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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
Azmi & Associates Haavind Schönherr Rechtsanwälte GmbH
Bell Gully IndoJuris Studio Legale Bonora e Associati
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
F&F Studio Design
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
Publisher
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Kenji Okura 133
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20 Mexico Aguilar, Loera, Cortina & Martínez: Alejandro Loera & Mario del Bosque 155
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ISSN 1743-338X
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
33 UAE Ashurst LLP: Mhairi Main Garcia 270
34 United Kingdom Ashurst LLP: Geoffrey Picton-Turbervill & Erin Dyer 279
35 USA Dewey & LeBoeuf LLP: Eli Farrah & Scott Mueller 292
36 Uzbekistan Denton Wilde Sapte: Marla Valdez & Ravshan Adilov 303
37 Venezuela Travieso Evans Arria Rengel & Paz: Vera De Brito de Gyarfas 311

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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
Huw Thomas
and Fightback For Small to Mid-
Cap Oil and Gas Companies
Ashurst LLP Nick Williamson

Introduction opportunity to refinance, it is not surprising that things got tough for
many small to mid-cap oil and gas companies. Some companies
Huw Thomas, a partner at Ashurst London, and Nick Williamson, which had been more aggressive with the use of leverage and took
a partner at Ashurst Abu Dhabi, consider the return of the debt on debt to finance pre-development assets, such as North Sea
market and lessons learned by small to mid-cap oil and gas focused player Oilexco, were particularly badly squeezed..
companies and their lenders during the credit crunch.
Now that we are some way on from the onset of the credit crunch
Lessons to be Learned?
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
How to get out of a hole
lenders learn as a result of their sometimes traumatic recent
experiences?
Some companies have been in the fortunate position of having
sufficient cash reserves, or production rates, to enable them to
Debt Troubles service their debt obligations without significant difficulty. For
others, however, the liquidity trap has resulted in them having to
First, it is important to understand the background to some of the consider urgent solutions to service their debt obligations. These
difficulties which have been faced by small to mid-cap oil and gas solutions have variously involved the renegotiation of facilities,
companies since summer 2008. During the period of increasing oil asset disposals, raising equity from current shareholders, raising
and gas prices, many of these companies took on substantial cash from a strategic investor or mergers with other companies.
amounts of debt to finance the development of upstream assets. A Can we learn anything from the way different companies have
lot of this debt is in the form of borrowing base facilities (“BBFs”) approached possible solutions? Where companies have been open
under which the amount capable of being borrowed from time to with their lending banks as to the difficulties they face and have
time is calculated by reference to the value of reserves, which of worked co-operatively with them to find solutions, so maintaining
course varies according to oil and gas prices. the trust of their lending banks even in the midst of a crisis, the
Some companies perhaps lost sight of the fact that, in the event of outcome has tended to be more favourable for all concerned.
a dramatic fall in oil and gas prices, their borrowing capacity would Borrowers who have tried to carry on as if nothing has happened, or
suffer a similarly abrupt reduction. The borrowing base is typically have tied themselves in knots trying to find artificial solutions, have
redetermined every six months and a repayment will be necessary eventually found the going perhaps harder than it needed to be.
if the outstandings exceed the new borrowing base. Under the Raising equity from existing shareholders is one possible solution,
redetermination procedures, the lenders invariably have a wide but this has not been easy in the current environment (with over-
discretion over setting the economic assumptions to be used in leveraged small to mid-cap oil and gas companies not being in the
recalculating the borrowing base. Some banks will say privately enviable position of the likes of Cairn Energy and Tullow Oil).
that they deliberately did not reset their petroleum “price decks” too Companies which have been willing to consider imaginative
sharply down so as to avoid defaulting a large number of their solutions have been rewarded. An injection of cash from a new
borrowers overnight. Nevertheless, the result has often been a strategic investor has been an option, either for shares (in which
substantial and sudden reduction in a company’s borrowing case there is the issue of how existing shareholders will react to the
capacity and in some cases, the need to make an immediate dilution) or at the asset level. For instance, in September 2009,
repayment of debt in the tens of millions of dollars. Matters were Sterling Energy, an oil and gas exploration and production company
made worse by the fact that, although BBFs have been typically with interests in the Middle East, Africa and the Gulf of Mexico,
structured as five to seven-year facilities, the commitments of the successfully raised approximately £60m through a placing of its
lenders start stepping down long before final maturity, with perhaps shares, allowing it to pay down a significant amount of its BBF.
a step-up in interest rate margin. In a normal market the borrower In autumn 2008, Dyas (a wholly-owned subsidiary of SHV, the
would be expected to refinance the facility well in advance of the largest privately owned conglomerate in The Netherlands) acquired
final maturity. But when the credit crunch hit, it became very a portion of the North Sea oil and gas assets of Ithaca Energy and
difficult for all but the most established names to arrange also stepped into the shoes of The Royal Bank of Scotland under
refinancing. So when borrowing base amounts were redetermined Ithaca Energy’s debt facility. Dyas subsequently converted the debt
sharply downwards, and credit markets dried up thus removing the into further assets of Ithaca Energy, leaving the latter debt free. A

