
financial plans, proofs on capital contributions etc.); and (v)
confirmation by the respective authorities in charge that the members
of the management board have not been processed for any crimes.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
There are several ways of obtaining the necessary land and the
accompanying land rights to enable the construction of gas
transportation pipelines and/or associated infrastructure according to
the legislation in force. The first possibility is the purchasing of land
necessary for the construction of the pipelines and energy
infrastructure from the land owners in accordance with the Law on
Transfer of Real Estate (“Official Gazette of Serbia”, no. 42/98,
111/09). The second possibility is the lease of the needed land in the
state ownership in accordance with the Law on Planning and
Construction that stipulates the possibility of getting of lease of the
construction land in the state ownership in the procedure of public
auction or public tender, and in very limited circumstances, through
the direct negotiations. And finally, the third option is the
expropriation of the land in accordance with the Expropriation Law
(“Official Gazette of Serbia” no. 53/95, 16/2001 and 20/2009) upon
the payment of the expropriation commission. The public interest
for expropriation is determined by the law or by the resolution of the
Government. Expropriation could be performed for the needs of
Serbia, autonomous province, town, city of Belgrade, municipalities,
state owned companies, companies incorporated by the state owned
companies or the companies with the majority state ownership. The
Government can determine the public interest for expropriation,
among other, if the expropriation is necessary for the construction of
the energetic infrastructure. The public interest can be determined if
the planning act has been enacted.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Please address our answer to question 4.6.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
There are two companies in Serbia conducting the energetic
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operation of natural gas transportation - one of them being the state
owned company and other privately owned company. The
transportation system operated by the state owned company
represents approximately 95% of the overall natural gas
transportation system and broadly covers the northern part of the
country. The southern-eastern part of the country is less gasified.
The subject two natural gas transportation systems within the
Serbia
the changes of the tariffs, prices and commissions, etc.
The Energy Law explicitly prohibits the connection to the
transportation system of the objects that do not have adequate
construction permits in accordance with the legislation in force.
4.7 Are parties free to agree the terms upon which natural gas

is to be transported or are the terms (including costs/tariffs

territory of Serbia are well integrated. The measurement of the
which may be charged) regulated?
quantity and quality of transported natural gas is performed at the
measurement stations at the point of the connection of the
The tariff system determines the elements for the calculation of the
transportation systems. Taking into consideration that Serbia is
delivered energy for the tariff purchasers. Tariff elements include
importing the natural gas from the Russian Federation through
the reasonable expenditures consisting of amortisation
Ukraine and Hungary, the natural gas transportation system of
expenditures, maintenance, construction, reconstruction and
Serbia is also connected to the Hungarian transportation system.
modernisation of energetic infrastructure, insurance, environmental
protection, etc. The tariff system may include tariff items
4.6 Outline any third-party access regime/rights in respect of depending on the characteristics of the energy, season and daily
natural gas transportation and associated infrastructure. delivery dynamics, take-over point and manner of measurement.
For example, can the regulator or a new customer wishing The tariff system determines the tariff items for production of
to transport natural gas compel or require the
natural gas for the needs of tariff purchasers, natural gas
operator/owner of a natural gas transportation pipeline or
transportation, operation of natural gas transportation system,
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If storage of natural gas, operation of storage of natural gas, natural
so, how are the costs (including costs of interconnection, gas distribution system and operation of distribution system.
capacity reservation or facility expansions) allocated? The tariff systems for the calculation of the delivered energy or
performed energetic operations are determined by the Agency with
The access and connection of the object to the transportation system the consent of the Government.
is performed on the basis of the approval of the energetic entity
(qualified for the performance of energetic operation of transportation
of natural gas) to the system of which the object is to be connected, 5 Transmission / Distribution
upon the consent of the operator of transportation system.
The entity to the system of which the connection is required, is 5.1 Outline broadly the ownership, organisational and
allowed to access, if the subject entity determines that all the regulatory framework in relation to the natural gas
devices and installations of the accessing entity meet the transmission/distribution network.
requirements stipulated by the legislation, technical standards and
other legislative provisions determining the conditions and manner The distribution system of natural gas comprises of the pipelines
of exploitation of energy. networks, other energetic infrastructure, telecommunication,
information and other accompanying infrastructure necessary for
The approval for access and connection is issued on the basis of
the distribution of natural gas of the working pressure of 6 bars.
submitted request of the legal entity or individual interested in access
and connection. The deadline for rendering resolution upon the Pipeline networks and other accompanying energetic objects and
subject request is 30 days as from the day of submission of the request. infrastructure in which the working pressure is between 6 and 16
bars could also be a part of the distribution system of natural gas.
The resolution on approval of access and connection to the
transportation system contains especially the specification of the The entity entitled to perform the energetic operation of distribution
access point, manner and technical conditions of access, point of of natural gas is obliged to deliver the natural gas to all the
measurement and measurement methodology, the connection purchasers in the region where it performs the respective energetic
deadline and expenditures of access and connection. operation, all in accordance with the principles of publicity and
equal treatment. It is liable for the regular and safe distribution of
The amount of connection expenditures is determined in
natural gas distribution system, as well as for the functioning,
accordance with the methodology of access and connection
maintenance and development of the distribution system. It is
determined by the Agency.
additionally required to apply all the standards of environmental
The entity which provides the energy to the purchaser and the protection and the technical provisions and requirements.
purchaser itself, enter into agreement on sale of natural gas before
The entity entitled to perform the energetic operation of distribution
the connection of the purchaser to the transportation system. The
of natural gas mandatory conducts the technical control of internal
entity entitled to operating of transportation system is obliged to
gas installations in the purchaser’s premises, all in compliance with
connect the purchaser to the transportation system within 15 days as
the technical provisions and requirements regulating the
from the date of execution of the above mentioned agreement,
construction, maintenance and usage of internal gas installations.
under the condition that the purchaser has met its obligations
On the other hand, the purchaser of natural gas is obliged to procure
stipulated in the connection approval, as well as that the purchaser’s
the maintenance of the internal gas installations in its premises.
object and installations meet all the technical requirements.
The entity entitled to perform the energetic operation of distribution
The agreement on connection especially regulates the time of
of natural gas is obliged to prepare the development plans for the
connection, rights and obligations of the parties regarding the
construction or reconstruction of the existing natural gas
amounts of the energy to be delivered, dynamics and quality of the
distribution system for the period of 5 years, and it is liable for the
delivery, validity of the agreement, termination of the agreement,
implementation of the development plan.
rights and obligations in case of temporary suspension of delivery,
manner of measurement of the delivered energy, calculation of
expenditures and payment for the delivered energy, notification on
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5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
According to the Energy Law, operation of distribution networks is
considered to be an energetic operation. A precondition for the
performance of the subject energetic operation is the issuance of the
energetic licence by the Agency. The procedure and the respective
documentation that accompany the request for the issuance of the
energetic licence are elaborated in detail in question 4.2 above.
5.3 How is access to the natural gas distribution network
organised?
The access and connection of the object to the distribution system
is performed on the basis of the approval of the energetic entity
(qualified for the performance of energetic operation of distribution
of natural gas) to the system of which the object is to be connected,
upon the consent of the operator of distribution system.
The requirements and procedure for access to the natural gas
distribution network completely comply with the requirements and
the procedure for access to the natural gas transportation network
elaborated in detail in above question 4.6.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
According to the Energy Law, the operator of the transportation
and/or distribution system can reject the request of the costumers
for access to the network system if it does not have technical
capacities, if there are obstructions in the functioning of the
distribution/transportation system, if the system is overloaded, if
there is a threat to the safety and stability of the
distribution/transportation system and in similar cases. The data on
the degree of overload of the distribution/transportation system or
the percentage of usage of the storage capacities are public. The
operator of the distribution/transportation system and/or the
operator of the natural gas storage is obliged to issue an elaborated
written explanation to interested customer stating why its request
has been rejected. The subject written explanation should be
provided within 3 days as from the date of receipt of the request for
access to the system. The potential customer is entitled to submit a
complaint to the Agency, against the resolution of the operator,
within 8 days from the date of receipt of the elaborated resolution.
The subsequent resolution of the Agency is final and can be
disputed in administrative proceedings.
On the other hand, the operator of transportation system is obliged
to provide a transit through the transportation system, based on the
executed international conventions and agreements. However, it is
entitled to reject the request for the transit from the same reasons
elaborated above in which case the same procedure applies
accordingly.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
The prices for access to the transportation and distribution system,
as well as for the natural gas storage are regulated and are publicly
announced. Such prices are determined by the operator of the
transportation/distribution system or the operator of the gas storage
in accordance with the methodology for calculation of the access
fees, upon the prior opinion of the Agency. The Government
provides its consent to the prices.
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Serbia
The prices of the energy and services provided by the entities
qualified for performing of energetic operations could be regulated
or non-regulated (meaning that they are formed on the market).
The prices of energy for qualified purchasers are not regulated by
the state authorities and are subject to the agreement between the
qualified purchaser and the supplier of energy.
Serbia
The prices under which the energy is delivered to the tariff
purchasers are regulated.
The prices for the delivery of energy to tariff purchasers and the
prices of services provided to the tariff purchasers are determined
by the energy entity that provides the tariff purchases with the
energy, only upon the prior obtaining of the opinion of the Agency
to the subject prices.
The Government of Serbia provides its consent to the prices for
delivery of energy to tariff purchasers and for the prices of services
provided to the tariff purchasers.
Tariff system determines the elements for the calculation of the
delivered energy for the tariff purchasers. Tariff elements include
the reasonable expenditures consisting of amortisation
expenditures, maintenance, construction, reconstruction and
modernisation of energetic infrastructure, insurance, environmental
protection, etc. Tariff system may include tariff items depending on
the characteristics of the energy, season and daily delivery
dynamics, take-over point and manner of measurement. Tariff
system determines the tariff items for production of natural gas for
the needs of tariff purchasers, natural gas transportation, operation
of natural gas transportation system, storage of natural gas,
operation of storage of natural gas, natural gas distribution system
and operation of distribution system.
The tariff systems for the calculation of the delivered energy or
performed energetic operations are determined by the Agency with
the consent of the Government.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
Please refer to the limitations referred to under questions 4.2 and 5.2.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
The natural gas trade sector is being regulated by the provisions of
the Energy Law and several related bylaws. As one of the energy
operations, natural gas trade can be performed only by the entities
who have prior obtained the energetic licence for trading with
natural gas, issued by the Agency.
Under the natural gas trade sector, three separate energy operations
are being considered: (i) natural gas retail for needs of tariff
purchasers; (ii) natural gas trade for supply of the tariff purchasers;
and (iii) free market natural gas sale. Traders of the natural gas on
these markets are both state owned and the private owned
companies. At the end of 2009, there were 50 licences issued in
total to the energy entities for performance of the natural gas trading
activities on the Serbian territory. The prices of the natural gas for
tariff purchasers are being regulated by the Agency (as elaborated
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under question 5.5 above).
In accordance with the Energy Law, energy operation of natural gas
trade for supply of the tariff purchasers, among others, is being
considered as the business operation of the general interest to
Serbia. By the same Law it has been stipulated that these activities
could be performed by the state owned companies, private owned
Serbia
companies, separate divisions of the companies and entrepreneurs if
they meet all the conditions prescribed by the Energy Law, Law on
State Owned Companies and Performing of the Business
Operations of the General Interest, and other related legislation.
In addition to the above, Serbia has executed and ratified the
Agreement on the foundation of the Energy Community by which
the Agreement; the unique legal frame has been established, for
trade with the electric energy and natural gas in south-eastern
Europe and in the EU, elaborated in more detail in the below
question 9.2.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
In Serbia, it is currently traded both with natural gas as a
commodity, as well as with the leased capacities of natural gas
within the transportation system.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
Currently, there is no legislation in Serbia regulating the LNG.
Besides, there are no technical possibilities for LNG production,
importation and consummation in Serbia.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Please see our answer to question 7.1.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
Please see our answer to question 7.1.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The governmental authority responsible for the regulation of the
competition aspects as well as the anti-competitive practices of the
participants on the Serbian market in general, therefore including
the natural gas sector as well, is the Agency for protection of the
competition. In accordance with the Law on Protection of the
Competition (“Official Gazette of Serbia” no. 51/2009) acts or
activities of the market participants which have or could have, for a
purpose or as a consequence, significant limitation, violation or
preventing of the competition are considered to be anti-competitive
practice.
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8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
Criteria stipulated in the Law on Protection of the Competition to
which the Agency for Protection of the Competition, as the
regulator, has a regard to determine whether a participant’s conduct
is anti-competitive are:
(i) Whether various restrictive agreements between the market
participants have been executed. Under such agreements,
particular provisions of the agreements, both explicit or implicit,
contain agreed practice and decisions of the market participants by
which: (i) the purchase or sale prices are determined directly or
indirectly; (ii) the production, market or technical development or
investments are being limited; (iii) unequal conditions of operations
are applied in same activities for different undertakings, through
which the undertakings are put into an unfavourable position in
relation to their competitor; (iv) one of the contracting parties is
conditioning the execution of the agreement with another party by
acceptance of additional obligations that by their nature, trading
habits and practice are not connected with the subject of the
agreement; or (v) the agreements by which the markets or
procurement sources are divided.
Notwithstanding the above, the Law stipulates the general and
individual exemptions from execution of the restrictive agreements,
in which case their execution and implementation could not be
considered as anti-competitive conduct of the market participant.
(ii) Whether the market participant is abusing its dominant position
on the market
Under the Law on Protection of Competition it is deemed that the
market participant has a dominant position in a relevant market in
case that it has no competition or the competition is insignificant, or
it has a substantially better position than the competitor considering
market shares, economic and financial strength, possibilities for
supplies and distribution, as well as legal and factual barriers which
impede other undertakings upon their entry into the market. In any
case, there is a legal presumption that the market participant has a
dominant position when its market share on the relevant market is
reaching or exceeding the threshold of 40%.
In accordance with the Law on Protection of Competition, abuse of
the dominant position presents the criteria under which the Agency
for Protection of the Competition is proclaiming a participant’s
conduct on the market as anti-competitive. In any case,
characteristics which imply that participant is abusing its dominant
position are: (i) performing direct or indirect imposing of unjust
purchase or sale price, or other unfair business conditions; (ii)
limiting the production, market or technical development; (iii)
applying different conditions to equivalent transactions with other
trading parties, thereby placing them at a competitive disadvantage;
and (iv) conditions the contracting party requesting it to accept the
additional obligations, which, by its nature or by commercial
practice have no connection with the subject of the executed
contract.
(iii) Whether there is non-approved/prohibited concentration of the
market participants
Under the Law on Protection of the Competition the concentration
is considered to exist in case of: (i) merger of two or more
previously independent entities; (ii) acquisition of direct or indirect
control by one entity over other entity; or (iii) two or more
companies jointly incorporate new entity, or acquire joint control
over an existing entity which has all the functions of an independent
legal entity on the market.
Criteria which the regulator has while determining whether the
concentration of the market participant is allowed i.e. their conduct
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on the relevant marked is deemed competitive are: structure of a
relevant market; actual and potential competition; market position
of concentration participants and their economic and financial
power; possibility to choose the suppliers and users; legal and other
barriers to entry the relevant market; level of competitiveness of
concentration participants; supply and demand trends for certain
goods or services; technical and economic development trends; and
interests of consumers.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
Depending on the different anti-competitive behaviour of the market
participant, the regulator can imply various measures of prevention or
repression and has significant authorities with that respect.
Under the actions preventing the anti-competitive practices, the
Commission is, among other actions, entitled to: impose
administrative measures; define the rules in the field of protection of
competition; propose to the Government the regulation for
implementation of the Law on Protection of the Competition; enact
instructions and guidelines for implementation of the Law; monitor
and analyse the competition conditions on particular markets and in
particular sectors; submit opinion to the competent authorities on draft
rules, as well as on current rules that have an influence of the
competition on the market; issue opinions in view of implementation
of rules in the field of protection of competition; establish international
cooperation in the field of protection of competitiveness, for fulfilment
of international obligations in this area, and collecting information on
protection of competitiveness in other countries; cooperate with the
state authorities, territorial autonomy and local-self-government
bodies, for providing the conditions for implementation of the Law
and other rules that regulate the issues of importance for protection of
competitiveness; perform activities with respect to raising of
awareness on the need for protection of competition; keep the records
on agreements announced reported, on entities which have a dominant
position on the market, as well as on concentrations; to organise,
perform and control the implementation of measures with which the
protection of competitiveness is provided.
While determining whether a participant’s conduct is being deemed
anti-competitive, a regulator can initiate, ex officio, the procedure of
investigation of the infringement of the competition, when the
Commission learns on the basis of submitted initiatives, and
otherwise available information that there are plausible indications
of the infringement, as well as in the case of investigation of the
concentration.
In case where the trend rigidity of prices or other circumstances
suggest that competition may be restricted or distorted on the
market, the regulator may perform an analysis of a particular sector
of the state’s economy or a particular type of agreements across
various sectors.
The Commission may submit a request for information to other
state entities and organisations as well. State entities and
organisations are due to cooperate with the Commission and to
proceed, within the deadline given by the Commission, or to submit
the information, documents or other required evidence they possess
or to provide an explanation about the subject of the request.
The Commission cooperates with the police who assist the
Commission during certain actions in the procedure, and
particularly with inspections and provisional repossessions.
Letters, notices and all other forms of communication between the
entities against which the procedure is ongoing, and its attorneys in
the scope relevant to the procedure itself, shall be considered as
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Serbia
privileged communication. In case of doubt that the misuse of
privileged communication occurred, the Commission may reassess
the content of such privileged communication, or decide on
suspension of this option in relation to some of its forms.
Authorised officials of the regulator in course of investigation, may:
enter and check business premises, vehicles, land and other
Serbia
premises at the seat of the party and other places where the party or
another person perform business and other activities; inspect
business and other documents, regardless of the manner that these
documents are stored; repossess, photocopy or scan business
documentation, and if this is not possible due to technical reasons,
the authorised official may repossess the business documentation
and keep it for the time necessary to make copies of this
documentation; seal business premises and business documents for
the time of the investigation; take oral or written statements from
the representative of the party or its employees, as well as the
documents on the facts that are the subject of the investigation, and
if a written statement is necessary, the authorised official must set a
date until which this statement must be delivered; perform other
actions that are in accordance with the objective of the procedure.
If there is a plausible concern of danger of disposal or altering
evidence that is in possession of the party or other person,
unannounced inspection may be performed.
In cases of urgency due to the risk of serious and irreparable
damage to persons to which actions or acts in the process directly
refer, the Commission can order a ban of certain actions or
execution of acts, or order the obligation of taking actions that
prevent or remove their damaging consequences (interim
measures).
If the Commission finds that an infringement to the competition
was made or other violation of the law is committed, it can issue a
measures for protection of competition (infringement fines such as
a pecuniary fine up to 10% of total annual income), measures for
removal of results of competition infringement, measures of
deconcentration and measures of the procedural penalty (daily
procedural penalty in the amount between €500 and €5,000 against
the undertaking that is acting in contrary to the orders of the
Commission).
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
Serbian Commission for Protection of the Competition has the
power to approve or to disapprove mergers or other changes in
control over businesses in all the economy and industry sectors, and
therefore in the natural gas sector as well. Changes of control,
mergers and acquisitions are considered as concentration of the
market participants as explained above under question 8.2 (iii).
The party in the procedure before the Commission is the entity that
submits the notification on concentration or requests individual
exemption, as well as the entity against which the investigation
procedure is initiated.
The provisions of the Law on the General Administrative Procedure
apply to the procedure before the Commission unless otherwise
determined.
Concentration, as considered in accordance with the Law on
Protection of the Competition must be applied by the market
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participant(s) to the Commission in case when the combined
aggregate annual turnover of all entities concerned made on the
global market in the preceding year is above €100 million, with the
condition that at least one participant in the concentration on the
market of Serbia has incomes over €10 million; or in case that the
aggregate annual turnover of at least two undertakings of
concentration made on the market of Serbia is higher than €20
Serbia
million in the preceding year, if at least two undertakings concerned
have annual turnover more than €1 million each in same period.
Notification of concentration has to be submitted to the
Commission prior to its implementation, yet not later than 15 days
of conclusion of the agreement or contract; announcement of public
bid or acquisition of a control.
Concentration notification has to be submitted to the Commission,
as well, when the entities express intent for execution of the
agreement, by signing the letter of intent, announcing the intent to
make a bid or in other manner.
Upon initiation of the procedure, participants are obliged to halt the
implementation of the concentration.
If a concentration has already been implemented and the
concentration has been declared incompatible with the provisions of
the Law or has been implemented in contrary of a conditionally
approved concentration, the Commission may instruct the entities
to perform a division of the entity, selling the shares, termination of
a contract and/or take other measures necessary for establishing and
preservation of the competition (measure of deconcentration).
The Commission is obliged to issue a decision on appraisal of
performed concentration initiated upon receiving the notification by
market participants within one month from the day of receipt of
such notification. If the decision upon notification is not made
within this time period or official investigation of concentrations
has not been initiated, concentration is considered to be approved.
The Commission is obliged to reach a decision in the investigation
of concentration procedure within three months as of the beginning
of the investigation ex officio.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
There are no any special requirements or limitations on acquisitions
of interest in the natural gas sector by the foreign companies, other
than those stipulated for the domestic companies as well (licences,
approvals of Ministries, etc.). As elaborated under section 8 above,
investigations of the acquirement of the interest in the other entities,
are subject of the Commission for Protection of the Competition,
who does not take nationality as criteria when determine whether
participants’ conduct is being anti-competitive.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
New legislative regulations are being prepared so that they fully
correspond with European Union regulations, regulations of the
countries in our region and internationally accepted principles on
creating non-discriminatory conditions for the transfer, transport
and trade of electricity and natural gas throughout the region.
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Serbia
Given that Serbia has at the end of 2002, signed an Athena
Memorandum on the Establishment of a regional (ECSEE) energy
market of South Eastern Europe and its accession, the Government
has acknowledged that it is necessary to perform, substantial
reorganisation of the electric power and gas industry.
Serbia has ratified the Agreement on foundation of the Energy
Community between the European community and the Republic of
Albany, Republic of Bulgaria, Republic of Bosnia and
Herzegovina, Republic of Croatia, FYR of Macedonia, Republic of
Montenegro, Romania, Republic of Serbia, UNMIK in accordance
with the Resolution 1244 of the Security Council, signed on
October 2005 in Athens. It has been published in the “Official
Gazette of Serbia” no. 62/2006, and has been in force in Serbia as
of July 27th 2006. These actions have established the unique legal
framework for trade with the electric energy and the natural gas in
south-east Europe and in EU. With that respect it has been
determined that the Serbian Law on amendments and supplements
of the Energy Law, should be passed, so that the regulations
stipulating the internal power and gas market and adjoined to the
electro energetic network for cross-border exchange of the
electricity should be implemented into the Serbian Law.
Further on, on January 25th 2008, the Government of the Russian
Federation and the Government of Serbia have entered into the
Accord for co-operation in the oil and gas industry. This bilateral
Accord has been ratified by the Parliament of Serbia on September
9th 2008, and published in the “Official Gazette of Serbia” no.
83/2008. Subject to this Accord was joint cooperation in realisation
of the projects by which Serbia wishes to achieve strategic interest
of the related to increase of the energy safety, based on providing
for the continuous supply of gas and oil from the Russian
Federation to Serbia, transit thereof to third countries, as well as the
production of oil derivates on the Serbian territory.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
As a sovereign entity - state, as well as the Government, enjoy
immunity when being sued by other states or foreign companies
before the foreign courts or foreign arbitrage. However, this is not
the case if the state waived its immunity, whether by signing of the
accord or other document, by which it gives its consent to be called
to account before an external court or the judging body.
With respect to the bilateral commercial agreements where Serbia
(and relevant Ministry in charge as the representative of the state in
every subject case) appears as a contracting party - it is usual in the
practice that it is agreed between the parties which court shall be
authorised in case of the dispute arises, or the parties can agree to
resolve their dispute before the arbitration.
Since the resolutions of the regulatory body - Commission for
Protection of the Competition as administrative and independent
agency are final - disputes between the participants and the
regulator in relation to the natural gas sector is possible in case
when the participants are complaining on the decision rendered by
the regulator in procedure where regulator has decided about the
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participant’s right are being initiated before the Administrative
Court. Since the Administrative Court has been just recently
established as a part of a country’s judicial reforms, and has not
commenced with performing activities from its competence, Higher
Commercial Court is been authorised to resolve these disputes.
These rules are not applied only to the participants in the natural gas
sector, but in general, so in the practice, as far as we are aware there
have not been any disputes between the participants and the
regulatory body with this respect.
The same administrative procedure applies with respect to the
Ministries issuing licences and approvals to the participants in the
natural gas sector, therefore when the relevant Ministry renders the
resolution with respect to the rights of the participant in the natural
gas sector, such participant can initiate the administrative dispute
before the Administrative Court within 30 days as of the day of
receipt of such resolution.
10.2 Is Serbia a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
The Serbian Parliament has duly ratified New York Convention on
the Recognition and Enforcement of Foreign Arbitral Awards by
passing the Law on ratification of the Convention on the
Recognition and Enforcement of Foreign Arbitral Awards (“Official
Gazette of the Federative Republic of Yugoslavia no. 11/81).
The Convention has been ratified with the reserves that:
1. the Convention applies in the domestic territory only with
respect to those arbitral awards rendered after enforcement of
the Convention;
2. the country shall apply the Convention on the reciprocity
bases, only to those arbitral awards rendered on the territory
of the other contracting party; and
3. the country shall apply the Convention only on those
disputes originated from the legal relations, contractual and
non-contractual, which in accordance with the domestic
legislation are considered to be commercial disputes.
This Convention has been in force in Serbia as of October 17th
1981.
Parliament of Serbia and Montenegro has ratified the Convention
on the Settlement of Investment Disputes between States and
Nationals of Other States by passing the Law on ratification of the
Convention on the Settlement of Investment Disputes between
States and Nationals of Other States and is published in the
“Official Gazette of the Serbia and Montenegro”, no. 2/2006.
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Serbia
This regulation has been in force since May 20th 2006.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
Serbia
There isn’t any special difficulty (whether as a matter of law or
practice) in litigating, or seeking to enforce judgments or awards,
against Government authorities or state organs.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
We are not aware of such judgments or awards against Government
authorities or the state organs pursuant to litigation before domestic
courts successfully obtained by the foreign corporations in natural
gas sector. This is due to the fact that the natural gas sector has
been, up to recently, and still is in its biggest part, under control of
the state owned and domestic commercial companies.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Serbia.
Upon rendering of the current Energy Law in 2004, Serbia has
undertaken significant efforts for further development of its energy
sector. In the scope of such actions, Serbia has ratified (as
mentioned above in the question 9.2), among others, the Agreement
on foundation of the Energy Community, with respect to which it
has undertaken the obligation to additionally harmonise its
legislation with the EU Law.
Hence, the Ministry of Mining and Energy, has prepared the draft
proposal of the amendments and supplements to the Energy Law, by
which the provisions of the Directives of the EU Parliament and
Council no. 2003/54, 2003/55, 2001/77 and the Rulebook no. 1228 as
well as the directive for promotion and usage of the renewable sources
of energy, are to be implemented into the Serbian legislation.
Another substantial innovation proposed by the Ministry would be
the establishment of the Fund for the Energetic Efficiency aimed to
enable the providing of the funds for the increase of the energetic
efficiency and to further promote the usage of the renewable
sources of energy in Serbia.
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Jelena S. Gazivoda, LL.M. (Cambridge) Marija M. Kostic

Jankovic, Popovic & Mitic, Belgrade Jankovic, Popovic & Mitic, Belgrade
37, Carli Caplin Street 37, Carli Caplin Street
Belgrade 11000 Belgrade 11000
Serbia Serbia

Tel: +381 11 2076 850 Tel: +381 11 207 6850

Serbia

Fax: +381 11 2076 899 Fax: +381 11 207 6899

Email: jelena.gazivoda@jpm.rs Email: marija.kostic@jpm.rs
URL: www.jpm.rs URL: www.jpm.rs

Jelena Gazivoda is partner in corporate and energy department. For
the last several years she has participated in the most relevant
energy projects implemented in the Republic of Serbia. Jelena
Gazivoda has acted as legal advisor of the Republic of Serbia in the
negotiations leading to the execution of the agreement on sale and
purchase of 51% of shares in Serbian Oil Industry “NIS” with
Gazpromneft, Russia. She has also been the legal advisor of
Srbijagas in negotiations and preparation of contracts and all
accompanying documents with respect to the Joint Venture
Agreement related to the construction of the Underground Gas
Storage Facility Banatski Dvor with Gazpromexport, Russia, as well
as legal advisor of Srbijagas in the negotiations and preparation of
agreements leading to the execution of the Joint Venture Agreement
related to the construction of the section of gas pipeline South
Stream through the Republic of Serbia with Gazprom, Russia.
Marija Kostic is senior lawyer in corporate and energy department,
and is a member of team engaged by the Republic of Serbia, as well
as state owned companies in various projects regarding the energy
industry. Most significant projects within last two years were related
to the acquisition of the controlling stake in Serbian Oil Industry
(“NIS”) by Gazpromneft, Russia. Marija was also member of the
legal team advising State owned company Srbijagas Novi Sad in the
negotiation procedure and preparation of contracts leading to
execution of the Joint Venture Agreement related to the construction
of the Underground Gas Storage Facility Banatski Dvor with
Gazpromexport, Russia, as well as member of the legal team
advising Srbijagas during the negotiations and preparation of
contracts relevant for execution of the Joint Venture Agreement
related to the construction of the section of gas pipeline South
Stream through the Republic of Serbia with Gazprom, Russia.

JPM is the leading law firm in Serbia providing full service in Serbia and CEE region*. Since 1991 we are serving
international and national clients from various industries in establishing, building and maintaining their business
presence in Serbia and CEE. Our expertise, commitment, experience and highest standard practice has been proven
and recognized at the market. Our track record comprises numerous successfully completed landmark transactions in
a developing and transitional economy. We are committed in finding solutions and providing the flexibility of choice to
our clients.
We are focused on developing solutions and implementation of practices that satisfy business goals our clients and the
requirements of compliance and legal safety. Our commitment, expertise and experience in resolving complex business
and legal issues enables us to be able to devise applicable solutions to be successfully implemented for the benefit of
our clients.
________________________________________
*in cooperation with CHSH Cerha Hempel Spiegelfeld Hlawati