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Ashurst LLP Lessons From the Tough Times

quick fire-sale of assets, while not ideal, has sometimes been the calculated by reference to the six-monthly projections have not in
only option for some if borrowing capacity has been exhausted. themselves been excessive. The problems have often arisen where
The problem with this strategy is that companies have found that a group has incurred exploration and appraisal expenditure on non-
the price gained for such assets may be at a discount to their value borrowing base assets and that expenditure is not included in the
as a result of the need to inject cash quickly. If lenders are patient cash flow projection which is used as the basis for determining the
though, the result can be much more positive. In September 2009, group’s borrowing capacity. The expenditure may be incurred by a
Stratic Energy, an international oil and gas company operating member of the group which is not a BBF borrower but,
principally in the North Sea and Italy, managed to pay down a nevertheless, it represents a drain on the cash of the group which
significant amount of its bank debt through the sale of its interest in might otherwise have been available as “equity” to support the
the pre-development Breagh gas field in the North Sea to RWE. development activities which are taking place within the ambit of
Also, Sterling Energy finally found itself debt-free after the sale in the BBF. So lenders will be more wary of liabilities within the
December 2009 of its US assets. As the debt market returns it has borrower’s group which may not be directly related to the debt
become a fairly common ‘ask’ from borrowers for a grace period facility in hand, but which may have an untoward impact on the
(perhaps up to three months) to be allowed post borrowing base viability of the group as a whole. A number of borrowers, amongst
redetermination before a repayment becomes due, so as to allow them Oilexco, were caught out by incurring capital expenditure
time to pursue solutions before having to seek a bank waiver. 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
Less leverage
to impose tighter restrictions on the incurrence of such liabilities
and it may well become market standard for BBFs to include whole
It seems likely that the amount of debt which borrowers seek to take
group liquidity testing covenants and events of default.
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 Broader debt funding sources
being financed through, perhaps, adoption of more conservative oil
and gas price assumptions or a refusal to take into account P50 With debt capacity and risk appetite among commercial banks having
reserves (those which have a 50 per cent or more probability of being fallen back, there has been a heightened interest among borrowers in
economically recoverable), with an insistence only on P90 reserves seeking out funding from multilateral lending bodies including the
(90 per cent or more probability of being economically recoverable). International Finance Corporation (IFC), the European Bank for
This could be particularly true of heavily development-weighted Reconstruction and Development (EBRD) and the European
financings, i.e. where there is not a good balance of development and Investment Bank (EIB). In the past, there has sometimes been a
producing assets in the portfolio being financed. Although likely to perception that these organisations are quite bureaucratic and time-
receive strong push back from borrowers, a reduction in borrowing consuming to deal with. To cast off this image, they have been keen
capacity may also be achieved by increasing the coverage of reserves to show themselves to be quick to react and “commercial” in their