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Chapter 31
Singapore
Allen & Gledhill LLP and Ashurst LLP
1 Overview of Natural Gas Sector
1.1 A brief outline of Singapore’s natural gas sector, including
a general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Singapore does not have any known natural gas reserves and,
accordingly, does not produce or export natural gas from domestic
sources.
Singapore currently relies exclusively on piped natural gas from
Indonesia and Peninsular Malaysia to meet the country’s demand
for natural gas. In 2008, imports of natural gas from Indonesia and
Malaysia were approximately 8.27 bcm, with 6.65 bcm being
imported from Indonesia and 1.62 bcm being imported from
Malaysia. Currently there are four natural gas pipelines (two from
Indonesia and two from Malaysia) which import natural gas into
Singapore.
The legal framework for Singapore’s gas industry is established by
the Gas Act (Cap. 116A) (the “Gas Act”), which was brought into
force in 2001. Key initiatives established by the Gas Act in order
to foster a competitive gas industry in Singapore include:
(a) separation of the gas transportation business (a natural
monopoly) from contestable parts of the gas industry, such as
gas importation, shipping and retailing;
(b) development of a single integrated gas network code
governing the use of the onshore pipeline network (the “Gas
Network Code”);
(c) a licensing regime for gas industry participants: the gas
transporter, gas importers, gas shippers and gas retailers
(recently amended to include LNG terminal operators); and
(d) open and non-discriminatory access to any gas pipelines and
gas pipeline network.
The Gas Act is administered by the Energy Market Authority of
Singapore (the “EMA”), a statutory board tasked with the
responsibility for the economic, technical and competition
regulation of the gas industry in Singapore. The EMA’s regulatory
function includes the regulation of the importation of natural gas
and LNG, the management and operation of onshore receiving
facilities and LNG terminals, the shipping of natural gas, the
production and retail of town gas, and the retailing of natural gas, in
Singapore. The EMA also regulates the electricity industry in
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Kelvin Wong
Daniel Reinbott
Singapore and the provision of district cooling services in
designated areas of Singapore.
Singapore’s restructured gas market, together with the Gas Network
Code, became operational on 15 September 2008. The Gas
Network Code governs the activities of transporting gas within
Singapore and provides for open and non-discriminatory access to
the onshore gas pipeline network based on contractually defined
and tradable capacity rights within the gas transmission network.
Following the commencement of Singapore’s restructured gas
industry, PowerGas Limited (a member of the Singapore Power
Group) (“PowerGas”) became the sole holder of a gas transporter
licence granted under the Gas Act. PowerGas owns and operates the
main onshore pipeline network in Singapore (the “Transportation
System”), which comprises a high pressure transmission network
and lower pressure distribution networks. However, in recognition
of subsisting arrangements prior to the restructuring of the gas
industry, SembCorp Gas Pte Ltd is exempted from the requirement
to hold a gas transporter’s licence to convey gas through any
onshore gas pipeline owned by it.
There are currently no large scale natural gas storage facilities in
Singapore. The Toh Tuck gasholder station owned by PowerGas
provides up to 150,000 cubic metres of town gas storage for
emergency use and peak load shaving. All electricity generating
companies in Singapore are required to maintain a minimum
quantity of reserve fuel as back-up in the event of a disruption to the
supply of natural gas.
In an effort to diversify the nation’s sources of energy and to meet
Singapore’s rising future energy demand, the EMA will be
developing an LNG regasification terminal with an initial send-out
capacity of approximately 3 mtpa and a potential expanded capacity
of approximately 6 mtpa. Construction work on the new terminal
is expected to start in 2010, with start-up anticipated to take place
in 2013. It is anticipated that the proposed LNG regasification
terminal will include LNG storage capacity.
1.2 To what extent are Singapore’s energy requirements met
using natural gas (including LNG)?
In 2008, 80.3% of Singapore’s electricity was generated using
natural gas. Fuel oil (15.2%) and other energy sources (4.5%),
including diesel and refuse incineration, are also used in electricity
generation in Singapore.
Natural gas is also utilised in Singapore in the production of town
gas and for industrial purposes, such as fuel and feedstock for
petrochemical plants.
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1.3 To what extent are Singapore’s natural gas requirements
met through domestic natural gas production?
Singapore does not have any known natural gas reserves and
currently relies exclusively on piped natural gas from Indonesia and
Peninsular Malaysia to meet the country’s demand for natural gas.
Singapore
In 2008, imports of natural gas from Indonesia and Malaysia were
approximately 8.27 bcm, with 6.65 bcm being imported from
Indonesia and 1.62 bcm being imported from Malaysia.
There are currently four gas pipelines which import natural gas into
Singapore. The table below summarises the approximate daily
quantities of natural gas imported into Singapore through these
pipelines:
Importer Source of Natural Gas Approx. Daily Volume
Senoko Energy Pte Ltd Malaysia 150 MMscf
SembCorp Gas Pte Ltd West Natuna, Indonesia 325 MMscf
Gas Supply Pte Ltd South Sumatra, Indonesia 350 MMscf
Keppel Gas Pte Ltd Malaysia 115 MMscf
Natural gas is used in the production of town gas, which is primarily
used for cooking, heating, and other commercial and industrial
purposes. Town gas is produced by City Gas Pte Ltd and supplied
to its customers island-wide through a separate pipeline network.
1.4 To what extent is Singapore’s natural gas production
exported (pipeline or LNG)?
Singapore is a net importer of natural gas and does not produce or
export natural gas.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
As mentioned above, Singapore does not have any known natural
gas reserves. This section is not applicable to Singapore.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
Not applicable to Singapore.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration, appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
Not applicable to Singapore.
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2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
Not applicable to Singapore.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
Not applicable to Singapore.
2.6 Are there any restrictions on the export of production?
Not applicable to Singapore.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
Not applicable to Singapore.
2.8 What restrictions (if any) apply to the transfer or disposal of
natural gas development rights or interests?
Not applicable to Singapore.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
Not applicable to Singapore.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Not applicable to Singapore.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Not applicable to Singapore.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
Not applicable to Singapore.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Importers of natural gas into Singapore are required to hold a gas
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importer licence, issued by the EMA, authorising the relevant
licensee to import natural gas into Singapore, subject to the
conditions of the licence. The licence, identifies the particular gas
sales agreement that the relevant gas importer has with the foreign
gas supplier, and specifies the maximum quantity of natural gas that
the licensee is permitted to import into Singapore in each year.
Other specific conditions of the gas importer’s licence include:
unless approved by the EMA, the licensee is not permitted to
acquire or hold, whether directly or indirectly, any shares in
(a) any other gas importer, (b) a gas transporter or gas
transport agent, or (c) entities licensed to conduct certain
activities under the Electricity Act;
the licensee shall not enter into any new gas sales agreement
or vary the quantity of gas to be imported under its existing
gas sales agreement, without the prior approval of the EMA;
restrictions on the resale or transfer of natural gas imported
under the licence; and
provision for the payment of initial and subsequent annual
fees (as notified by the EMA) by the licensee to the EMA.
Gas importer licences are currently held by Senoko Energy Pte Ltd,
Gas Supply Pte Ltd, Keppel Gas Pte Ltd and SembCorp Gas Pte Ltd
(“SembGas”).
To build up demand for regasified LNG, the Singapore Government
has imposed restrictions on the import of new piped natural gas.
The gas import controls took effect on 21 August 2006, but do not
apply to existing contracted volumes of gas imports. Subject to
certain exceptions, no additional volumes of piped natural gas may
be imported for the purpose of commercial generation capacity (i.e.,
the generation of electricity to be exported into the electricity
transmission system). The import of additional volumes of piped
natural gas may be permitted by the EMA, on a case by case basis,
for non-commercial generation (including industrial feedstock and
embedded generation for own use) and other industrial uses. The
Singapore Government announced that it will consult the industry
and review the piped natural gas import control policy when LNG
imports reach 3 mtpa or, if earlier, in 2018.
BG Singapore Gas Marketing Pte Ltd (“BG”) has been appointed
by the EMA as the LNG aggregator to aggregate demand for
regasified LNG from all end-users in Singapore, and to procure and
import LNG for supply to those end-users. It is understood that the
pricing parameters and other terms and conditions for the supply of
LNG to Singapore are to be set out in an Aggregator Agreement
between the EMA and BG. In addition, the EMA has indicated that
it will issue an exclusive licence to BG to import LNG and sell
regasified LNG in Singapore for up to 3 mtpa or until 2023,
whichever is earlier.
Imported natural gas and regasified LNG must comply with the gas
specifications set out in the Gas Network Code before it can be
injected into the transmission system.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
There was originally a single submarine import pipeline to
Singapore, for the supply of gas by Petronas in Malaysia to Senoko
Power Ltd for use in electricity generation. However, with the
demand for natural gas increasing greatly over the last decade, the
capacity of the pipelines importing natural gas into Singapore has
had to increase accordingly. Consequently, three major pipeline
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projects have been completed within the last nine years. The table
below summarises the ownership of each of these gas import
pipelines:
Import Pipeline Owner in Exporting Country Operator in Singapore
Malaysia (completed in
Singapore
Petronas Senoko Power Ltd
1992)
West Natuna Group (comprised
West Natuna Pipeline of Conoco Indonesia Inc. Ltd.
SembGas*
(completed in 2001) (operator), Premier Oil Natuna
Sea Ltd. and others)
South Sumatra
Pipeline (completed in PT Transportasi Gas Indonesia PowerGas
2003)
Malaysia (completed in
Petronas PowerGas
2006)
The initial pipeline from Malaysia was the first trans-border gas
pipeline in Southeast Asia. This pipeline imports approximately 150
MMscf of natural gas per day to the Senoko Power electricity
generation facility in the north of Singapore. The second pipeline
into Singapore was the West Natuna Pipeline (“WNP”) which
transports natural gas approximately 650 kilometres from the gas
fields under Indonesia’s West Natuna Sea into Singapore. The WNP
transports approximately 325 MMscf of natural gas per day as part of
a 22-year deal with SembGas. The third pipeline into Singapore was
the pipeline from Asamera in South Sumatra which is capable of
transporting approximately 350 MMscf of natural gas per day into
Singapore. This pipeline is 470 kilometres long, and is partly owned
by PowerGas. The fourth pipeline into Singapore was completed in
2006 and transports 115 MMscf per day of natural gas to Singapore.
This pipeline was set up pursuant to a gas sales agreement which
provides for gas transportation for a period of approximately 18 years
from the first gas via a 5 kilometre pipeline jointly constructed by
Keppel and Petronas Gas Bhd, a subsidiary of Petronas.
There are four onshore receiving facilities in Singapore. SembGas
and ConocoPhillips Operations Singapore Pte Ltd each operate and
manage an onshore receiving facility, and PowerGas operates and
manages the remaining two facilities. The management and
operation of an onshore receiving facility is an activity which is
subject to a gas licence granted under the Gas Act.
The Gas Act regulates third party access to the gas pipelines and
other gas facilities, and requires owners of these pipelines and
facilities to provide access to the relevant pipelines and facilities to
third parties without undue discrimination. The Gas Act also
empowers the EMA to impose allocation arrangements on users of
any offshore gas pipelines.
The Gas Network Code does not apply to the conveyance of natural
gas within the gas import pipelines (i.e., prior to the onshore
receiving facilities). However, the injection and conveyance of gas
into and through the onshore gas pipeline network (the
Transportation System) is governed by the Gas Network Code. As
mentioned above, imported natural gas will need to meet the gas
specifications set out in the Gas Network Code as a precondition for
its injection into the Transportation System.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
A person who wishes to convey gas through any offshore gas
pipeline within Singapore’s territorial limits will require a gas
licence from the EMA to transport gas through such pipeline.
However, in recognition of subsisting arrangements, those persons
which had been conveying gas through offshore gas pipelines since
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16 March 2001 are exempted from the requirement to hold a gas
transporter’s licence to convey gas through those offshore gas
pipelines. Senoko Energy Pte Ltd has also been granted an
exemption in respect of the conveyance of gas through the offshore
gas pipeline through which Senoko Power Ltd was, immediately
prior to 13 January 2010, conveying gas.
Singapore
The Gas Act also requires managers or operators of onshore gas
receiving facilities to obtain an onshore receiving facility operator’s
licence. Such licences are currently held by ConocoPhillips
Singapore Operations Pte Limited and SembGas. PowerGas’ gas
transporter licence also authorises PowerGas to operate its onshore
gas receiving facilities.
In order to lay a pipeline in Singapore territorial waters, consents
will be required from, inter alia, the Maritime and Port Authority of
Singapore and the Singapore Land Authority.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
A gas transporter has statutory powers under the Gas Act to carry out
works on privately owned land. Such works include the construction
and installation of gas pipelines and associated facilities. In the case
of land owned by the Government or any statutory body, consent will
need to be obtained from the owner of the land. In the case of
commercial and industrial land, this would typically be the Singapore
Land Authority or the Jurong Town Corporation. In addition, the
President of the Republic of Singapore has the power to acquire
privately owned land for certain purposes (including for the public
interest or of public utility) under the Land Acquisition Act (Cap. 152).
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
The Gas Act requires that a person who owns or has control of, inter
alia, a gas pipeline (including any offshore gas pipeline), gas
pipeline network and certain other gas facilities (including any
onshore receiving facility) designated by the EMA, must provide
access to the relevant facility without undue discrimination. If a
prospective user is unable to negotiate access to such a facility, the
prospective user may apply to the EMA for directions in order to
secure rights of access to that facility. In addition, if a person is
unable to conclude an arrangement for the allocation of gas in any
offshore gas pipeline, that person may make an application to the
EMA, and the EMA may impose directions as to a gas allocation
arrangement to be made in respect of that pipeline.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
The four offshore gas pipelines for the import of natural gas into
Singapore are separate and independent from each other, but each
are or may be connected to the onshore pipeline network. Access
to and use of the onshore pipeline network is governed by the Gas
Network Code. There are currently two distinct natural gas
transmission networks within the onshore pipeline network - both
of which are owned and operated by PowerGas. The two
transmission networks are currently not interconnected, but it is
understood that there are plans to establish an interconnection in the
future (see further discussion below in response to question 5.1).
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In order to minimise the likelihood of gas supply disruptions, the
EMA has required that a holder of an onshore receiving facility
operator licence must establish agreed operating procedures for the
integration and operation with onshore receiving facilities.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Please refer to the response to question 4.4. The EMA has fairly
broad powers under the Gas Act to specify the terms of an access
agreement to be made between the owner of the relevant facility
and the prospective customer, including the charges to be paid by
the prospective customer for the use of the facility. The EMA may
also impose directions on the facility owner with respect to any
adjustments, which the EMA considers appropriate, to be made to
the charges payable by the existing users of the facility.
There is, however, no current regulatory requirement for the owner of
a gas pipeline to expand the capacity of the pipeline to accommodate
a new customer. In July 2007, Island Power Pte Ltd (“Island
Power”), made an application to the EMA for directions to secure
rights to access the South Sumatra gas import pipeline, which is
operated by PowerGas and transports gas imported from Indonesia by
Gas Supply Pte Ltd. Island Power had entered into a gas sales
agreement with ConocoPhillips in 2003 for the supply up to 110
MMscf/d of natural gas to support its proposed power plant
development in Singapore. However, subsequent to its application to
the EMA, this contract was terminated by Indonesian upstream
regulator BPMIGAS, due to Island Power’s failure to secure
transportation capacity. The EMA declined to issue directions under
the Gas Act until Island Power (a) enters into a new gas sales
agreement with an upstream gas seller, and (b) enters into an upstream
allocation agreement with PowerGas, Gas Supply Pte Ltd, the
upstream gas seller and PERTAMINA. In its decision, the EMA also
stipulated that it would not issue the direction to grant Island Power
access to the South Sumatra import pipeline unless there was available
capacity in that pipeline. It has been reported that Island Power is
again in discussions with Gas Supply Pte Ltd to secure supplies of
natural gas from Indonesia.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Currently, the terms for transportation through the offshore
pipelines are not regulated although, as described in the response to
questions 4.4 and 4.6 above, operators of the gas import pipelines
are required to provide access to third parties without undue
discrimination. The charges for the use of the onshore pipeline
network are prescribed and governed by the Gas Network Code.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The onshore Transportation System in Singapore comprises the high
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pressure transmission network (the “Transmission Network”) and
lower pressure distribution networks (the “Distribution Networks”).
As part of the restructured gas industry, PowerGas has been
designated as the gas transporter and is now the sole owner and
operator of the Transportation System. In this regard, the onshore
natural gas transmission and distribution pipeline assets which were
previously owned by SembGas, were transferred to PowerGas on
15 September 2008. PowerGas is also responsible for maintaining
the reliability and safety of the Transportation System, and has
appointed SP PowerGrid Ltd as agent to convey gas and manage the
gas pipeline network on its behalf. SP PowerGrid Ltd is licensed by
the EMA as the gas transport agent.
The Transmission Network is currently not fully interconnected and is
separated into two distinct networks. Accordingly, natural gas injected
at a system entry point in one network is not able to be transported to
the system exit points in the other network. It is envisaged that both
networks will eventually be interconnected in the future. The
Distribution Networks are also not interconnected with each other.
In addition to the Transmission Network, PowerGas also owns and
operates the separate lower-pressure Distribution Networks in
Singapore, which supply town gas to approximately 580,000
domestic, commercial and industrial consumers. Town gas, which is
produced by City Gas Pte Ltd (“City Gas”) from naphtha or natural
gas, is used mainly for cooking and heating purposes. As part of the
restructuring of the gas industry in Singapore, it is intended that the
town gas system will be progressively converted to transport natural
gas. It is envisaged that PowerGas and City Gas will collaborate to
prepare and submit a conversion plan to the EMA for approval.
The licensing regime for the various gas market participants in
Singapore is prescribed by the Gas Act. In addition to the gas
licenses mentioned above, licences which have been issued by the
EMA under the Gas Act, as well as the respective licensees include:
gas shipper’s licence: Senoko Gas Supply Pte Ltd, Gas
Supply Pte Ltd, Keppel Gas Pte Ltd; PowerSeraya Ltd, City
Gas Pte Ltd and SembGas;
gas retailer’s licence: Gas Supply Pte Ltd, SembGas and City
Gas Pte Ltd; and
town gas producer’s licence: City Gas Pte Ltd.
The Gas Network Code governs the activities of natural gas
transportation and the operation of, and the open access to, the
Transportation System in Singapore. The Gas Network Code
operates as a binding contract between PowerGas, as the designated
transporter, and each gas shipper.
The Gas Network Code distinguishes between high pressure gas
pipelines with definable capacity rights, known as the Transmission
Network, and low pressure pipelines feeding retail customers,
known as the Distribution Network. There are various points on the
system where the natural gas is stepped down from the
Transmission Network to the Distribution Network.
In addition to the Gas Act and the Gas Network Code, there are also
a number of codes of practice which apply to the gas transportation
network in Singapore, including:
(a) Metering Code;
(b) Retailer Code of Conduct; and
(c) Gas Supply Code.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
As the designated gas transporter, PowerGas holds a gas
transporter’s licence, issued by the EMA, which authorises it to
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convey gas through the Transportation System, subject to the
conditions of the licence. SP PowerGrid Ltd, the managing agent
appointed by PowerGas to operate the transmission and distribution
network, holds a gas transport agent licence.
Entities who wish to contract with PowerGas for the injection,
Singapore
transportation and offtake of gas through the gas pipeline network
are required to obtain a gas shipper’s licence.
5.3 How is access to the natural gas distribution network
organised?
If a gas shipper wishes to have gas conveyed through the
Transmission Network, it must apply for, and be registered with,
capacity rights. In accordance with the Gas Network Code, a
capacity right gives a gas shipper the right to have gas conveyed
through the Transmission Network by the transporter from a
designated Transmission Network entry point (entry capacity right) to
a designated Transmission Network offtake point (exit capacity right)
during a one hour balancing period. A gas shipper’s registered
capacity rights are specified in a capacity certificate granted by the
transporter (PowerGas) and expressed in MMBtu/balancing period.
In addition to applying to the transporter for capacity rights, the Gas
Network Code also contemplates that a gas shipper may acquire
capacity rights directly from another gas shipper who is the registered
holder of those rights (i.e., capacity trading).
Under the Gas Network Code, capacity rights are separated into two
classes:
(a) Firm Capacity Rights: whereby the transporter is required to
convey gas when a gas shipper submits a nomination for gas
to be transported pursuant to that capacity right; and
(b) Non-Firm Capacity Rights: whereby the transporter may, but
shall not be required to, convey gas when a gas shipper
submits a nomination for gas to be transported pursuant to
that capacity right.
The Gas Network Code provides for open and non-discriminatory
access to the gas transportation system in Singapore and the
transporter is required to consider applications and register capacity
rights on a “first-come, first-served” basis. If the transporter
determines that there is available uncontracted capacity with respect
to the capacity application made by a gas shipper, the transporter is
required to approve the gas shipper’s application. In addition to
providing for direct applications to the transporter to acquire
capacity rights, the Gas Network Code also provides for an “open
season” invitation and application process for the acquisition and
surrender of registered firm capacity rights.
The Gas Network Code provides for the reduction of a gas shipper’s
registered firm capacity rights by applying a “use it or lose it”
principle in the event that the gas shipper has not made any
nomination for the injection of a quantity or quantities of gas at the
relevant transmission network injection point equal to at least 80%
of the registered firm entry capacity right in any balancing period
during the previous 6 months. If such case, the transporter may
reduce the amount of the gas shipper’s registered firm capacity, by
an amount calculated in accordance with the Gas Network Code, in
order to satisfy an application for firm capacity rights from another
gas shipper, that cannot be satisfied from the available uncontracted
capacity, but which can be satisfied from the “dormant” capacity of
the existing registered capacity holder.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
If the Transmission Network needs to be expanded to meet the
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demand for natural gas in the Distribution Network, expansion of
the Transmission Network will be driven by the “open season”
process contemplated by the Gas Network Code. The transporter is
not obliged to make available new capacity which is proposed as
part of the “open season” process unless the customers undertake to
Singapore
pay the cost of developing the additional new capacity and other
associated charges.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
Transportation charges are levied on gas shippers by the transporter.
Gas shippers pay transmission as well as distribution charges as part
of the distribution tariff for transportation of natural gas to
distribution level end users. This is to reflect the cost of
transporting gas through both the Transmission and Distribution
Networks.
Transmission charges consist of transmission capacity charges and
usage charges. Gas shippers book capacity with PowerGas to
transport gas from designated injection points to offtake points.
The transmission capacity charges are paid annually by gas shippers
based on network specific entry and exit capacity charges which are
levied on the quantity of each gas shippers booked capacity. A
uniform transmission usage charge is levied on the per MMBtu
volume of gas transported. Overrun charges are payable by gas
shippers in the event they offtake gas above their booked capacity.
Distribution charges payable by gas shippers to PowerGas are based
on usage.
The transportation charges are regulated by the EMA under
PowerGas’ gas transporter licence, including by limiting the
average revenues per MMBtu from gas transmission and
distribution services by reference to specific economic formulae.
The parameters to be used in each formula are subject to
redetermination by the EMA, in consultation with the licensee, for
each regulatory period. Under the current gas transportation
licence, the revenue allowed to the licensee shall consist of:
(a) an allowed rate of return on the transporter’s fixed
investment in the relevant network, plus an approved rate of
depreciation on that investment;
(b) projections of operation, maintenance and administration
expenses;
(c) forecast tax payments; and
(d) sharing of capital and operating efficiency generated in the
previous regulatory period to promote sustained productivity
initiatives.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
The gas industry is separated into activities which are natural
monopolies (such as the transportation of gas) and those which are
competitive in nature (such as the shipping and retail of gas). There
are no restrictions on acquiring an interest in a gas utility in the
competitive sector. However, the Gas Act currently imposes certain
restrictions in the acquisition of equity interest or voting power in a
gas transporter (PowerGas) or a gas transport agent (SP PowerGrid
Ltd). Notice needs to be given to the EMA if any person acquires
an interest of 5% or more of the gas transporter or gas transport
agent. No person may acquire 12% or more except with the EMA’s
consent. Please refer further to the response to question 8.4.
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6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
As the Singapore gas market is in its infancy, and given the close
correlation between gas importers, shippers and retailers, there is
currently no trading of natural gas in Singapore. The Gas Network
Code contemplates that gas shippers may trade their transportation
capacity rights with other gas shippers.
To support the Singapore Government’s aspirations to develop
Singapore as an LNG trading hub, additional capacity will be built
at the proposed LNG regasification terminal to enable LNG traders
to lease capacity for temporary LNG storage and reloading/re-
export. The Singapore Government has also introduced a special
corporate tax of 5% on LNG trading income to encourage existing
energy players to expand into LNG trading.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Please see the response to question 6.1 above.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
As mentioned above, the Singapore Government has approved the
development of a LNG receiving and regasification terminal with
an initial send-out capacity of approximately 3 mtpa and a potential
expanded capacity of approximately 6 mtpa. In September 2007,
PowerGas was designated as the LNG terminal owner and operator.
However, in June 2009, the EMA announced that it would take over
the development and ownership of the LNG terminal from
PowerGas and its partner GDF Suez. A new company, Singapore
LNG Corporation Pte Ltd, was subsequently established by the
EMA to own and oversee the development of the terminal. Start-up
of the LNG receiving and regasification terminal is anticipated to
take place in 2013.
As also mentioned above, the EMA has appointed BG as the LNG
aggregator, whose role will be to aggregate demand for regasified
LNG from all end-users of natural gas in Singapore and procure the
supply of regasified LNG for these end-users. The EMA has
indicated that it will issue an exclusive licence to BG to import
LNG and sell regasified LNG in Singapore for up to 3 mtpa or until
2023, whichever is earlier.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Licences and permits will be required from, amongst others, the
Building and Construction Authority, the Jurong Town Corporation, the
Urban Redevelopment Authority and the Maritime and Port Authority.
A person managing or operating the LNG terminal will be required
to hold an LNG terminal operator’s licence issued by the EMA
under the Gas Act. BG, as the LNG aggregator, will be required to
hold a gas importer’s licence.
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7.3 Is there any regulation of the price or terms of service in
the LNG sector?
It is anticipated that the EMA will regulate the terminal charges
payable to the LNG terminal owner for the regasification of LNG,
in order to ensure equitable access to the LNG terminal and
regulation of the price payable for natural gas by the end-users. The
EMA may also regulate the margin that the LNG aggregator can
charge over and above the cost of the LNG imported into
Singapore, in order to ensure that LNG is competitive to existing
piped natural gas and to support the build-up of demand for
regasified LNG in Singapore. Further regulation of the LNG
terminal operator and the LNG aggregator is likely to be included
as part of the licences which are issued by the EMA.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The Gas Act incorporates specific provisions regulating
competition and anti-competitive practices. The EMA is designated
to oversee and enforce these provisions.
Section 69 of the Gas Act prohibits “agreements, decisions or
concerted practices by persons which have as their object or effect
the prevention, restriction or distortion of competition in any gas
market in Singapore”, and any such agreement or decision shall be
void. However, this prohibition only applies if the agreement,
decision or practice is, or is intended to be, implemented in
Singapore.
In addition, section 70 of the Gas Act prohibits any conduct on the
part of one or more persons which amounts to the abuse of a
dominant position, within Singapore, in the Singapore gas market,
if it may affect trade within Singapore.
Notwithstanding the above, the EMA may grant an exemption from
sections 69 or 70 to any such agreement or conduct. The wording
of sections 69 and 70 of the Gas Act is almost identical to the
corresponding provisions in the Competition Act (Cap. 50B).
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The Gas Act sets out some guidelines as to what is regarded as anti-
competitive. For instance, agreements, decisions or concerted
practices which (a) directly or indirectly fix prices or any other
trading conditions of gas, (b) restrict production, markets, technical
development or investment in the gas industry in Singapore, (c)
apply dissimilar conditions to equivalent transactions with other
trading parties, thereby placing them at a competitive disadvantage,
(d) make the conclusion of contracts subject to acceptance by the
other parties of bundling arrangements for unconnected services or
products, or (e) provide for the acquisition, directly or indirectly, of
shares in or the assets of a gas licensee, are likely to be prohibited
by virtue of Section 69 of the Gas Act.
Conduct may constitute a contravention of Section 70 of the Gas
Act if such conduct involves (i) directly or indirectly imposing
unfair prices or other trading conditions of gas, (ii) limiting
production, markets or technical developments in the gas industry
in Singapore to the prejudice of consumers, (iii) applying dissimilar
conditions to equivalent transactions with other trading parties,
thereby placing them at a competitive disadvantage, or (iv) making
the conclusion of contracts subject to acceptance by the other
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Singapore
parties of bundling arrangements for unconnected services or
products.
It has been noted that the operative provisions of Sections 69 and 70
of the Gas Act are almost identical to the corresponding provisions
in the Competition Act. As such, the EMA may also have regard to
Singapore
the guidelines issued by the Competition Commission of Singapore
(the “CCS”) regarding the interpretation of the Competition Act.
The CCS may co-operate with the EMA in regulating competition
in the gas industry under section 87 of the Competition Act.
Regard may also be had to the competition jurisprudence in the UK
and EU.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The Gas Act gives the EMA wide discretionary powers to promote
and maintain fair and efficient market conduct and effective
competition or, in the absence of a competitive market, to prevent
the misuse of monopoly or market power. The EMA may conduct
investigations (either of its own volition or upon receipt of a
complaint, and may in the conduct of investigations, require any
person to produce documentation or information, or apply to Court
for a warrant to enter onto and search premises for documents.
The EMA may give directions to bring any anti-competitive
behaviour to an end and may require an infringing person to pay a
financial penalty of S$1,000,000, or 10% of such person’s annual
turnover, whichever is higher, and/or provide a performance bond
or other security on such terms as the EMA may consider fit.
Further, as noted in question 4.4, the EMA may impose directions
in order to grant an aggrieved person rights of access to a gas
pipeline or onshore receiving facility. Such directions are binding
notwithstanding that the effect of such directions may contravene
any subsisting contractual term (regardless of when the contract
was made). The EMA is also empowered to impose a gas allocation
arrangement on users to enable third party access to an offshore gas
pipeline if the parties cannot agree of their own accord. This is to
prevent the situation where an existing user attempts to block third
party access by refusing to negotiate a gas allocation arrangement.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
Whilst the Competition Act has a merger control regime as of 1 July
2007, the Gas Act does not. However, the Gas Act contains
provisions which regulate the acquisition of interests in a gas
transporter, gas transport agent, and certain other entities (which
own any part of a gas pipeline network) designated by the EMA
(collectively, “Regulated Persons”). Any person who acquires 5%
or more equity interest in any Regulated Person must give written
notice thereof to the EMA. Further, no person (whether
individually or together with any associates) may hold or control
12% or more of the equity or voting interest in any Regulated
Person except with the EMA’s prior written approval. No person
(whether individually or together with any associates) may directly
or indirectly hold or control 30% or more of the equity or voting
interest in any Regulated Person except with the EMA’s prior
written approval. Additionally, no person may acquire, as a going
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concern, any part of the business of a Regulated Person except with
the EMA’s prior written approval.
In deciding whether or not to give its approval, the EMA will take
into account whether the relevant person is a fit and proper person,
the person’s likely influence in the operations and business of the
Singapore
Regulated Person, and whether it is in the public interest that
approval be given.
To effect the separation of the non-contestable business of gas
transportation from the contestable business of retailing, section 98
of the Gas Act allows the Singapore Government to require any gas
company substantially owned by the Government to transfer its
property, rights, obligations and liabilities to another gas company
substantially owned by the Government.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
There are no restrictions on foreign ownership in Singapore (but see
the response to questions 5.6 and 8.4 above concerning restrictions
in ownership of the gas transporter or gas transport agent). It is not
anticipated that any gas pipeline within Singapore will be owned
and operated by any entity other than PowerGas.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
Singapore has concluded Free Trade Agreements (“FTAs”), which
are currently in force, with the Association of South East Asian
Nations (ASEAN) countries, Australia, China, India, Japan, Jordan,
New Zealand, Panama, Peru, South Korea, the United States, the
European Free Trade Association (comprising Switzerland, Iceland,
Norway and Liechtenstein) and the Trans-Pacific Strategic
Economic Partnership (comprising Brunei, New Zealand and
Chile). In addition, Singapore signed a FTA with the Cooperation
Council for the Arab States of the Gulf (GCC) countries
(comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the
United Arab Emirates) on 15 December 2008, although this FTA is
currently not in force. Singapore is also engaged in ongoing
negotiations regarding the establishment of FTAs with Canada,
Mexico, Pakistan and Ukraine.
Whilst these do not currently impact upon Singapore’s proposed
regulatory policy, there has been discussion for some years about
the creation of a Trans-ASEAN gas pipeline network. If this were
to become a reality, one can presume that all ASEAN participants
would need to amend their internal regulatory policy to support this
objective.
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10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
The Gas Network Code provides for disputes between gas shippers
and PowerGas to be settled by expert resolution (technical) or in
accordance with the Rules of the Singapore International
Arbitration Centre.
The EMA has broad powers under the Gas Act to hear and
adjudicate on disputes arising between the participants (or
prospective participants) in the gas industry. A person aggrieved by
a decision of the EMA may, in certain instances, appeal to the
Minister for Trade and Industry, who may in turn convene an
Appeal Panel to hear the appeal.
10.2 Is Singapore a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Singapore has ratified both the New York Convention and the
ICSID, which have been in force in Singapore since 1986 and 1968,
respectively.
The New York Convention is given effect via the International
Arbitration Act (Cap. 143A), which also makes provision for the
conduct of international commercial arbitrations based on the
Model Law on International Commercial Arbitration adopted by the
United Nations Commission on International Trade Law.
The Arbitration (International Investment Disputes) Act (Cap. 11)
implements the ICSID in Singapore.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
The EMA, the statutory body charged with the administration of the
Gas Act, has the capacity to sue and be sued, and a judgment or
award issued against the EMA may be enforced in Singapore
against the assets of the EMA. However, it may be noted that the
Gas Act provides the EMA with certain exemptions. For instance,
whilst Section 3 of the Gas Act sets out certain duties to be assumed
by the EMA, and imposes an obligation on the EMA to act in a non-
discriminatory manner, and in a reasonable manner in all
circumstances, Section 3 also states that nothing in that Section
shall impose any form of duty or liability on the EMA enforceable
by proceedings before any court.
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Allen & Gledhill LLP and Ashurst LLP Singapore

11 Updates

11.1 Please provide, in no more than 300 words, a summary of

any new cases, trends and developments in Gas
Regulation Law in Singapore.

Singapore
All significant updates have been mentioned earlier in this chapter.

Kelvin Wong Daniel Reinbott

Allen & Gledhill LLP Ashurst LLP
One Marina Boulevard #28-00 55 Market Street, #07-01
Singapore 018989 Singapore 048941
Singapore Singapore

Tel: +65 6890 7644 Tel: +65 6221 2214

Fax: +65 6302 3048 Fax: +65 6221 5484
Email: kelvin.wong@allenandgledhill.com Email: daniel.reinbott@ashurst.com
URL: www.allenandgledhill.com URL: www.ashurst.com

Kelvin is a partner of Allen & Gledhill LLP and is widely regarded as
the leading expert in Singapore in the energy, gas, petrochemical
and utilities sectors. He has been the Lead Counsel in many of the
infrastructure plants and facilities projects in Singapore (as project
counsel or financiers’ counsel). He regularly advises industry
participants on all legal aspects in the establishment,
commissioning, operation and maintenance of infrastructure and
utility plants, including regulatory and governance aspects. He has
extensive knowledge of the rapidly evolving electricity and gas
sectors in Singapore, having acted for several players in various
aspects of the restructuring of both industries, as well as in ongoing
developments of the respective industries.
Daniel is a Senior Associate in the energy, transport and
infrastructure group of the Singapore office of Ashurst LLP. His
practice focuses on advising project developers, offtakers and
lenders in relation to energy and infrastructure projects, with
particular emphasis on the LNG, oil and gas and power sectors. He
has advised project developers, gas suppliers and LNG buyers in
respect of many of the existing and proposed LNG projects in the
Asia Pacific region. Daniel’s experience also includes seven months
on secondment with a major international oil and gas company in
London, where he acted as an internal legal adviser to its natural gas
supply and trading business.

Ashurst operates at the heart of the energy industry worldwide. With a global energy team of over 80 lawyers we can
assemble teams to provide the highest quality advice tailored to our clients’ needs. We have helped hundreds of
companies, financial institutions and governments deal successfully with challenging energy projects by developing
innovative solutions.
Our lawyers provide a comprehensive service to the energy and natural resources industry in the following areas:

Upstream oil and gas Pipelines

LNG Refining and petrochemicals
Power Mining
Renewables Water
Nuclear

We advise on all aspects of work in the energy industry:

Mergers, acquisitions and corporate finance Greenfield projects

Project and acquisition financing International law
Environmental law Joint ventures
Commercial agreements Litigation and arbitration

Contact Geoffrey Picton-Turbervill, Head of Ashurst’s Global Energy Team.

Tel: +44 (0)20 7859 1209; Email: geoffrey.picton-turbervill@ashurst.com

259
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 Chapter 32
Spain
Uría Menéndez
1 Overview of Natural Gas Sector
1.1 A brief outline of Spain’s natural gas sector, including a
general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
A Legal overview
The natural gas sector in Spain has substantially changed in the last
decade due to the implementation of the European directives related
to the creation of a sole internal gas market.
The regulation of the natural gas sector in Spain is essentially
contained in Law 34/1998, on hydrocarbons, dated October 7th,
1998 (the “1998 Hydrocarbons Law”), which implemented
Directive 98/30/EC of the European Parliament and the Council.
Directive 2003/55 dated June 26th, 2003 was implemented through
Law 12/2007, which incorporated several changes to the 1998
Hydrocarbons Law. It should be noted that although Directive
2009/73/EC, of July 13th, concerning common rules for the internal
market in natural gas and repealing Directive 2003/55/EC has not
been implemented yet, the 1998 Hydrocarbons Law already applies
most of its basic principles (e.g. unbundling, freedom of the
consumers to choose their gas suppliers, etc.).
The Spanish regulations distinguish between regulated activities
(natural gas transportation, which includes transportation,
regasification and storage and distribution activities) and non
regulated activities (wholesale activities “comercialización”).
Companies undertaking regulated activities must abide by specific
regulatory requirements as further explained in sections 3 and 4 below.
The main competent bodies in Spain with regards to the natural gas
sector are the Ministry of Industry, Tourism and Commerce (the
“Ministry of Industry”), the relevant Autonomous Regions, the
National Energy Commission (“CNE”), which is the Spanish
regulator for the gas market and for the energy sector generally, and
the “Corporación de Reservas Estratégicas de Productos
Petrolíferos” or “CORES”, which is the Spanish organisation
responsible for the supervision of the accomplishment of minimum
stocks duties and for managing the strategic reserves of natural gas.
In addition, Enagás, S.A. (“Enagás”), which is the incumbent
transportation company, is responsible for the management of the
Spanish gas system or the System Technical Manager (“Gestor
Técnico del Sistema” or “GTS”).
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Juan Ignacio González Ruiz
Maria José Descalzo
B Spanish Gas sector overview
Gas exploration and production activities are almost irrelevant in
Spain (in 2008 less than 0.0003% of the total gas consumption) and,
therefore, the Spanish gas system relies almost entirely on imported
natural gas.
The vast majority of the gas (73% of the total consumption in 2008)
is introduced in Spain in the form of liquefied LNG through LNG
carriers to one of the six LNG terminals currently operating
(Huelva, Barcelona, Cartagena, Bilbao, Sagunto and Galicia).
In addition, there are five international pipeline connections: two
connections with Portugal (through Tuy and Badajoz); one with
Morocco (through Tarifa); and two with France (through Navarra
and Guipúzcoa). New pipelines are expected to become fully
operational shortly (Almería - Medgaz).
In 2008, the national transportation pipeline network amounted to
10,189 km, out of which Enagás owns 82%. As for the distribution
network, the Gas Natural Group is the leading company owning
more than 83% of the total distribution network, which amounted in
2008 to 57,935 km.
As regards gas storage, there are only two (basic) underground gas
storage(“UGS”) facilities currently operating in Spain: (i) a depleted
offshore field called Gaviota (off the Basque Coast) with a capacity of
779 Mm3(n); and (ii) a depleted field known as “Serrablo” located in
the municipality of Huesca, with an operating capacity of 890
Mm3(n). Such UGS facilities are owned by Enagás and Repsol
Investigaciones Petrolíferas, S.A. (RIPSA), respectively, but both are
operated by Enagás. In addition, LNG terminals also allow storage
capacity (a map of the Spanish Transportation System, including,
storage and regasification facilities, as of the third quarter of 2009, is
available in the Spanish CNE’s website: http://www.cne.es-cne-doc-
consumidores-red_gas_V2_2009).
In 2008, the Spanish Government issued the 2008-2016 Energy
Infrastructures Plan, a mandatory plan containing the main gas
transportation (and power) infrastructures to be developed in Spain.
Among such projects, we would highlight the following:
LNG facilities Construction of three new LNG terminals,
(Gran Canaria and Tenerife (Canary Islands) and Musel
(Asturias)), having an aggregated regasification and storage
capacity of 445,000 m3.
Transportation pipelines With the aim of decreasing Spain’s
dependence on LNG, the 2008-2016 plan foresees several
projects with respect to the pipeline network, including: (i)
the duplication of the “Euskadur” pipeline connecting the
Spanish gas network through France to 2.5 bcm per year; (ii)
the construction of a new 25 Km pipeline connecting
Cataluña with France, and (iii) the construction of a pipeline
connecting Spain with the Algerian fields (the Medgaz
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pipeline). As for the national transportation network, there is
a whole plan for the development of an appropriate gas
transportation network in the Canary Islands.
Storage facilities As a governmental priority, the plan
contains six UGS projects, of an aggregate capacity of 3.4
bcm: (i) an aquifer under development in Yecla (Guadalajara)
with an operating capacity planned to be in excess of 1 bcm
(around 1,050 Mm3(n)); (ii) a project to convert a depleted
offshore oil field called “Castor”, off the Castellón coast, with
an operating capacity of 1,100 Mm3(n); (iii) two other
projects intended to use depleted gas fields in the Southwest
(known as “Marismas” and “Poseidón”), with an estimated
operating capacity of 300 Mm3(n) and 250 Mm3(n),
respectively; and (iv) two additional projects known as “Las
Barreras” and “El Ruedo”, both former reservoirs, with an
estimated operating capacity of 162 Mm3(n). However,
according to the information provided in the website of the
CNE, such projects have incurred significant delays in 2008.
(Figures taken from the CNE website:
http://www.cne.es/cne/doc/publicaciones/PA002_09.pdf)
1.2 To what extent are Spain’s energy requirements met using
natural gas (including LNG)?
According to the information issued by the Ministry of Industry, out
of the total Spanish energy requirements in 2008, 24.5% were met
directly by natural gas (including LNG).
1.3 To what extent are Spain’s natural gas requirements met
through domestic natural gas production?
As stated in question 1.1 above, Spain imports almost its entire
national gas requirements from foreign gas producing countries. In
particular, during 2008, the five principal foreign suppliers of gas
were: (i) Algeria: 35% (12.3 % LNG); (ii) Nigeria: 19%; (iii)
Persian Gulf: 13%; (iv) Egypt: 12.42%; and (v) Trinidad and
Tobago: 11.1% [Source: CNE].
1.4 To what extent is Spain’s natural gas production exported
(pipeline or LNG)?
Spain is not a producer country. However, Spain is a transit country
for gas pipelines connecting Portugal to Algeria.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
As gas exploration and production activities are almost irrelevant in
Spain, the main policies of the Government with respect to natural
gas reserves relate to the enhancement of the security of supply and
the diversification of the energy resources; one of the priorities is
the creation of UGS facilities (please refer to question 1.1 above).
In this regard, it is worth noting that the storage of gas is required
in Spain not only to modulate seasonal fluctuations to the demand
of gas, but also to fulfil the obligations imposed by the 1998
Hydrocarbons Law on wholesale suppliers and direct consumers in
the market to maintain certain security and operating stocks
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Spain
(“reservas estratégicas” and “reservas operativas”) equivalent to
20 days’ worth of their firm (non-interruptible) sales or supplies, of
which almost all shall be kept, by law mandate, in UGS facilities.
Although according to the Spanish law, UGS facilities are deemed
to be transportation facilities and, as such, are subject to their legal
regime (as explained in section 3 below), we refer in this section to
some particularities regarding their legal ownership and operation
Spain
regime which have certain similarities with the statutory and
organisational framework foreseen in the 1998 Hydrocarbons Law
for the exploration and production of gas. On the contrary, due to
its limited interest for the reasons explained, we are not explaining
hereunder to the exploration and production of gas.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
Title to both offshore and onshore UGS facilities is awarded in the
form of administrative concessions (“concesiones”) granted by the
central Government. Such administrative concessions are classified
as concessions for the use of public domain assets owned by the
central State (“dominio público estatal”).
In addition, in the case of offshore UGS projects it needs to be
borne in mind that a separate concession will be required to use the
coast and the beach line even if only to cross it with pipelines
connecting the storage facilities to the entry and exit point.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
UGS concessions are supposed to culminate a permitting process
that starts with an exploration or investigation permit
(“autorización administrativa de exploración o de investigación”).
Such permits are issued by the regional governments, unless more
than one region is affected or it is an offshore project, in which case
the central Government is competent. The initial duration of such
permits is 6 years, but a 3-year extension (with a reduction in the
area covered by the permit) may be obtained.
According to the 1998 Hydrocarbons Law, UGS concessions have a
maximum initial duration of thirty (30) years, but may be renewed in
two periods of 10 years each. Even at the end of a concession, if a new
concession is to be awarded by tender in respect of the same facilities,
the former concessionaire has a preference recognised by law.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
As stated, title to UGS facilities is granted by the central Government
by way of a concession for the use of public domain assets.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
All hydrocarbons exploitation concessions (and consequently, the
UGS concession) need to pay a certain amount (known as “canon
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de superficie” or “surface fees”) per each hectare and year
comprised by the concession. The amount of the fees payable
increases during the first 20 years (every 5 years) and then starts to
decrease every five years. Such fees payable are set out in the 1998
Hydrocarbons Law (First Additional Provision).
2.6 Are there any restrictions on the export of production?
Spain
As a general rule, exports are free subject to the EU regulations,
however, as already stated, Spain is not a gas producer country.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
No such restrictions apply.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
A UGS concession may be assigned to a third party, but prior
authorisation from the Ministry of Industry is required.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
As part of the application process of a UGS concession the
applicant needs to post a guarantee to secure its compliance with its
obligations and duties under the concession. Such guarantee is also
expected to secure its decommissioning obligations.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Pursuant to the Spanish regulations, the works or facilities
constructed over public domain plots by virtue of a concession may
only be mortgaged as a security for the loans granted to finance
such works or facilities. In all cases, a previous administrative
authorisation is required. In addition, the mortgage would be
cancelled upon the end of the relevant concession.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Please refer to section 3 below in respect of the authorisation
regime applicable to all transportation facilities.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
The 1998 Hydrocarbons Law provides that the application for a UGS
concession already needs to incorporate a decommissioning plan and
an indication of the restoration works to be undertaken. The
concessionaire must fund a decommissioning provision in its
accounts in an amount to be determined in the respective concession.
If a UGS concession is cancelled or annulled and the facilities need
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to be decommissioned (upon a prior authorisation), the prudent
costs incurred in such decommissioning are treated as part of the
concessionaire’s remuneration (except where the concessionaire is
at fault) and the concessionaire may request an additional
remuneration for the decommissioning costs (subject to audit).
Special rules on the determination of the decommissioning
provision for the Gaviota and Serrablo UGS facilities have been
issued in the Ministerial Order ITC/3802/2008.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
Pursuant to the 1998 Hydrocarbons Law, EU imports, exports and
exchanges are free subject to EU regulations. It should be noted,
however, that in Spain only wholesale suppliers and direct consumers
may freely import natural gas from any country (in the case of the
direct consumers, only for their own consumption). Transportation
companies may only import natural gas for the purpose of filling their
tanks with the minimum operating levels and the GTS may also
import to comply with its duties. As distribution companies can no
longer supply gas, such companies cannot buy or import gas either.
The only restriction applicable to imports of gas is the need to
maintain a certain diversity of supply sources, such that the aggregate
of certain imports of natural gas by wholesale suppliers from any
country may not exceed 50% of the aggregate of the total imports.
Furthermore, any group made up of gas suppliers and direct
consumers importing over 7% of the gas quantities in Spain needs to
diversify its supplies such that not more than 50% of their supplies
may come from the principal supplier country to Spain (currently,
Algeria). Moreover, no company or group of companies is allowed to
import and sell more than 70% of the total national gas consumption.
In principle, any company introducing gas in the Spanish System
for the supply of third parties would need to qualify as a wholesale
supplier and, therefore, would have to comply with the technical
requirements and the regulatory obligations set out in the applicable
regulations (see section 6 below). On the contrary, if the gas is sold
or purchased outside the Spanish territory, to or from a Spanish-
based counterparty, such gas supplier would be free to engage in the
transactions without being affected by any of such obligations. This
would be the case, for instance, for transactions in which the
delivery of gas would take place offshore or transactions related to
LNG in which a sale takes place and the title passes on or before the
discharge flange connecting a vessel to the LNG facilities.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
The 1998 Hydrocarbons Law defines transportation companies as
the companies authorised to construct, operate and maintain LNG
terminals, transportation pipelines and basic storage facilities.
Further, the transportation network is deemed to comprise: (a) the
primary network (“red básica”), which consists mainly of high-
pressure pipelines (with a pressure above 60 bar), LNG terminals,
basic storage facilities, compression stations, international
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connections to the Spanish gas system and national connections to
the basic network; and (b) the secondary network (“red
secundaria”), consisting of lower pressure pipelines (i.e.: those
pipelines having a pressure between 16 and 60 bar).
As stated in question 1.1, Enagás is the incumbent transportation
company and, as such, the GTS. Apart from Enagás, the other main
transportation companies are Gas Natural Transporte, S.A. and
Naturgas Energía Transporte, S.A.
Due to the natural monopolistic characteristics of the gas networks
infrastructure, gas transportation (including LNG and basic gas
storage) are considered regulated activities and thus transportation
companies need to comply with specific regulatory requirements
(as are the distribution companies).
Among such regulatory requirements, we would highlight the
obligation of having an exclusive corporate purpose and abiding by
the legal and functional unbundling obligations set out by the 1998
Hydrocarbons Law. In particular, gas transportation companies may
not undertake the production or supply of natural gas (classified as
non-regulated activities), although the same group of companies may
comprise all such activities through different subsidiaries. However,
even under such circumstances (the same group of companies
undertaking regulated and non-regulated activities), the 1998
Hydrocarbons Law contain additional provisions aimed at ensuring a
functional separation of the different activities.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
Without prejudice of the concession regime applicable to UGS (see
section 2 above), the applicable regulations set forth that the
construction, transfer, modification, and closing of a gas
transportation facility is subject to a previous administrative
authorisation (“autorización administrativa previa”). To that end, a
company needs to prove that it holds the required:
“legal capacity” (formerly this was proven by becoming
Spanish or EU companies, with an exclusive transportation
purpose);
“technical expertise”, which may be proven through the
submission of reports and other documentary evidence, but is
also legally presumed if the company itself, directly or
through an affiliate, or at least one of its shareholders with a
minimum stake of 25%, has already operated transportation
assets at least during the preceding three years; and
“economic capacity” to support the financial viability of the
relevant transportation project, which leaving aside other
means of evidence, is deemed to be fulfilled if the company
has equity resources amounting at least to Euro 5 million or
25% of the relevant transportation project budget.
In respect to the above referred requirements, it should be noted,
however, that Law 25/2009, dated 22 December, for free access to
services activities, which implements Directive 2006/123/EC has
amended, among other regulations, the 1998 Hydrocarbons Law
(the “New Regulation”) and eliminated the obligation for a
transportation company to become a Spanish or EU company.
Nevertheless, such law is still to be implemented.
In addition to the previous authorisation, the following permits must
be obtained before a transportation facility can enter into service: (i)
the approval of the engineering construction project (“proyecto de
ejecución”) necessary for the commencement of the works; and (ii)
the final commissioning certificate (“acta de puesta en servicio”),
without which the relevant facility cannot start its commercial
operation and perceive the applicable regulated remuneration.
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Such authorisations will be granted either by the Ministry of
Industry, in the event that the facilities belong to the primary
network or affect more that one region, or by the regional authority
where the facility is to be located.
From an environmental perspective, transportation facilities may be
subject to a strict environmental control by being required, in most
of the cases, to obtain an integrated environmental authorisation
Spain
(“declaración de impacto ambiental”) from the relevant authorities,
before the construction work starts and to fulfil several
environmental requirements.
Finally, there is a series of environmental and planning
requirements and licences related to the municipal activity and
operation that may be required at a municipal level.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
The 1998 Hydrocarbon Law provides for a general recognition of
gas transportation as an activity of public interest (“actividad de
interés público”). As such, the granting of the preliminary
administrative licence referred to above (or, in the case of a UGS,
of a UGS concession), confers the transportation company the right
to request: (i) either the expropriation of the particular land on
which the transportation facility is to be constructed; or (ii) the
rights of way (servidumbres de paso) and other property
encumbrances imposed on the land owner in favour of the
transportation company for the purposes of allowing the
construction and operation of the relevant facility. In practice, in
respect of underground infrastructure, the granting of rights of way
is the most common mechanism to obtain access to the plots.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Gas natural transportation and distribution companies must allow third
party access (“TPA”) to the users of the gas network (i.e.: wholesale
suppliers and direct consumers). TPA to gas facilities is regulated (not
negotiated TPA) and is basically governed by the provisions of Royal
Decree 949/2001, subsequently amended by RD 1434/2002. In
particular, the TPA system is organised and supervised by the
competent energy authorities (mainly the CNE and the GTS), based on
mandatory tolls, charges and tariffs and standard form contracts
drafted on a non-discriminatory and transparent basis.
A copy of such standard form is available at the following website:
http://www.cne.es/cne/contenido.jsp?id_nodo=52&&&keyword=
&auditoria=F.
Certain general remarks need to be made in respect of the
organisation of the TPA system and the allocation of capacity to the
transportation users:
As a general rule, capacity is allocated to the gas system’s
users on a “first come, first serve basis” through the
procedure referred to in question 4.6 below. In principle, all
natural gas facilities subject to TPA need to provide for a
minimum 25% of their capacity to be available for contracts
with a duration not exceeding 2 years (short-term contracts).
Furthermore, no single party may contract for more than
50% of such short-term capacity.
However, in the case of (basic) UGS facilities different rules
apply since 2007. As contracting for UGS capacity is
directly linked to the obligation to maintain certain minimum
strategic and operating reserves (see question 2.1 above), the
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UGS capacity is no longer booked on a first come, first
served basis, but rather on an annual basis as a function of the
capacity booked on the previous year. In particular, the GTS
reserves certain capacity: (i) for wholesale suppliers and
direct consumers (10 days’ worth of sales or consumption
allocated in the previous year that where destined to strategic
security stocks and an additional capacity of 10 days’ worth
of their sales); and (ii) a capacity equivalent to 30 days’
Spain
worth of consumption for consumers connected to pipelines
at 4 bars or lower.
Only to the extent that there is any UGS capacity left after
the mandatory amounts have been booked, the remainder
capacity will be allocated through specific auctions
organised by an independent entity chosen by the GTS and
supervised by the CNE (currently OMEL, the electricity
market operator).
The system is supplemented by a secondary market capacity
where the entities with capacity assigned may transfer their
capacity, total or partially, through a bilateral contract
(except for such capacity allocated to the strategic security
reserves). Even the injection and extraction rights linked to
such capacity may be traded in such market.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
As a consequence of the regulated TPA system, different regulations
apply in order to ensure access to the gas transportation and
distribution system and a coordinated allocation of gas storage
capacity.
In addition, Spain has implemented the concept of the “Technical
Manager of the System” (“GTS”) (Enagás), or TSO, as defined in
the Directive EC/2003/73 modelled on the lines of the “System
Operator” for the electricity market. The GTS was first introduced
by virtue of Royal Decree-Law 6/2000, dated 23rd June, with the
purpose of having an entity whose main purpose and obligations are
precisely guaranteeing the continuous and secure supply of gas and
ensuring a proper co-ordination among access points, storage
facilities, transportation and distribution. In this regard, it should be
noted that all gas agents must abide by the GTS’s instructions with
respect to the gas sector.
Finally, it is worth noting that the Spanish Government issued, by
virtue of Order ITC/3126/2005, a whole set of rules for the
technical management of the system, aiming at ensuring the correct
functioning of the gas system, the quality, continuity and security of
the gas supply and the co-operation between the different
transportation agents (“NGTS”).
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Under the current regulatory framework, wholesale suppliers and
direct consumers in the market are entitled to TPA to transportation
and distribution facilities.
TPA rights are first exercised by filing an application for capacity
with the owner of the relevant facilities through standard
application forms.
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A TPA application may only be refused on the basis of the following
grounds:
if there is not enough capacity available;
if serious economic and financial difficulties would arise for
the owner of the facilities under existing take-or-pay
contracts (or similar contracts). If such were to be the case,
the owner of the facilities will be required to file an
application with the Ministry of Industry so as to evaluate the
actual extent of the economic difficulties invoked; or
if access is requested by a supplier who is resident in a
country which would not provide reciprocal access to a
Spanish operator.
Once a TPA request has been accepted, the parties must conclude a
TPA contract within the following 24 business days. If such term
has elapsed without an agreement, the applicant may have recourse
to the CNE, which will provide a solution to the conflict.
As a separate issue, it should be noted that the expansion of the
transportation networks is subject to the mandatory 2008-2016
Energy Infrastructure Plan referred to in section 1 above and,
therefore, in Spain, as a general rule, it is not permitted to develop any
transportation facilities that are not included in the plan, even if such
expansion is required to attend new TPA requests. However, regular
updates of the plan are contemplated such that sponsors may apply
the Government for new projects to be incorporated in the plan.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
As stated, TPA to gas facilities is regulated and therefore gas agents
wishing to have access to a transportation facility must execute
standard-form TPA agreements. Parties may be free to agree on
those terms and conditions which are not regulated, provided that
all users are treated on an objective, transparent and non-
discriminatory basis.
In addition, it should be noted that the 1998 Hydrocarbons Law
allows for new projects or capacity increases to apply to be exempt
from TPA rules (in line with the rules of Article 27 of Directive
2003/55/EC and substantially in line with the rules of Article 36 of
the new Directive 2009/73/EC), but to date there is no precedent yet
of any such exemption having been granted in Spain.
Finally, non-basic storage is expressed to be subject to negotiated
TPA. However in Spain negotiated TPA has only been provided for
access to the oil transportation and LPG facilities, but not in the natural
gas industry where regulated TPA has been the standard since 1998.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
The activity of gas distribution is carried out by entities transporting
gas through medium and low pressure pipelines (below 16 bars) and
those that distribute gas directly to a single customer from the primary
and secondary transportation networks irrespective of the pressure. In
addition, the Spanish system also regards as gas distribution the
satellite LNG plants that supply the distribution network.
Gas Natural Group is the leading distribution company in Spain
with a market share of approximately 81.4% in 2008. Other
relevant players are Naturgas and Endesa.
Like gas transportation, the distribution of gas is considered a
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regulated activity and, therefore, the general requirements and
obligations referred in section 4 above also apply to such
companies.
In this regard, it should be noted that, since the liberalisation of the
market carried out through the Law 12/2007, distribution
companies can no longer supply natural. Before 30 June 2008, the
Spanish natural gas retail supply market was divided between (a)
tariff-based market, and (b) the liberalised market, being both gas
distribution and supply companies entitled to carry out any of such
activities. However, as of 1 July 2008, the tariff-based market has
been eliminated and there is only a liberalised market where gas is
supplied exclusively by wholesale suppliers at free prices or by
suppliers of last resort (“comercializadores de último recurso”),
who are also wholesale suppliers, at regulated prices (please refer to
section 6 below).
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
Please refer to question 4.2.
5.3 How is access to the natural gas distribution network
organised?
The TPA regime applicable to distribution facilities is essentially
the same as those described in questions 4.4 to 4.7 above.
As a particularity (also applicable to the transportation pipeline
network), it must be noted that the relevant user needs to execute a
TPA contract with the owner of the entry point to the gas
distribution and transportation system (or an intermediate delivery
point). That contract needs to be supplemented through the
execution of an annex for each of the delivery or exit points
connecting the end consumer.
Consequently, in addition to the common requirements applicable
to any formal TPA application (as described in question 4.6 above),
an application for access to the network needs to contain an
indication of the exit points that will initially be contracted for; and
once access is granted to the relevant distribution network, a user
may change exit points provided that such a user is a wholesaler and
that there is enough capacity available. In such cases, the relevant
TPA contract need not be modified, but only completed by means
of an addendum.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
Unlike the gas transportation network, distribution companies are
obliged to expand their distribution network in the areas for which
they have been issued with authorisations, when such an expansion
is necessary to attend the requests from new customers to be
connected, and provided that there is sufficient capacity available
(for supplies below 4 bars it is by law presumed that such capacity
exists if the new consumption planned does not exceed 100,000
kWh/year).
Connecting a new customer for supplies below 4 bars in a new
development will be carried out at regulated prices. On the
contrary, for new supplies above 4 bars, such obligation will be
conditional upon reaching an agreement on the costs to be borne by
the applicant for the connection.
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5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
In consideration for the TPA to a distribution facility, the relevant
user shall pay the mandatory tariffs set out in the applicable
regulations (mainly contained in Royal Decree 949/2001, of 3rd
August and related regulations).
Spain
Such tariffs consist mainly of (i) a fixed charge or reservation fee
(“término de reserva de capacidad”) paid to the owners of the entry
point, and (ii) the so-called “transmission charge” (“término de
conducción”) paid to the owners of exit points. The transmission
charge varies according to the consumption of the final consumer
and the design pressure of the facilities to which the final consumer
is connected. In addition, the applicable tariffs are due to be revised
yearly.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
a) Acquisition of a stake in or by regulated companies
Pursuant to the 14th Function attributed to the CNE by the 1998
Hydrocarbons Law: (i) any company carrying out regulated activities;
or (ii) any company intending to acquire a stake over 10% or any other
conferring a significant influence over a company performing
“regulated activities” or holding “strategic energy assets” must hold a
prior authorisation by the CNE in order to make the acquisition.
However, the prohibition referred in (ii) above was declared
contrary to Article 56 of the European Treaty by the Court of Justice
of the European Communities on 17 July 2008 and, therefore,
although it has not been formally abrogated in Spain, it may be
assumed that such provision will be no longer applicable to
European companies, as the CNE has already stated in its
Resolution dated 18 September 2008 (Resolution issued by the
CNE with regard to the acquisition of Unión Fenosa, S.A., by Gas
Natural SDG, S.A.).
b) Acquisition of a stake over 3% in more than one principal
operator in the gas natural sector: authorisation to exercise
voting rights beyond such percentage
Article 34 of Royal Decree-Law 6/2000 provides that individuals or
entities that participate, direct or indirectly, in more than 3% of
more than one principal operator (“operador principal”) in the
energy markets (including the gas market), may not exercise their
voting rights exceeding the 3% threshold referred to above or to
appoint directors, unless the prior authorisation of the CNE has
been obtained. Such restriction would apply also to a principal
operator wishing to carry out any of the aforementioned actions in
respect of any other principal operator in the same market.
The principal operators are designated by the CNE taking into
account certain rules. In this regard, pursuant to two CNE’s
resolutions dated 17 March 2009 and 3 July 2009, the principal
operators in the natural gas market are Gas Natural Group,
Iberdrola Group, Unión Fenosa Group, Endesa Group and
Hidrocantábrico/EDP. However, it should be noted that Gas
Natural and Unión Fenosa have merged during 2009 and, therefore,
belong to the same group.
c) Transfer of assets
Royal Decree 1434/2002 provides that any transfer of
transportation or distribution assets (including UGS or LNG
facilities) shall be previously approved by the relevant competent
authority (e.g.: the Ministry of Industry or the Regional Authority,
as the case may be).
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6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
Spain
natural gas trading.
As opposed to gas transportation and distribution, natural gas
trading is now a liberalised activity that may only be carried out by
wholesale suppliers (“comercializadores”) at free prices to certain
type of consumers (those acceding directly to third party gas
networks or direct consumers in the market) and by suppliers of last
resort (“comercializadores de último recurso”) at regulated prices.
From July 1, 2009, such regulated prices are only available to
consumers connected to pipelines at 4 bars or below and with an
annual consumption of less than 50,000 kWh. In 2008, the gas
quantities supplied to non-regulated customers amounted to 96% of
the total consumption.
As for the licensing requirements, before December 28th, 2009, any
company carrying out gas trading activities in Spain was required to
be licensed as a wholesale supplier and having been granted with an
authorisation as such. The requirements to be granted such a licence
are substantially similar to those referred to in question 4.2 above.
This situation has changed upon the recent enactment of the New
Regulation (as such term is defined in question 4.2) amending the
1998 Hydrocarbons Law. In particular, pursuant to such New
Regulation, the wholesale supply licence referred to above is no any
longer required and is substituted by the compliance with certain
requirements (which are yet to be defined through the enactment of
a governmental regulation), evidencing a company’s technical
capacity and by imposing on such company certain reporting
obligations to the Ministry of Industry. However, in the case of
companies located in third countries not pertaining to the European
Union in which analogous rights have not been recognised, such
companies must still obtain an administrative authorisation prior to
the start of their services as supply companies in Spain.
Finally, any company wishing to become a last resort supplier has to
be appointed as such by the Government by means of a Royal Decree.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Natural gas products may be traded along with other products (such
as electricity) by duly licensed suppliers. The following services
may be traded separately: (a) supply of natural gas or LNG; (b)
regasification; (c) pipeline transportation; (d) LNG or UGS storage;
or (e) distribution. Even the injection and extraction rights
associated to specific UGS capacity may be traded within the
secondary market referred in question 4.4 above. Bundling the
commodity and the use of the infrastructure (on a regulated TPA
basis would be feasible).
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
Because of its complete dependence on gas natural imports, Spain
has developed a sophisticated transportation and distribution
network, which includes six LNG terminals (please refer to section
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1 above for a description of such facilities). In this regard, it is
especially significant that, as stated in section 1 above, out of the
total national gas requirements in 2008, 73% were introduced in
Spain in the form of liquefied LNG.
Enagás is the owner of the three LNG facilities located at
Barcelona, Cartagena and Huelva. The other three located at
Sagunto, Mugardos and Bilbao are owned by various energy
companies (e.g. Endesa).
LNG facilities are deemed to be part of the transportation system
and, therefore, the legal framework explained in section 5 below is
also applicable to these facilities.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
The authorisations and permits required for the construction of an
LNG facility are substantially the same as those referred in question
4.2 above.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
LNG facilities are considered part of the transportation network
and, as such, TPA to such facilities is regulated. The price for the
use of LNG facilities is also regulated through mandatory tolls and
charges for regasification and LNG in-plant storage set out in the
applicable regulations.
As a particular characteristic of the tolls applicable to LNG facilities,
such tolls include the use of the facilities necessary for vessel
discharge and for LNG transport to storage tanks, as well as a 5-day
in-plant operative LNG storage (although from April 2009 users have
to pay for the 5-day operational storage). In-plant stocks exceeding
this operative storage are charged a specific LNG storage toll.
In addition, a common feature for regasification and transportation
tolls is the fact that they allow for certain flexibility as to the actual
use of capacity. As long as the maximum daily amount nominated
in a relevant month does not fail to reach 85% of the total daily
amount contracted for or exceed 105%, users are not penalised in
terms of the applicable tolls and are charged the maximum daily
amount nominated during that month. Account must be taken, at all
events, of the “use it or lose it” principle.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
As of 1 September 2007, all competition aspects in Spain are
governed by Law 15/2007, of 3 July on the Defence of Competition
(“LDC”). The LDC foresees that antitrust rules in Spain are
enforced by the National Competition Commission (“CNC”) (and,
in some cases, by regional competition authorities established by
the regional governments).
The CNC is an autonomous body composed of two sections: (i) the
Investigation Directorate (in charge of conducting investigations on
anticompetitive conducts); and (ii) the Council (that is in charge of
deciding on the cases submitted by the Investigation Directorate).
Apart from the CNC, the CNE also has some competences in
controlling the compliance of the Spanish competition rules within
the energy sector. These competences are limited to the application
of the sectorial legislation, not the LDC.
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8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The LCD reproduces almost entirely the definition of anti-
competitive conducts set forth in Articles 101 and 102 of the Treaty
on the Functioning of the European Union (“TFEU”) regarding
restrictive practices and abuse of dominant position and, therefore,
the criteria to determine whether are in line with the EU legislation.
The only exception to this rule is the fact that the LDC forbids
conscious parallelism, a conduct not included within the scope of
Article 101 of the TFEU.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
As stated, the CNC is the main body in charge of controlling and
enforcing the Spanish antitrust rules, for which purposes it is vested
with broad powers, including inspection and sanctioning powers.
In the exercise of these powers, the CNC may launch on-the-spot
inspections or address information request to any economic
operator and to public entities. All entities are obliged to
collaborate with a CNC investigation.
In addition, the CNE may initiate investigations or proceedings in
order to prosecute breaches of the antitrust rules in the energy
sector, including the gas sector, but it does not have the
investigative and sanctioned powers vested in the CNC by the LDC.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
Merger control in Spain is an exclusive competence of the CNC,
which is responsible for deciding whether or not to clear
concentrations or to subject clearance to certain conditions or
commitments.
a) Spanish thresholds for mandatory filing
The LDC sets forth that concentrations that are not subject to
mandatory filing pursuant to the European Merger Control
Regulation should be notified to the CNC if, as a consequence of
the transaction, the following thresholds are exceeded:
a share of 30% of the national market, or of a defined
geographical market within it, for a given product or service,
is acquired or increased as a result of the transaction; or
the aggregate turnover in Spain of the companies involved in
the transaction exceeds EUR 240 million during the last
financial year and the turnover in Spain of at least two of the
parties exceeds EUR 60 million.
b) Procedural issues
In general, notifications in Spain are time consuming, as the
documentation to be submitted before the CNC is very complete
and follows substantially the forms provided in the EU. However,
in some cases (e.g.: none of the parties are active in the same
geographic and relevant product market), the LDC allows the
parties to file a simplified form.
Pursuant to the LDC, the proceeding may be resolved in one ore
two phases, based on the complexity of the competition issues
therein raised. In particular:
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Spain
Phase 1: If the operation does not raise competition concerns,
the Council may authorise it within one month from filing.
Failure to notify the parties of a decision within this deadline
will amount to a tacit approval of the transaction.
Phase 2: If the Council considers that the transaction may
affect effective competition in the market, it will open the
second phase of the proceedings. This second phase is
Spain
longer, and includes the issuance of a statement of objections
by the Investigation Directorate and even an oral hearing.
The Council must take a decision on the case within two
months from the opening of the second phase or the
transaction will be deemed tacitly approved.
The potential antitrust concerns raised by the Investigation
Directorate may be eliminated at both Phase 1 and Phase 2 if the
parties propose commitments that remove these potential concerns.
The Council may also impose the conditions that it considers
necessary to re-establish competition in the market.
The Council of Ministers may exceptionally intervene in a merger
control process in order to clear transactions that have been blocked
or modify the conditions/commitments approved by the Council.
The Council of Ministers can only base its intervention in grounds
different from competition (generally, public interest reasons). In
this case, the Council of Ministers will have one additional month
to issue its final decision, after which, if no resolution has been
granted, the CNC’s decision will be effective.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Please refer to question 5.6 above.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
Please note that international treaties, together with the EU
regulations, are directly applicable in Spain.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Pursuant to the 1998 Hydrocarbons Law, the CNE has been
entrusted with the role of resolving disputes in relation to the
technical management of the gas system and the exercise of TPA
rights. The time conferred to the CNE to issue a resolution in
relation to these matters is three months. CNE resolutions may be
appealed before the Ministry of Industry and subsequently before
the National High Court (“Audiencia Nacional”).
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 Uría Menéndez Spain

10.2 Is Spain a signatory to, and has it duly ratified into 11 Updates
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment 11.1 Please provide, in no more than 300 words, a summary of
Disputes between States and Nationals of Other States any new cases, trends and developments in Gas
(“ICSID”)? Regulation Law in Spain.
Spain

Yes, both of them.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
In relation to this matter it should be noted that in Spain public
entities would not be granted immunity for suits and, therefore,
public administrations are subject to the rulings of the Courts or to
arbitration awards.
This being said, it should be borne in mind that, in the principles of
the Spanish 1978 Constitution (Article 132.1), there is the inability
to seize assets attached to the public domain (“inembargabilidad de
los bienes de dominio público”). Both Article 132.2 of the Spanish
Constitution and Article 339 of the Spanish Civil Code provide for
a broad definition of the assets which are to be considered of public
domain (those expressly contemplated by law and, in any case, the
maritime-terrestrial zone, beaches, territorial sea and natural
resources of the economic zone and the continental platform) and
therefore, it would be necessary to analyse on a case by case basis,
depending on the public entity concerned, which of its assets would
be attached to the public domain.
Royal Decree-Law 6/2009, dated 30th April 2009, has abrogated the
Additional Provision Twenty-Seventh of Law 55/1999 (the
“Additional Provision 27”). Such Additional Provision 27 stated
that any foreign public entity or any company controlled by such
foreign public entity intending to acquire a significant stake (i.e., over
3%) in a company active in the Spanish energy markets (including
the natural gas market) had to obtain the approval from the Council
of Ministers in order to exercise its voting rights is such company.
However, such rule, broadly known as the “anti-state owned
companies rule”, has been declared contrary to Article 56 of the EC
Treaty by the European Court of Justice in its ruling of February 14,
2008 and formally abrogated by the abovementioned Royal Decree
Law 6/2009.
In addition, it is worth noting that, by virtue of the same Royal
Decree-Law 6/2009, Enagás was appointed as the sole
transportation company allowed to construct and operate basic
transportation pipelines (“gasoductos de transporte primario”)
forming part of the primary network (“red mallada”).

10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?

For the time being, we are not aware of any particular cases, but
nothing should prevent a foreign corporation from successfully
obtaining a judgment against the Spanish government authorities or
State organs.

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Uría Menéndez Spain

Juan I. González Ruiz María José Descalzo Benito

Uría Menéndez Uría Menéndez
Príncipe de Vergara 187 Príncipe de Vergara 187
28002 Madrid 28002 Madrid
Spain Spain

Tel: +34 91 586 0381 Tel: +34 91 586 0381

Spain
Fax: +34 91 586 0341 Fax: +34 91 586 0341
Email: jgr@uria.com Email: mjd@uria.com
URL: www.uria.com URL: www.uria.com

Juan Ignacio González Ruiz is partner in the Madrid office of Uría
Menéndez. He joined the firm in 1988 and became a partner in
1998. He was resident partner in the firm’s London office between
1995 and mid-July 2001.
His practice is focused on banking and finance, energy law and
project finance. During his stay in London, Juan advised some of
the leading international investment banks on setting up products
for, and deals in, the Spanish market, whilst retaining a direct
involvement in all areas of energy law. In the wake of the recent
liberalisation of the Spanish energy markets, Juan has been advising
on many legal “firsts” in those markets, particularly on energy
supply and trading, development of new infrastructures and mergers
and acquisitions in such markets.
María José Descalzo Benito is a senior associate lawyer in the
Madrid office of Uría Menéndez. She joined the firm in 2006.
María José Descalzo’s practice at Uría Menéndez focuses on Energy
law and banking and Project Finance. Previously, between 2001
and 2006, she developed her professional career in the National
Energy Commission (Comisión Nacional de Energía), in the legal
department, advising to different matters and issues related to
energy sector.

Uría Menéndez is an independent law firm founded in the 1940s by Professor Rodrigo Uría González. The firm
currently has sixteen offices based in Spain, Portugal, the rest of Europe, the Americas and China. Uría Menéndez
specialises in providing legal advice to Spanish, Portuguese and European Community-based businesses. The firm also
provides support to its clients through its network of offices and through its relationships with equally prestigious
international law firms.
Uría Menéndez is recognised to be one of the leading commercial law firms in Spain, and possibly one of the few firms
with a practice area in energy law and a long-standing record in the area of project finance. Uría Menéndez has been
at the core of much of such development and its energy practice is now considered as one of the most important in
Spain.