required for a given amount of debt - for example, increasing the approach. Where the loan needs to be, for political risk mitigation
project life cover ratio used to calculate the borrowing base amount reasons, fronted by the multilateral lender with the commercial banks
from the classic 1.5x to perhaps 1.6x. taking back-to-back participations, it will of course be necessary to use
Also, there may be a more pronounced tendency to include cash the multilateral’s form of documentation, which will vary from the
sweep mechanisms to accelerate repayment of the financing - i.e. a LMA forms commercial banks normally use. In a co-financing with
requirement to apply a certain percentage of excess cash flow to commercial lenders where the multilateral “umbrella” is not required
debt repayment after an initial grace period, particularly in the case by the commercial lenders, it has sometimes been possible for
of junior facilities. Companies with simpler financing structures borrowers to persuade multilaterals to set aside their traditional
have, unsurprisingly, found it easier to work through their problems requirement for a separate loan facility agreement, with the additional
during the credit crunch. There may therefore be a desire for less work that can involve, in favour of participating in a single loan
complex debt structures going forward. Pre-development facilities facility alongside the commercial banks, albeit with certain specific
have attracted particular criticism. Although they looked fairly provisions applying for the benefit of the multilateral only. This
conservative in that they attributed only a very few dollars in value approach can certainly make the documentation process much more
to the oil and gas reserves, it has not always been attractive in a straightforward.
bearish commodity market with the availability of equity money
severely constrained, to bring assets to the development phase. So Prospects
it may be some time before we see pre-development debt financing
make a return. Subordinated debt of any description is likely to be While the signs are looking more positive, the next few months will
harder to raise, for a while at least. Inevitably, restructuring continue to be a crucial time for small to mid-cap oil and gas
negotiations have been more tortuous where different lenders companies faced with onerous debt repayment obligations. There
appear for different levels of commitment in the senior debt and the is no doubt that the sector has taken a hit in the last 18 months or so
junior debt. From the borrower’s point of view at least, it is clear but the trauma has thrown up some good deals for larger companies
that the ideal position is that the lenders are the same under the with the cash and the desire to purchase a bolt-on company or asset
senior and junior facilities and that their percentage commitments portfolio with attractive production, reserves or resources. We may
are the same under both facilities. well see further consolidation in the sector and certainly can expect
more surprises in these still uncertain times. Lending appetite
Lenders seek more control appears to be increasing, although banks will no doubt be more
selective about which deals to go into and the pendulum has firmly
The fundamentals of reserve-based financing have generally swung back to tighter structures underpinned by more conservative
remained conservative compared to forms of lending in other assumptions. It is a different market which will require different
sectors. For example, the available debt amounts under BBFs 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

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Chapter 2

Floating LNG Regasification:


Legal Issues

Ashurst LLP Anthony Patten

Introduction the long-term charter by the Dubai Supply Authority of an


FSRU from Golar. The FSRU will be constructed by
Anthony Patten, a partner at Ashurst London, considers the conversion of the LNGC Golar Freeze and will be moored at
increasing popularity within the LNG industry of floating Jebel Ali Port, Dubai. Golar Freeze will remain classified as
regasification and the specific issues which need to be considered in an LNGC, but is intended to be used only for FSRU service
and will be permanently moored at Jebel Ali Port;
respect of the long-term lease or charter of a floating storage and
regasification unit. the purchase from Golar by OLT Offshore LNG Toscana
S.p.A. (“OLT”) (a joint venture company of which E.ON and
LNG (liquefied natural gas) is formed by the cooling of natural gas Iride are the major sponsors) of the LNGC Golar Frost, for
to -163°C (-260°F), resulting in its condensation and conversion subsequent conversion into an FSRU, which is to be
into a liquid. Liquefaction causes a significant reduction in permanently moored at OLT’s offshore LNG terminal in
volume1, meaning that LNG can be transported much more cost- Livorno, Italy (delivery of the FSRU is scheduled for the
effectively over longer distances than natural gas via utilisation of second half of 2010); and
purpose-built road tankers, railway tankers and LNG carrier ships. the charter by Kuwait Petroleum Corporation of a
On arrival at an unloading destination, the LNG is regasified for regasification vessel from Excelerate Energy, which will be
distribution to the end-user. If the LNG has been transported via an stationed at the existing Mina Al-Ahmadi jetty facility in
LNG carrier ship (an “LNGC”), a floating storage and Kuwait and form the basis of Kuwait’s first LNG import
regasification unit (“FSRU”) allows regasification to be undertaken terminal.
offshore. Specifically, an LNGC moors alongside the FSRU and Interest in FSRU utilisation is increasing as parties seek to take
unloads its LNG cargo into tanks onboard the FSRU for storage advantage of the associated benefits (please refer to table 1). With
prior to its passage through the FSRU’s onboard regasification this in mind, summarised below are the main issues which parties
system. The regasified natural gas is then piped to shore for onward should consider when negotiating the long-term lease or charter of
distribution to the end-user via the existing gas pipeline network. 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
Reliance on FSRUs in Today’s LNG Market terminal).
The world’s first FSRU based on conversion of an existing LNG
vessel commenced operation in Pecem, Brazil in January 2009.
Table 1 - Potential benefits of FSRU projects
Chartered by Petrobras from Golar LNG Limited (“Golar”), the
conversion of the Golar Spirit (a 1981-built ship) into an FSRU was Potentially lower costs than on shore LNG regasification terminals, with
completed in June 2008. While primarily intended to provide quicker development time.
storage and regasification services, Golar Spirit has also retained its Flexibility of location - an FSRU is a converted LNG vessel and can therefore
ability to operate as an LNGC. In contrast, other FSRUs forsake be relocated if necessary.
this flexibility and are, instead, designed to remain permanently More simplified decommissioning than onshore LNG regasification
moored at the LNG unloading port (other than for relocation due to terminals.
drydocking or in emergency circumstances). Currently, a number Ability to meet seasonal peaks in gas demands.
of other FSRU (or similar) projects are ongoing including: Extension of life for ships converted into an FSRU.
the long-term charter by Petrobras of a second FSRU from Ability to meet a shortfall in gas production during an interim period, e.g.
Golar, which is intended to be moored in Rio de Janeiro, while a permanent energy production facility is being constructed.
Brazil. The FSRU was constructed by conversion of the Ability to access rapidly high-value gas markets.
LNGC Golar Winter (completed Q2 2009) and will retain the Decreased construction and delivery risk for the host country (although
flexibility to operate as a LNGC;
consideration must be given to the potential repercussions for the host country
the utilisation of shuttle and regasification vessels (“SRV”) if delivery of the FSRU is delayed).
in the Gulf of Mexico Gateway Scheme and the Teesport Potential reduction in carbon dioxide emissions - commentators believe
Project (Teesside, UK). An SRV is a form of intermittent
that use of an FSRU may result in increased burning of gas rather than diesel
FSRU as it operates as a shuttle vessel which serves both as
for energy generation, which, in turn, will significantly reduce carbon emissions.
an LNGC and, on arrival at the unloading destination, an
LNG regasification plant;

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Ashurst LLP Floating LNG Regasification: Legal Issues