269
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 Chapter 33
United Arab
Emirates
Ashurst LLP
1 Overview of Natural Gas Sector
1.1 A brief outline of the United Arab Emirates’ natural gas
sector, including a general description of: natural gas
reserves; natural gas production including the extent to
which production is associated or non-associated natural
gas; importation and exportation of natural gas, including
liquefied natural gas (LNG) liquefaction and export
facilities, and/or receiving and re-gasification facilities
(“LNG facilities”); natural gas pipeline transportation and
distribution/transmission network; natural gas storage; and
commodity sales and trading.
The United Arab Emirates (“UAE”) was established in 1971 as a
federation of emirates. There are seven emirates, each with their
own Ruler: Abu Dhabi; Ajman; Dubai; Fujairah; Ras Al Khaimah
(which joined the federation in 1972); Sharjah; and Umm Al
Quwain. The Emirate of Abu Dhabi, which holds the majority of
the UAE’s natural gas reserves, is the capital of the federation.
The oil and gas sector accounts for more than a third of the UAE’s
gross domestic product. The UAE has the fifth largest natural gas
reserves in the world (behind the Russian Federation, Iran, Qatar
and Saudi Arabia). The UAE’s proven natural gas reserves at the
end of 2008 stood at 6.43 trillion cubic metres, representing
approximately 3.5 per cent of the world’s total proven reserves.
The Emirate of Abu Dhabi holds more than 90 per cent of these
reserves, with the Emirates of Sharjah and Dubai holding 5 per cent
and 2 per cent respectively. In Abu Dhabi, the non-associated Khuff
natural gas reservoirs beneath the Umm Shaif and Abu Al Bukhush
oil fields are among the largest in the world.
The majority of UAE’s natural gas production is associated gas.
Natural gas plays an important role in the UAE’s energy mix and
demand continues to increase at a rapid rate. The UAE produced
50.2 billion cubic metres of natural gas in 2008, representing 1.6 per
cent of global natural gas production for that year. During the same
period, the UAE exported 7.54 billion cubic metres of natural gas in
the form of LNG, primarily to Japan, the world’s largest importer of
liquefied gas, with the UAE supplying almost eight per cent of
Japan’s LNG requirements. A smaller amount of LNG was also
exported to India. Based on current production levels the UAE’s
natural gas reserves will reportedly last for between 100 to 150
years.
In 2008, the UAE imported 15.4 billion cubic metres of natural gas
by pipeline from Qatar; this compares with total imports of 1.75
billion cubic metres during 2007 from Oman and Qatar. The
increase is largely due to the Dolphin Pipeline becoming fully
operational.
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Mhairi Main Garcia
1.2 To what extent are the United Arab Emirates’ energy
requirements met using natural gas (including LNG)?
Natural gas is an increasingly important energy source and accounts
for approximately two-thirds of the UAE’s total energy
consumption, with crude oil accounting for the remainder. In 2008,
the UAE consumed 58.1 billion cubic metres of natural gas,
representing 1.9 per cent of total world consumption. This was a
substantial increase from 2007, where consumption stood at 43.2
billion cubic metres (or 1.5 per cent of total world consumption).
This increase also means that although domestic natural gas
production in the UAE has increased, domestic consumption has
now overtaken production. Increased electricity consumption
(accompanied by a preference for natural gas as the feedstock for
power generation and water desalination projects) and a growing
petrochemicals industry have contributed to the sharp increase in
demand; it is estimated that as much as half of UAE’s natural gas
production is used for domestic power generation during the peak
summer months. Significant quantities of natural gas are also used
in re-injection operations for oil reservoir pressure maintenance.
Given the increasing demand for natural gas, the UAE has embarked
on a substantial investment programme to boost domestic gas
production, most notably the sour gas development projects in Abu
Dhabi (discussed below). There has also recently been some debate
in relation to whether the current levels of LNG exports should be
maintained in view of the UAE’s growing domestic gas demand. As
a means of addressing the shortfall in domestic gas supply, the UAE
is assessing alternative sources of energy in the form of renewable
energy, most notably through the Masdar Initiative in Abu Dhabi,
and nuclear energy, following the establishment of the Emirates
Nuclear Energy Corporation which was set up to act as the
government investment arm for the development of nuclear energy.
However, notwithstanding the increase in domestic natural gas
production and the alternative energy initiatives, it is likely that in
the short to medium term the UAE will need to continue to look to
gas imports to help meet its domestic gas demand, such demand
being largely met through imports from Qatar and reflected in the
substantial increase in natural gas imports from Qatar in 2008.
1.3 To what extent are the United Arab Emirates’ natural gas
requirements met through domestic natural gas production?
The UAE’s natural gas requirements are met through domestic
production and imports from Qatar. The UAE continues to export
a large amount of gas and exports continue at relatively stable
levels, notwithstanding the increase in imports to meet the UAE’s
domestic needs. This is largely due to two factors: (i) a significant
portion of the UAE’s natural gas production is committed to long-
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Ashurst LLP
term LNG export contracts; and (ii) most of the UAE’s natural gas
reserves are concentrated in the emirate of Abu Dhabi and because
of a lack of an integrated pipeline gas distribution network within
the UAE, the other emirates (particularly the “northern” emirates of
Dubai, Sharjah, Ras Al Khaimah and Fujairah) need to import
natural gas.
The Dolphin Gas Project involves the production of natural gas
from Qatar’s North field, the processing of the natural gas at Ras
Laffan Industrial City and the transportation of the dry gas by a sub-
sea export pipeline from Qatar to gas receiving facilities at
Taweelah in Abu Dhabi. The export pipeline has been operational
since July 2007. It has a design capacity of 90.6 million cubic
metres per day and it can currently carry up to a maximum of 56.6
million cubic metres per day of refined methane gas from Qatar.
Usage of the additional capacity is subject to a future agreement
between Dolphin Energy and the Qatari authorities.
The Dolphin Gas Project is owned by Dolphin Energy Limited, in
which the Abu Dhabi Government-owned Mubadala Development
Company holds a 51 per cent interest, with Total and Occidental
each holding a 24.5 per cent interest. Dolphin Energy has signed
long-term gas supply contracts with Abu Dhabi Water and the
Electricity Authority, Dubai Supply Authority (“DUSUP”) and
Oman Oil Company. The agreements provide for supply of
Dolphin natural gas to each customer for terms of 25 years.
In Dubai DUSUP is developing a floating LNG regasification
facility which will be supplement existing supplies of natural gas
during summer peak demand. A floating storage and regasification
unit chartered by DUSUP from Golar LNG will to be moored
offshore within the DP World Jebel Ali Terminal. Gas will be piped
through a sub-sea pipeline from the vessel into the Dubai natural
gas pipeline network to industrial customers. Qatargas LNG (a
joint venture between Shell and Qatar Petroleum) has signed a 15-
year contract to supply the LNG, starting in 2010.
It is also anticipated that natural gas will be imported into the UAE
from Iran in the future. There are a number of Iranian pipeline gas
import proposals currently under consideration, the most developed
of which is Crescent Petroleum’s project with the National Iranian
Oil Company to import 17 million cubic metres per day of natural
gas by pipeline from Iran’s Salman field into Sharjah via the
offshore Mubarak field. Although much of the pipeline and
associated project infrastructure has already been built, the project
remains in doubt due to an ongoing and well-publicised gas pricing
dispute between the parties.
1.4 To what extent is the UAE natural gas production exported
(pipeline or LNG)?
In 2008 the UAE exported 7.54 billion cubic metres of natural gas
as LNG. Of those export quantities, 7.41 billion cubic metres of
LNG were exported to Japan, while 0.13 billion cubic metres of
LNG were exported to India.
There are no pipeline exports of UAE domestic gas production.
The Dolphin Gas Project does, however, involve the transportation
of natural gas from Qatar to Oman through pipeline infrastructure
situated within the UAE.
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United Arab Emirates
2 Development of Natural Gas
United Arab Emirates
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
Each emirate has constitutionally entrenched rights to the natural
resources (including natural gas) within that emirate; such resources
are deemed the public property of that emirate. As a result, each
emirate pursues its own policies regarding the development of
natural gas, with the Ruler in each emirate having ultimate control
over the development of natural gas reserves in that emirate.
The right to explore, develop and produce petroleum is typically
granted by way of a concession by the applicable emirate.
Concessions are often granted to state-controlled companies, with
the involvement of international oil companies being limited to
minority ownership interests in the project companies which are
granted the concession and the provision of technical services to
those project companies.
Abu Dhabi does not have comprehensive petroleum legislation
governing the granting of exploration and development concession
rights, however, a number of laws affect the petroleum industry,
including the Abu Dhabi Gas Ownership Law, the Petroleum
Resources Conservation Law, the Petroleum Ports Law and the Abu
Dhabi Tax Decree. The Supreme Petroleum Council, which was
established in 1998, regulates Abu Dhabi’s natural gas policy.
Since 1976, pursuant to the Abu Dhabi Gas Ownership Law, the
ADNOC group of companies has managed upstream, midstream
and downstream oil and gas operations on behalf of the
Government of Abu Dhabi. ADNOC, the Abu Dhabi National Oil
Company, is owned by the Abu Dhabi Government and the
management of ADNOC reports directly to the Supreme Petroleum
Council. The Ruler of Abu Dhabi, whilst not directly involved in
the Supreme Petroleum Council, retains final authority over key
decisions relating to natural gas development.
In the other emirates, the respective Rulers regulate the natural gas
industry. In Sharjah, the Sharjah Petroleum Council is responsible
for regulating policy regarding the development of natural gas in
that emirate. In Dubai, policy is regulated through the Department
of H.H. the Ruler’s Affairs and Petroleum Affairs, with the
Executive Council of the Government of Dubai responsible for
approving agreements relating to natural gas development.
Operations are carried out through concessions or contracts
concluded between companies and the Government of Dubai.
The federal Ministry of Energy has limited powers to set policies
and planning at a federal level and is subject to the constitutional
rights of the emirates. Approvals are also required from the Federal
Environment Agency in accordance with the UAE Law on the
Protection and Development of the Environment (Federal Law No.
24 of 1999) (the “Federal Environment Law”).
Regionally, the states of the Gulf Co-operation Council (“GCC”)
have agreed at a political level to pursue unified policies in the
exploitation of natural resources. The GCC Economic Agreement
(incorporated into UAE domestic law via Federal Decree No. 55 of
2002) provides that the GCC states will adopt integrated policies in
all stages of the oil and gas industries in a manner that facilitates
best exploitation of natural resources, taking into account the
environmental considerations and the interests of future generations
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and that they should lay down unified policies for gas, adopting a
common position towards third countries and international
organisations.
United Arab Emirates
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
The granting of natural gas development rights is overseen by the
respective regulatory bodies in the relevant emirates. Foreign
companies or investors are generally not permitted to hold majority
interests in natural gas development activities or enterprises. In most
circumstances the right to explore, develop and produce natural gas is
granted by way of a concession by the applicable emirate.
Concessions are often granted to state-controlled companies, with the
involvement of international oil companies being limited to minority
ownership interests in the concession project company. Under UAE
law, concession agreements have the legal status of contracts.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration or production
arrangements), please specify those authorisations and
briefly summarise the most important (standard) terms
(such as term/duration, scope of rights, expenditure
obligations).
In general, different authorisations are not issued in respect of
different stages of development. The concessions typically embody
the principal authorisations necessary for the exploration,
development and production of natural gas. Concession terms vary
substantially, both between the different emirates and within the
emirates themselves, depending on factors such as the date of the
initial grant, the size and importance of the development and the
level of foreign involvement.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
Each emirate participates directly in the development of natural gas.
In most circumstances, concessions are granted by the emirate to
the state-owned petroleum company, or to a concession project
company in which the emirate or the state-owned petroleum
company will hold a majority interest. Given that the majority of the
natural gas reserves in the UAE are located in Abu Dhabi, most
natural gas development and production activities are carried out by
companies within the ADNOC group of companies.
The main gas operators in the UAE are Abu Dhabi Gas Industries
Limited (“GASCO”), which is 68 per cent owned by ADNOC, and
ADGAS in which ADNOC holds a 70 per cent interest. Foreign
participation by international oil companies accounts for the
remaining interests in GASCO and ADGAS, the main players being
Total, Royal Dutch Shell Group, Mitsui & Co, BP and Partex Gas
Corporation.
GASCO carries out natural gas liquids extraction, treatment
fractionation, storage and shipping. It was founded in 1978 to
process Abu Dhabi’s onshore associated gas production and to
transport it to the Al Ruwais Gas Liquefaction Plant where the gas
is fractionated and exported. ADGAS is responsible for the
production and export of LNG and LPG. ADGAS’s plant on Das
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United Arab Emirates
Island processes both non-associated and associated gas, and
comprises three trains producing liquefied natural gas, liquefied
petroleum gas, pentane and liquid sulphur. Feed gas for the plant is
sourced from Abu Dhabi’s offshore fields.
In Sharjah, the Sharjah LPG Company, which is 60 per cent owned
by the Sharjah Government, with BP, Itochu Middle East and Tokyo
Boeki holding the remaining interests, processes output of the
Sajaa, Moweyid and Kahaif fields in Sharjah and produces LPG for
consumption in Sharjah and Dubai.
In Dubai, the Dubai Natural Gas Company, a wholly-owned
subsidiary of the Dubai Government-owned Emirates National Oil
Company, oversees the exploitation of Dubai’s natural gas reserves,
as well as being involved in the petrochemicals sector.
In Ras Al Khaimah, RAK Petroleum, a company part owned by the
Ras Al Khaimah Government, holds a majority interest in the
exploration and production assets of UAE-based Indago Petroleum,
which includes a concession in relation to the offshore Saleh field
and Indago’s 40 per cent interest in the offshore Bukha
gas/condensate field in Oman, located close to the UAE-Omani
border.
Finally, a concession for the Umm Al Quwain gas field located in
the Emirate of Umm Al Qaiwain is held jointly by Atlantis Holding
Norway AS and the Abu Dhabi government-owned Mubadala
Development Company.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
At emirate level, the emirates derive value from natural gas
development through equity participation (discussed above) and
taxation. The taxation of natural gas development activities is
regulated by the individual emirates. The taxation of companies
engaged in oil and gas activities is one of the rare cases of tax being
levied in the UAE.
In Abu Dhabi a corporate tax applies to natural gas activities in
accordance with the Abu Dhabi Income Tax Decree of 1965 (as
amended). Although not a petroleum-specific decree, it applies
only to chargeable persons “dealing in oil”, “chargeable persons”
including foreign entities, ADNOC and its subsidiaries and any
other domestic companies involved in petroleum. The tax ranges
between 55 and 85 per cent depending on the product that generates
the taxable income. The Supreme Petroleum Council grants tax
incentives to businesses that benefit Abu Dhabi, for example,
through furthering its economic development, investment,
technology transfer and training of UAE nationals.
At a federal level, the majority of the UAE Federal Government’s
income is contributed by Abu Dhabi, with a substantially smaller
contribution from Dubai. The other emirates do not contribute to
federal revenues and are, to varying degrees, dependent on federal
expenditure for their development and infrastructure.
2.6 Are there any restrictions on the export of production?
There are currently no restrictions on the export of production,
although standard export controls (through permits) may apply on
certain products for safety, security and environmental reasons, and
to ensure compliance with international obligations under treaties
and conventions to which the UAE is a signatory. The UAE also
restricts exports of dual-use goods that may be used as weapons.
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2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
The UAE dirham, the national currency, is pegged to the U.S.
dollar. The exchange system is generally free of restrictions on
payments and transfers for international transactions, except for
certain restrictions under terrorist financing provisions that have
been taken in accordance with the UAE’s international obligations.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
In accordance with the terms of the individual concessions, the
approval of the relevant emirate is required before natural gas
concession rights can be transferred.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
Participants are generally not obliged to provide any security or
guarantees in connection with the granting of natural gas
development rights.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Equity participation under the concessions would ordinarily
facilitate the booking of reserves and such rights can generally be
pledged for security.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Authorisations are required at both federal level and emirate level.
Participants are obliged to comply with the framework of federal
and local environmental, health and safety laws and regulations.
Environmental protection is regulated at a federal level by the
Federal Environment Agency in accordance with the Federal
Environment Law. Amongst other things, the Federal Environment
Law requires permits to be issued and environmental impact
assessments to be undertaken in respect of natural gas development
projects. The Federal Environment Law also regulates the disposal
of water and hazardous materials which can potentially impact upon
natural gas development operations.
A local authority is nominated in each of the emirates as the
competent authority responsible for implementing the Federal
Environment Law. In addition, there are a number of laws,
regulatory measures and guidelines in place at emirate level which
address environmental concerns, including regulations on storage,
waste management and record keeping.
In relation to health and safety, a number of safety regulations have
been introduced by the federal Ministry of Labour and Social
Affairs, local authorities in the emirates and civil defence, with all
large industrial enterprises required to have in place certified
occupational safety officers. Health and safety issues are becoming
increasingly important in the UAE natural gas sector, with most
companies operating within the UAE now seeking to implement
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United Arab Emirates
health and safety measures in line with international practice.
Pursuant to the Federal Environment Law, ADNOC acts as the
United Arab Emirates
environmental regulator of the Abu Dhabi oil and gas industry.
ADNOC proactively regulates its group companies and pursues a
number of strategic objectives for health, safety and the
environment, which are subject to implementation by its
subsidiaries including GASCO and ADGAS. ADNOC has in place
codes of practice and a health, safety and environment management
system requiring its group companies to develop and implement
compatible programmes.
Under the Federal Environment Law, parties licensed to prospect,
extract or exploit onshore or offshore gas fields are prohibited from
discharging any polluting substance resulting from drilling, exploring,
testing of wells or production into the water environment or land area
in the vicinity of those activities unless safety measures are adopted.
Such safety measures must safeguard against harm to land and water
environments, and oblige participants to treat discharged waste and
polluting substances in accordance with technical systems approved
under regional and international protocols. Emissions from burning of
fuels or other substances for any commercial purpose must be within
the permissible limits and a registry recording measurements of the
amounts of pollutants resulting from such combustion must be
maintained. There are also specific requirements for transportation by
sea of hazardous substances.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
There is no legislation or regulatory framework specifically
governing the abandonment and decommissioning of physical
structures. However, participants are obliged to comply with
general requirements relating to pollution and protection of the
environment under the Federal Environment Law, in addition to any
specific environmental requirements under the relevant concession
and any environmental regulations applicable in the emirate where
the structures are located.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
There are no express regulatory requirements, or specific terms,
limitations or rules which apply in respect of cross-border sales or
deliveries of natural gas. In terms of exports, standard export
controls may apply (see above for further details).
The emirates each have their own local customs departments, which
fall under the Federal Customs Authority. The role of the Federal
Customs Authority is to unify, develop and improve customs
policies, legislation and regulations, and supervise their
implementation across the local departments of customs. The
customs procedures are generally the same throughout the UAE.
Since the establishment of the GCC customs union on 1 January
2003, the UAE has applied the GCC Common Customs Law, which
provides for a single port of entry whereby items imported in the
UAE (or any other GCC State), and destined for another GCC
market, are subject to customs duty only at the first point of entry
into the GCC. Customs procedures and the required documentation
are the same for all GCC members.
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4 Transportation
United Arab Emirates
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Each emirate controls its own infrastructure for the transportation of
natural gas. As a result, different government bodies and authorities
regulate gas transportation within the different emirates. There is
also regulation at a federal level by the Ministry of Petroleum and
the Federal Environment Agency.
There are a number of examples of private companies constructing
and operating natural gas pipelines in the UAE, usually in joint
ventures with state-owned entities. GASCO manages Abu-Dhabi’s
gas pipeline network which supplies oil fields, power plants and
petrochemicals facilities as well as supplying gas to Dubai. GASCO
is currently developing the Offshore Associated Gas Project which
will transport excess offshore associated gas from Das Island
through a 200 kilometre offshore-onshore pipeline, establishing a
link between the offshore and onshore facilities in Abu Dhabi. The
project is being implemented through three separate packages: one
for the Das Island facilities; one for the offshore pipeline; and one
for the processing facilities at Habshan and the onshore pipeline.
GASCO’s Asab Gas Development - Phase II will also include a
natural gas pipeline from Asab to Habshan.
Sharjah-based Crescent Petroleum operates a 92 kilometre offshore
gas pipeline to Dubai. Sharjah-based Dana Gas and UAE
Government-owned Emirates General Petroleum Company
(“Emarat”) have formed a joint venture to build, own and operate
the 32 kilometre Hamriyah Gas Pipeline connecting the gas hub at
Sajaa in Sharjah to Hamriyah industrial area, supplying feedstock
for power generation and industrial users. The Hamriyah Gas
Pipeline will be the first common user gas pipeline in the region.
Emarat also operates the 182 kilometre Al Ain to Fujairah pipeline
owned by Dolphin Energy Limited and which came on-stream in
January 2004 to supply the Fujairah power plant. The natural gas
transported by Emarat comes from Qatar, flowing from Taweelah
via Maqta to Al Ain and is connected to the Dolphin Gas Project. In
August 2009, commissioning was completed of early gas facilities
at Dolphin Energy’s Gas Receipt Station that services ADWEC’s
power and water desalination plant at Qidfa, Fujairah, following
extensive modification work on one section of Al Ain to Fujairah
pipeline.
In Abu Dhabi the marine terminals of Jebel Dhanna and Ruwais,
Umm al-Nar, Das Island, Zirku and Mubarraz islands handle crude
oil and gas exports. They are owned and operated by the Abu Dhabi
Petroleum Ports Operating Company.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The individual emirates regulate the requirements and procedures
for obtaining permits for transporting natural gas. In addition,
approvals are required at a federal level, with the Ministry of
Petroleum and the Federal Environment Agency responsible for
preparing guidelines of specifications on the conditions of
environmental safety and management of waste resulting from the
transportation of gas.
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United Arab Emirates
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
Under the UAE Constitution the natural resources in each emirate
are the public property of that emirate. Further, as the Ruler of each
emirate ultimately owns the land in that emirate, the construction of
natural gas transportation pipelines or associated infrastructure
requires a grant of rights from the relevant Ruler. The Rulers also
possess powers of compulsory acquisition to facilitate land access.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Access to natural gas transportation pipelines and associated
infrastructure is generally organised at emirate level. The emirate
granting the rights to construct, own and operate natural gas
transportation pipelines or associated infrastructure retains inherent
rights of access on the basis that the Ruler ultimately owns the land
upon which such infrastructure is located.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
Currently there is limited integration and interconnection of natural
gas transportation pipelines within the UAE.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
There are no standard rights for a new customer to compel or require
the operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its facilities in
order to accommodate the new customer. Regulation is governed by
the emirate concerned, which may include agreement for third party
access or for expansion of capacity/facilities as a matter of contract.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
The parties are at liberty to agree the terms upon which the natural
gas is to be transported.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
There is no integrated framework for the ownership, organisation
and/or regulation of natural gas transmission/distribution
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infrastructure, with each emirate overseeing the ownership,
organisation and regulation of such infrastructure within its territory.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
Government authorisations to operate a distribution network are
required at emirate level and at a federal level from the Ministry of
Petroleum and Federal Environment Agency.
5.3 How is access to the natural gas distribution network
organised?
There are no specific laws organising access to the natural gas
distribution network. Access is organised at emirate level and is
linked to the rights granted by the relevant emirate for constructing
any pipeline or associated infrastructure.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
The natural gas distribution systems are currently owned and operated
by a number of parties under different operations protocols.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
Fees charged for accessing the distribution network are a matter of
contract between the parties.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
There are no specific restrictions or limitations in relation to
acquiring an interest in a gas utility or the transfer of assets forming
part of the distribution network. However, there is a general
requirement under UAE law that all entities must be majority-
owned by UAE nationals or wholly-owned UAE entities.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
There is no specific framework for the ownership, organisation or
regulation of natural gas trading.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Whilst the UAE has local markets trading in crude oil futures and fuel
oil futures, there is currently no trading of natural gas commodities in
the UAE. In November 2007, the Dubai Multi Commodities Centre
announced that it intends to establish an LNG futures exchange by
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United Arab Emirates
launching an LNG futures contract on the Dubai Gold and
Commodities Exchange. This plan has yet to come to fruition.
United Arab Emirates
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
As with natural gas in general, LNG is regulated by the respective
emirates.
Government participation is prevalent through Abu Dhabi’s ADGAS.
ADGAS operates an LNG plant on Abu Dhabi’s Das Island which
has been operating since 1977. The plant is run on associated natural
gas from the Um Shaif Lower Zakum and Bunduq oil fields. LNG
exports reached 7.54 billion cubic metres in 2008, with 7.41 billion
cubic metres of LNG exported to Japan and the remaining 0.13
billion cubic metres of LNG exported to India. LNG is exported to
Japan under a long-term contract between ADGAS and Tokyo
Electric Power Corporation (“TEPCO”). The relationship with
TEPCO dates back to the 1970s. In 1994 a new agreement came into
effect pursuant to which TEPCO and ADGAS agreed to double LNG
cargoes for the period 1994 to 2019.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Approvals are required from the relevant emirate and, at a federal
level, from the Federal Environment Agency in accordance with the
Federal Environment Law.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
There is no regulation of the price or terms of service in the LNG
sector.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
As a result of the state ownership interests in the natural gas
industry there is no effective competition in the natural gas sector.
Federal Cabinet Resolution No. 7 of 2009 concerning the
Organisational Structure for the Ministry of Economy (the “Cabinet
Decision”) provides for a Competition Department to operate under
the jurisdiction of the Ministry of Economy. The Competition
Department is responsible for proposing drafts of laws and
regulations for organisation of competition, combating monopoly
practices and seeking to eliminate all barriers restricting competition,
investigating anti-competitive acts and complaints handling.
With the exception of a passing reference to unfair competition in
the UAE Commercial Transactions Code (Federal Law No. 18 of
1993, as amended), there is currently no specific regulation of anti-
competitive practices in the UAE and there is no competition
authority specifically responsible for policing such practices. In
2006 it was announced that the UAE Federal Government would be
introducing a federal competition law. However, although it has
been reported that the law is in its final stages, there is currently no
confirmed date for its implementation. In addition, the scope of
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application of the new competition law and whether it will apply to
the energy sector and, in particular, to the natural gas sector remains
to be confirmed.
United Arab Emirates
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The role of the Competition Department of the Ministry of
Economy is set out in the Cabinet Decision as summarised above.
Pending introduction of the federal competition law there are no
publicly available criteria for determining anti-competitive conduct.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The Cabinet Decision provides that the Competition Department of
the Ministry of Economy can investigate information for
uncovering harmful practices, put in place mechanisms and plans
for collecting complaints and problems of the authorities concerned
with competition, propose regulations, laws and instructions for
handling complaints and take measures for their resolution.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
The Cabinet Decision does not set out any specific powers of the
Competition Department of the Ministry of Economy in regulating
mergers and acquisitions/changes of control.
Any mergers or changes in control over businesses relating to the
natural gas sector, or the proposed acquisitions of natural gas
development assets, transportation pipelines or associated
infrastructure, require the approval and consent of the relevant
emirate. There are no standard criteria or procedures which apply
in respect of such transactions.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
There is a general requirement under UAE law that all entities must be
majority-owned by UAE nationals or wholly-owned UAE entities. In
addition, both the UAE Federal Government and the respective
emirates may regulate acquisitions by foreign companies of interests
in the natural gas sector where the Government holds an interest.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
The UAE’s environmental regime has developed in accordance
with international obligations. The UAE has ratified a number of
important environmental treaties including the Basel Convention on
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United Arab Emirates
Hazardous Waste, the Convention on Marine Pollution by Dumping
Wastes and Other Matter, the Convention on Biological Diversity,
the Convention to Combat Desertification, the Kyoto Protocol on
Climate Change and the Montreal Protocol on Substances that
Deplete the Ozone Layer.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
There are no compulsory dispute resolution procedures which apply
to the natural gas sector. Any decisions or disputes which affect a
particular concession are governed in accordance with the terms of
the relevant concession agreement rather than direct government
regulation.
10.2 Is the United Arab Emirates a signatory to, and has it duly
ratified into domestic legislation: the New York Convention
on the Recognition and Enforcement of Foreign Arbitral
Awards; and/or the Convention on the Settlement of
Investment Disputes between States and Nationals of
Other States (“ICSID”)?
On 21 August 2006 the UAE acceded without any reservations to
the 1958 New York Convention on the Recognition and
Enforcement of Arbitral Awards. The Convention entered into
force in the UAE on 19 November 2006. Given that this is a
relatively new development it remains uncertain how the
Convention will be interpreted and applied in practice by the UAE
courts. Nonetheless, this is widely seen as a positive development
which should lead to foreign arbitral awards being more readily
enforceable in the UAE.
The UAE ratified the ICSID Convention on 23 December 1981, the
Convention entering into force in the UAE on 22 January 1982.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
It is not possible to enforce judgments which seek to seize property
owned by the state. Article 247(1) of the UAE Civil Procedure
Code (Federal Law No. 11 of 1992 (as amended)) (the “Civil
Procedure Code”) provides that “public property owned by the
state or one of the emirates” may not be seized for the purposes of
enforcement.
In addition, in relation to Government-owned corporations or other
institutions established as independent legal entities, Article 247(1)
does not expressly refer to the property of such institutions or
entities. These institutions or entities may be considered as separate
legal entities to be distinguished from the Federal Government
and/or Government of the relevant emirate for the purposes of
Article 247. There is however a risk that this article may be
interpreted such that it extends to all government departments,
entities, institutions and corporations.
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With regard to the enforcement of foreign judgments, whether
against a government authority, state organ or private entity, Article
235 of the Civil Procedure Code provides that judgments and orders
passed in foreign countries may be executed in the UAE under the
same conditions as are provided for in the law of such foreign state
for the execution of judgments and orders of the UAE courts. There
is thus a requirement for reciprocal treatment. A number of
conditions must also be satisfied, affording UAE courts a wide
discretion to reject enforcement of a foreign judgment on the basis
of conflict or contradiction with previously passed orders or
judgments of a court in the UAE and/or violation of public policy
or public order. As a result, in the absence of a specific treaty
between the UAE and the country concerned on mutual recognition
and enforcement of judgments, in practice there are only limited
circumstances when a foreign judgment is enforceable in the UAE.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
We are not aware of any such instances in the natural gas sector.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in the United Arab Emirates.
The most significant development in the UAE during 2008 was the
massive increase in natural gas imports via the Dolphin Pipeline,
with imports into the UAE increasing from 1.75 billion cubic
metres in 2007 to 15.4 billion cubic metres in 2008. The landmark
Dolphin Gas Project is particularly important to Dubai and the
UAE’s other northern emirates where indigenous natural gas
resources are insufficient to meet demand. Indeed, some of the
northern emirates have suffered power shortages during peak
summer months. With natural gas being the feedstock of choice for
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United Arab Emirates
power generation and water desalination projects within the UAE
and significant quantities of natural gas also being used in re-
injection operations for oil reservoir pressure maintenance, the
United Arab Emirates
realisation of the Dolphin Gas Project is a milestone in securing a
more stable supply of natural gas for the UAE.
Other recent developments relate to the Shah field, the development
of an integrated gas transfer system and GASCO pursuing a number
of projects to increase capacity.
ADNOC and ConocoPhillips continue to develop the Shah sour gas
field in Abu Dhabi. The facility will produce 28 million cubic
metres a day of sour, or sulphur-rich, gas from the Shah field.
Pipelines will then take gas, condensate and natural gas liquids to
other processing and distribution facilities at Habshan for use as
feedstock for new gas-fired power and desalination plants,
industrial development and oil field pressure maintenance re-
injection operations.
In addition, GASCO is contracting out the construction of Abu
Dhabi’s integrated gas transfer system. The project will include the
production and transfer of more than 19.8 million cubic metres a day
of high pressure gas from the offshore Umm Shaif and Khuff
reservoirs to new onshore processing facilities at Habshan and Ruwais
and is being jointly developed by Abu Dhabi Marine Operating
Company, GASCO and ADGAS. The project is part of Abu Dhabi’s
plan to minimise the environmental impact of gas flaring.
Finally, GASCO is tendering projects with respect to the Asab, Bab,
Bu Hassa and Ruwais fields in order to improve the existing
infrastructure to accommodate greater volumes of gas. The project
at the Asab field involves installation of a new gas booster station,
increasing production capacity at the existing natural gas liquids
plant, and the replacement of a natural gas pipeline. GASCO hopes
these works will increase capacity at the site by 4.2 million cubic
metres a day. The project at the Bu Hasa field involves the
installation of pipelines to transport sour gas from the Bu Hasa field
to the Bab and Thammama oil and gas reservoirs where GASCO
will use it for increasing pressure. The pipelines will also carry
sweet, or sulphur-light, gas from the Bab field to Bu Hasa, again for
injection and use as fuel.
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 Ashurst LLP United Arab Emirates

Mhairi Main Garcia

Ashurst LLP
United Arab Emirates

Level 5, Gate Precinct Building 3

Dubai International Financial Centre
P. O. Box 119974
Dubai, United Arab Emirates

Tel: +971 4365 2012

Fax: +971 4365 2050
Email: mhairi.maingarcia@ashurst.com
URL: www.ashurst.com
Mhairi Main Garcia is a Senior Associate in Ashurst’s Energy,
Transport and Infrastructure department and has been based in
Dubai since 2001. Mhairi has a particular focus on energy and
infrastructure projects and international law issues. She has advised
on numerous oil and gas transactions and power projects in the
MENA region. Prior to moving to Dubai, Mhairi worked for more
than three years in Belgium and France as a Group Adviser on the
European Parliament’s Legal Affairs and Internal Market Committee.
Mhairi is admitted as an attorney in the State of New York and a
solicitor in England and Wales. She holds an LL.M. in International
and Comparative Law (Vrije Universiteit Brussel), a Master in
International Politics (Université de Libre Bruxelles) and an LL.B.
first-class honours (University of Aberdeen).

Ashurst LLP is a leading international law firm that operates at the heart of the energy industry with a network of 16
offices worldwide. With offices in Abu Dhabi and Dubai, Ashurst has a proven track record of advising on some of the
most important and challenging energy projects in the Middle East and is able to provide clients with the highest quality
advice in all key areas including:

upstream
oil and gas field construction, procurement and infrastructure
pipelines
LNG
refining and petrochemicals
power and water
The firm regularly advises governments, companies and financial institutions on high profile and high-value projects
and transactions throughout the Middle East and advises on all legal aspects associated with the energy sector
including:

commercial agreements
joint ventures
mergers and acquisitions
supply, offtake and transportation arrangements
project development and financing
international law
environmental law
regulatory work
dispute resolution

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Chapter 34
United
Kingdom
Ashurst LLP
1 Overview of Natural Gas Sector
1.1 A brief outline of the country’s natural gas sector,
including a general description of: natural gas reserves;
natural gas production including the extent to which
production is associated or non-associated natural gas;
importation and exportation of natural gas, including
liquefied natural gas (“LNG”) liquefaction and export
facilities, and/or receiving and re-gasification facilities
(“LNG facilities”); natural gas pipeline transportation and
distribution/transmission network; natural gas storage; and
commodity sales and trading.
The UK is currently the world’s eighth largest producer of natural
gas, producing 68 billion cubic metres (“bcm”) in 2008 or
approximately 2.3 per cent. of the world’s total production. The UK
is the third largest producer of natural gas in Europe after Russia
and Norway.
The UK’s proven reserves of natural gas as of the end of 2008 stood
at 292 bcm, the vast majority of which are located in the UK sector
of the North Sea (the United Kingdom Continental Shelf or
“UKCS”) with the largest concentration of natural gas production
stemming from the SAGE (Scottish Area Gas Evacuation) system.
In 2008 the UK exported natural gas to Germany (1.60 bcm),
Ireland (5.00 bcm), the Netherlands (0.90 bcm), Belgium (1.70
bcm), Italy (0.70 bcm) and France (0.60 bcm).
In 2008 the UK imported 35.42 bcm natural gas, 25.30 bcm from
Norway via the Frigg, Statfjord and Vesterled pipelines and the
remainder from Belgium and the Netherlands via the Bacton-
Zeebrugge interconnector. The UK also imported 1.04 bcm of LNG
from Trinidad and Tobago (0.47 bcm), Qatar (0.12 bcm), Algeria
(0.37 bcm) and Egypt (0.08 bcm). Over time, the UK is also likely
to increase imports from Russia, the Caspian Sea and Nigeria and
by 2020, approximately 80 per cent. of the UK’s natural gas
demand is expected to be satisfied by imported natural gas.
In view of the forecast decline in production of the UK’s indigenous
natural gas, new interconnector pipelines have been developed to
facilitate increased imports of natural gas from Europe, among these
is an interconnector from Balgzand in the Netherlands to Bacton (the
“BBL interconnector”) (15 bcm per annum import capacity) and a
pipeline linking the Ormen Lange gas field in the Norwegian
continental shelf to Britain (25 bcm per annum import capacity).
With a view to increasing diversity of import sources, several LNG
import terminals are also being developed to enable large-scale
LNG imports into the UK. To date, the following LNG import
terminal projects have been completed:
Grain LNG - this LNG importation and regasification terminal
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Geoffrey Picton-Turbervill
Erin Dyer
on the Isle of Grain was commissioned in 2005 and was the
UK’s first LNG import facility. It is owned and operated by
National Grid Grain LNG Limited, a wholly owned subsidiary
of National Grid plc (“National Grid”). The terminal’s 3.3
million tonnes per annum (“mtpa”) initial capacity is
contracted to BP and Sonatrach. A subsequent expansion
increased import capacity to 9.8 mtpa and the 6.5 mtpa
expansion capacity is contracted to Sonatrach, Centrica and
GDF Suez. A further 5 mtpa expansion has been announced
and is expected to be complete by winter 2010/2011.
GasPort LNG - Excelerate Energy’s 4 bcm world-first
dockside LNG regasification terminal at Teesside received
its first shipment of LNG in February 2007. The facility
enables LNG to be converted into gas while still aboard the
ship and delivered to shore as gas.
South Hook LNG - Qatar Petroleum (67.5 per cent.),
ExxonMobil Qatargas (II) Limited (24.15 per cent.) and
Total’s (8.35 per cent.) 11 bcm LNG import terminal at
Milford Haven. Phase 2 of the project (to provide an
additional 10 bcm) is expected to be completed by late 2009.
Dragon LNG, BG Group (50 per cent.), Petronas (30 per
cent.) and 4Gas’ (20 per cent.) LNG import and storage
terminal at Milford Haven received its commissioning cargo
in July 2009 and will have a start-up capacity of 6 bcm. The
terminal’s entire send out capacity is expected to be taken by
BG and Petronas.
There are also a further five LNG import terminals proposed in the
UK including:
Canvey LNG - Calor Gas and two Japanese-based companies,
LNG Japan Corporation and Osaka Gas, are proposing to
reopen the Canvey Island LPG facility as an LNG import
terminal with a planned capacity of 5.4 bcm per day.
Construction was due to start in 2007/2008, with terminal
operations hoped for 2010, however initial planning
permission was refused. An appeal was lodged in March 2007.
Amlwch LNG - Canataxx acquired a chemical facility at
Amlwch on Anglesey Island with the intention of importing
LNG. Planning approval has been granted and the terminal
is estimated to provide 20 bcm of import capacity
commencing between 2013 and 2015.
Norsea Oil Terminal LNG - ConocoPhillips has announced
plans to construct an LNG import terminal at Teesside. The
terminal proposal remains at the planning application stage;
however DECC consent was granted in April 2009 in respect
to a proposal to build an 800MW gas fired power station
immediately adjacent to the site to supply electricity to the
proposed terminal.
Gateway LNG - Stag Energy Ltd is proposing to construct an
offshore LNG regasification facility with expected capacity
of 7 bcm per annum and underground gas storage facility in
the Irish Sea southwest of the Barrow NTS entry point.
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When completed, the gas storage facility will have a capacity
of 1.512 bcm, adding nearly 30 per cent. to the UK’s current
gas storage capacity. Planning permission has been granted
in respect of the underground gas storage facilities with
United Kingdom
construction expected to commence in 2010. Initial gas
storage services are estimated to be available in 2015.
Port Meridian LNG - Port Meridian Energy Limited, a wholly
owned UK subsidiary of Höegh LNG AS, is proposing to
construct a deep water port LNG receiving terminal offshore
Barrow-in-Furness, Cumbria. The proposal is awaiting
Department of Energy and Climate Change (the “DECC”) and
Barrow Borough Council consents.
The UK has four other small-scale LNG storage facilities
strategically located across the UK (Glenmavis, Avonmouth,
Dynevor Arms and Partington). These facilities are designed only
to address winter peak demand requirements and are not suitable for
large-scale LNG imports.
There are no LNG exports from the UK, nor any LNG liquefaction
plants.
There are gas storage facilities located in the UK, most notably the
offshore Rough field storage facility (owned and operated by Centrica,
with storage capacity of 3,340 million cubic metres (“mcm”)). Other
depleted field gas storage facilities are located at Humbly Grove (Star
Energy, 300 mcm) and Hatfield Moor (Scottish Power, 120 mcm).
Smaller onshore salt cavity storage facilities are located at Holehouse
Farm (Energy Merchants Gas Storage, 40 mcm) and Hornsea
(Scottish and Southern Energy, 330 mcm). Aldbrough
(StatoilHydro/Scottish and Southern Energy, 420 mcm) is currently
being commissioned and planning approval has been granted for
Aldbrough II (StatoilHydro/Scottish and Southern Energy, 400 mcm).
Construction is currently underway on a number of other gas storage
facilities, including at Isle of Portland (Portland Gas Ltd, 1 bcm by
2014), Stublach (Ineos Enterprises, 400 mcm by 2013), Byley (E.ON,
165 mcm by 2010) and Whitehill (E.ON, 420 mcm by 2010).
Proposals have also been put forward for developments at Albury
(Star Energy, 200 mcm and 700 mcm by 2012), Bletchingley (Star
Energy, 1 bcm by 2010/2011), Saltfleetby (Wingas, 700 mcm by
2009), Welton (Star Energy, 400 mcm by 2010/2011) and
Gainborough (Star Energy, 220 mcm by 2010/2011).
Natural gas production from the UKCS is piped ashore to beach
terminals, the largest being situated at St Fergus in Scotland and
Teesside and Bacton in England. After treatment in the beach
terminals, the processed natural gas is usually then piped into the
National Transmission System (“NTS”), the high pressure
component of the UK’s gas distribution network. The NTS, which
is owned and operated by National Grid Gas (“NGG”), transports
processed natural gas to power stations, large-scale industrial users
and other offtake points, for distribution within eight regional
distribution networks. It is through the regional distribution
networks that the majority of the processed natural gas reaches
domestic and commercial end users.
1.2 To what extent are the country’s energy requirements met
using natural gas (including LNG)?
In 2008 approximately 46 per cent. of the UK’s indigenous natural
gas production (or approximately 34.26 per cent. of the UK’s total
natural gas supply) was utilised to generate approximately 39.30
per cent. of all electricity generated in the UK.
1.3 To what extent are the country’s natural gas requirements
met through domestic natural gas production?
The UK’s natural gas requirements are not met entirely through
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domestic natural gas production. In 2008 the UK was a net
importer of natural gas, importing 284,384 GWh, an increase of
approximately 32.4 per cent. on 2007 levels.
1.4 To what extent is the country’s natural gas production
exported (pipeline or LNG)?
The UK exported approximately 15.15 per cent. of its gross natural
gas production in 2008, compared with approximately 14.70 per
cent. in 2007. Pipeline natural gas is exported from the UK to
Belgium, France, Germany, Ireland, Italy and the Netherlands.
The UK does not export any LNG.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The principal legislation governing the development of natural gas
reserves is the Petroleum Act 1998 (the “Petroleum Act”).
Under the Petroleum Act, all rights to petroleum including the
rights to “search for, bore for and get” petroleum (which includes
natural gas) are vested in the Crown. The Secretary of State for
Energy and Climate Change (the “Secretary of State”) and the
DECC are primarily responsible for the development of the UK’s
natural gas resources.
Current UK policy in relation to natural gas development is focused
upon ensuring that companies with rights to develop natural gas
resources actively exercise those rights. In view of these objectives,
the PILOT taskforce (a successor to the Oil and Gas Industry Task
Force (the “OGITF”) instituted the “Fallow Initiative”, aimed at
rejuvenating development activity in dormant acreage by placing
areas of the UKCS in the hands of those most willing and able to
exploit it, and the “Promote Licence”, aimed at encouraging smaller
companies with limited resources to either sell such acreage or
bring in other investors (see question 2.3 below).
The UK Government also established the West of Shetland Task
Force to identify a technically and economically viable joint
infrastructure project to enable development of significant gas
reserves in the area West of Shetland. This Task Force sought to
gauge third party interest to participate in an integrated gas export
scheme along with the equity owners of the Total-operated Laggan
and Talmore gas/condensate fields and the Chevron-operated
Rosebank and Lochnagar oil/gas discoveries. Expressions of
interest closed in October 2008.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. license, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
The Petroleum Act empowers the Secretary of State to grant
licences to explore for, develop and produce natural gas reserves.
In awarding licences regard must be given to the Hydrocarbons
Licensing Directive Regulations 1995, which implement certain EU
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directives in relation to hydrocarbon licensing passed in 1994.
Licences are usually awarded by the Secretary of State in annual
licensing rounds where a large number of blocks are made
available. The 26th Seaward Licensing Round is expected to
launch in the first half of 2010. “Out of round” licences may also
be granted in certain circumstances.
Licences take the form of a deed, pursuant to which the licensee is
bound to observe the conditions of the licence. The conditions of the
licence (referred to as “Model Clauses”) are published in secondary
legislation (which for current licence awards, is the Petroleum
Licensing (Exploration and Production) (Seaward and Landward
Areas) (Amendment) Regulations 2006, as amended by the Petroleum
Licensing (Production) (Seaward Areas) Regulations 2008). The
Model Clauses attached to existing licences are not affected by the
issue of subsequent sets of Model Clauses except through specifically
retrospective measures. While most licences follow a standard format,
DECC may consider adapting licence terms in some circumstances.
UK licences are both contractual and regulatory in nature: contractual,
being executed as a deed providing for the contractual transfer of
rights from the Crown to the licensee to develop petroleum resources
in return for a financial reward; and regulatory, because the Model
Clauses (being the standard conditions attaching to the licences) are
embodied in statutory regulations, and the terms upon which a licence
is granted may be unilaterally amended by Parliament. Licences may
be granted to one or more licensees; however legally only one licence
exists which is held collectively by the licensees who are jointly and
severally liable in respect of obligations arising under, or operations
conducted pursuant to, the licence.
It is important to note the distinction in the UK between the
application of English law and Scottish law in the UKCS (and to a
lesser extent, Northern Irish law in non-North Sea fields). Although
the Model Clauses applying to licence awards in English and Scottish
areas of the UKCS will be substantially the same, the jurisdictional
distinction is particularly important as different arbitration provisions
will apply to a licence depending on whether it is situated in the
English or Scottish area of the UKCS. The Isle of Man issues
licences for its own onshore area and territorial waters.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration or production
arrangements), please specify those authorisations and
briefly summarise the most important (standard) terms
(such as term/duration, scope of rights, expenditure
obligations).
The most common types of offshore licences are the traditional
Seaward Production Licence (“SPL”) and the Exploration Licence.
In recent years the Secretary of State has also issued three variations
on the SPL to take account of the particular circumstances of the
field, being: Promote Licences; Frontier Licences; and licences
specifically drafted to cover the redevelopment of a
decommissioned field (e.g. Argyll/Ardmore). For onshore
exploration and production activities, a Petroleum Exploration and
Development Licence (“PEDL”) is required.
Offshore Seaward Production Licence
An SPL is usually granted in respect of a relatively small
geographical area (typically, not more than several hundred square
kilometres). It covers the full life of a field from exploration to
decommissioning. It grants the licensee the exclusive right to
undertake various activities within defined phases being:
exploration (typically four years); appraisal, during which the
licensee must draw up and submit a field development plan (four
years); and production of oil and natural gas (18 years, with a
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possibility of extension). The licence will expire at the end of each
phase unless the licensee has made sufficient progress to move to
the next phase.
Typically, the licensee must surrender 50 per cent. of its acreage at
United Kingdom
the end of the exploration phase and all acreage not covered by the
field development plan at the end of the appraisal phase.
Offshore Exploration Licence
A non-exclusive Offshore Exploration Licence enables the licensee
to carry out exploratory surveys over large geographical areas of the
offshore sector where an SPL would be impractical and
prohibitively expensive, in return for a modest annual rental
payment. Such licences are typically granted for a three-year term
(with the possibility of a further three-year extension if certain
terms and conditions have been met). Exploration drilling below
certain depths (typically 350 metres) is usually not permitted.
Offshore Promote Licence
A Promote Licence is similar to the traditional SPL, with the term of
the various phases being the same. However, the Promote Licence
allows a licensee to hold the licence (and, therefore, assess future
prospects) for up to two years before it must satisfy the stringent entry
checks required under the traditional SPL. Promote Licensees are not
permitted to carry out any exploration activities until they have
satisfied the entry checks and given a firm commitment to complete
an agreed work programme. Licensees benefit from a 10 per cent.
discount on rental fees payable under a traditional SPL.
Offshore Frontier Licence
An Offshore Frontier Licence grants a licensee the right to explore a
large amount of acreage which is considered to be difficult or
unexplored. Three quarters of this acreage will be relinquished after
an initial screening phase. Licensees benefit from a 90 per cent.
discount on rental fees payable under a traditional SPL and from
extended exploration and development periods (an additional two
years in both phases) from those granted under the traditional SPL.
Onshore Petroleum Exploration and Development Licence
The Onshore PEDLs are similar in form to an offshore SPLs and
include Model Clauses and a three-phase lifespan. Licensees are
granted the exclusive right to explore for and exploit petroleum in a
specified area. The exploratory phase for Onshore PEDLs is six
years; the appraisal phase is five years; and the production phase for
a PEDL is 20 years, subject to a governmental discretion to extend.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
The State does not participate directly in natural gas production,
other than having an economic interest in the development of
natural gas through the imposition of acreage rental, royalties and
certain taxes (see question 2.5 below). The UK no longer has a
State petroleum company, and natural gas development is carried
out entirely by private companies or foreign State-owned
companies under licences granted by the Secretary of State.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
Profits from the development of natural gas in the UKCS are
potentially subject to the following three taxation regimes:
Petroleum Revenue Tax; Ring-Fence Corporation Tax; and
Supplementary Charge. A brief summary of each is given below.
Petroleum Revenue Tax (currently levied at 50 per cent.)
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applies to net income from natural gas extraction, but only in
respect of those fields for which development consent was
given prior to 16 March 1993.
Ring-Fence Corporation Tax applies to profits from oil and
United Kingdom
gas extraction activities and rights in the UK and UKCS and
aims to prevent profits from these activities being reduced
for tax purposes by the setting off of losses from other
trading activities. The profits from oil and gas extraction
activities and rights are “ring-fenced” and treated for tax
purposes as a separate trade, so that only losses derived from
these activities can be set off against profits from these
activities. The current rate of corporation tax for these
activities is 30 per cent. (versus 28 per cent. for “non-ring
fence” profits). Companies which are subject to the
Supplementary Charge (see below) benefit from enhanced
capital allowance deductions within the ring-fence whereby
capital investment in plant and machinery and expenditure
on mineral extraction in the UKCS qualifies for a 100 per
cent. first year allowance. In 2008, the distinction between
expenditure on long-life assets which previously qualified
for a 24 per cent. capital allowance was removed, so that all
plant and machinery expenditure should now qualify for the
100 per cent. first year allowance. In 2006, the Exploration
Expenditure Supplement was widened to provide an annual
uplift of 6 per cent. in the value of unused capital allowances
carried forward for a maximum of six years which are due
for all qualifying UKCS expenditure.
A Supplementary Charge of 20 per cent. (with effect from
1 January 2006) is charged on profits arising from any ring-
fenced activities, excluding financing costs. In order to
encourage development of remaining reserves, a new field
allowance for certain oil fields (either small fields, ultra-
heavy oil fields or ultra-high pressure or high temperature oil
fields) which received development consent on or after 22
April 2009, is now available to offset against the
supplementary charge on profits from those fields.
2.6 Are there any restrictions on the export of production?
Please refer to question 3.1 below.
Whilst no restrictions relate solely to the export of production, in
practice the energy regulator - the Office of Gas and Electricity
Markets (“OFGEM”) noted that UK exporters and potential
exporters of gas are finding significant barriers to exporting to
Continental Europe, including difficulties in obtaining economic
access to gas storage facilities and transportation networks and
issues concerning gas specification.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
There are no restrictions on currency exchange or on the transfer of
funds derived from production out of the jurisdiction.
2.8 What restrictions (if any) apply to the transfer or disposal of
natural gas development rights or interests?
The Secretary of State’s consent is required before any transfer of a
licence interest can be made, including any affiliate transfer.
Whilst the Model Clauses do not impose any requirement for the
Secretary of State’s approval in respect of a change of control of a
licensee, this is specified as a ground for revoking a licence. In
practice, licensees who are the subject of a change of control
usually request an assurance from the Secretary of State that it will
not exercise this power of revocation.
The transfer approvals process has recently been streamlined in line
with the general policy to encourage the transfer of licence
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interests. A licensee wishing to transfer its licence interest must
advise DECC by lodging a standard application form which
requires the licensee to provide a short checklist of information.
DECC reserves the right to seek further information.
DECC will usually approve the transfer having particular regard to
the technical and financial capability of the proposed transferee, in
particular, where the proposed transferee is likely to have to bear
some of the decommissioning costs in respect of the field. DECC
is likely to undertake a more detailed assessment if the proposed
transferee is a new entrant into the UK upstream petroleum industry
or if the transfer would result in a change of operatorship.
In some circumstances DECC may provide an opinion of “no
objection in principle” to a proposed transfer which is to occur at
some point in the future after the transferee and proposed transferee
have made financial commitments (such as earn-in arrangements).
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
All companies active on the UKCS are required to provide security
for future decommissioning of their works at up to 150 per cent. of
the gross decommissioning costs. Currently, the only accepted
forms of security are bank letters of credit or, in very limited
circumstances, parent company guarantees.
Under the Energy Act 2008 which received Royal Assent on 26
November 2008 (“Energy Act 2008”), the Secretary of State may
require a person to provide security for its decommissioning
obligations in order to reduce the risk to the UK taxpayer (who
would otherwise bear this liability). It also obliges companies to
provide adequate financial information (including management
accounts and revenue predictions) in order to enable the Secretary
of State to assess whether decommissioning security ought to be
provided at an earlier stage. Any funds set aside in a secure manner
(such as a trust or other arrangement which was established on or
after 1 December 2007) to meet decommissioning obligations will
not be accessible to creditors under insolvency legislation.
The Secretary of State may also require participants to enter into a
Decommissioning Security Agreement (“DSA”) where it is deemed
that the participants may be unable to pay for decommissioning costs
following any request to submit a decommissioning programme (see
question 2.12 below). DECC does not prescribe a standard form
DSA, but the agreement must meet certain minimum requirements;
an agreement requiring the parties to provide security in the form of
cash, irrevocable standby letters of credit issued by a Prime Bank (as
defined in the DECC Guidance Notes), or on-demand performance
bonds from Prime Banks, would normally be acceptable. The
security should be renewed annually and should cover each party’s
respective share of decommissioning costs; it should equal at least
100 per cent. of the expected decommissioning costs of the
installations and pipelines covered by the DSA. The Secretary of
State will become a party to the DSA to prevent any alterations or
proposed changes being made to it without his consent.
Recently, an industry-wide standard template DSA known as the
“Decommissioning Cost Provision Deed” has been developed which,
it is hoped, will reduce the overall cost of providing the security and
ensure the efficient and timely negotiation by the parties.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
The creation of charges over licence interests is subject to the
conditions under the Model Clauses attached to each licence. Any
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licensee proposing to create the charge should refer to the Open
Permission (Creation of Security Rights Over Licences) which
automatically grants DECC’s consent to a variety of charges
including fixed or floating charges, share pledges, share mortgages
and debentures subject to the following conditions:
the chargee must have an office within the UK, and must be
authorised to carry on banking business in the UK or be a
trustee appointed by a person so authorised for the purpose
of holding and dealing with the security; and
the licensee must notify the Secretary of State of the amount
of money or other liabilities to be secured by such charge,
which licences are the subject of the charge and the identity
of the chargee within ten days of the execution or date of
creation of the charge.
The fact that a proposed security interest falls outside the scope of
the Open Permission does not mean that the creation of such a
security interest will not be approved, rather that it will be subject
to DECC’s individual approvals process.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
While natural gas development is principally regulated and
controlled through the terms of the licence, various statutory
controls also exist. The main statutory controls relating to natural
gas development include:
the Coast Protection Act 1949;
the Offshore Safety Act 1992 and Offshore Installations
(Safety Case) Regulations 2005;
the Offshore Petroleum Production and Pipelines
(Assessment of Environmental Effects) Regulations
(Amendment) 2007;
the Offshore Installations and Wells (Design and
Construction, etc) Regulations 1996;
the Offshore Installations and Pipeline Works (Management
and Administration) Regulations 1995;
the Offshore Installations (Prevention of Fire and Explosion,
and Emergency Response) Regulations 1995;
the Health and Safety at Work Act 1974; and
the Offshore Safety Act 1992.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
The decommissioning of offshore installations and pipelines is
regulated under Part IV of the Petroleum Act 1998 as supplemented
by Chapter 3, Part 3 of the Energy Act 2008. Responsibility for
ensuring compliance rests with DECC.
Typically, DECC will issue a notice (a “section 29 notice”) to the
operator of the field and each of the licensees requiring them to
submit upon request for DECC’s approval a decommissioning
programme (including likely costs) within six months of the
commencement of production. DECC will usually request the
submission of a decommissioning programme when the field
production goes into decline. DECC may also serve a section 29
notice on:
any person having an ownership interest in the installation or
pipeline;
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a parent or associated companies of a licensee;
any person intending to carry on specified activities in
relation to the installation or pipeline in the future;
any transferor of an interest in an offshore installation or
United Kingdom
pipeline where such transferor has failed to obtain the
consent of the Secretary of State to the transfer; and
any licensee and parties to joint operating or similar
agreements in relation to a petroleum exploration or
extraction licence regardless of whether such party benefited
or had the potential to benefit from the particular installation.
Typically, DECC will utilise this wider class of parties if it is of the
view that the decommissioning arrangements proposed by the
operator and licensees are unsatisfactory.
Until such time as the section 29 notice has been withdrawn, the
licensee remains liable for decommissioning obligations. If a
licensee transfers its interest to a third party, DECC will usually
issue a section 29 notice to the transferee and the transferor may
then request withdrawal of the section 29 notice against it in respect
of the same. DECC may give the other licensees the opportunity to
make submissions in relation to the proposed withdrawal; however
in most circumstances, the section 29 notice will be withdrawn
provided that DECC is satisfied that an adequate DSA is in place
(please see question 2.9 above). In some exceptional
circumstances, the transferor may still remain under a duty to carry
out a decommissioning programme, notwithstanding its departure
from the licence and the withdrawal of the applicable section 29
notice. This is most likely to occur when the existing licensees
default on their obligations.
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
The UK imports and exports natural gas principally through gas
interconnectors, namely:
the Bacton-Zeebrugge interconnector connecting the UK
with Belgium, owned and operated by Interconnector UK
Limited;
two interconnectors which connect Moffat in Scotland with
the Republic of Ireland, and Twynholm in Northern Ireland,
both of which are owned and operated by Bord Gas Eireann
of Ireland; and
the BBL interconnector connecting the Netherlands with the
UK, owned and operated by BBL Company.
In general, any person participating in the operation of a gas
interconnector must hold a Gas Interconnector’s Licence.
“Participating” includes co-ordinating and directing the conveyance
of natural gas through a gas interconnector, or making a gas
interconnector available for the conveyance of natural gas. The
holder of a Gas Interconnector Licence cannot hold a Gas
Transporter Licence, Gas Shipper’s Licence or Gas Supplier’s
Licence (please refer to question 5.2 below).
The requirement for a licence has been disapplied by The Gas Act
1986 (Exemption) Order 2005 in relation to those persons
conveying gas from LNG import facilities to a pipeline system
operated by a licensed gas transporter or to premises associated
with an LNG import facility. It has also been disapplied by The Gas
Act 1986 (Exemption from the Requirement for an Interconnector
Licence) Order 2006 in relation to any person who operates a gas
interconnector which transports gas from production facilities
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outside the UK to terminals or processing facilities inside the UK.
The Secretary of State may also grant individual exemptions. An
exemption has been granted in respect of the Bacton-Zeebrugge
interconnector. The interconnectors connecting Moffat in Scotland
United Kingdom
and Ireland have been deemed not to require a licence.
The construction of a gas interconnector will need to comply with
the regulatory requirements applying in respect of the construction
of offshore pipelines and infrastructure. Please refer to question 4.2
below.
Gas interconnectors are subject to the rights of third party access
under the Petroleum Act 1998 (as amended by the Energy Act 2008)
and the Gas Act 1986 (as amended by the Gas Act 1995, the
Utilities Act 2000 and the Energy Act 2004) (the “Gas Act 1986”).
Please refer to question 4.6 below for further details.
Each gas interconnector will have an international treaty associated
with it. The treaty will apply in addition to UK legal requirements
and will usually clarify various legal, technical and safety issues
relating to the gas interconnector.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Offshore and onshore pipelines and associated infrastructure are
subject to different legal regimes in the UK. This section will focus
on offshore infrastructure because the majority of the UK’s natural
gas production is derived from offshore fields in the UKCS.
Offshore infrastructure includes offshore platforms and pipelines,
onshore gas processing terminals and pipelines connecting those
terminals to the NTS.
Offshore infrastructure is generally constructed, owned and
operated by private companies - in most circumstances, by
licensees developing offshore natural gas fields. Given that the
UKCS has been in production for approximately 30 years, there is
a well-established network of offshore infrastructure bringing
natural gas production ashore.
The construction and operation of offshore infrastructure is
principally governed by the Petroleum Act 1998. The terms of the
applicable production licence and field development programme
approved by DECC will also regulate the construction and
operation of offshore infrastructure to a large extent.
Gas storage capacity in the UK is currently estimated at around 4.3
bcm and is primarily provided by the offshore Rough field owned
by Centrica Storage Ltd. The principal legislation applying in
relation to gas storage facilities is the Gas Act 1986 (as amended by
the Energy Act 2008). The Energy Act 2008 created a new
licensing regime in respect of gas storage and recovery or unloading
to installations or pipelines within a “controlled place”, which is
defined as either the UK territorial sea or an area which will be
designated by an Order as a “Gas Importation and Storage Zone”.
The licensing requirements extend not only to activities related to
the construction and operation of gas storage and recovery or
unloading facilities, but also to any exploration activities for the
purpose of the above, any maintenance of such facilities, and any
conversion of existing natural features for gas storage.
Other UK legislation will also apply in relation to the construction
and operation of gas storage facilities, including legislation relating
to the storage of hazardous substances.
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4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
The construction and operation of offshore infrastructure must be
carried out in compliance with the terms of the applicable
production licence. The Model Clauses applicable to a production
licence (refer to question 2.2 above) prohibit licensees from
installing facilities without the authorisation of the Secretary of
State. When considering whether to authorise a proposal, the
Secretary of State will take into account whether the proposed
project maximises the economic benefit to the UK of its oil and gas
resources, its environmental impacts, security of supply and
ensuring adequate competition and whether the methods proposed
to be used comply with good oilfield practice.
Field development plans, which regulate the construction and
operation of offshore pipelines and associated infrastructure, must
also be approved by DECC. In reviewing and approving a proposed
field development programme, DECC’s primary policy
considerations include:
avoiding the unnecessary proliferation of pipelines;
encouraging interested parties to co-operate in the
construction and sizing of pipelines according to future
potential, and ensuring adequate provision is made for tie-ins
and risers, and onshore petrochemical industries taken into
account; and
ensuring open and competitive marketing of gas on a “level
playing field”.
To construct an offshore pipeline, a Pipeline Works Authorisation
(“PWA”) issued by the Secretary of State under the Petroleum Act
1998 is required. The Energy Act 2008 expanded the definition of
offshore pipelines to include any “system of pipes together with all
apparatus, works and services associated [therewith].” This
includes pipelines used for the conveyance of hydrocarbons, water,
chemicals, apparatus for the supply of energy for operations,
hydraulic control lines or umbilicals, as well as services (for
example the provision of fuel or power). The PWA will usually be
issued to the operator of the licensee group wishing to construct the
pipeline (the “holder”) and will authorise the licensees (the
“users”) to use the pipeline and apparatus.
Under the terms of a PWA, the holder is responsible for organising
or supervising the construction and operation of the pipeline and
ensuring compliance with all relevant legislation prevailing at the
time. The holder must also provide DECC with advance notice of
any proposed modifications to the pipeline and any changes to the
holder, owners, users or operator of the pipeline.
Regard must also be had to the following UK legislation, most of
which is environmentally focused:
the Pipeline Safety Regulations 1996, introduced by the
Health and Safety Executive;
the Offshore Petroleum Activities (Conservation of Habitats)
Regulations 2001;
the Offshore Installations and Wells (Design and
Construction) Regulations 1996;
the Offshore Chemicals Regulations 2002;
the Prevention of Oil Pollution Act 1971;
the Offshore Installations (Emergency Pollution Control)
Regulations 2002;
the Offshore Combustion Installations (Prevention and
Control of Pollution) (Amendment) Regulations 2007;
the Merchant Shipping (Oil Pollution Preparedness,
Response Co-operation Convention) Regulations 1998 (as
awarded by the Merchant Shipping (Oil Pollution
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Preparedness, Response Co-operation Convention)
Amendment Regulations 2001);
the Offshore Petroleum Production and Pipeline
(Assessment of Environmental Effects) Regulations
(Amendment) 2007;
the Coast Protection Act 1949, pursuant to which consent for
the construction of the pipeline will be required; and
the Offshore Petroleum Activities (Oil Pollution Prevention
and Control) Regulations 2005.
The authorisations required to own, construct and/or operate gas
storage facilities will depend on whether the facility is to be located
offshore or onshore:
offshore gas storage facilities (i.e. depleted reservoirs such as
Rough) generally require a licence from, and the payment of
consideration to, the Crown Estate Commissioners under the
Crown Estate Act; and
onshore gas storage facilities (e.g. salt cavities) generally
require the holder of a Gas Transportation Licence issued
pursuant to the Gas Act 1986 (refer to question 5.2 below) to
obtain a “storage authorisation order”. This order grants
deemed planning permission.
The large natural gas storage facilities may also need to be licensed
by the applicable local authority and as well as health and safety
and pollution control regulations, the Planning (Control of Major
Accident Hazards) Regulations 1999 may apply on the basis that
stored natural gas is regarded as a “hazardous substance”.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
A licensee wishing to develop offshore gas fields in close proximity
to existing infrastructure will usually seek to negotiate access
arrangements (e.g. gas transportation agreements) with the
infrastructure owners. If the licensee is unable to agree a
satisfactory access arrangement with the infrastructure owners, then
the licensee may apply to the Secretary of State pursuant to the
Petroleum Act 1998 (as amended by the Energy Act 2008) to
require access to be granted. Rights of third party access are
discussed in more detail in question 4.6 below.
In relation to onshore gas pipelines, the Secretary of State has
powers under the Gas Act 1986 and the Pipeline Act 1962 to
authorise a Gas Transporter to compulsorily acquire land (please
refer to question 5.2).
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
Land and other access rights relating to infrastructure associated
with offshore development will primarily be contained within the
terms and conditions of the applicable production licence and the
field development plan approved by DECC.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
Because offshore pipeline systems are generally privately owned,
licensees wishing to connect new pipelines into existing pipeline
systems or to interconnect existing pipeline systems will generally
need to negotiate contractual arrangements with the existing
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pipeline owners. Rights of third party access are discussed in more
detail in question 4.6 below.
Any connection of new pipelines to existing offshore pipeline
systems will also need to comply with the authorisations and
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requirements referred to in question 4.2 above.
4.6 Outline any third party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Under the Petroleum Act 1998 and the Gas Act 1986 (each as
modified by the Energy Act 2008), the Secretary of State is
empowered to resolve disputes relating to access to all upstream
petroleum infrastructure. These include powers to admit additional
users to an existing system and to set the terms of such access, most
notably the tariff, that is to apply.
In granting access to existing infrastructure to a new user, the
Secretary of State will consider, amongst other things, whether the
infrastructure could be used in the proposed way without
prejudicing its efficient operation in respect of the owner’s
requirements.
The Code of Practice on Access to Upstream Oil and Gas
Infrastructure on the UK Continental Shelf (the “Infrastructure
Code of Practice”) provides a framework to oil and gas
infrastructure owners and users for the process which should be
followed in seeking, offering and negotiating access to offshore
infrastructure. The Infrastructure Code of Practice applies to
offshore and onshore oil and gas infrastructure up to the point that
natural gas enters into the Gas Transmission System. The
Infrastructure Code of Practice is intended to clarify, streamline and
facilitate the timely resolution of access requests on a negotiated
non-discriminatory basis. The Infrastructure Code of Practice is
voluntary and is not legally binding. As such, it does not fetter the
Secretary of State’s discretion under the relevant legislation but
where an application is made to the Secretary of State to exercise its
statutory powers relating to third party access disputes, the
Secretary of State will consider the extent to which the parties
involved have adopted the Infrastructure Code of Practice’s
procedures.
Under the Petroleum Act 1998 an application may be made to the
Secretary of State for a pipeline owner to increase capacity in an
offshore pipeline through the modification of associated works and
apparatus, or for an offshore pipeline, for the installation of a
junction for connection of another pipeline. The applicant will be
obliged to pay to the pipeline owner reasonable remuneration as is
determined by the Secretary of State.
The Gas (Third Party Access and Accounts) Regulations 2000, the
Gas Act 1986 and the Pipelines Act 1962 require owners of natural
gas processing facilities to publish annually their main commercial
conditions for access. Third parties wishing to obtain access to such
facilities negotiate in good faith directly with the owners in the first
instance on the basis of these publicised commercial terms. If the
parties are unable to agree on suitable terms of access, then an
application may be made to the Secretary of State to resolve the
dispute, and if applicable, determine the terms (including the tariff)
upon which access shall be granted.
Exemption from the application of third party access rights may be
granted in special circumstances. In the UK OFGEM has the power
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to grant such exemptions but any grant remains subject to EU
approval. In deciding whether to allow an exemption, OFGEM will
consider the participants’ market shares and any concerns over
capacity-hoarding.
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Please refer to question 5.3 below in relation to third party access to
the gas distribution network in the UK.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Parties are free to agree the terms upon which natural gas is to be
transported. However, if a third party is unable to agree satisfactory
terms of access with the pipeline owner (including the applicable
tariff), the third party can make an application to the Secretary of
State to require access to be granted. Please refer to question 4.6
above for further details.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
NGG, part of National Grid plc (previously known as “Transco”), is
the owner, operator and developer of the high pressure NTS.
There are eight gas distribution networks (“GDNs”) which each
cover a separate geographical region of Britain. In addition there
are a number of smaller networks owned and operated by
Independent Gas Transporters - most but not all of which have been
built to serve new housing. The GDNs are owned by NGG, Scotia
Gas Networks (which owns Southern Gas Network and Scotland
Gas Network), Northern Gas Networks and Wales & West Utilities.
The entire UK network comprises 6,600 km of high pressure
national and regional transmission systems and around 275,000 km
of lower pressure local distribution systems.
The Gas Act 1986 provides the statutory framework in respect of gas
distribution networks in the UK. Transporters, shippers and suppliers
of gas are required to hold a licence (see question 5.2 below).
The Secretary of State has overall responsibility in respect of gas
distribution networks, while day-to-day regulation has been
delegated to OFGEM.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
The Gas Act 1986 makes it an offence to carry out certain activities
unless licensed or exempt from the requirement for a licence. The
four types of gas licence are:
Gas Transporter’s Licence - authorising the licensee (“Gas
Transporter”) to convey gas through pipelines to any
premises within an area specified by the licence (such area
may be held by the Gas Transporter or extend to pipelines
operated by another Gas Transporter). The licence requires
the Gas Transporter, amongst other things, to establish
transportation arrangements which achieve efficient and
economic operation of the pipelines and effective
competition between Gas Shippers and Gas Suppliers;
Gas Shipper’s Licence - authorising the licensee (“Gas
Shipper”) to contract with a Gas Transporter for gas to be
introduced into, conveyed by means of, or taken out of a
pipeline system operated by that Gas Transporter. Gas
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Shippers purchase natural gas from upstream producers,
traders or other Gas Shippers and enter into contractual
arrangements with Gas Transporters for the natural gas to be
transported to the customers of such Gas Suppliers. The
Uniform Network Code (“UNC”) sets out the legal and
contractual arrangements in relation to the transportation of
natural gas through the NTS;
Gas Supplier’s Licence - authorising the licensee (“Gas
Supplier”) to supply gas to any domestic or non-domestic
premises which gas has been conveyed to those premises
through pipelines. Customers benefit from the competition
that exists between Gas Suppliers as a result of the UK
having an open gas supply market; and
Gas Interconnector’s Licence - authorising the licensee to
convey gas into or through a gas interconnector or to make
such an interconnector available for use for the conveyance
of gas.
All gas licences are subject to standard conditions imposed by the
Secretary of State, but OFGEM is authorised to amend or modify
these conditions as appropriate.
To facilitate effective competition, the Gas Act 1986 de-links the
transportation, shipping and supply of natural gas and prohibits a
person from holding:
a Gas Transporter’s Licence and a Gas Supplier’s or Gas
Shipper’s Licence; or
a Gas Interconnector Licence and any other type of gas
licence.
A party wishing to construct an onshore pipeline in excess of ten
miles in length must obtain a pipeline construction authorisation
from the Secretary of State pursuant to the Pipelines Act 1962. The
proposed pipeline owner must demonstrate to the Secretary of State
that it has consulted with certain bodies, most notably local
authorities, and landowners and occupiers affected by the proposed
pipeline routing. The application must specify the rights and
consents required to enable the pipeline to be constructed, and the
extent to which the applicant has been successful in obtaining such
consents. Where the applicant has been unable to negotiate access
rights or easements by way of voluntary agreement with land
owners or occupiers, subject to the Secretary of State approving the
application, the applicant may be entitled to exercise powers of
compulsory purchase pursuant to the Pipelines Act 1962.
With the exception of certain pipelines, the environmental
management of onshore pipelines (and the onshore hydrocarbon
industry generally) does not come within the jurisdiction of DECC,
but rather is overseen by the Department for Environment, Food
and Rural Affairs, the Environment Agency (in England and Wales),
the Scottish Environment Protection Agency (SEPA) and local
authorities. The construction of such a pipeline currently requires a
licence under the Food and Environment Protection Act 1985,
however a new regime is proposed to apply under the Marine and
Coastal Access Bill which is currently before the House of
Commons. Any party wishing to own, construct and/or operate any
onshore pipeline must have regard to the requirements of both UK
and European Commission environmental legislation.
5.3 How is access to the natural gas distribution network
organised?
The third party access regime is implemented in relation to the gas
distribution network and interconnectors through the applicable
licence terms. In addition, the Infrastructure Code of Practice sets
out principles and procedures to guide all those involved in
negotiating third party access to oil and gas infrastructure on the
UKCS (see question 4.6 above).
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Participation in the market under the UNC is through forward-
nominated trades with counter parties and physical or non-physical
within-day trading. Both balancing and charging take place on a
daily basis. In addition to the balancing requirements, the UNC
also deals with a number of other issues, including entry and exit
requirements, emergencies and storage. If parties are unable to
agree upon access arrangements, an application can be made to the
Secretary of State to exercise its powers in relation to third party
access (please see question 5.4 below).
The Gas (Third Party Access and Accounts) Regulations 2000 are
designed to implement the EC Directive 98/30/EC concerning
common rules for the internal market in natural gas. The Secretary
of State’s directions under this legislation may include directions as
to transportation charges. Access to gas transportation, storage and
processing infrastructure must be given on the basis of the main
commercial terms of business publicised by the pipeline or facility
owner.
The Pipelines Act 1962 (as amended by the Energy Act 2008) sets
out the principles on which negotiations for access to existing
infrastructure will be based and setting out the terms of such access.
Where negotiations fail, the Secretary of State has the power to
direct owners to give access to third parties on specified terms.
The Gas (Third Party Access and Accounts) Regulations 2000, the
Gas Act 1986 and the Pipelines Act 1962 require owners of onshore
pipelines connecting processing facilities to the NTS or directly to
large industrial users to publish annually their main commercial
conditions for access. It is the responsibility of the pipeline owner
to obtain the necessary rights from landowners, lessees or occupiers.
For each pipeline, it is usual for conditions of entry to be negotiated
and agreed between the pipeline owners and representatives of all
landowners and occupiers (easements). If these cannot be secured
by voluntary agreement, a compulsory purchase or rights order
(subject to special Parliamentary procedure) may be required. If the
parties are unable to agree on suitable terms of access, then an
application may be made to the Secretary of State to resolve the
dispute, and if applicable, determine the terms (including the tariff)
upon which access shall be granted.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
European Gas Directive 2003/55 requires that non-discriminatory
third party access to pipeline and storage facilities be provided.
In relation to pipelines operated by Gas Transporters, an application
may be made to OFGEM under the Gas Act 1986 for the increase
in capacity of such pipelines through modification of associated
works and apparatus, or for the installation into any such pipeline of
an interconnection point. Upon the granting of such an order, the
applicant will be obliged to provide such reasonable remuneration
to the Gas Transporter as determined by OFGEM.
The Gas Act 1986 requires every Gas Transporter to comply with
any reasonable request for it to convey gas by means of its pipeline
system to any premises, provided it does not prejudice the Gas
Transporter’s ability to develop and maintain an efficient and
economical pipeline system.
Exemptions from the application of third party access rights will be
granted in certain circumstances. In accordance with the European
Gas Directive 2003/55, five conditions must be met for an
exemption to be granted:
the underlying investment enhances competition in gas
supply and security of supply;
the level of risk attached to the investment would be too high
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for it to go ahead within an exemption;
the underlying infrastructure will be owned by an entity
which is separate from the relevant system operator in whose
systems that infrastructure will be built;
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user charges will be levied; and
the exemption is not to the detriment of competition or the
effective functioning of the internal gas market, or the
efficient functioning of the regulated system to which the
infrastructure is connected.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
Gas Transporters charge connection and system-use charges derived
by reference to price control formulae and subject to price control by
OFGEM. The price control dictates the maximum revenue NGG can
earn for each unit of gas transported through its network. Should
NGG not earn the maximum permitted revenue in a formula year, a
compensating adjustment is made in the following year. Adjustments
may also be made during the year where a significant intra-year over-
recovery is anticipated. The current price control applying to NGG
has been set in respect of the period 1 April 2008 to 31 March 2013.
The next price control is expected to be set on 1 April 2012 and will
apply to the period 1 April 2013 to 31 March 2018.
Under the terms of the Gas Transportation Licence, a Gas
Transporter must conduct its business to ensure that neither it nor
any of its related companies obtains any unfair commercial
advantage.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
Please refer to the limitations referred to under question 5.2 above.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Trading takes place at a number of points in the gas supply chain.
Gas is traded from producers to Gas Shippers at the “Beach” i.e. at
the onshore point before entry into the NTS. This is usually
effected on the terms of the “Beach 2000” Contract. The Beach
2000 Contract is a “physical” contract which provides for the
transfer of title to physical volumes of gas and also includes
provisions relating to gas quality and pressure. There is an
imbalance regime governing the failure to deliver the relevant
quantities of gas. A delivery shortfall by the seller will require the
seller to pay the higher of the System Average Price or the System
Marginal Buy Price, which are the two prices used by NGG to
calculate imbalance charges under the UNC. The imbalance charges
are calculated by NGG on a daily basis and represent the cost that
it pays (or is paid) in the market to buy or sell gas in order to
balance the system.
Gas Shippers trade gas between themselves within the NTS at the
National Balancing Point (“NBP”). The NBP is a notional point
and as such has no actual physical location. It is used for gas
trading and for the calculation of transportation charges for the
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traded gas. Gas may also be traded between shippers for delivery
at exit points from the NTS. Gas sold between shippers is normally
traded on the terms of the “NBP 97” Contract, although there is an
increasing use of ISDA Contracts (with a gas annex attached).
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Neither the NBP nor the ISDA Contract are physical contracts i.e.
they do not provide for the transfer of title to physical volumes of
gas (since title to all gas within the NTS vests in NGG). Instead,
each party makes nominations to NGG which set out the volumes
of gas that it contracts to deliver or offtake from another party. Both
parties must make the notification and where the notifications from
both parties do not match, the trade will be rejected by NGG. If one
party makes an error in its notification, it will be liable to pay
Deemed Imbalance Charges to the other party, the amount of which
represents the imbalance charges which the other party would have
incurred if the relevant trade were the only transaction that party
had entered into on that day.
In addition, gas can be traded on an anonymous, screen-based,
within-day gas market - the on-the-day commodity market
(“OCM”). This allows Shippers to fine-tune their daily positions
and allows NGG to purchase and sell gas in order to balance the
NTS. The OCM is operated by an independent market operator
(“EnMO”) and is designed for gas trading in which the Gas Shipper
and NGG can post bids and offers to buy or sell gas either at the
NBP or at specific locations on the NTS. EnMO also operates the
EnEx trading platform and the Gas Physical Futures market, which
allows physical gas contracts to be traded, before delivery,
alongside the OCM. EnMO has also introduced weekend, balance
of week and working days next week strips to allow traders to trade
gas further ahead of physical delivery.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
There is no obligation to trade only bundled products. Instead, gas
as a wholesale commodity, entry and exit capacity on the NTS and
balancing services can all be traded independently.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
There are no LNG liquefaction or export facilities in the UK, and in
view of the UK being a net importer of natural gas, no such
facilities are planned.
There are a number of existing LNG sites in the UK, most of which
have been in operation in excess of 30 years. National Grid
currently owns and operates three LNG storage facilities (excluding
Grain LNG) across the United Kingdom which are designed to meet
peak demand requirements and for gas storage to address changes
in supply or demand forecasts, offshore failures, transportation
plant failures, and to address a network emergency.
Many stakeholders in the industry believe that importing gas to the
West Coast of the UK and the associated pipeline extension is the best
solution to ensure diversity and security of supply. In addition,
industry has recommended that up to three more interconnections
(fixed pipelines) within the UK or the equivalent in LNG importation
facilities will be needed in the next ten years to fill the demand gap.
There are currently a number of LNG import terminal projects
being developed in the UK, the details of which are in the public
domain (see question 1.1 above).
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7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
The construction and operation of LNG facilities must comply with
the relevant environmental, planning and health and safety
requirements referred to in question 4.2 above. There are no
specific UK Government authorisations required to construct and
operate LNG facilities.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
The requirements specified under questions 5.3 and 5.4 above also
apply in respect of LNG facilities. The European Gas Directive
2003/55 provides that terms and conditions for the provision of
such services by transmission system operators, including rules and
tariffs, must be established in a non-discriminatory and cost-
reflective way and must be published.
Each of South Hook LNG, Dragon LNG and Grain LNG has been
granted an exemption by OFGEM from the application of third
party access rights under the Gas Act 1986, which exemptions have
been approved by the European Commission (which possesses the
right to veto the granting of such an exemption).
Each of these exemptions was granted on the condition that the
access arrangements in respect of the LNG terminals contained
capacity management and anti-hoarding measures.
OFGEM retains the right to revoke an exemption if market
circumstances change.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The Office of Fair Trading (“OFT”) is primarily responsible for
enforcing competition law in the UK.
Pursuant to the Competition Act 1998 (Concurrency) Regulations
2004 and the Gas Act 1986, the Gas and Electricity Markets
Authority (“GEMA”) and the Northern Ireland Authority for
Energy Regulation both have concurrent powers with the OFT to
investigate suspected anti-competitive activity and take action for
breaches of competition law in the gas sector. GEMA (for which
OFGEM is the supporting administrative body) and the OFT have
agreed to operate pursuant to concordats regarding the exercise of
their concurrent powers where the principal effect of the alleged
anti-competitive practice is in the gas sector, governing
circumstances such as which authority takes the lead in
investigations and liaison and consultation between the authorities.
Typically, GEMA will take the lead in any competition law
investigation whose principal focus is any gas-related activity
which is within its overall purview as a regulatory authority.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
Both EC and UK competition law is applicable in the UK and both
may apply to particular situations. In summary, EC competition
law applies where the agreements, business practices or behaviour
concerned may affect trade between European Union Member
States - a concept which is broadly defined. UK competition law
will apply where there may be an effect on trade within the UK.
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Anti-competitive agreements
Chapter I of the Competition Act 1998 and Article 81 of the EC
Treaty both prohibit agreements and concerted practices which, by
object or effect, may prevent, restrict or distort competition. These
laws apply not only to formal written agreements, but also to oral
“gentlemen’s agreements” and can also apply to tacit
understandings between businesses. Under both EC and UK
competition law, the prohibition on anti-competitive agreements
only applies where there is an appreciable prevention, restriction or
distortion of competition.
Some agreements, such as price-fixing cartels or resale price
maintenance obligations, are considered to be anti-competitive by
their nature; others, such as exclusive purchasing and supply
obligations, only infringe the law where anti-competitive effects
can be shown.
Agreements and concerted practices which do have anti-
competitive aspects can nevertheless benefit from an exemption
where, broadly speaking, those aspects are outweighed by pro-
competitive benefits for consumers.
As a final point, it should be noted that in the UK dishonest price-
fixing, market-sharing and bid-rigging is a criminal offence for
individuals, punishable by an unlimited fine and/or up to five years’
imprisonment (the “criminal cartel offence”). Individuals may
also be disqualified from acting as a director of a company for up to
15 years.
Abuse of dominant position
Chapter II of the Competition Act 1998 and Article 82 of the EC
Treaty prohibit conduct by one or more undertakings which is an
abuse of a dominant position. The essence of dominance is the ability
to behave independently of competitive pressures i.e. the behaviour
of customers, suppliers and competitors. An undertaking may have a
sole dominant position or a collectively dominant position together
with other competitors. EC and UK competition law does not
provide statutory market share thresholds for defining dominance
but, as a general rule, dominance is unlikely to be a concern where
market shares are less than 30 per cent.; however, there is a rebuttable
presumption of dominance where market shares are 50 per cent. or
more. Factors such as the size and number of competitors and
customers, and the ease of setting up a new business in competition,
are all relevant to the assessment of dominance.
Examples of abuse of a dominant position include charging unfair
prices (which could be excessively high prices for consumers or
excessively low prices in order to drive a competitor out of
business) or imposing other unfair trading conditions, refusing to
supply an existing customer without good reason, limiting
production, markets or technical development, or applying different
conditions to similar transactions with different parties.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The Competition Act 1998 gives the OFT, GEMA and other sectoral
regulators concurrent powers to apply and enforce Articles 81 and
82 of the EC Treaty as well as the Chapter I and II prohibitions.
These powers include the ability:
to investigate suspected infringements including requesting
information and documents, interviewing individuals and
conducting unannounced “dawn raids”;
to impose interim measures during the investigation;
to give directions to bring an infringement to an end;
to accept binding commitments which fully address
competition concerns;
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to impose financial penalties on undertakings of up to 10 per
cent. of an undertaking’s worldwide turnover in the business
year preceding the date of the decision. It is worth noting
that such fines may run into the tens and hundreds of millions
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of pounds; and
the OFT may bring a prosecution for the criminal cartel
offence.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
The UK merger control regime applies in full to the gas sector. The
UK’s merger control legislation is contained in the Enterprise Act
2002 and a merger is subject to that legislation where the relevant
jurisdictional thresholds are met (broadly, either that (i) the target
has annual turnover in the United Kingdom of more than £70
million, or (ii) that, as a result of the merger, a share of supply for
the merged entity in the United Kingdom (or a substantial part of it)
of any description of goods and services of 25 per cent. or more will
be created or increased). It should be noted that the UK merger
control regime applies not only to acquisitions of a controlling
interest but also to changes of control at a much lower level: thus,
the acquisition of what is known as “material influence” will trigger
the application of the UK merger control regime. Material
influence may be gained with acquisitions of shareholdings of even
less than 20 per cent. in certain circumstances.
The substantive test applied in UK merger control is whether the
transaction may be expected to result in a substantial lessening of
competition in any market or markets in the United Kingdom.
Merger control review in the UK is a two-stage process. The OFT
undertakes the initial first-stage review of a transaction and, where, it
has no material concerns about the merger, it will be cleared. Where
there are material concerns, the OFT may either accept undertakings
from the parties to address those concerns, or it may refer the merger
to the Competition Commission (“CC”) for an in-depth second-stage
review. At that stage, the CC may clear the merger unconditionally,
may clear the merger subject to conditions or may prohibit the merger
outright. Both the OFT and CC have wide powers to request
information from the parties and will consult interested third parties
(such as customers, suppliers and competitors) for their views when
assessing mergers. In terms of timing, the OFT’s first-stage review
will normally take between 20 and 40 working days depending on
whether the parties elect to have the merger reviewed under a
statutory or non-statutory timetable. At second-stage, the CC has 24
weeks to complete its review which may be extended by up to 8
weeks (although such extensions are relatively rare). It should also
be noted that UK merger control does not have any mandatory
notification requirements and so parties are free to complete their
transactions without notifying them or waiting for clearance.
In respect of mergers in the natural gas sector, GEMA has
concluded a concordat with the OFT such that GEMA will provide
advice to the OFT on whether the merger may be expected to result
in a substantial lessening of competition, given its specialist
knowledge of market conditions in the sector. However, the
ultimate decision rests with the OFT. GEMA will also provide
advice to the CC in respect of mergers which go to second-stage. It
should be noted that, separately from the merger control regime,
GEMA will always consider whether a merger involving a
regulated company means that changes to that company’s licence
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conditions should be made. The effect of mergers in regulated
sectors will also be taken into account when GEMA undertakes
more in-depth regulatory reviews of regulated markets.
As a final point it should be noted that larger mergers where the
United Kingdom
parties involved have sufficient Europe-wide turnover may be
subject to merger control review by the European Commission
under the EC Merger Regulation. Mergers which are caught by this
regulation may not be reviewed under the national merger control
laws of EU Member States except in circumstances where they are
referred back to one or more Member States, which can happen in
specific circumstances.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Limitations on acquisitions are a matter for the competition
authority in the UK or the EC (see section 8 above), but are not
subject to a test based on the nationality of the purchaser.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
All regulation in the UK, including competition, environmental,
health and safety and other sector-specific concerns is constrained
by the requirements of EC law.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
Traditionally governments cannot be called to account before any
external body, including a court or arbitral tribunal, except by their
consent, which may be given either on an ad hoc basis or by
agreement.
However, States are increasingly choosing to subject themselves to
compulsory dispute resolution through international law. For
example, the 1982 UN Convention on the Law of the Sea prescribes
certain jurisdictional rules, which for landlocked States may include
rights of access to the seas by gas pipelines. However, even when
a State is a signatory to an international legal instrument such as this
convention, it cannot be wholly relied upon because States usually
reserve the right to opt-out and enforcement of international law is
always a difficult issue.
In any event, the existence (or, as the case may be, absence) of
compulsory jurisdictions in some areas does not preclude the two
States concerned from agreeing on other, more appropriate, methods.
It follows that if, in the course of inter-State negotiation, certain
questions appear intractable, one option open to either State is to
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United Kingdom
propose a speedy and efficient mechanism for third party resolution
of any legal issue. Equally it follows that, if there is a dispute over a
non-legal question, it can, by appropriate agreement, be referred for
technical resolution by an agreed expert or group of experts.
In the UK, gas licence holders are regulated pursuant to the Gas Act
1986. Under this act, if a gas licence holder has a decision made
against it by a government authority, reasons for this decision must be
given and any representations or objections which have been made in
relation to the dispute must be considered by the authority. If a penalty
is imposed upon a licence holder, it may appeal against the penalty to
the High Court within 42 days of service of the notice of the decision.
The act does not otherwise provide for a specific procedure for
appealing licence decisions, although judicial review may be available
where all other avenues for appeal have been exhausted.
10.2 Is the country a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes (“ICSID”) between States and Nationals of Other
States?
The UK ratified the New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards on 24 September 1975,
which came into force on 23 December 1975.
ICSID was ratified by the UK on 19 December 1966, and it came
into force on 18 January 1967.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
There is no special difficulty in litigating, or seeking to enforce
judgments or awards against Government authorities or the State
organ. Public bodies enjoy no immunity against litigation and are
subject to the rule of law on the same basis as individuals and non
state-owned corporations and other entities.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
Although there are not many instances where foreign corporations
or organisations have obtained judgments or awards against UK
Government authorities in the context of the natural gas sector, the
legal system in England and Wales is internationally recognised as
being independent and impartial. This is one of the reasons why
many international oil and gas contracts designate English law as
the governing law of the contract notwithstanding that neither the
parties nor the subject matter of the contract may have any
particular nexus with England.
One example of where a foreign organisation was successful in
obtaining a judgment against a UK Government authority involved
in the regulation of the natural gas sector in the UK came in R v.
Secretary of State for Trade and Industry, ex parte Greenpeace
Limited which dealt with the territorial scope of the EU Habitats
Directive (Council Directive 92/43/EEC). Greenpeace argued
successfully that the Habitats Directive applies beyond the 12-mile
limit of the UK’s territorial waters to the UKCS as a whole, and that
the UK was therefore legally obligated to comply with the
requirements of the Habitats Directive in awarding licences for the
exploration and production of petroleum in the UKCS.
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11 Updates In the Courts, the Court of Appeal considered the case of Star
Energy UK Onshore Limited and another vs. Bocardo S.A. [2009]
EWCA Civ 579, overturning a first instance decision which had
11.1 Please provide, in no more than 300 words, a summary of surprised many observers. The Court of Appeal found that the

United Kingdom
any new cases, trends and developments in Gas
rights of a landowner were technically prejudiced by exploration for
Regulation Law in the United Kingdom.
petroleum under his land (but within the licensed area), but reduced
the first instance damages award significantly. The landowner is
The 2009 Budget announced the introduction of a new field
seeking leave to appeal.
allowance for certain oil fields which received development consent
on or after 22 April 2009. The allowance is able to be offset against
the Supplementary Charge payable in respect of such field (see
question 2.5 above).