Issues for Consideration in the Long-term more general definition (i.e. an event or circumstance
that is beyond the reasonable control of a party, acting
Charter of an FSRU 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
Timing of transaction force majeure events does, arguably, offer more
certainty to the parties with respect to identifying
Typically, a long lead time follows execution of an agreement for whether an event of force majeure has occurred, but is
the long-term charter of an FSRU. This is because construction of dependent on each event being adequately defined and
an FSRU or conversion of an LNGC into an FSRU is both time- the list of force majeure events being sufficiently
consuming and costly, thus generating significant capex costs for comprehensive.
the owner which are not typically incurred on a speculative basis. 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
Form of agreement permitted to seek force majeure relief under the TCP
for a force majeure event affecting a downstream gas
The form of agreement typically used for the charter of a ship is a time buyer or upstream LNG supplier? Should the owner
charter party (“TCP”). Depending on whether the FSRU is to be be permitted to seek force majeure relief for a force
permanently moored or is to retain its flexibility to operate as an majeure event affecting the shipyard at which the
LNGC, an FSRU project may adopt characteristics of: (i) an LNGC; FSRU is being built? No definitive answers can be
given to these questions as the equitable solution may
(ii) a land-based regasification facility; and/or (iii) an offshore floating
largely depend on the relationships (if any) between
crude oil storage or production unit. One may therefore need to the various parties along the LNG value chain and,
consider issues deriving from each of these types of project.2 ultimately, the level of control that the owner and/or
the charterer may have over such parties.
Charter hire Relief. The occurrence of a force majeure event
typically relieves a party from performing its
Commencement date. Consideration must be given to the obligations under an agreement and thus prevents that
date upon which the FSRU is deemed to be “on-hire” and, party from being in breach. With respect to a TCP, the
thus, from which charter hire is payable. Specifically, the primary obligations for which the parties will seek
owner will want to ensure that charter hire is due from the relief are payment of charter hire (charterer) and
date the FSRU is delivered in accordance with the owner’s provision of services (owner). Consideration must
obligations under the TCP. This may be the date that the therefore be given to the extent to which relief is
FSRU is actually delivered at the unloading port or, if the granted and for how long. For example, should a
charterer is unable to accept delivery, a deemed delivery termination right accrue for the non-affected party
date. Conversely, the charterer will want to ensure that and/or the affected party after a prolonged period of
payment of full charter hire only commences as and when the continuous force majeure?
FSRU is delivered in accordance with the contracted Extension of term. If a force majeure event occurs,
specification. should the charter term be extended by a period equal
Terms of charter hire. The charter hire is typically a fixed to the duration of the force majeure event? Any such
daily fee which is due if the FSRU is performing within extension may provide an opportunity for the charterer
certain defined limits. The owner has no ability to manage to make good any shortfall in gas delivered to its
the extent to which the FSRU is utilised and should therefore downstream gas buyer(s) during the force majeure
carry no risk in respect of underutilisation. However, period or, alternatively, allow the owner to recoup any
consideration should be given to what recourse is available to shortfall in charter hire received. However, the
the charterer if the FSRU is underperforming. Potential charterer must consider whether the supply contracts
recourse includes a proportionate reduction in the charter under which it provides natural gas to its downstream
hire and/or an extension of the charter hire period. buyer(s) permit it to make good any such shortfall
and/or whether the contracts will remain in place during
Creditworthiness of counterparties. As is the case with
the extension period. Conversely, the owner must have
other long-term contracts, consideration should be given
regard to any future arrangements (i.e. post-charter
during TCP negotiations to the creditworthiness of each
period) that are already in place for the FSRU.
party. The owner will primarily be concerned about the
charterer’s ability to pay the charter hire when due. If the Off-specification. An FSRU is designed to receive and
charterer’s creditworthiness is inadequate, a letter of credit regasify LNG within defined specifications. Any LNG
may be requested by the owner or, alternatively, the ultimate received outside these specifications (“Off-spec LNG”) may
parent company of the charterer (or a group company with cause damage to the regasification unit. An FSRU is also
sufficient credit strength) may act as guarantor of the designed (and typically contracted) to produce natural gas
charterer’s obligations. In contrast, the charterer will want to within defined specifications - gas not falling within these
ensure it is sufficiently protected in the event that the owner specifications (“Off-spec Gas”) may be unacceptable to the
fails to deliver the FSRU on time. Such protection may downstream gas buyer and, potentially, cause damage to the
include the payment of liquidated damages by the owner. receiving gas network while exposing the charterer to a claim
for damages. Consideration must therefore be given to what
Force majeure. Although the occurrence of force majeure in
recourse should be available to the owner and charterer for
the LNG industry is relatively rare, the consequences can be
accepting delivery of Off-spec LNG and Off-spec Gas
significant. Careful consideration must therefore be given to
respectively. Options include:
the extent to which force majeure relieves a party from its
obligations under the TCP. a right for the receiving party to refuse to accept
delivery of the Off-specification product;
Scope of definition. Thought needs to be given to
whether the definition of force majeure includes an a reduction in charter hire if Off-spec Gas is delivered;
exhaustive list of agreed force majeure events or a and

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granting of an indemnity to: (i) the owner for any costs Rights of compensation for nonperformance. The ability
incurred in cleaning or remedying the FSRU and/or of a party to claim compensation for a counterparty’s failure
venting the Off-spec LNG; and (ii) the charterer for to perform its obligations under an agreement is always an
loss suffered as a result of unknowingly accepting area of focus during pre-contractual negotiations. With
Off-spec Gas (e.g. inability to fulfil contractual respect to a TCP, the owner’s primary concern is to ensure
obligations to its downstream gas buyer(s)). that the charterer continues to pay full charter hire in the
Regulatory concerns. Consideration should be given to event of charterer default (e.g. failure by the charterer to
what regulatory permits, licences and other forms of consent provide, operate and/or maintain a mooring berth for the
(together, “Permits”) are required for mooring and operating FSRU at the unloading port, failure to secure all necessary
the FSRU at the unloading port. This requirement will vary permits, etc.). Conversely, the charterer will seek relief from
depending on the country in which the unloading port is payment of the charter hire if the owner is in default (e.g. late
located. Sufficient time and resource must be dedicated to delivery of the FSRU). Furthermore, the charterer may seek
ensuring all Permits are secured prior to the FSRU’s arrival. liquidated damages as a means of compensation for any loss
Furthermore, the TCP should expressly state which party is suffered under gas supply contracts with downstream gas
responsible for securing the Permits. Typically, a distinction buyers.
is drawn between those Permits necessary for FSRU Termination rights. To avoid future uncertainty, the
mooring and operation, which are for the owner’s account, termination rights of each party to a TCP should be expressly
and those Permits required for construction and operation of identified. Typical termination rights may include:
the LNG terminal and mooring platform, which are for the a right for the owner to terminate for non-payment of
charterer’s account. charter hire. The daily charter hire is typically a
Third party access regimes. A further regulatory concern considerable amount, therefore the owner may require
which should be considered is the applicability of third party a termination right after a short period of non-payment
access regimes. In various jurisdictions (such as in the EU), to limit any compounding effect and, ultimately, its
local law requires the owner of certain infrastructure to make financial exposure to the charterer;
available to third parties (on reasonably competitive or a right to terminate for prolonged force majeure.
regulated terms) some or all of that infrastructure’s capacity. When considering if and/or when a termination right
Consequently, the owner is prevented from awarding 100 per accrues following a force majeure event, thought
cent of the infrastructure capacity to one party and, by should be given to, among other factors, how long the
extension, an FSRU owner may be prohibited from force majeure event must continue prior to a
contracting 100 per cent of the nominal regasification termination right accruing and which party the
capacity to a sole charterer. termination right accrues to (i.e. non-affected party
Liability and indemnity. The parties to a TCP should give only or both the affected and non-affected party);
careful consideration to the liability regime which they wish a right for the charterer to terminate for prolonged late
to rely on. The two options which typically underpin liability delivery of the FSRU. Given that the charterer is
regimes are: likely to have gas supply contracts in place with
“guilty party pays”, whereby one party (party A) downstream buyers, late delivery of the FSRU may
indemnifies the other party (party B) for any liability have significant consequences for the charterer. The
incurred by party B as a result of the acts or omissions charterer may therefore seek a right to terminate the
of party A; and TCP in such circumstances and negotiations are likely
“mutual hold harmless” (also known as “knock-for- to centre on what period of delay must pass before any
knock”), whereby one party (party C) is responsible such termination right accrues;
for and indemnifies the other party (party D) against a right for the non-affected party to terminate for
any liability incurred by party D which relates to bankruptcy and/or commencement of insolvency
personal injury, illness or death of personnel proceedings; and
employed by party C (or party C’s affiliates) or a right for the charterer to terminate for loss (actual or
damage to property belonging to party C (or party C’s constructive) of the FSRU.
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 Endnotes
parties may agree not to apply knock-for-knock principles
where the non-indemnifying party has committed gross 1 LNG is estimated to have less than 0.2 per cent of its original natural
negligence or wilful misconduct. Arguably, the “mutual hold gas volume.
harmless” approach allows for strict allocation of liability as 2 Note that this article does not consider any specific marine law issues
each party bears responsibility for its own property and (e.g. salvage, outbreak of war, additional war expense and New Jason
personnel (which responsibility it could ordinarily seek to clauses), but such issues should be taken into account by all parties
manage through insurance). In contrast, the “guilty party during TCP negotiations.
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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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