Geoffrey Picton-Turbervill Erin Dyer

Ashurst LLP Ashurst LLP
Broadwalk House, 5 Appold Street Broadwalk House, 5 Appold Street
London EC2A 2HA London EC2A 2HA
United Kingdom United Kingdom

Tel: +44 20 7638 1111 Tel: +44 20 7638 1111

Fax: +44 20 7638 1112 Fax: +44 20 7638 1112
Email: geoffrey.picton-turbervill@ashurst.com Email: erin.dyer@ashurst.com
URL: www.ashurst.com URL: www.ashurst.com

Geoffrey Picton-Turbervill is a partner in the energy, transport and Erin Dyer is an associate in the energy, transport and infrastructure
infrastructure department in London and heads Ashurst’s global department of the London office of Ashurst.
energy team. He has some 23 years’ experience of working in the Erin specialises in the development of projects in the energy and
international energy industry, and specialises in UK and infrastructure sectors, including upstream oil and gas, LNG and
international oil and gas and electricity work, including mergers and power. Erin also has significant experience in third party access to
acquisitions, greenfield projects and commercial agreements. He energy assets.
regularly acts for international energy companies and governments,
and is recognised in independent guides as one of the world’s
leading energy lawyers. After qualifying as a lawyer, Geoffrey was
seconded to an international oil and gas company where he gained
wide experience of work in that sector, and in 1994-5 he was based
in New Delhi, India, where he opened Ashurst’s liaison office. He is
a member of the Energy Institute, the International Bar Association,
the UK Energy Lawyer’s Group and the Association of International
Petroleum Negotiators, and is a regular speaker at international
energy conferences.

Ashurst operates at the heart of the energy industry worldwide. With a global energy team of over 80 lawyers we can
assemble teams to provide the highest quality advice tailored to our clients’ needs. We have helped hundreds of
companies, financial institutions and governments deal successfully with challenging energy projects by developing
innovative solutions.
Our lawyers provide a comprehensive service to the energy and natural resources industry in the following areas:

Upstream oil and gas Pipelines

LNG Refining and petrochemicals
Power Mining
Renewables Water
Nuclear

We advise on all aspects of work in the energy industry:

Mergers, acquisitions and corporate finance Greenfield projects

Project and acquisition financing International law
Environmental law Joint ventures
Commercial agreements Litigation and arbitration

Contact Geoffrey Picton-Turbervill, Head of Ashurst’s Global Energy Team.

Tel: +44 (0)20 7859 1209; Email: geoffrey.picton-turbervill@ashurst.com

291
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 Chapter 35
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Dewey & LeBoeuf LLP
1 Overview of Natural Gas Sector
1.1 A brief outline of the United States’ natural gas sector,
including a general description of: natural gas reserves;
natural gas production including the extent to which
production is associated or non-associated natural gas;
import and export of natural gas, including liquefied
natural gas (LNG) liquefaction and export facilities, and/or
receiving and re-gasification facilities (“LNG facilities”);
natural gas pipeline transportation and
distribution/transmission network; natural gas storage; and
commodity sales and trading.
In the United States, natural gas is domestically produced and
readily available to end-users through an extensive utility
infrastructure. The U.S. is the second largest producer and the
largest consumer of natural gas in the world. In 2008, the U.S.
produced over 20 trillion cubic feet (Tcf). The U.S. Department of
Energy (DOE) estimates that total marketed natural gas production
increased by 3.7% in 2009, despite a 59% decline in the working
natural gas rig count from September 2008 to July 2009 but
forecasts a 3% decline in 2010 production. In 2008, the U.S
consumed over 23.2 Tcf of natural gas. The DOE estimates that
total natural gas consumption fell by 1.5% in 2009, primarily
because of the economic downturn. The total annual natural gas
consumption is forecast to remain relatively unchanged in 2010.
About 24% of energy used in the United States came from natural
gas in 2008. The largest consumers of natural gas in the U.S. are
electric power generators (29% in 2008), industrial customers (29%
in 2008), residential consumers (21% in 2008) and commercial
consumers (13% in 2008).
As of January 1, 2009, the U.S. had the fifth largest percentage of the
world’s proven natural gas reserves, with approximately 238 Tcf of
proven reserves. Estimated natural gas reserves in the United States
have increased significantly in recent years, from 1,532 Tcf in 2006 to
2,074 Tcf in 2008. Much of the growth in estimated reserves comes
from estimated gas in shale rock, which accounts for almost one third,
or 616 Tcf, of the estimated reserves. New and advanced exploration,
well drilling and completion technologies are providing improved
access to domestic gas resources in the United States, especially
‘unconventional’ natural gas such as that found in shale rock.
The United States imports about 17% of the natural gas it
consumes. Imports of natural gas, particularly from Canada and in
the form of liquefied natural gas (LNG) from overseas production
areas, are expected to be a growing source of supply for the U.S. In
2008, the U.S. imported approximately 3,981 billion cubic feet
(Bcf) of natural gas. On an annual basis from 2003 to 2008, the
United States imported between 13% and 16% of its natural gas
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Elias G. Farrah
Scott J. Mueller
requirements. Most of these imports were in gaseous form
delivered by pipeline from Canada. Annual U.S. LNG imports are
projected to exceed 1 Tcf by 2015. However, LNG imports still
currently account for a small portion of natural gas requirements in
the United States, at just 1.5% in 2008. In 2008, there were 352 Bcf
of LNG imported into the U.S., a decrease of 54% from 2007.
Market conditions and federal legislation in recent years have
increased interests in new LNG receiving and regasification
facilities. There are about 40 LNG terminals that are either before
the Federal Energy Regulatory Commission (FERC) or being
discussed by the LNG industry for North America. Eleven
terminals are already operating (including 3 terminals that opened
in 2009, including the first new onshore terminal in more than 25
years) on the East Coast, Gulf Coast, Puerto Rico and Alaska.
Domestically, the largest on-shore producing fields are located in
Texas, Oklahoma, Wyoming, New Mexico, Louisiana and
Colorado. Texas, with vast proved reserves of natural gas, has close
to one-third of the U.S.’s total reserves and more than twice as
much as the proved reserves found in Wyoming, the State with the
next highest amount. Off-shore production, primarily in the Gulf of
Mexico, also serves a critical role in the US natural gas sector. The
federal offshore producing areas and these six states account for
approximately 80% of the natural gas production in the United
States. The largest undeveloped fields, however, are in northern
Alaska but the lack of a pipeline transmission system prevents those
supplies from reaching the continental U.S. Pursuant to recent state
and federal legislation, a new 1,700-mile pipeline is now being
developed to deliver Alaskan natural gas to the lower 48 states.
Natural gas production in the Lower 48 States has seen a large
upward shift in recent years.
The United States natural gas transportation network delivered
more than 23 Tcf of natural gas during 2008 to about 70 million
customers. The network, excluding gathering system operators, is
made up of about 1.5 million miles of mainline and other pipelines,
and includes more than 200 mainline transmission pipeline
companies, more than 1,300 local distribution companies (LDCs),
and about 125 underground natural gas storage operators. About
306,000 miles of wide-diameter, high-pressure interstate and
intrastate transmission pipelines transport natural gas from the
producing area to market areas. During 2008, at least 84 natural gas
pipeline projects were completed in the Lower-48 States, adding
close to 4,000 miles of natural gas pipeline and about 43.9 Bcf per
day of new capacity to the national natural gas pipeline grid.
Underground natural gas storage provides pipelines, LDCs,
producers and shippers with an inventory management tool,
seasonal supply backup and access to supplies for balancing. In
2008, about 125 natural gas storage operators managed roughly 400
active storage fields. At the end of 2007, the U.S. has a total
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underground storage capacity of over 8.5 Bcf. The volume of
working (withdrawable) gas in storage during 2008 ranged from 1.2
Tcf at the end of March to 3.4 Tcf at the end of October.
The production and delivery of natural gas in the U.S. is subject to
significant regulation from a number of regulatory bodies,
including the FERC, the Department of Energy, the Department of
Transportation and state public utility commissions. In brief, under
the current regulatory framework, pipelines and LDCs are heavily
regulated with respect to the services they provide. Interstate
pipeline companies, which can serve only as transporters of natural
gas, are regulated by the FERC in the rates they charge, the access
they offer to their pipelines, and the siting and construction of new
pipelines. Similarly, LDCs are regulated by state utility
commissions, which oversee their rates and services, and
procedures for maintaining adequate supplies for their customers.
In contrast, natural gas producers and marketers are not heavily
regulated. While producers are subject to environmental and
conservation controls and are required to obtain the proper
authorisation and permitting before beginning to drill, particularly
on federally-owned land, the prices that production and marketing
companies charge are a function of competitive markets, subject to
FERC’s monitoring for market manipulation and abuse.
1.2 To what extent are the United States’ energy requirements
met using natural gas (including LNG)?
Most of the energy consumed in the United States comes from fossil
fuels. In 2008, natural gas satisfied approximately 24% of the
energy requirements of the United States. In comparison,
petroleum accounted for 37%, coal accounted for 23%, renewable
energy accounted for 7%, and nuclear electric energy accounted for
9%.
1.3 To what extent are the United States’ natural gas
requirements met through domestic natural gas
production?
U.S. natural gas production and consumption were nearly in
balance through 1986. After that, consumption began to outpace
production, and imports of natural gas rose to meet U.S. demand for
the fuel. In 2008, production stood at 20.6 Tcf, net imports at 3.0
Tcf, and consumption at 23.2 Tcf. Domestic natural gas production
accounted for approximately 89% of total United States natural gas
requirements in 2008. Net imports of natural gas accounted for
approximately 11% of natural gas use in the United States in 2008,
their lowest level since 1997. In 2008, 90% of net imports came by
pipeline, primarily from Canada, and 10% came by liquefied
natural gas (LNG) tankers carrying gas from five different
countries. The United States imports natural gas via pipeline from
Canada and Mexico. In 2008, the U.S. obtained a majority of its
LNG from Trinidad and Tobago (75%), Egypt, Norway, Nigeria and
Qatar.
1.4 To what extent is the United States’ natural gas production
exported (pipeline or LNG)?
Very little of the United State’s natural gas production is exported.
In 2008, overall U.S. pipeline exports in North America increased
in 2008 to 956 Bcf.
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2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
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responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
Regulatory Framework: The exploration and development of
natural gas in the United States is regulated by either the federal
government or the individual states. The U.S. Department of the
Interior is responsible for issuing leases for federal lands, whether
onshore or offshore. The Department of the Interior’s Bureau of
Land Management (BLM) is responsible for the administration of
onshore leases and its Minerals Management Service (MMS) is
responsible for the royalty management programme (covering both
offshore and onshore leases) and operations on the Outer
Continental Shelf. With respect to Indian lands, the Bureau of
Indian Affairs is generally responsible for the leasing of tribal lands,
and works closely with the MMS regarding royalties.
Geophysical exploration operations on public lands require approval
by BLM. The Mineral Leasing Act of 1920 (MLA), as amended, and
the Mineral Leasing Act for Acquired Lands of 1947, as amended,
give the BLM responsibility for oil and gas leasing on about 564
million acres of BLM, national forest, and other federal lands, as well
as state and private surface lands where mineral rights have been
retained by the federal government. The BLM reviews and approves
permits and licences from companies to explore, develop, and
produce oil and gas and geothermal resources on both federal and
Indian lands. The BLM’s review may take into account other federal
requirements, such as certification that the BLM consulted with the
relevant state historic preservation officer and relevant Indian tribes
under the National Historic Preservation Act. Companies operating
under federal lands must make royalty payments, rentals, bonus
payments, and sometimes, fines and penalties for non-compliance
with their permit or licence or any other applicable rule.
Pursuant to the MLA, and regulations passed thereunder, entities
wishing to explore for natural gas on federal lands must communicate
with the BLM and act in accordance with any specified procedures.
BLM is responsible for inspection and enforcement of oil, gas, and
geothermal wells and other development operations to ensure that
lessees and operators comply with the lease requirements and BLM’s
regulations. After exploration, parties may drill a well on lands leased
in conformity with a spacing order approved by the appropriate state
entity. Drilling must comply with a variety of federal requirements,
including safety, well identification, and site security.
At the state level, public utility commissions generally govern the
regulation of natural gas development. For example, in Texas, the
Railroad Commission has jurisdiction over all oil and gas wells in the
state, and over all persons owning or engaged in drilling or operating
oil or gas wells in the state. The Texas School Land Board must
approve any lease for the production of gas on certain lands and bodies
of water subject to the state’s jurisdiction. Where operations proceed
to the development stage, entities must comply with environmental
and conservation regulations. Like many other states, Texas has also
enacted conservation regulations that restrict development to prohibit
waste and compel ratable production of natural gas.
Oklahoma regulates natural gas development through the Oil and
Gas Conservation Division of the Oklahoma Corporation
Commission. The Commissioners of the Land Office of Oklahoma
have authority to lease all state-owned public lands. Once an
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operator leases land from the state, the operator must obtain a
permit to drill from the Conservation Division before starting
exploration and production of oil and gas. While the lessee then has
the right to sink a well and take natural gas, the right to extract
natural gas is limited by the Oklahoma Corporation Commission
conservation regulations aimed at preventing waste.
In general, under United States law, a landowner has legal title to
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the substances under the surface of the land. Accordingly, mineral
rights vest in the owner of the land. A landowner may establish a
mineral estate by severing its interest in the minerals underlying the
land. The relationship between the surface estate and the mineral
estate will be governed by contract between the relevant parties.
Recent Developments: In 2007 there were several positive
developments for the licensing and construction of an Alaska natural
gas pipeline project that would allow for the development of Alaskan
supplies. The state of Alaska enacted the Alaska Gasline Inducement
Act (AGIA) in May, 2007, which will provide up to $500 million for
the planning and construction of a natural gas pipeline. In January
2008, the state of Alaska announced that TransCanada Company,
LLC/Foothills Pipelines, Ltd. (TransCanada) was the only one of five
applicants that had been selected to proceed to the evaluation phase
for a licence under the AGIA. TransCanada’s proposal to build a
1,715 mile, $26 billion pipeline from Alaska’s North Slope to the
Calgary hub would be the most expensive energy facility ever
constructed in North America. On April 8, 2008, BP and
ConocoPhillips announced they have combined resources to form
Denali - The Alaska Gas Pipeline LLC (Denali), a pipeline project
proposal to construct and operate an Alaska natural gas transportation
system as defined by section 103 of the Alaska Natural Gas Pipeline
Act of 2004 (ANGPA). Denali plans to construct and operate a 48-
to 52-inch-diameter pipeline to move 4 billion cubic feet of natural
gas per day (Bcf/d) from the Alaska North Slope to the Alberta Hub
for North American consumers. Both Denali and TransCanada have
publicly stated that they intend to hold open seasons pursuant to
FERC’s open season regulations for their respective Alaskan natural
gas transportation projects in 2010.
The major Federal government initiatives relating to natural gas
development arise from the enactment of the Energy Policy Act of
2005 (EPAct). EPAct resolved the uncertainty about state
jurisdiction over LNG facilities by granting FERC exclusive
authority for siting, construction, expansion and operation of LNG
terminals. EPAct also allows LNG terminal services to be provided
at market based rates without being subject to the open access
requirements that apply to interstate natural gas pipelines. As
discussed in question 6.1, EPAct also prohibits manipulation of the
markets, or deceptive acts, in regards to the purchase and sale of
natural gas or related transportation services. In the event of such
violations, the FERC may order disgorgement of profits and impose
fines of up to $1 million a day. Section 344 of EPAct provides
incentives in the form of royalty relief for the production of natural
gas from ultra deep wells in the Gulf of Mexico. EPAct also grants
FERC authority to approve market based rates for storage and
storage-related services from new storage facilities, even where an
applicant cannot demonstrate a lack of market power.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
In the United States, mineral rights owned by state or federal
governments are transferred to investors/companies through leases.
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Under the MLA, the Department of the Interior, through the BLM,
grants leases for gas exploration and development on public domain
lands and on lands having federal reserved minerals. The MLA
authorises the Secretary of the Interior to lease federal lands known
or believed to contain oil or gas deposits. The Act establishes
qualifications for mineral lessees, sets out maximum limits on the
number of acres of a particular mineral that can be held by a lessee,
and prohibits foreign ownership of leases except though stock
ownership in a corporation. While all federal mineral leases require
the payment of annual rentals and production royalties to the United
States, the terms and conditions of the leases vary.
The BLM issues two types of leases for gas exploration and
development on lands owned or controlled by the federal
government - competitive and non-competitive. Congress passed
the Federal Onshore Oil and Gas Leasing Reform Act of 1987
requiring that all public lands available for gas leasing be offered
first by competitive leasing. The BLM may issue non-competitive
leases only after the agency has offered the lands competitively at
an oral auction and not received a bid. The BLM issues both
competitive and non-competitive leases for a 10-year period, which
lease can be automatically continued.
Other statutes may provide opportunities for obtaining leaseholds of
lands that are not “public domain” lands as defined by the MLA,
including the Mineral Leasing Act for Acquired Lands, the Outer
Continental Shelf Lands Act of 1953 (OCSLA), and the Indian
Mineral Development Act of 1982. The Mineral Leasing Act for
Acquired Lands provides the framework for leasing of lands which the
United States obtained by deed through purchase or gift, or through
condemnation proceedings and provides the Secretary of the Interior
the authority to lease acquired lands pursuant to the MLA, subject to
some limitations. The Mineral Leasing Act for Acquired Lands also
provides for leases of a partial or future interest where the United
States does not own a complete interest in the mineral deposits under
the land. The OCSLA governs the leasing of off-shore areas and
allows a lessee to explore, develop and produce gas in lands subject to
the lease, provided the lessee exhibits due diligence and complies with
an approved development and production plan. Finally, the leasing of
gas on Indian lands is subject to a separate procedural system under
the Indian Mineral Development Act of 1982, which authorises the
tribal council to lease tribal lands through competitive bidding, subject
to approval by the Secretary of the Interior.
A lessee of federal lands may explore and drill for, extract, remove,
and dispose of gas deposits, except helium, that are provided for in the
lease. However, before conducting any surface-disturbing activities,
the lessee must obtain BLM approval. Drilling proposals are subject
to the lease terms and stipulations that are attached to the lease and
necessary mitigation measures that are consistent with the lease rights.
States follow different procedures for granting mining leases
covering state-owned lands, and for approval of transfer of such
leases. Information relating to royalties payable under state mineral
leases, assignment forms and fees relating to transfers of interest in
state mineral leases can be obtained by review of state regulations
and consulting the applicable state agency.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
There is no standard or universal lease form used in the gas
industry. Typical provisions, however, include: 1) a granting
clause, which describes the substances that can be explored and
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Dewey & LeBoeuf LLP
provided; 2) provisions which define the lessees right to surface
operations; 3) delay rental terms, under which a lease automatically
terminates if drilling is not started in a specified time frame unless
a payment is made; 4) dry-hole and shut-in provisions that allow for
extension of the term of the lease when no gas is discovered or
production ceases; 5) a royalty clause which allocates to the lessor
a portion of the gas produced; and 6) pooling provisions granting
the lessee the right to consolidate the leased land with adjoining
leased tracts. Also see question 2.2, above.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
The federal government does not actively participate in the
development of natural gas reserves. Rather, pursuant to the MLA and
OCSLA, the government leases federal lands for exploration and
production of natural gas, and collects royalties on the gas produced.
The United States retains an ownership interest in the mineral estate
under federal lands except where otherwise transferred.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
As noted above, the U.S. government mainly derives value from
natural gas development through leasing mineral estates underlying
federal lands and the collection of royalty payments. Federal
statutes impose a minimum royalty of no less than the amount of
rental which otherwise would be received. The Secretary of the
Interior has the discretion to waive or reduce the royalty. States
where the federal land is located are also generally entitled to 50%
of the federal government’s revenues. For leases on state land, the
lease agreement will define the state’s right to royalty payments.
2.6 Are there any restrictions on the export of production?
Section 3 of the Natural Gas Act of 1938, as amended, requires that
anyone who wants to export natural gas to a foreign country must
first obtain an authorisation from the DOE. While FERC is
responsible for the siting, construction and operation of natural gas
import and export facilities, the DOE is responsible for the
contracts governing the import or export of natural gas. There are
basically two types of export authorisations, blanket and long-term
authorisations. The blanket authorisation enables an entity to
export natural gas on a short-term or spot market basis for a period
of two years. Under this type of authorisation, an entity is
authorised to export natural gas for itself or act as a marketing agent
for a third party. Entities with blanket authorisation are not
obligated to export natural gas and contracts are not required to be
filed for review by the DOE. The long-term authorisation is used
when an entity has, or intends to have, a signed gas purchase or
sales agreement/contract for a period of time longer than two years.
Export authorisations have been granted to local distribution
companies, municipalities, industrial end-users, electric utilities,
pipeline transportation companies, and individuals and companies
that market natural gas.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
We are not aware of any currency exchange restrictions.
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2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
As a general matter, for privately owned lands, there are no
restrictions on the transfer or disposal of natural gas development
rights or interests unless specifically provided for in a contract.
Leases of privately owned lands may expressly grant or limit the
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authority of the parties to transfer or assign the lease.
In the case of leases of federal lands, an entity may transfer its interest
in the acreage in the lease, with approval of the Secretary of Interior,
by assignment of the record title interest or by transfer of the operating
rights interest. At the state level, assignment of a lease, or transfer of
rights thereunder, may require approval of state authorities.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
A lessee of federal land must provide the BLM a bond of at least
$10,000 to ensure compliance with all the lease terms, including
environmental protection before they begin geophysical exploration
on leased or public lands. The BLM may require an increase in the
bond amount whenever conditions warrant. For multiple leases, a
lessee may provide a $25,000 state-wide bond or $150,000 nationwide
bond. States may also require filing of a bond or alternative security.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Specific lease terms, or applicable statutes, may restrict granting a
security interest in development rights.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
There are a host of rules and regulations, at both the federal and state
level, that may apply to the development of natural gas reserves in the
United States. One of the more prominent environmental regulations
at the federal level is the National Environmental Policy Act (NEPA),
which requires a federal agency to prepare an Environmental Impact
Statement before any major federal action. As part of the NEPA
process, the BLM may require that natural gas developers comply
with Best Management Practices to ensure that development on the
public lands is conducted in a manner that prevents or lessens its
environmental impact on public lands resources. Additionally, the
Federal Onshore Oil and Gas Leasing Reform Act, prohibits certain
types of gas leasing on lands recommended for wilderness allocation.
State regulations, such as compulsory pooling and well spacing, may
also restrict development of natural gas.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
Pursuant to Section 7 of the Natural Gas Act, natural gas companies
may only abandon natural gas facilities, or any portion or services
rendered by means of such facilities, with the approval of the
FERC. The FERC may only permit the abandonment of natural gas
facilities upon a finding “that the available supply of natural gas is
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depleted to the extent that the continuance of service is
unwarranted, or that the present or future public convenience or
necessity permit such abandonment.”
3 Import / Export of Natural Gas (including
LNG)
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3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
As noted in questions 2.6, Section 3 of the Natural Gas Act requires
Federal approval by the Department of Energy for the import and
export of natural gas, including LNG. The DOE issues two types of
import and export authorisations, blanket and long-term
authorisations. The blanket authorisation enables an entity to
import/export natural gas on a short-term or spot market basis for a
period of two years. Under this type of authorisation, an entity is
authorised to import/export natural gas for itself or act as a
marketing agent for a third party. Entities with blanket
authorisation are not obligated to import/export natural gas and
contracts are not required to be filed with the application. The long-
term authorisation is used when an entity has, or intends to have, a
signed gas purchase or sales agreement/contract for a period of time
longer than two years. Import/export authorisations have been
granted to local distribution companies, municipalities, industrial
end-users, electric utilities, pipeline transportation companies, and
individuals and companies that market natural gas.
Section 3 of the Natural Gas Act also requires approval by FERC for
the siting, construction, and operation of natural gas (including LNG)
import and export facilities. The FERC has the authority to review
applications for siting, construction, or operation of facilities to be
used for the export or import of natural gas and to review the proposed
rates for the interstate transportation and sale of the imported gas.
Applicants must provide a detailed summary of the proposal,
including descriptions of the facilities, and a statement demonstrating
that the proposal is “not inconsistent” with the public interest. If the
facilities will be located on the international boundary between the
United States and Canada or Mexico, additional filings are required to
obtain a Presidential Permit from FERC. FERC is authorised to grant
Presidential Permits if approved by the Secretaries of Defense and
State and it is consistent with the public interest.
In addition, the North American Free Trade Agreement (NAFTA)
plays a role in the import/export of natural gas as it governs the
trading relationship between Canada, Mexico, and the United
States. Canada and Mexico are directly connected to the U.S.
interstate pipeline network and are responsible for the majority of
gas imports. In part, NAFTA is aimed at reducing or eliminating
tariffs and liberalising trade in energy products. At present, under
NAFTA, natural gas exports are free from export controls, and
imports are not subject to any existing tariffs. The Trade Expansion
Act and Trade Act authorises the President to impose quantitative
restrictions on imports for national security reasons.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
“Transportation” is the term used for the carriage of natural gas
through interstate and intrastate pipelines from upstream points of
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production or importation of the gas to downstream points of
delivery, i.e., either to direct retail customers or to LDCs. There are
approximately 210 pipeline systems in the United States, with
approximately 306,000 miles of pipe, of which 180,000 miles are
interstate pipelines. In general, pipelines are public, investor-
owned companies, frequently affiliated with natural gas production
companies, gathering companies, LDCs, or electric power
companies.
FERC regulates interstate pipelines that transport natural gas in
interstate commerce under the Natural Gas Act (NGA) and the
Natural Gas Policy Act (NGPA), whereas intrastate pipelines which
operate wholly within a single state are generally subject to
regulation by the state within which they operate. FERC regulates
the rates and services offered by interstate pipeline companies, as
well as certification and operation of new pipeline construction. A
key component of the regulatory framework is that pipelines must
offer access to their transportation infrastructure to all market
participants on a non-discriminatory basis, referred to as ‘open
access,’ allowing marketers, producers, LDCs, and end users access
to transportation service, on an equal basis. Interstate pipelines can
serve only as transporters of natural gas and are no longer permitted
to act as merchants and sell bundled products.
FERC has defined “transportation” to include “storage”,
“exchange”, and “backhaul”, and the rates, terms and conditions for
each of these services are set forth in each pipeline company’s
FERC-approved tariffs.
EPAct 2005 added a new Section 4(f) to the Natural Gas Act, stating
that the Commission may authorise natural gas companies to provide
storage and storage-related services at market-based rates for new
storage capacity (placed into service after the date of enactment of the
Act), even though the company can’t demonstrate it lacks market
power. To issue such authorisation, the Commission must determine
that market-based rates are in the public interest and needed to
encourage the construction of the storage capacity, and that customers
are adequately protected. The FERC periodically reviews the
authorised market-based rates for storage to ensure they are just,
reasonable and are not unduly discriminatory or preferential.
Pipelines are also subject to various environmental and safety laws
during construction and operation of the transportation facilities.
Once natural gas pipeline projects become operational, safety is
regulated, monitored and enforced by the Department of
Transportation.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
For the construction of interstate natural gas transportation
pipelines and associated infrastructure, Section 7 of the NGA
mandates that developers obtain FERC approval, in the form of a
“certificate of public convenience and necessity” authorising the
construction, operation or expansion of such facilities. Under
Section 7(c), the FERC will grant a certificate if it determines that
the proposed project is in the public interest. Any abandonment of
“certificated transportation facilities” must also be approved by the
FERC as required in the public interest under Section 7(b) of the
NGA. Part 157 of FERC’s regulations allow for public
participation in the certification process and require applicants to
make a good faith effort to provide notice of the proceeding to
affected persons, such as landowners, and state and local
governments where the project is located. Details of the proposed
project must be included in the application such as the location of
the facilities, a full environmental report and flow diagrams. The
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flow diagrams should contain detailed descriptions of the wellhead
production areas and relevant market data, including estimates of
gas to be delivered and prospective customers who have entered
into transportation agreements or signed letters of intent, and the
estimated cost of the facilities and the proposed financing for the
project. The filing should also be accompanied by a tariff setting
forth the rates and terms for the various services to be provided.
The Pipeline and Hazardous Materials Safety Administration
(PHMSA) of the U.S. Department of Transportation regulates the safe
and secure transportation of hazardous materials in the United States,
including the operation and maintenance of natural gas pipelines.
Compliance with certain aspects of the PHMSA regulations have been
delegated to state authorities. In recent years, PHMSA has issued
rules requiring gas transmission pipelines to develop and implement
integrity management programmes for their systems. The integrity
management rules generally require operators to develop written plans
for the continuing review of threats to the pipeline system and
implementation of measures to reduce those risks.
Project construction must also comply with multiple environmental
statutes including, but not limited to, the Clean Water Act, the Clean
Air Act, the Coastal Zone Management Act of 1972, and the
Endangered Species Act of 1973. In October 2006, the FERC
finalised rules for the coordination of all federal environmental
reviews and authorisations for natural gas infrastructure projects to
ensure that the required authorisations are processed expeditiously.
Under that rule, FERC acts as the lead agency for federal
environmental reviews, establishes a schedule for the completion of
reviews of requests for authorisations necessary for a proposed
project and maintains a consolidated record of those decisions to
expedite potential judicial review.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
Developers may acquire land rights through purchases from
individual landowners or through negotiation of rights-of-way, or
easements. Section 7(h) of the NGA also allows a pipeline
certificate holder to obtain such rights through eminent domain, i.e.,
the inherent power of the government to compel a land-owner to
surrender certain rights to his/her land in exchange for just
compensation. Eminent domain procedures are also generally
available under state law for pipelines located within the state.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
The NGA established a regulated system of private contract
carriage. Pursuant to FERC’s rules and regulations, access to
natural gas transportation pipelines and associated infrastructure is
available to market participants on a non-discriminatory basis.
FERC Order Nos. 436 and 636 require that interstate pipelines offer
open access to all qualified shippers on a non-discriminatory basis.
While an interstate pipeline is not required to provide requested
transportation service for which capacity is not available or that
would require the construction or acquisition of new facilities, it
must provide available capacity without preference in the quality of
service provided, the duration of service, the categories, prices, or
volumes of natural gas to be transported. Pipelines are required to
have on file with FERC tariffs of general applicability that provide
for the rates, terms and conditions applicable to the various services
offered on the pipeline. FERC’s open access regulations govern the
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various services offered by the pipeline, including, firm and
interruptible service, temporary or permanent release of capacity
that shippers previously subscribed to on the pipeline, and business
practices for pipeline operations and communications.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
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between different transportation systems established and
regulated?
The U.S. natural gas pipeline network is a highly integrated
transportation and distribution grid that can transport natural gas to
and from nearly any location in the lower 48 States. Shippers can
choose from a number of alternate routes to move gas from
production areas to market areas and to access storage facilities. In
2000, FERC created the framework for market participants to
obtain interconnection, provided the following five conditions are
satisfied: (i) the party seeking the interconnection must agree to
bear the costs of constructing the interconnection; (ii) the proposed
interconnection must not adversely affect the pipeline’s operations;
(iii) the proposed interconnection and resulting transportation must
not result in diminished service to the pipeline’s existing customers;
(iv) the proposed interconnection must not cause the pipeline to be
in violation of any applicable environmental or safety laws or
regulations with respect to the facilities required to establish the
interconnection; and (v) the proposed interconnection must not
cause the pipeline to be in violation of its right-of-way agreements
or any contractual obligations with respect to the interconnection
facilities. FERC’s policy objective is to ensure that competitive
markets operate fairly, with open access to the pipeline systems.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
As noted in questions 4.4 and 4.6, while interstate pipelines are
required to provide open access transportation service, an interstate
pipeline is not required to provide requested transportation service
for which capacity is not available or that would require the
construction or acquisition of any new facilities.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
FERC has authority over the rates, terms and conditions for service
over interstate natural gas transportation facilities, and, pursuant to
its authority under Sections 4 and 5 of the NGA, FERC ensures that
rates, terms and conditions are “just and reasonable.” Traditionally,
rates that are costs-based are deemed “just and reasonable”, i.e., the
rates allow the pipeline operator an opportunity to recover the costs
and expenses of operating the pipeline (including taxes and
depreciation), as well as a fair return on the capital invested in the
pipeline. An interstate pipeline’s cost-based rates are established by
FERC in a Section 4 rate proceeding, which is frequently lengthy
and complex. Essentially, the FERC examines the pipeline’s books
and records to ensure that the proposed rates properly reflect the
pipeline’s prudently-incurred cost of providing transportation
services. The approved rates are incorporated in the pipeline’s tariff
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on file with FERC and represent the maximum rate the pipeline can
charge for transportation service. Pipelines and shippers, however,
are free to negotiate a discount to that maximum rate, provided it is
offered on a non-discriminatory and non-preferential basis.
FERC also permits pipelines that lack market power to request
negotiated rates for shippers, provided the customers have access to
recourse rates under an approved tariff. In order to implement a
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negotiated rate transaction, a pipeline must file either the negotiated
rate agreement itself or a tariff sheet describing the agreement.
Continuing its efforts to “carry out Congress’ mandate to protect
consumers by protecting the integrity of the markets for physical
gas” FERC issued two orders intended to increase transparency of
price and availability of supply in natural gas markets. See Pipeline
Posting Requirements under Section 23 of the Natural Gas Act, 125
FERC 61,211 (2008) and Transparency Provisions of Section 23 of
the Natural Gas Act, Order No. 704, 121 FERC 61,295 (2007). In
both cases, FERC exercised its expanded market transparency
authority under section 23 of the Natural Gas Act (NGA), a section
added to the NGA by EPAct. The first order requires both interstate
and certain major non-interstate pipelines to post on a daily basis
capacity, scheduled flow information, and actual flow information.
According to FERC, the requirement would provide a complete
picture of daily supply and demand information across the United
States. FERC expects that the additional information required of
pipelines would improve the quality of information about physical
flows of natural gas across the United States pipeline system and
facilitate price transparency in markets for the sale or transportation
of physical natural gas in interstate commerce to implement section
23 of the NGA.
The second order, among other things, introduces a new annual
reporting requirement for any buyer or seller of more than 2.2 million
mmBtus of physical natural gas each year. Such entities must report
aggregate volumes of relevant transactions, including, total volume of
sales and purchases, volumes of transactions at fixed prices and
volume of transactions reportable to price index publishers. Buyers or
sellers operating under blanket sales certificate authority that buy or
sell less than that amount of gas must also submit an annual report for
identification and certain reporting purposes but need not report
aggregate volumes of relevant transactions. A market participant that
buys or sells less than that amount of gas and does not operate under
blanket sales certificate authority is not required to submit the annual
report. The annual report is due on May 1 of each year.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
Although some large end-use customers (e.g., industrial, commercial,
and electric generation customers) receive natural gas directly from
high capacity interstate and intrastate pipelines (addressed in question
4.1, above), state-regulated LDCs distribute the majority of natural gas
to end-users through thousands of miles of small-diameter distribution
pipe. There are two basic types of local distribution companies: (1)
investor-owned utilities; and (2) public gas systems owned by local
municipals, cooperatives or other governmental bodies.
The retail sale and distribution of natural gas in the United States is
regulated by the individual states and localities in which the LDCs
operate, and extends to the rates charged to various classes of
customers (e.g., residential, small commercial, commercial and large
industrial customers), as well as a range of operational issues such as
curtailment, balancing and other general terms and conditions of
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service. There are regulatory commissions in all 50 states which
supervise the rates, services and operations of LDCs. Traditionally,
LDCs have been awarded exclusive franchise rights to distribute and
sell natural gas in a specified geographic area. However, some states
have created retail choice programmes in which customers have the
option to choose from whom they purchase their gas and require the
LDCs to provide distribution service.
Certain aspects of the operation of natural gas distribution lines are
also subject to the safety and security regulations of PHMSA, as
noted in question 4.1. Compliance with certain PHMSA rules have
been delegated to state authorities. PHMSA issued final rules in
December 2009 extending the integrity management requirements
to operators of gas distribution lines.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
LDCs are typically granted franchises or charters by state or local
governments to provide gas distribution service in an exclusive
service territory. The procedures under which an LDC may expand
or transfer its franchise rights vary under state law.
5.3 How is access to the natural gas distribution network
organised?
Access to the various distribution systems across the United States
is a matter of state law and policy generally administered by state
public utility commissions and varies by state. Generally, LDCs
must provide distribution service to all customers located on their
distribution system on a non-discriminatory basis.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
The standards under which LDCs may be compelled to grant
capacity or expand their systems for new or existing customers are
established on a state-by-state basis.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
The rates and terms under which LDCs must offer service over their
systems are established on a state-by-state basis and vary among the
states. Generally, the rates and services of an LDC are subject to
regulation by the state commission.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
In general, the acquisition or transfer of distribution network assets that
are necessary in the provision of service to the public may require the
prior approval of the state commission in which the assets are located,
but the specific restrictions and limitations vary from state to state.
Frequently, state law requires a demonstration that the acquisition of a
gas utility or transfer of utility assets is in the public interest, either by
showing no net harm to, or net benefits for, customers resulting from
the transaction. The Federal Trade Commission (FTC) and the
Department of Justice (DOJ) also have authority under the Hart Scott
Rodino Antitrust Improvements Act of 1976 (HSR) over mergers and
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significant acquisitions of and by natural gas distribution companies. If
the FTC or DOJ determine that a proposed transaction will decrease
competition in the relevant market, the transaction may either be
denied, or approved with conditions, such as requiring divestiture of
certain assets. Foreign investment in a gas utility may also be subject
to review by the Committee on Foreign Investment in the Unites States,
as discussed in question 8.1.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Under the current regulatory framework, interstate natural gas sales
and marketing are not heavily regulated. Pursuant to FERC Order
No. 547, any entity, except interstate pipelines, is granted blanket
authority (i.e., a “blanket certificate of public convenience and
necessity” pursuant to section 7 of the Natural Gas Act) to make
sales for resale at negotiated rates in interstate commerce of any
category of natural gas. Essentially, the blanket authority permits
entities to engage in negotiated sales of natural gas. The blanket
authority does not subject the certificate holder to any other
regulation by the FERC under the NGA, and there is no requirement
to file rates or contracts with the FERC.
Although price is a function of competitive markets, and is no
longer regulated by the government, FERC requires sellers to
comply with a “code of conduct” to protect against market
manipulation. Pursuant to Order No. 673, to the extent sellers
engage in the reporting of transactions to publishers of natural gas
indices, FERC requires sellers to notify the Commission of the
details of their arrangement, report the information accurately,
update the Commission of any change in their reporting practice,
and “adhere to such other standards and requirements for price
reporting as the Commission may order.” 18 C.F.R. § 284.403(a).
The code of conduct also directs blanket certificate holders to
retain, for a period of three years, “all data and information upon
which it billed the prices it charged for the natural gas sold pursuant
to its market based sales certificate or the prices it reported for use
in price indices.” 18 C.F.R. § 284.403(b).
As discussed in question 4.7, certain FERC regulations are designed to
improve the transparency of wholesale natural gas prices and supplies.
Interstate and certain major non-interstate pipelines have increased
reporting requirements related to daily capacity and flow information,
and an annual reporting requirement for buyers or sellers of more than
2.2 million mmBtus per year to report aggregate annual volumes at
fixed prices and volumes reported to price index publishers.
Additionally, EPAct amended the NGA to make it unlawful for an
entity to use a “manipulative or deceptive device or contrivance” in
connection with a purchase or sale of natural gas or of any
transportation service. FERC issued rules making it unlawful for an
entity to, directly or indirectly, defraud, make any untrue statement
of material fact or omit a material fact, or engage in any act, practice
or course of business that operates or would operate as a fraud or
deceit, in connection with transactions involving the purchase or sale
of natural gas or of a transportation service. Any violation of the
Commission’s code of conduct or the prohibition of market
manipulation rules subjects a blanket certificate holder to
disgorgement of unjust profits and suspension or revocation of the
certificate pursuant to FERC’s authority under the NGA and EPAct.
Significantly, EPAct also increased FERC’s civil penalty authority,
and authorised it to impose fines of up to $1,000,000 per day per
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violation of the NGA, or any rule, regulation or order issued by
FERC. In 2009, FERC settled the first two enforcement proceedings
in which it used its new enforcement authority to prosecute natural
gas market manipulation for a combined $37.5 million. In 2009, the
FERC also initiated enforcement matters related to conduct of
market participants in releasing pipeline capacity.
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6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Under federal law, natural gas is sold or traded separate and apart
from the interstate transmission of the supplies. There is also a
market for natural gas related derivative financial products in the
United States. At the state level, the sale and distribution of natural
gas was traditionally sold as a bundled service but in recent years
many states have introduced retail choice programmes that allow an
LDC’s customers to purchase natural gas from third-party suppliers.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
Although LNG currently accounts for only a minor percentage of
natural gas consumption in the U.S., LNG is expected to play an
increasing role in the future. LNG projects are subject to various
laws and regulations that are administered by FERC, the US Coast
Guard/Maritime Administration, the US Army Corps of Engineers,
as well as the individual states.
To construct an LNG facility, import authorisation from the
Department of Energy’s Assistant Secretary of Fossil Energy must be
obtained. The Assistant Secretary must approve the application unless
it determines that the import is not consistent with the public interest.
After the import authorisation is obtained, the FERC must review the
application pursuant to its exclusive jurisdiction under Section 3 of the
NGA. Depending on the location of the proposed project, the U.S.
Coast Guard and Maritime Administration (“MARAD”) may have
jurisdiction: The U.S. Coast Guard and MARAD has jurisdiction for
siting and operation of all LNG import terminals in federal waters
pursuant to the Deepwater Ports Act. The FERC’s authority, as
amended under EPAct, is addressed in question 7.2.
The environment for obtaining approval of new LNG receiving and
regasification facilities has improved significantly. Two new
onshore facilities in the Gulf of Mexico region and one facility in
offshore Massachusetts became operational in 2008. On April 12,
2008, Sabine Pass LNG, L.P. took delivery of the LNG tanker the
Celestine River at its new terminal located in Cameron Parish,
Louisiana, and became the first new onshore LNG terminal to open
in the U.S. in more than 25 years. On April 15, Freeport LNG L.P.,
which broke ground on its facility on Quintana Island, Texas in
2005, received the LNG tanker Excelsior. The Northeast Gateway
port offshore Massachusetts received its first supplies May 23, but
the less-than-1 Bcf delivered from Trinidad and Tobago was the
only volume accepted at the port during the year. With these
terminals now operational, U.S. capacity to receive LNG imports
has increased from approximately 5.0 Bcf per day at the end of
2007 to about 9.1 Bcf per day as of 2008.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
As noted in question 7.1, the first step in obtaining approval for the
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construction and operation of an LNG facility in the United States
is to present an application to import gas to the Assistant Secretary
of Fossil Energy at the DOE.
Pursuant to Section 3 of the NGA, (as amended by EPAct), FERC has
exclusive authority to approve or deny an application for the “siting,
construction, expansion, or operation” of onshore LNG import
terminals, offshore import terminals in state waters, as well as
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pipelines and other onshore LNG facilities. FERC must review the
environmental impact of the proposed LNG project pursuant to the
National Environmental Policy Act (NEPA) and for compliance with
other environmental and safety standards. This includes review of
the potential impacts to public safety, including thermal and
flammable vapour exclusion zone modelling, and marine safety
analysis. FERC also conducts a Cryogenic Design Review to verify
the safe design of the facilities and the reliability of the system. As
part of the approval process, the company must obtain a water quality
certificate, a dredge fill permit and Coastal Zone Management
clearance from the state in which construction will occur.
FERC continues to monitor the design and construction of the
project through detailed monthly reports. After construction is
complete, prior to commencing operations, the company must
receive written approval from the Director of the Office of Energy
Projects. Thereafter, the facility will be subject to periodic
inspection by FERC, and the operator is required to file semi-
annual reports summarising plant operations, maintenance activity
and accounts of any abnormal events. The Department of
Transportation has authority under the Pipeline Safety Act to
prescribe minimum operation, maintenance and safety standards for
the location, design, installation, construction, inspection and
testing standards of LNG facilities.
The U.S. Coast Guard and Maritime Administration administers a
similar process for the approval of LNG projects in federal waters.
Pipelines leading from deepwater LNG terminals come under
FERC jurisdiction above the “high water mark” when the pipeline
comes onshore.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
The LNG sector is lightly regulated by the FERC. LNG projects are
not required to offer open access service or to maintain tariffs or
rate schedules. The rates, terms and conditions of LNG
terminalling service are mutually agreed to by the parties. EPAct
provides, however, that any order for an LNG terminal that offers
open access shall not result in subsidisation of expansion capacity
by existing customers or degradation of service to existing
customers. Before January 1, 2015, without other justification,
FERC may not deny an application on grounds that the applicant
proposes to use the LNG terminal exclusively or partially for gas
that the applicant or an affiliate will supply to the facility.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
As discussed in question 5.6, the FTC and the DOJ have authority
to consider mergers and acquisitions of and by natural gas
companies, and to investigate, prevent and punish anticompetitive
behaviour as proscribed under the Sherman Act, the Federal Trade
Commission Act, and the HSR. The remedial power of the FTC and
the DOJ includes both civil and criminal penalties.
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As discussed in question 6.1, above, FERC also has authority to
monitor, prevent and penalise anticompetitive behaviour in natural
gas markets. Additionally, EPAct amended the NGA to make it
unlawful for an entity to use a “manipulative or deceptive device or
contrivance” in connection with any purchase or sale of natural gas
or purchase or sale of any transportation services. EPAct also
increased FERC’s authority to impose fines or penalties of up to
$1,000,000 per day for violations of the NGA, or of any rule,
regulation or order issued by FERC. The Commodities Futures
Trading Commission has authority over the trading of natural gas
futures. State law may also regulate competition in the retail sale of
natural gas and/or prohibit anti-competitive practices.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
This issue is addressed in question 6.1 above. EPAct provides that
it is unlawful for an entity to use a “manipulative or deceptive
device or contrivance” in connection with any purchase or sale of
natural gas or purchase or sale of any transportation services.
As stated in question 5.6 in the context of merges or acquisitions of gas
distribution assets, the FTC and DOJ typically examine whether the
transaction will decrease competition in the relevant market, and may
either block the transaction, or approve it with conditions (including
required divestitures). The FTC and DOJ’s broad authority to
investigate, prevent and punish anticompetitive behaviour arise from
the Federal Trade Commission Act, which prohibits “unfair methods
of competition,” and the Sherman Act, which prohibits
anticompetitive contracts, combinations or conspiracies and
monopolistic conduct. The individual states and territories also have
antitrust statutes that may be used to challenge transactions. FTC/DOJ
approval can be obtained within 30 days following submission of all
the required information, although the approval process can take much
longer if a material effect on competition is found.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
See question 8.1 above.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
In addition to the HSR requirements discussed in question 8.2
above, FERC has jurisdiction under Section 7 of the NGA to
approve the acquisition or abandonment of jurisdictional facilities.
The FERC’s authority generally does not extend to mergers, or
changes of control, through the exchange of the stock of
corporations engaged in the natural gas business.
Many state public utility commissions are required under state law
to review and approve the change of control of a state jurisdictional
gas utility. Generally, state laws require a demonstration that a
proposed change of control is in the public interest by showing net
benefits for, or no net harm to, customers of the regulated utility.
State laws may also require a demonstration that the acquiring
entity has the financial, managerial and technical expertise or
capability to own and operate the gas utility. Reviews of the change
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Dewey & LeBoeuf LLP
of control a gas utility by a state public utility commissions may
take three to twelve months for completion.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
Any transaction by or with any foreign person which could result in
control of a U.S. business by a foreign person is subject to review by
the Committee on Foreign Investment in the United States (CFIUS).
CFIUS is an inter-agency committee chaired by the U.S. Secretary of
Treasury which conducts reviews of foreign investments pursuant to
the Foreign Investment and National Security Act of 2007 (FINSA),
which amended Section 721 of the Defense Production Act of 1950.
On November 14, 2008, the U.S. Treasury Department issued final
regulations governing CFIUS. Under FINSA, the U.S. President,
acting through CFIUS, is authorised to review foreign acquisitions of
controlling interest in U.S. businesses if national security is
implicated. The President may prohibit a transaction (or force
divestiture of a completed transaction) that threatens to impair the
national security of the United States.
A CFIUS review focuses on a foreign person’s power to control a U.S.
business, not on the form of the transaction. Thus, covered transaction
may include asset acquisitions, equity investments, joint ventures and
long-term leases. Providing notice of a transaction to CFIUS is
voluntary, but CFIUS may initiate a review even after closing of a
transaction. CFIUS reviews are subject to statutory timeframes which
require a CFIUS review of a completed notification within 30 days
and completion of an investigation, if deemed necessary, within 45
days. FINSA expanded the mandate of CFIUS to review foreign
investments, including consideration of the potential effect on critical
infrastructure and critical technologies.
Lastly, the MLA prohibits foreign ownership of leases except
though stock ownership in a corporation.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
The importation or exportation of natural gas to a country with
which the United States has an effective free trade agreement is
deemed to be in the public interest, and is usually not controversial.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
There are no provisions mandating compulsory dispute resolution
procedures in suits with the government. For private parties, the
FERC adopted Order No. 578, which allows parties to voluntarily
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USA
submit disputes to alternative dispute resolution procedures, such as
settlement negotiations, conciliation, facilitation, mediation, fact-
finding, mini-trials and arbitration.
10.2 Is the United States a signatory to, and has it duly ratified
into domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
USA
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Although the United States is a signatory of the New York
Convention on the Recognition and Enforcement of Foreign
Arbitral Awards, it applies the Convention “only to recognition and
enforcement of awards made in the territory of another Contracting
State”, and only to “differences arising out of legal relationships
whether contractual or not which are considered as commercial
under the national law”. The United States is also a signatory to the
Convention on the Settlement of Investment Disputes between
States and Nationals of Other States.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
As natural gas production, transmission and local distribution
facilities in the United States are not typically owned by the federal
government or by the individual states, this question has limited
application in the United States. Moreover, such suits would be
subject to the restrictions of the Eleventh Amendment to the United
States Constitution and the doctrine of sovereign immunity.
Certain distribution systems may be owned and operated by
municipalities or other governmental entities, and the extent to
which judgments may be enforced against such entities is a matter
of state law and, therefore, varies among the states.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
See question 10.3 above.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in the United States.
Trends and developments in the regulation of the United States gas
industry in 2009 included the following:
The FERC continued to refine its pipeline capacity release
rules by removing price caps on short-term (1 year or less)
releases of pipeline capacity, but kept the rate cap on primary
sales of capacity by pipelines. The FERC also exempted
capacity releases made as part of asset management
arrangements (where a party manages gas supply and
delivery arrangements for another entity) from the
prohibition on tying capacity releases to any extraneous
conditions. FERC also exempted capacity releases made
under State-approved retail access programmes from the
prohibition against tying and from bidding requirement
regulations.
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The FERC also continued the trend of increasing
transparency in natural gas markets by requiring interstate
natural gas pipelines and certain major non-interstate natural
gas pipelines to post daily scheduled volume information and
design capacity for certain receipt and delivery points and
required interstate natural gas pipelines to post information
regarding the provision of no-notice service.
PHMSA issued final rules in December 2009 requiring all
USA
been applied to operators of hazardous liquid and gas
transmission pipelines. The PHMSA rules require operators
to develop written integrity management plans to identify
and address threats and risks to the safe and secure operation
of their facilities, including periodic inspections and annual
reports on performance measures.

operators of gas distribution lines to develop integrity Acknowledgment

management programmes for their gas distribution systems. The authors would like to acknowledge the assistance of their
These rules generally extend to gas distribution systems the colleague S. Shamai Elstein in the preparation of this chapter.
integrity management requirements that have previously

Elias G. Farrah Scott J. Mueller

Dewey & LeBoeuf LLP Dewey & LeBoeuf LLP
1101 New York Ave, NW 260 Franklin Street
Washington D.C. 20005 Boston, MA 02110
USA USA

Tel: +1 202 346 8013 Tel: +1 617 748 6843

Fax: +1 202 956 3247 Fax: +1 617 897 9043
Email: efarrah@dl.com Email: smueller@dl.com
URL: www.deweyleboeuf.com URL: www.deweyleboeuf.com

Eli Farrah specialises in representing natural gas companies and
electric utilities before the FERC and state and federal courts. His
work in these areas also involves mergers and acquisitions in the
energy industry. Mr. Farrah’s practice is nationwide in scope and
includes representation of natural gas pipelines and local gas
distribution companies, as well as electric utilities on a broad range
of regulatory and other legal issues, including RTO-related matters.
Prior to joining the firm, Mr. Farrah spent five years in the Office of
General Counsel at the Federal Energy Regulatory Commission
where he held various trial and supervisory positions, including
Acting General Counsel for Natural Gas Policy Act Matters and
Assistant Deputy General Counsel in charge of Natural Gas Pipeline
Litigation.
Scott Mueller is co-head of the firm’s Energy Regulatory Department
and has extensive experience in the areas of energy, utility, and
regulatory law. He represents a wide variety of clients in related
transactions, proceedings and litigation, and regularly advises
clients on the state law aspects of utility mergers and acquisitions.
Typical clients include natural gas distribution companies,
independent power producers, electric utilities, investors, energy
marketers, interstate pipelines, municipalities and large consumers
of energy. In recent years he has counseled clients on matters
related to the restructuring of the gas and electric industries both at
the state and federal level. He frequently represents clients
regarding the introduction of competition in regulated markets, the
purchase and sale of gas and electricity, public utility mergers and
acquisitions, and the development and siting of energy facilities. Mr.
Mueller routinely represents clients on regulatory and rate matters
and practices before the state utility commissions and appellate
courts in New York and New England. He is President Emeritus of
the Northeast Energy and Commerce Association and a frequent
lecturer on public utility issues. Prior to joining the firm, Mr. Mueller
held a number of positions with federal regulatory agencies in
Washington and Boston.

Dewey & LeBoeuf LLP is an international New York-headquartered law firm with more than 1,400 lawyers in 12
countries, including the United States, the United Kingdom, Belgium, France, Germany, Italy, Poland, China, South
Africa, Kazakhstan, Russia and Saudi Arabia. The firm provides advice and representation to the full spectrum of clients
in the energy industry including natural gas and electric utilities, oil and gas producers, pipeline operators, generators,
marketers, end-users, financial institutions and investors. Dewey & LeBoeuf’s leadership in the utilities, power and
pipeline industries has been recognised by a number of legal publications and the firm was named “Number 1 for
Energy and Natural Resources” by Chambers USA for 2006 - 2007.
Dewey & LeBoeuf’s Washington D.C.’s office features more than 160 top litigators, corporate, and regulatory attorneys
well-versed in their fields of expertise. The firm’s attorneys and other professionals in Washington practice in the areas
of energy, tax, antitrust, telecommunications, international trade, project finance, insurance and reinsurance, securities
and white collar litigation, intellectual property and government investigations.
The Boston office of Dewey & LeBoeuf, in addition to delivering to its clients the firm’s Wall Street experience and vast
global resources, provides expertise and service in energy, public utility regulation, mergers and acquisitions,
international corporate and securities law, environmental, insurance, litigation and maritime law.

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Chapter 36
Uzbekistan
Denton Wilde Sapte
1 Overview of Natural Gas Sector
1.1 A brief outline of Uzbekistan’s natural gas sector, including
a general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Uzbekistan is a former Soviet satellite located in the heart of
Central Asia. Uzbekistan is the region’s most populous nation with
over 27 million people. It is one of only two double landlocked
countries in the world, along with Liechtenstein, requiring crossing
of at least two other countries to gain access to the sea.
Uzbekistan is the CIS' third largest producer of natural gas after the
Russian Federation and Turkmenistan and the 12th largest producer
of natural gas in the world. As of the end of 2008, according to the
BP Statistical Review of World Energy 2009, its proven reserves of
natural gas were estimated at 1.58 tcm, effectively making
Uzbekistan the 17th largest holder of proven reserves of natural gas
in the world.
Uzbekistan produces approximately 65 bcm of natural gas annually
(62.2 bcm in 2008), of which nearly 80% is sold domestically with
the remaining 10-15 bcm being exported to Russia and other
Central Asian neighbours. Uzbekistan’s natural gas production and
exports are expected to grow in coming years.
Russian giant Gazprom is actively present in Uzbekistan and,
pursuant to the co-operation agreement between the governments of
Russia and Uzbekistan signed in 2002, has been the sole exporter of
Uzbek natural gas since 2003, other than exports to neighbouring
Central Asian countries.
Uzbekistan’s gas pipeline system was built during the Soviet era as
part of a centralised system delivering natural gas to Russia. Its
export options are limited to Russia and other Central Asian
countries. Any export initiative beyond the territory of the Russian
Federation and Central Asia requires authorisation by the Russian
government for the transit of natural gas through its territory.
Uzbekistan is currently participating in the Central Asia-China
pipeline for exporting natural gas from Central Asia to China. The
1,833km gas pipeline starts in Saman-Depe carrying natural gas
from the Bagtyyarlyk gas fields in Turkmenistan through central
Uzbekistan and southern Kazakhstan before entering China.
Natural gas from Turkmenistan and Kazakhstan is to be exported to
China through this pipeline with Uzbekistan merely undertaking the
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Marla Valdez
Ravshan Adilov
transit of it through its territory.
There are presently over 50 natural gas fields in Uzbekistan. The
major fields are Gazli, Shurtan, Pamuk, and Khauzak.
One of the largest natural gas exploration projects in Uzbekistan is the
Kandym-Khausak-Shady-Kungrad project. In March 2002, Russia’s
Itera and Lukoil signed a PSA with Uzbekneftegaz to form a joint
stock company to develop several new gas fields in Uzbekistan,
including the giant Kandym field. Natural gas reserves at the fields
covered by the PSA are estimated at 8.1 tcf, including approximately
5.4 tcf at the Kandym structure. Itera and Lukoil together hold a 90%
interest, with Uzbekneftegaz holding the remaining 10%.
In 2006, Russian Lukoil, Malaysian Petronas and Chinese CNPC
established a consortium to explore and develop the Uzbek part of
the Aral Sea.
More recently, in 2009, Uzbekneftegaz signed a heads of agreement
with South African Sasol and Malaysian Petronas for the
development of a gas-to-liquids (GTL) project in Uzbekistan.
1.2 To what extent are Uzbekistan’s energy requirements met
using natural gas (including LNG)?
According to 2008 estimates, Uzbekistan produced 83.82 mboe/d
while it consumed 143 mboe/d. Thus, Uzbekistan’s total oil
production in 2008 met 70% of Uzbekistan’s demand.
With regard to natural gas, Uzbekistan’s domestic needs are fully met
by Uzbekistan’s natural gas production. For example in 2008,
Uzbekistan produced 62.2 bcm while its consumption was 48.7 bcm.
Similar to natural gas, 100% of Uzbekistan’s demand in coal and
electricity in 2007 was met by local production (coal: 3.638 MMT
(short tonnes) of production vs. 3.643 MMT (short) of
consumption; and electricity: 46.66B kWh of net generation vs.
42.23B kWh of net consumption).
1.3 To what extent are Uzbekistan’s natural gas requirements
met through domestic natural gas production?
Uzbekistan’s natural gas requirements are fully met through
domestic natural gas production. Unlike other Central Asian gas
producers, Uzbekistan allocates most of its produced natural gas
(nearly 80%) for domestic needs.
1.4 To what extent is Uzbekistan’s natural gas production
exported (pipeline or LNG)?
Uzbekistan exports approximately 10-15 bcm of its produced
natural gas every year. The Russian Federation purchases more
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than half of the above volumes; the remaining is exported to
Kyrgyzstan, Kazakhstan and Tajikistan.
According to recent reports, Uzbekistan and Tajikistan have
reached an agreement for Uzbekistan to export 250 mcm of natural
gas in 2010 to Tajikistan at world market prices.
Uzbekistan
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
The primary legislation for exploration and production of natural
gas in Uzbekistan consists of the Subsurface Law, the Law on
Concessions, and the Law on Production Sharing Agreements.
The Main state regulators of the natural gas sector in Uzbekistan are
the Cabinet of Ministers (COM), the State Committee on Geology
and Mineral Resources (the Geology Committee), and the State
Inspection on Oversight of Safe Conduct of Work in Industry,
Mining and Domestic Sectors of the Republic of Uzbekistan (the
Safety Inspection).
State regulation of Uzbekistan’s natural gas sector includes, inter
alia, licensing activities on geological studies of subsurface,
exploration and production of mineral resources; managing the state
subsurface fund; approval of state programmes for the development
and production of the country’s mineral base; and organisation of
the state control over the use and protection of the subsurface.
The subsurface and minerals in situ are owned by the state. The
COM is the authorised body representing the State and acting on its
behalf on issues related to subsurface use in Uzbekistan.
The state’s participation in exploration and production of natural
gas is carried out through the state-run entity, Uzbekneftegaz, and
its subsidiaries. Uzbekneftegaz enters into contractual agreements
and forms joint ventures with private partners, representing the
interests of the Republic of Uzbekistan.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
The right to use the subsurface, including the development of
natural gas reserves, is granted on the basis of a licence issued by
the Geology Committee. Licences for exploration and production
are granted based on the results of a tender or by direct negotiations
and pursuant to the conclusion of a contract.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration, appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
Different licences must be granted for different stages of
exploration and development of a gas deposit. An exploration
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Uzbekistan
licence and a production licence may be granted for a term of up to
5 years. A test-production licence may be granted for a term of 3
years. All of these licences may be extended.
A separate licence is also required for the construction and use of
underground facilities, including the storage of hydrocarbons, and
storage and disposal of waste. This type of licence may be issued
for an undetermined period of time.
2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
In Uzbekistan, gas produced is shared and owned in accordance
with the terms of a PSA or other agreement for the production of
natural gas. A foreign investor is free to export its share of
production. There is no legal obligation for the state to have a
participating ownership in a natural gas production project and, as
a matter of practice, the percentage owned by the state is negotiated
or determined by the terms of the tender.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
In addition to the State’s share of production under PSAs, the State
derives value from natural gas development through licence
payments, special subsurface use taxes, such as a subsurface use tax,
excess profits tax, and signing and discovery bonuses. In addition,
subsurface users pay corporate income tax, value added tax, property
tax and other taxes. There are currently no export customs duties.
The current rate for subsurface use tax is 30%. Excess profit tax is
calculated at the rate of 75% if the taxable base exceeds US $130
per 1,000 cbm of natural gas sold. Excise tax on natural gas is
applied only to exports and is set at 25%.
2.6 Are there any restrictions on the export of production?
No, there are no such restrictions. A 2007 Presidential Decree No.UP-
2598 establishes the most favoured nation treatment regime for
foreign companies investing in exploration and development in the oil
and gas sector, whereby it expressly guarantees unobstructed export of
the foreign investor’s share of production from Uzbekistan.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
Currency convertibility in Uzbekistan is problematic. As a matter of
practice, most companies attempting to convert local currency (the
Sum) into hard currency are experiencing significant delays. This
can be explained by the country’s strict fiscal policies and the Central
Bank’s efforts to restrain the inflation of the national currency.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
Licences and contracts may be transferred partly or fully to a third
party, provided that the third party undertakes to comply with the
conditions established in the licence and contract, it meets all the
licensing requirements equal to those of the initial licence holder,
and such transfer is approved by the licensing authority.
In case of transfer of rights under a PSA, it requires the express
consent of the Uzbek COM for such transfer, and subject to the
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Denton Wilde Sapte
third party having the required financial capabilities and the
technological resources and management experience to undertake
the works under the PSA.
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
Participants are not required by law to provide any security or
guarantees in relation to the development of natural gas in
Uzbekistan. However, a condition to provide such guarantees and
securities can be established in contracts between the parties.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Subsurface use rights can be pledged to provide security for
fulfilment of an obligation.
Property rights acquired by an investor under a PSA can only be
pledged with the express consent by the state.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
If an investment project is under a PSA or involves the production
of natural resources with a value of at least US $10 million, it must
be approved by the COM. The required feasibility study must
include expert conclusions/opinions by various state agencies on
the conformity of the project to the legislation, including standards
on health, safety and the environment. Such approvals include:
"certification by the Safety Inspection and the state oil and
gas inspection, Uzgosneftegazinspekciya, regarding safety of
proposed technologies and technological processes;
certification by the State Committee on Architecture and
Construction and the State Committee on Nature Protection
on compliance of the proposed project with environmental
laws and standards; and
approval by the Ministry of Finance of the financial
effectiveness and recoupment of the proposed project.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
The Subsurface Law is the primary law regulating abandonment
and decommissioning of wells and other structures used in natural
gas development. Upon termination of the licence and contract, all
physical structures must be abandoned or conserved.
As a result of abandonment or decommissioning, structures, mine
openings (excavations) and wells must be brought to conditions that
would guarantee the security of public health and safety, and which
comply with the State’s environmental laws. Also, such protective
measures must be taken so that they will provide for the safety of
the deposit for the entire period of decommissioning.
Abandonment and decommissioning of structures is realised with
the appropriate approvals by the Safety Inspection and the State
Committee on Nature Protection.
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Uzbekistan
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
Uzbekistan
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
The legislation allows for the free export of natural gas, subject to
any agreed terms under an agreement.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
Uzbekistan has a centralised system of natural gas transportation
pipelines owned by the state. Most pipelines and associated
infrastructure in the natural gas sector were built during the Soviet
Era and are maintained and kept on the balance sheet of
Uzbekneftegaz’s subsidiaries, namely “Uztransgas” and
“Uzneftegazstroyinvest”. Under the Natural Monopolies law, the
transportation of natural gas through pipelines is subject to state
regulation of natural monopolies. Price control by approval of
tariffs is the major regulatory mechanism in this regard.
The construction of the Central Asia-China pipeline is the most
significant natural gas pipeline construction project since its
independence.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
In order for a company to be able to construct and operate a natural gas
transportation pipeline and associated infrastructure it needs to apply
for a specific licence, as provided by a 2003 COM Resolution No.310.
Under Resolution No. 310, the Cabinet of Ministers’ Commission on
licensing is authorised to issue, suspend, terminate and extend licences
for construction and operation of natural gas pipelines.
Such licences are issued for a general period of 5 years.
By law, the Commission must decide on the issuance of the licence
within 30 days from the date of submission of the application. The
Commission can reject such application only on the following
grounds: improper completion of the application documents;
submission by the applicant of incorrect, dishonest or fraudulent
information; and incompatibility of the applicant with licensing
requirements and the terms of a tender.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
There are three distinct categories of land-related rights that can be
obtained with regard to production of natural gas and construction
of transportation pipelines or associated pipelines:
1. Rights to use the Subsurface.
2. Rights to use land plots.
3. Rights to use mining allotments (production areas).
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With regard to obtaining the necessary land rights to construct
natural gas transportation pipelines or associated infrastructure, an
entity must purchase or seek to obtain an easement over the land to
be used for construction purposes. Article 173 of the Civil Code
specifically provides for the possibility of obtaining an easement for
Uzbekistan
the purposes of constructing a pipeline, provided it cannot be
constructed other than by using a particular piece of land.
Most property is still in the ownership of the State. Nevertheless,
the state has the right to acquire land owned by individuals or
entities by eminent domain.
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
As mentioned in question 4.1, natural gas transportation pipelines and
associated infrastructure are considered to be natural monopolies.
Natural monopolies are regulated by the Natural Monopolies Law and
supplemental regulations. Hence, access to main pipelines and
associated infrastructure is controlled by the State. Access is
organised by the Cabinet of Ministers in cooperation with
Uzbekneftegaz and appropriate state agencies based on the current
needs and requirements of producers and consumers of natural gas.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
As noted, all main pipelines are currently owned and operated by
the State. The only exception will be the construction of the
Uzbekistan-China section of the natural gas pipeline, which will be
owned 50% by the Chinese. As this pipeline will be constructed
under intergovernmental agreements, special rules will apply.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Since the transportation of natural gas by pipelines is treated as a
natural monopoly, it is subject to natural monopoly control. As part
of such control, the state obliges a natural monopoly entity to ensure
mandatory supply of product to certain categories of consumers and
in accordance with prescribed tariffs.
According to the COM Resolution No.8, the following categories of
natural gas consumers have priority of gas deliveries in Uzbekistan:
the general public;
consumers that the natural monopolies are required to supply
by law; and
consumers that do not have any debt for previous deliveries
of natural gas.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
JSC Uztransgas is authorised by the state to carry out distribution of
natural gas in Uzbekistan, including operating of pipelines through
its subsidiaries. As noted, it is a natural monopoly and as such, the
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terms upon which natural gas is to be transported are determined
and pre-approved by the Antimonopoly Agency, including approval
by the Ministry of Finance of tariffs for natural monopoly products.
5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
According to a 2006 Presidential Decree, the joint-stock company
Uztransgas, a subsidiary of the National Holding Company
Uzbekneftegaz, took over the management of the domestic natural
gas distribution network from the State Agency Uzkommunhizmat.
The natural gas distribution network, which comprises of pipelines
from the points of its transmission from gas-distributing stations to
the points where it is delivered to local consumers, is on the
Uztransgas’ balance-sheet. Sections of the distribution network are
run by the regional agents of Uztransgas based on agency
agreements concluded between them and Uztransgas.
Based on consumer demand, Uzbekneftegaz prepares a draft annual
natural gas balance for the following year and submits it to the
Ministry of Economy that, in turn, submits it to the COM for
approval. Based on the approved balance, Uzbekneftegaz allocates
annual and quarterly amounts of gas deliveries to regional end-
consumers and local distributors.
As mentioned above, Uztransgas is in charge of distribution of
natural gas to consumers in Uzbekistan either based on direct
agreements with them or through local distributors.
Distributors of natural gas may lower or discontinue deliveries to
consumers on the following grounds: force majeure; existence of
debt for past deliveries; and a failure by the consumer’s non-
compliance with regulatory requirements.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
The entire sector of operations of distribution networks is in the
exclusive competence of a single state-owned entity, Uztransgas, as
discussed in question 5.1. As with any infrastructure project,
distribution networks will be subject to the legislation on
environment and safety regulations. Consequently, the construction
and operations of a distribution network will require approvals from
the State Committee on Nature Protection and the Safety
Inspection, as well as other authorities.
5.3 How is access to the natural gas distribution network
organised?
See question 4.4.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
The state, being the owner of a 51% share in the National Holding
Company “Uzbekneftegaz”, has majority control over the
distribution network, and, hence, may grant capacity or expand its
system if needed.
During periods of low temperatures and for purposes of preserving
uninterrupted gas deliveries, natural gas distributors, in cooperation
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with regional government authorities, Uzneftegazinspection, a
subsidiary of Uzbekneftegaz, and consumers, develop and approve
appropriate schedules for switching certain entities to alternative
energy resources.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
The Ministry of Finance is the authorised state agency responsible
for approving tariffs for natural monopoly products and services in
Uzbekistan. The decision on tariffs is made based on an application
by the natural monopoly and must be issued within one week from
the date of submission of the complete application. In practice, the
Ministry of Finance sets tariffs in the form of price ceilings,
meaning that the applicant cannot consequently raise the price
above the established tariff, but may freely lower such tariff,
provided it informs the Ministry of Finance about such decrease.
The Antimonopoly Agency undertakes state supervision and control
over the tariffs set for products of natural monopolies. If it finds it
necessary, it may order the natural monopoly and/or the Ministry of
Finance to submit documentation justifying any particular tariff. If,
consequently, the Antimonopoly Agency reveals violations with regard
to establishment of a tariff, it may apply sanctions to natural monopoly.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
As discussed in question 9.1, gas utilities are considered monopolies.
As such they are fully regulated by the Antimonopoly Agency.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
The state trades natural gas to domestic consumers via distribution
networks operated by Uzbekneftegaz and its subsidiaries, as
outlined in previous sections.
Export of natural gas outside the country is controlled by the COM
by sanctioning bilateral agreements or export contracts with foreign
partners. Generally, Uzbekneftegaz is a signatory to such contracts
and represents the interests of Uzbekistan.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
Consumers are required to purchase natural gas products as a
bundle that includes natural gas commodities, distribution and
maintenance service fees.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
There are currently no LNG facilities in Uzbekistan.
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Uzbekistan
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Since there is no specific legislation regulating LNG facilities, the
provision set out in question 4.2 will apply.
Uzbekistan
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
See question 7.2.
8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The Cabinet of Minister’s Committee on Demonopolisation,
Support of Enterpreneurship and Competition (“Antimonopoly
Agency”) is the state’s primary authority responsible for the
regulation of competition aspects and anti-competitive practices in
general, and in the natural gas sector in particular. The
Antimonopoly Agency’s status and authorities are established by
the 2005 Presidential Decree No.PP-66.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
The Law on competition and restriction of monopolistic activity on
the goods market (Competition Law) defines monopolistic activity
as an activity of a person with a dominant market position (65% or
more of the market share) that aims to or, as a result of its activity,
has a potential to restrict competition or to infringe upon other
market participants’ rights and interests by:
withdrawing goods from circulation with the sole purpose of
creating or maintaining shortages and of raising prices;
establishing monopolistically high or low prices;
inclusion in contracts of discriminating terms that effectively
put its counteragent in an unequal position with other
contractors;
agreeing to conclude a contract only on the condition that the
counteragent buys or sells certain other products or that it
refrains from buying from or selling to other participants;
refusing without justification to contract while having
production capacity or ability to supply certain products; or
creating obstacles for the entry into the market by other
participants.
Under certain circumstances the above activity will not be
considered anticompetitive if proved that the social benefits created
by such activity outweigh the losses. The burden of proof is on the
person accused of the monopolistic activity.
Also, any agreement or any part thereof between direct or potential
competitors collectively holding 35% or more of the market share
of a certain good and aimed at restricting competition is prohibited.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
The Antimonopoly Agency has the authority to:
assign the status of a dominant market position to a market
participant;
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issue mandatory instructions for state agencies and
representatives and private market participants aimed at
discontinuing violations of antitrust legislation, including
instructions for state bodies to cancel previously enacted
ordinances and for private participants to terminate contracts
that are in violation of antitrust laws;
Uzbekistan
seize from private market participants their income
generated as a result of anti-competitive practices, and to
impose fines;
apply to courts to prevent alleged anti-competitive practices,
including seeking to declare commercial contracts that are
against the antitrust laws void in part or in full;
apply to appropriate law enforcement agencies to initiate a
criminal case based on evidence of antitrust practices; and
petition to appropriate state agencies for an introduction or
termination of licensing of certain types of activity or goods,
for a change of customs tariffs, for an introduction or
termination of quotas, and for an introduction or termination
of tax privileges.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
Yes, the Antimonopoly Agency has the power to
approve/disapprove mergers and acquisitions or other changes of
control over businesses, including the natural gas sector.
The Antimonopoly Agency’s prior approval is required to conclude
the following transactions:
Purchase of voting shares in a company by a person or group
that effectively makes such person a holder of 35% or more
of the company’s stock.
Acquisition by a person or group of rights that allow them to
prescribe terms for another company’s business or to
influence its executive body.
Merging parties must apply to the Antimonopoly Agency for
approval. Generally, the information that needs to be submitted
along with the application includes information on the merging
parties’ types of activity, their respective market shares and their
consent to a merger. The Antimonopoly Agency reserves the right
to additionally request any information it deems necessary to decide
on the matter.
Once the application is submitted, the Antimonopoly Agency has 30
days to take a decision. It may disapprove a merger, acquisition or
a change of control if it concludes that any such transaction may
lead to a restraint of competition or to an establishment of a
dominant market position by the proposed company. It may also
issue a conditional approval that would come into force only after
fulfilment by an applicant of certain actions aimed at safeguarding
competition on the market.
With regard to the natural gas sector, the Natural Monopolies Law
provides that transportation of natural gas through pipelines is
subject to state regulation of natural monopolies. Price control by
approval of tariffs is the major regulatory mechanism in this regard.
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Uzbekistan
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
No, there are no such requirements or limitations. However, in
general, any transfer of assets by a natural monopoly company into
a third party’s ownership or possession is subject to the
Antimonopoly Agency’s approval, provided that the transferred
assets amount to 10% or more of the natural monopoly company’s
ownership capital.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
Uzbekistan is a signatory to the Energy Charter Treaty and is a
member of the Energy Charter Conference. However, its regulatory
policy in respect of the natural gas sector is mainly influenced by
several bilateral agreements. In particular, Uzbekneftegaz and JSC
Gazprom signed an Agreement on strategic cooperation in 2002.
The Agreement grants Gazprom the right to purchase agreed
volumes of Uzbek gas from 2003-2012, Gazprom’s involvement in
natural gas production in Uzbekistan under the terms of its 2004
PSA, as well as cooperation in developing Uzbekistan’s gas
transmission infrastructure. Cooperation under the PSA terms is a
joint pilot project in the gas extraction sector. The initial project
involves 0.5 bcm of annual extraction, with a plan for a larger
project on exploration and production of gas in the Ustyurt region
of Uzbekistan.
Another notable cooperation agreement was signed between
Uzbekneftegaz and the China National Petroleum Company. The
agreement is aimed at constructing Uzbekistan’s 530km section of
the Central Asia-China pipeline.
Uzbekistan is also a signatory of the Kyoto Protocol to the United
Nations Framework Convention on Climate Change. Under the
Protocol’s clean development mechanism (CDM) scheme,
Uzbekistan has already implemented a number of projects aimed at
greenhouse gas reduction, among which is a project on decreasing
of gas emissions from five Uztransgas’ compressing stations with
the application of the green investments scheme. The appropriate
agreement was signed in 2008 between Uztransgas and Fortis Bank.
10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
There are no separate dispute resolution procedures for the natural
gas sector in Uzbekistan. Disputes arising in the natural gas sector
in Uzbekistan are deemed regular economic disputes, and,
therefore, are under the general jurisdiction of the economic courts
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of Uzbekistan. The parties may, however, also agree to have their 11 Updates
dispute settled by arbitration, including international arbitration.
Private parties may challenge any authority’s/regulator’s decision
11.1 Please provide, in no more than 300 words, a summary of
by seeking a court judgment declaring the decision void; by any new cases, trends and developments in Gas
appealing to the authority’s higher body, and/or by applying to the Regulation Law in Uzbekistan.

prosecutor’s office for protection.
10.2 Is Uzbekistan a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Uzbekistan is a signatory to the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards. The NY
Convention was ratified by Resolution of the Oliy Majlis
(Parliament) in 1995.
Uzbekistan is also a signatory to the Convention on the Settlement
of Investment Disputes between States and Nationals of Other
States (ICSID), which Convention was ratified by the Resolution of
Oliy Majlis in 1994.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
With regard to domestic judgments, as a matter of practice, Uzbek
courts are reluctant to award judgments against government
authorities or state bodies.
Regarding foreign arbitral awards, as noted in question 10.2,
Uzbekistan is a party to the NY Convention. Accordingly, a foreign
arbitral award obtained in a state which is party to that Convention
should be enforceable by an Uzbekistan court. Enforcement of
such an award will be subject to the compliance with Uzbekistan
civil procedures and the procedures established by Uzbekistan
legislation on commercial arbitration for the enforcement of
arbitration decisions. As a matter of practice, it may be difficult to
enforce such an award, as courts will still remain reluctant to issue
any order that may have a negative impact against the State.
Uzbekistan
While the rest of the world is trying to rebound from one of the
worst global economic downturns in recent history, Uzbekistan
found itself among very few nations experiencing a stable GDP
growth. The gross domestic product of Uzbekistan showed an 8%
growth in the first nine months of 2009 and as it has been recently
forecasted by The Economist Intelligence Unit, that the real growth
of the Uzbekistan’s GDP in 2010 will be at the rate of 8.1%.
The Uzbek government is trying to capitalise on this situation and
has, on many recent occasions, announced its firm commitment and
desire to set up a more attractive investment climate for foreign
investors.
Consequently, Uzbekistan has been working on remodelling its
legislative base for further liberalisation of the market economy,
including amending its tax legislation in 2008 and 2009, creating a
free economic zone in the city of Navoi, and issuing a number of
other regulations aimed at attracting foreign investments, including
investments into the natural gas sector. Both the Uzbek’s
commitment to the Central Asia-China gas pipeline and to
agreement with Sasol and Petronas for the construction of a
multimillion GTL facility reflect a positive trend for development
of Uzbekistan’s gas sector.
However, it would be an overstatement to say that recent trends and
developments in Uzbekistan’s legislation in general, and in gas
regulation law in particular, make this Central Asian country a
highly competitive investment destination. In order to achieve its
goals, Uzbekistan will still need to tackle a number of serious
investment concerns, such as free currency conversion, lessening of
bureaucratic procedures, and overall bolstering of its banking
sector.

10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?

There is no available information on this matter.

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 Denton Wilde Sapte Uzbekistan

Marla Valdez Ravshan Adilov

Denton Wilde Sapte CA Limited Denton Wilde Sapte CA Limited
90 V. Vokhidov St., Yakkasarayskiy District 90 V. Vokhidov St., Yakkasarayskiy District
Tashkent, 100031 Tashkent, 100031
Republic of Uzbekistan Republic of Uzbekistan
Uzbekistan

Tel: +998 71 120 6946/47 Tel: +998 71 1206 946/47

Fax: +998 71 120 6185 Fax: +998 71 1206 185
Email: marla.valdez@dentonwildesapte.com Email: ravshan.adilov@dentonwildesapte.com
URL: www.dentonwildesapte.com URL: www.dentonwildesapte.com

Marla is the Managing Partner and founder of Denton Wilde Sapte’s
Central Asia Practice. Marla is recognised as an oil and gas and
mining specialist. For the past several years, she has been named
in both the Oil & Gas and Mining sections of Who’s Who Legal and
has been identified as a top energy expert by Expert Guides to the
World’s Leading Lawyers - Best of the Best 2008.
Ravshan advises on a range of issues in oil and gas and mergers and
acquisitions. Ravshan has an LLM in International Trade and
Business Law from the University of Arizona (2007) and completed
a postgraduate program in Law and Economics at the University of
Manchester (2008).
Prior to joining DWS, Ravshan worked as a staff attorney for the
American Bar Association in Uzbekistan, where he was involved in
various legal reform projects.

Denton Wilde Sapte is an international law firm with 60 years of experience and a worldwide reputation in energy and
infrastructure. The firm’s energy practice covers all aspects of the energy industry including upstream and downstream
oil and gas, LNG, electricity and power, and regulation and privatisation of energy industries and enterprises.
Denton Wilde Sapte has over 15 years’ experience in Central Asia and is the largest full service international law firm
in the region. The firm is regularly recognised as a leading practice in the region.

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Chapter 37
Venezuela
Travieso Evans Arria Rengel & Paz
1 Overview of Natural Gas Sector
1.1 A brief outline of Venezuela’s] natural gas sector, including
a general description of: natural gas reserves; natural gas
production including the extent to which production is
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
gasification facilities (“LNG facilities”); natural gas pipeline
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
According to information from the Ministry of the Popular Power
for Energy and Petroleum (Menpet), Venezuela currently has 170.9
trillion cubic feet (Tcf) of proven natural gas reserves. An estimated
91% of Venezuela’s natural gas reserves are associated, meaning
that they occur jointly with oil reserves. In 1999, the Organic Gas
Law was enacted in order to promote the development of non-
associated natural gas reserves and the participation of private
investors in this development. Please note that up until 1999, the
exploration for and exploitation of natural gas was reserved to the
State which results in the fact that the majority of natural gas
production is carried out by Petroleos de Venezuela, S.A., through
its affiliate PDVSA Gas. This is also true with respect to transport,
distribution, and all other activities related to the natural gas
industry in Venezuela.
After 1999 there were three bidding rounds for the award of
licences to allow private investors to participate in both onshore and
offshore non-associated natural gas licences with the result that at
present there are several productive onshore non-associated natural
gas licences such as Yucal Placer - operated by Total, Gas Guárico
- operated by INPEX, Barrancas - operated by Repsol and certain
offshore licences which are still in an exploratory stage, such as
Plataforma Deltana - operated by CHEVRON and Rafael Urdaneta
- operated by ENI/REPSOL.
There is no export of natural gas at present but it is expected that
offshore production from Mariscal Sucre and Plataforma Deltana
will be exported. For such purposes, PDVSA Gas has begun the
Delta Caribe Project which consists in the construction of 3 LNG
trains for the export of approximately 9.4 million tonnes.
The transportation and distribution systems are currently owned and
operated by PDVSA Gas and supply natural gas for industrial and
housing purposes. There is a shortage of natural gas in the western
part of the country which has been temporarily addressed by import
of natural gas from Colombia through a pipeline that in the future is
to be used to export natural gas to Colombia.
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Vera De Brito de Gyarfas
1.2 To what extent are Venezuela’s energy requirements met
using natural gas (including LNG)?
Venezuela’s natural gas requirements are met through domestic
natural gas production and the import of 147 MMSCFD from
Colombia (2008). Approximately 66% of the 7,000 million cubic
feet per day (Mcf/d) of natural gas produced in Venezuela are used
in the oil industry as gas injection for secondary recovery. This
leaves approximately 34% to be used in industrial processes
(generation of electricity, and petrochemistry), residential use and
natural gas for vehicles.
1.3 To what extent are Venezuela’s natural gas requirements
met through domestic natural gas production?
Please see question 1.2 above.
1.4 To what extent is Venezuela’s natural gas production
exported (pipeline or LNG)?
At present Venezuela does not export any natural gas.
2 Development of Natural Gas
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
Up until 1999, all activities related to the exploration for and
production of natural gas was reserved to the State meaning that
only the State could develop natural gas reserves, transport and
distribute gas and export it. This is why the natural gas industry in
Venezuela was a monopoly. With the enactment of the Organic Gas
Law in 1999, the participation of private investors in the
exploration for and exploitation of non-associated natural gas was
permitted.
The development of non-associated natural gas reserves is regulated
by the Organic Gas Law (enacted in September 1999) and its
Regulations (enacted in June 2000). The Menpet is the regulatory
entity in charge of this development. Additionally ENAGAS is
another government entity that has the power to promote, supervise
and advise the Menpet with respect to the upstream gas industry.
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ENAGAS is under the supervision of the Menpet. Please note that
liquid hydrocarbons and associated gas are regulated by the Organic
Hydrocarbons Law (in force since January 2002) under a totally
different structure which requires that the exploration for and
production of crude and associated gas only be carried out by the
State, State-owned companies or Mixed Companies with a State
Venezuela
participation of more than 50%.
The Government’s policy is to increase natural gas production
through the exploitation and production of non-associated natural
gas. For such purposes the Government has carried out several
bidding rounds to award licences for the exploration and production
of non-associated natural gas, both onshore and offshore. At
present the most active projects are the Mariscal Sucre and
Plataforma Deltana offshore gas projects, the Delta Caribe Project
which involves the construction of three LNG trains to process gas
from Mariscal Sucre and Plataforma Deltana and the Cardon IV
Block located in shallow waters of the Venezuelan Gulf under
licence to ENI and REPSOL as part of the Rafael Urdaneta Project.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
Investors or companies (participants) must hold licences in order to
have the right to develop non-associated natural gas reserves. The
licence is issued by the Menpet through a bidding process unless for
special circumstances or public interest reasons and prior
authorisation of the President in Cabinet of Ministers, a licence may
be directly awarded. The licence is subject to the following
conditions:
(i) Description of the Project, indicating whether the gaseous
hydrocarbons will be used as fuel for residential or industrial
use or as raw material for industrialisation and/or
exportation.
(ii) Maximum duration of thirty-five (35) years extendible for a
period to be agreed upon between the parties that cannot
exceed thirty (30) years. This extension must be requested
after the end of half of the period for which the licence was
granted and five (5) years in advance of the expiration of the
same.
(iii) Maximum term of five (5) years (within the maximum term
of 35 years) for exploration and execution of the
corresponding programs, subject to the other conditions
established in the Regulations.
(iv) Indication of the extension, form, location and technical
delimitation of the licensed area and any other requirement
prescribed by the Regulations for the better delimitation of
said area.
(v) Indication of the special considerations prescribed in favour
of the Republic.
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations).
The licence encompasses the full scope of the project. Please see
question 2.2 above.
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2.4 To what extent, if any, does the State have an ownership
interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
policy)?
Pursuant to the Organic Gas Law, private investors may hold
licences without any State participation; however, it has been the
policy of the Government since 1999 to establish as a condition
under the bidding procedures carried out to award licences that
PDVSA Gas will have the right to hold a 35% participation in the
licence upon declaration of commerciality. This condition is
included in the text of each licence with minor modifications with
respect to payment by the State of incurred costs as of the date when
PDVSA Gas becomes a participant in the Licence.
In 2007, the Government indicated that gas activities would be
treated similarly as the rights to produce crude thus requiring the
incorporation of Mixed Companies with a mandatory majority (more
than 50%) participation of the State. This indication has not be
upheld and in a recent major non-associated natural gas discovery in
Cardon IV, the State ratified that PDVSA Gas has the right to acquire
up to 35% of the interests in the licence; thus, maintaining the
principle established in the licences issued as of this date.
In order to change this policy, the State could use arguments of
national interest due to the importance of the oil and gas industry in
Venezuela and modify the licences to increase the required State
participation.
2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
The Organic Gas Law establishes that the State will charge a royalty
of 20% over the volumes of gas extracted (and not re-injected) from
any reservoir. This tax is applicable only on non-associated natural
gas production. Associated gas is charged a royalty of 33.3% under
the Organic Hydrocarbons Law given that it is produced in
association with crude.
In order to promote the development of non-associated natural gas
reserves, after the enactment of the Organic Gas Law, the Income
Tax Law was amended to exclude the production of non-associated
natural gas from an activity subject to the special hydrocarbons tax
rate of 50%. As a result, the entities that hold licences are taxed at
a normal progressive corporate tax rate of 34%.
2.6 Are there any restrictions on the export of production?
The licences for exploration and production of non-associated
natural gas provide the destination of the gas produced. There are
no legal restrictions imposed on the export of gas but an exploration
and exploitation licence is required.
2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
production out of the jurisdiction?
At present there is an exchange control system in Venezuela which
centralises the purchase and sale of foreign currency through the
Venezuelan Central Bank. Access to foreign currency is subject to
the authorisation of the Commission for Administration of Foreign
Exchange (CADIVI in Spanish). Such authorisation may only be
granted for certain specifically allowed purposes, and actual access
to the foreign currency is subject to availability, and the general
guidelines approved by the President of the Republic in Council of
Ministers.
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The Regime provides for the mandatory sale of foreign currency to
the Venezuelan Central Bank, through commercial banks and other
foreign exchange brokers, at the official rate of exchange in the
case of: a) all foreign currency arising from the export of goods,
services or technologies, made after February 5, 2003; b) all foreign
currency entering Venezuela due to transportation, travel and
tourism operations, remittances, transfers, investment revenue,
lease agreements and other commercial, industrial, professional,
personal or construction services or activities; and c) foreign
currency entering Venezuela as direct foreign investment, loans, or
any other capital investment.
Purchase of foreign currency for payment of imports of goods and
services, foreign private debt, dividends, royalties or technological
fees, must be done from the Venezuelan Central Bank, through
commercial banks and other currency exchange operators, once
CADIVI has granted the necessary authorisation.
Mixed companies incorporated under the Organic Gas Law (with
participation of State-owned companies to carry out activities
regulated by the Organic Gas Law) are regulated by Exchange
Agreement No. 9 which allows said Mixed Companies to maintain
accounts in foreign currency abroad for purposes of making
payments and disbursements outside of Venezuela, in the
understanding that the rest of the foreign currency that is not used
for such payments shall have to be sold to the Venezuelan Central
Bank at the official exchange rate in effect at the time of the sale.
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests?
The transfer of a licence requires the prior approval of the Menpet
(article 25 of the Organic Gas Law).
2.9 Are participants obliged to provide any security or
guarantees in relation to natural gas development?
The holder of a gas licence is required to provide faithful
performance guarantees to guarantee to the State the performance
of the minimum work programme (exploratory programme in the
case of exploration projects and development programme in the
case of the production of proven reserves) (article 24 of the
Regulations to the Organic Gas Law). Generally these guarantees
have been required from the licensees as letters of credit for a
certain amount consistent with the cost of execution of the pertinent
exploratory or development programme.
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
accounting purposes under domestic law?
Pursuant to article 25 of the Organic Gas Law the rights granted
under licences for the exploration and exploitation of non-
associated natural gas cannot be encumbered or subject to seizure.
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and
safety) and from whom are these authorisations to be
obtained?
Since the activities of exploration and production of non-associated
natural gas are considered as activities capable of degrading the
environment, any licensee must obtain certain authorisations,
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registrations and filings with the Ministry of the Popular Power for
the Environment (ME) which will vary depending on whether the
activities will be carried out onshore or offshore. Basically it will
be necessary to obtain (i) a permit to occupy the territory - Land
Use Authorisation (Autorizacion para la Ocupación del Territorio,
AOT), (ii) authorisation to affect Renewable Natural Resources
Venezuela
(AARNR); and (iii) register with the ME as an entity that performs
activities capable of degrading the environment (RASDA). This
may require the preparation of environmental impact studies and
the presentation of guarantees/bonds to guarantee recovery of the
areas in the case of environmental damages.
Additionally there may be other Municipal permits and
requirements to be fulfilled which will vary depending on the
location of each project and deal with urban parameters, zoning, fire
department authorisations, etc.
Occupational health and safety requirements are regulated by the
Organic Law on Prevention, Work Conditions and Environment
(LOPCYMAT). This law is applicable to all entities operating in
Venezuela and a company operating in Venezuela must comply with
the following main obligations in the understanding that there are
others that we have not listed:
1 Register with the Social Security Treasury (‘Tesorería de la
Seguridad Social’) as an entity and register its employees.
Please note that enforcement of this obligation is pending for
the Regulation of the Law.
2 Form with its employees a Labor Safety and Health
Committee at every work centre, with an equal number of
prevention delegates and employers’ representatives.
3 Organise, individually or jointly with other employers, a
service of Safety and Health at Work for the purposes indicated
by the LOPCYMAT, including assuring workers’ protection
against any condition that damage their health as a result of the
labour activity or of the conditions under which it is performed;
to promote and maintain the highest possible level of workers’
physical, mental, and social well-being; to report the industrial
accidents and occupational diseases to the National Institute of
Labor Prevention, Health and Security (Instituto Nacional de
Prevención, Salud y Seguridad Laborales INPSASEL); to
investigate industrial accidents and occupational diseases, etc.
4 Inform the workers, prior to beginning their activities, of the
conditions in which such activities will be performed, the
presence of toxic substances in the work area, the damages
that such substances may cause to their health, as well as of
the means or measures to prevent the same.
5 Provide the workers with sufficient, appropriate, and
periodic theoretical and practical training in the performance
of the functions inherent in their activity, in the prevention of
industrial accidents and occupational diseases, and in the use
of free time and rest periods.
6 Provide the workers with appropriate personal protection
tools and equipment for the work conditions existing in their
work places and for the tasks performed according to the
regulatory provisions of the LOPCYMAT, its Regulations,
and collective bargaining agreements.
7 Have workers undergo periodic preventive health
examination and allow the workers full access to the
information contained in the same, and the results of such
examinations must be kept confidential before third parties.
8 Consult with the workers and their organisations and the
Labor Safety and Health Committee before implementing
measures that provide for changes in the organisation of the
work that may affect a group or the totality of the workers, or
important decisions on safety, health and work environment;
9 Inform the workers in writing of the principles of prevention
of hazardous and unhealthy conditions, both at the time of
their hiring and at the time when a change in the labour process
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or a change in their position occurs, and instruct and train them
in the promotion of health and safety, prevention of
occupational accidents and diseases, as well as in the matters
regarding the use of personal safety and protection devices;
10 Inform the workers and the Labor Safety and Health
Committee in writing of the hazardous conditions to which
Venezuela
workers are exposed because of the action of physical,
chemical, biological, meteorological agents or of non-
ergonomic or psychosocial conditions that may be harmful to
health, according to the criteria established by the National
Institute of Safety and Health at Work;
11 Prevent any situation of harassment by the degradation of the
work conditions and environment, physical or psychological
violence, isolation, or for not allowing the worker a
reasonable occupation according to his/her abilities and
background, and to avoid the application of not clearly
justified or disproportionate penalties and a systematic an
unjustified criticism against the worker or his/her work;
12 Inform the National Institute of Safety and Health and the
National Institute of Workers’ Recreation and Social Tourism
in writing of the programmes developed for idleness,
recreation, use of free time, rest and social tourism, of the
conditions of the infrastructure for performance of the same,
of the impact on quality of life, health, and productivity, as
well as of the difficulties in the incorporation and active
participation of workers in the same;
13 Prepare, with the workers’ participation, its Program of
Safety and Health at Work, the policies and commitments,
and the internal regulations related to the matter, and plan
and organise production according to said programmes,
policies, commitments, and regulations;
14 Notify the National Institute of Safety and Health at Work
within 24 hours following the occurrence of any accident or
the diagnosis of any occupational diseases, industrial
accidents, and any other pathological conditions occurring
within the work setting, and must keep a registry of the same.
The Labor Safety and Health Committee and workers union,
if existent, must also be notified.
2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
There is no specific legislation addressing abandonment and
decommissioning of infrastructure related to natural gas production
and the applicable requirements have been established in the text of
each licence which have varied throughout time. Generally it is
required that the licensee set up an abandonment fund to cover
abandonment and decommissioning costs upon termination of the
licence. Article 44 of the Regulations of the Organic Gas Law
establishes that prior to the expiration of the licence the Menpet will
instruct the Licensee what wells shall be abandoned and the
facilities to be removed, at the cost of the Licensee.
Please note that all assets used for the production of natural gas
reserves shall revert to the State upon the expiration of the licence.
(Article 24.6.a) of the Organic Gas Law.)
3 Import / Export of Natural Gas (including
LNG)
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
There are no specific regulations regarding the import/export of
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natural gas including LNG since this activity is not regulated
separately from the activities of exploration and production of non-
associated natural gas.
4 Transportation
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
processing and storage facilities).
At present most transport pipelines and associated infrastructure is
owned by PDVSA Gas. In general the transport of natural gas is
basically carried out by PDVSA Gas.
The Organic Gas Law regulates the activity of transport of natural gas
and requires the obtaining of a permit to carry out such activity within
Venezuela. In practice there have not been any major private
investments in this activity and PDVSA Gas continues to maintain the
monopoly over all transport of natural gas, except for minor pipelines
owned built and operated by private entities for specific projects.
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
It is necessary to have a permit granted by the Menpet in order to
be able to construct and operate transportation pipelines and
associated infrastructure. Transport permits grant a five-year
exclusivity period to provide transport services for the capacity
specified in the permit. These permits will also be granted through
a bidding process but the permit may be directly awarded due to
reasons of national interest or specific circumstances prior approval
of the President in Cabinet of Ministers.
Entities interested in providing transport of natural gas services
must be duly qualified by the Menpet and the pertinent request must
include documents to evidence the technical capacity of the entity
and the proposals of national participation. This technical
qualification needs to be updated every three (3) years if no services
have been provided during said period.
The environmental permits required are the same as those indicated
in question 2.11 as applicable.
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to
facilitate land access?
The Organic Gas Law specifically establishes that the persons
authorised to carry out the activities of exploration for, exploitation,
transportation, distribution, storage and processing of gas shall have
the right to have servitudes constituted in their favour, to
temporarily occupy land and to expropriate.
The procedure for the constitution of servitudes is the following:
(i) on privately owned land: the servitudes require the
agreement between the authorised persons and the owners of
the land. If no agreement is reached, the Organic Gas Law
establishes a judicial procedure whereby the authorised
person may obtain an authorisation to initiate the works in
the privately owned land by depositing an indemnification
estimated by experts (article 17 of Organic Gas Law); and
(ii) on federal lots (terrenos baldíos): the National Executive and
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the authorised person shall agree on the amount to be paid,
unless the National Executive decides to exempt the
authorised person from payment.
The expropriation procedure will be carried out as per the provisions
of the Expropriation Law (article 19 of Organic Gas Law).
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
There is an open access policy as per article 10 of the Organic Gas
Law and Article 14 of its regulations. The warehouse keepers, carriers
and distributors of natural gas and their by-products must allow other
warehouse keepers, carriers and distributors to use their facilities when
such facilities have the available capacity therefore and on the basis of
agreements among the parties or of conditions established by the
Menpet in the absence of agreement (article 10 of Gas Law).
This has been kept somewhat at a theoretical level because there are
no transport systems that are owned/operated by private entities so
the transport activity is basically a monopoly of PDVSA Gas; thus,
these provisions have not been relevant.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated?
As indicated in question 4.4, natural gas transportation pipelines are
owned/operated by PDVSA Gas and there is no regulation
regarding cooperation between transport systems.
4.6 Outline any third-party access regime/rights in respect of
natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Theoretically, there is an open access policy; therefore, a new
customer wishing to transport natural gas could require the
owner/operator of a natural gas transportation pipeline to grant it
capacity or expand its facilities to accommodate additional capacity
but the process for such negotiation is not regulated; therefore, it
would have to be agreed between the parties. If no agreement is
reached then the Menpet has the power to intervene and establish
the applicable conditions.
4.7 Are parties free to agree the terms upon which natural gas
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
The rates for storage, transportation and distribution services shall
be established by the providers but need to assure the lowest
possible cost for consumers and are compatible with the reliability
of supply. In principle rates should allow the carriers sufficient
income to pay operation and maintenance costs, taxes, depreciation,
amortisation of investments plus a reasonable profit similar to that
of activities of similar risk (article 13 of Gas Law).
Again, there is no competition and transport of natural gas is carried
out by PDVSA Gas.
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5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
transmission/distribution network.
Venezuela
Natural gas distribution is regulated by the Organic Gas Law and is
carried out solely by PDVSA Gas. This means that although the
Organic Gas Law contemplates the possibility of private entities
constructing, owning and operating distribution networks, at
present this has not occurred.
5.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
operate a distribution network?
It is necessary to have a permit granted by the Menpet in order to
be able to construct and operate distribution networks. These
permits will also be granted through bidding processes but the
permit may be directly awarded due to reasons of national interest
or specific circumstances prior approval of the President in Cabinet
of Ministers.
Entities interested in providing distribution of natural gas services
must be duly qualified by the Menpet and the pertinent request must
include documents to evidence the technical capacity of the entity
and the proposals of national participation. This technical
qualification needs to be updated every three (3) years if no services
have been provided during said period.
The environmental requirements are those listed in question 2.11
above, as applicable.
5.3 How is access to the natural gas distribution network
organised?
PDVSA Gas owns and operates the national gas distribution
network and in principle there is an open access policy; however,
due to the existing monopoly there is no precedent in this regard.
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
Theoretically, there is an open access policy; therefore, the need to
include new customers should be fulfilled by granting capacity or
expanding the distribution facilities but the process for this situation
is not regulated. If there is no agreement between the parties, the
Menpet has the power to intervene and establish the applicable
conditions.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated?
The Menpet jointly with the Ministry of the Popular Power for
Light Industries and Commerce is the entity that fixes the prices of
natural gas under equity principles to the end consumers.
ENAGAS will prepare the bases for the establishment of said rates.
The rates for minor consumers will be the result of the sum of: (a)
gas purchase price; (b) transportation rate; (c) distribution rate
(article 12 of Gas Law). At present there are resolutions of the
Menpet establishing the prices of natural gas for industrial and
residential purposes.
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5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
directly or indirectly)?
Pursuant to article 60 of the Regulations to the Organic Gas Law,
Venezuela
the disincorporation of assets of a distribution network that could
affect the operation of such network requires the prior authorisation
of the Menpet and the request should be filed six months prior to the
scheduled date for disincorporation.
6 Natural Gas Trading
6.1 Outline broadly the ownership, organisational and
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
Natural gas trading is not regulated in Venezuela. It is an activity
totally subject to control by the State and there is no open market
for natural gas trading.
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
gas commodity and the distribution thereof) be traded?
This is not applicable in Venezuela.
7 Liquefied Natural Gas
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
The ownership and operation of LNG facilities is regulated by the
Organic Gas Law and its Regulations. Private participation in LNG
infrastructure is minimal and it has been only recently that private
entities have executed agreements to participate in three LNG trains
for processing of gas from Mariscal Sucre and Plataforma Deltana.
There is very little regulation, only two articles of the Regulations to
the Organic Gas Law address LNG activities and require that entities
that wish to carry out said activities be duly authorised by the Menpet.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
Articles 75 and 76 of the Regulations to the Organic Gas Law
indicate that the Menpet needs to authorise any entity to carry out
LNG activities. There is no further regulation in this regard.
7.3 Is there any regulation of the price or terms of service in
the LNG sector?
No there is not.
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8 Competition
8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
ENAGAS is the entity in charge of regulating competition aspects
of the natural gas sector; however, due to the lack of competition
and the fact that there is a very limited participation of private
investors in natural gas activities, there has been no regulation,
principles or awards issued in this regard.
8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
This is not applicable in Venezuela.
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices?
This is not applicable in Venezuela.
8.4 Does the regulator (or any other Government authority)
have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
approving or disapproving the transaction?
This is not applicable in Venezuela.
9 Foreign Investment and International
Obligations
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
distribution or other) by foreign companies?
No. Foreign companies may participate in the natural gas sector
provided that they comply with all requirements applicable to
private investors under the Organic Gas Law and its regulations.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
or other multinational arrangements?
Regulatory policy has not been affected by international treaties or
other multinational arrangements. The participation of Venezuela
in OPEP may create certain restrictions on production which could
have an impact on prices and production but not at a regulatory
level.
Additionally, Venezuela has signed several Energy Cooperation
Treaties with China, Japan, Portugal, among others, which establish
a will to develop joint projects including specifically LNG and gas
projects but these treaties do not have an impact on the Venezuelan
regulatory policy.
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10 Dispute Resolution
10.1 Provide a brief overview of compulsory dispute resolution
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas.
The Organic Gas Law contains a provision (article 24 (6) (b) which
establishes that the following clause will be included in the text of
the licences and permits:
“The doubts and controversies of any nature whatsoever arising out
of the license and which may not be settled in a friendly manner by
the parties, including arbitration, shall be settled by the competent
Courts of the Republic, under its laws, and for no reasons or causes
shall it give rise to foreign claims.”
As it may be noted, the Organic Gas Law expressly prescribes the
possibility of the inclusion of arbitration clauses in Licences;
however, in practice the Menpet is not willing to establish binding
arbitration clauses in the Licences that have been issued under the
Organic Gas Law.
All other agreements executed for the construction and operation of
the required infrastructure (for purposes of development of
reserves, transportation and distribution services) may include
arbitration clauses. If any of these contracts are executed with a
State-owned entity the prior approval of the Ministry in charge of
said entity is required and the award must be in writing, reasoned
and issued by a three member arbitral tribunal as required by the
Venezuelan Commercial Arbitration Law.
10.2 Is Venezuela a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States
(“ICSID”)?
Yes it is.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
The execution and enforcement of a judgment or decision against
the Republic must comply with certain formalities and requirements
established in the Organic Law of the Attorney General’s Office
(“Ley Orgánica de la Procuraduría General de la República”).
According to Article 87 of the Organic Law of the Attorney
General’s Office in case the Republic is condemned to pay
damages, the tribunal in charge of executing the decision must
notify the Attorney General. Within 10 days following his/her
notification, the Attorney General shall inform the public entity
concerned as to the content of the decision and the latter shall in
turn inform the Attorney General as to the manner and opportunity
that it plans to execute the decision.
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The interested party may approve or reject the proposal of the
public entity and in this latter case the Tribunal shall fix another
term for the submission of a new proposal. If the new proposal is
also rejected by the interested party or if the public entity against
which the decision is being executed does not submit a proposal, the
Venezuela
Tribunal shall determine the manner and opportunity to comply
with the decision as per the following procedures:
1. If the decision refers to the payment of money, the Tribunal
shall order, upon request of the interested party, the inclusion
of the amount in an item of the following two budgetary
exercises (this may delay payment). Also, such amount must
be charged to a budgetary item not destined to the execution
of public programmes.
2. If the decision refers to the delivery of assets, the Tribunal
shall put the interested party in possession of such assets.
However, if the assets are affected to a public use, to
activities of public utility or to a public service rendered
directly by the Republic, the interested party shall receive the
price of the assets fixed through an appraisal performed by
three experts.
Also, the Attorney General may intervene in those procedures
where even though the Republic is not a party, the rights, assets and
patrimonial interests of the Republic may be directly or indirectly
affected.
It is important to point out that State-owned companies enjoy some
procedural prerogatives even though they are corporations
(sociedades anónimas) which carry out commercial activities due to
the fact that they carry out activities of public interest. In that sense,
according to Article 99 of the Organic Law of the Attorney
General’s Office in the event that the assets of one of these
companies were attached, seized, mortgaged, or subject to any
preventive or definitive judicial measure, the Judge who would be
in charge of carrying out the judicial measure must necessarily
notify the Attorney General of such measure, in order to prevent any
interruption in the activities being carried out by such company. In
this case, the process may be suspended for a term of 45 continuous
days as from the date on which the notification of the Attorney
General is evidenced in the pertinent file, in order for the public
administration to adopt the proper measures to prevent the
interruption of the service.
10.4 Have there been instances in the natural gas sector when
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
No there have not.
11 Updates
11.1 Please provide, in no more than 300 words, a summary of
any new cases, trends and developments in Gas
Regulation Law in Venezuela.
There is nothing new to report.
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 Travieso Evans Arria Rengel & Paz Venezuela

Vera De Brito de Gyarfas

Travieso Evans Arria Rengel & Paz
Torre La Castellana, Piso 6
Av. Ppal. La Castellana
Venezuela
Venezuela

Tel: +58 212 918 3333

Fax: +58 212 918 3334
Email: vbg@traviesoevans.com
URL: www.traviesoevans.com

Vera De Brito de Gyarfas is a partner of Travieso Evans with a

practice focused in energy and natural resources regulation in
Venezuela. Recently she advised clients in the bidding procedure for
award of gas licences in the Mariscal Sucre, Plataforma Deltana and
Rafael Urdaneta projects, the obtaining of the licences and
subsequent permits. Vera is currently advising clients in the
Carabobo Project Bidding Procedure which is the first bidding
procedure under the 2002 Organic Hydrocarbons Law and in the
contracts for the construction of LNG trains. Vera is the Editor of the
Venezuelan Legal and Economic Newsletter, a monthly publication
of the firm alerting management of economic and legal
developments of importance for companies doing business in
Venezuela. Vera is the Exclusive Columnist in Venezuela for the
International Law Office on Energy and Natural Resources and is a
member of the Association of International Petroleum Negotiators -
AIPN and of its Latin American Regional Committee.

Travieso Evans Arria Rengel & Paz (Travieso Evans) was formed in the 1920s and originally specialised in petroleum
and mining law. The firm has diversified to provide services in all aspects of Venezuelan law except criminal law.
During the 1990s Travieso Evans represented clients in the Oil Industry Opening including the negotiation and
implementation of Profit Sharing Agreements, Operating Services Agreements and Strategic Associations for the
Exploitation of Extra Heavy Crude from the Orinoco Oil Basin. Subsequently, the firm focused on the migration of these
agreements into Mixed Company Structures and continued to advise clients in this regard. In parallel the firm
represented clients in bidding rounds for granting of offshore gas licences and other energy infrastructure projects. The
advice ranges from analysis of the regulatory, contractual and corporate requirements to the implementation of all
required permits, authorisations and contracts for the operation of the projects including the financing thereof. In
addition one of the strongest practices of the firm is related to the assistance of a great variety of oil service contractors

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