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Chapter 3

Argentina Roberto A. Fortunati

Fortunati & Asociados Mónica Centeno Lappas

1 Overview of Natural Gas Sector 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
1.1 A brief outline of Argentina’s natural gas sector, including down-stream sectors. Between 2003 and 2007 a carve out to that
a general description of: natural gas reserves; natural gas
capacity was made by virtue of certain law and decrees of the
production including the extent to which production is
Executive Branch of the Federal Government, allowing the
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG) provinces to concede exploration and gas exploitation fields
liquefaction and export facilities, and/or receiving and re- previously transferred to such provinces (Law 24,145).
gasification facilities (“LNG facilities”); natural gas pipeline Note that Argentina is organised as a Federal country. In this
transportation and distribution/transmission network; respect, it is worth mentioning that several provincial laws and
natural gas storage; and commodity sales and trading. regulations often overlap with Federal ones.
As a result of the described legal framework there are Federal and
Natural gas leads the Argentine energy matrix, and its importance
provincial Enforcement Authorities (for the up-stream sector),
has been growing during the last 50 years. Such growth accelerated
usually belonging to the Executive Branch of the given
after the privatisation process of the gas industry that started in the
Government.
early ‘90s. After the referred to privatisation, the industry
developed dramatically, suffering however, the strong impact of the When the domain and jurisdiction of the oil and gas reservoirs have
2002 Argentine economic and financial crisis. Since then, the been transferred by virtue of Law 24,145 -and subsequent Law
negative impact of price controls for the up-stream sector, as well 26,197- the licensing capacity of exploration and exploitation of gas
as the lack of timely adjustment of tariffs for transportation and reservoirs has also been transferred to the relevant provinces.
distribution -which value deteriorated in US Dollars terms- added to Transportation and distribution including commercialisation and
the existence of debts acquired in foreign currency has put the storage of natural gas are regulated by the Federal Government, and
industry in a rather complicate situation. It is expected that it may have been licensed to private companies. This notwithstanding, the
start to get out from such point sometime this year. Federal Government is an indirect holder of a stake in certain
The gas up-stream sector is regulated by a specific legislation (the companies. Currently, the Federal Government -for reasons that are
“Law on Hydrocarbons”), while transportation, distribution, not necessary grounded on commercial reasons- is delaying the
commercialisation and storage is specifically regulated by other law appropriate adjustment of tariffs for transportation and distribution
(the “Law on Gas”) and its specific complementary regulation. The of gas.
Law on Hydrocarbons contemplates that the Federal or local
Governments where the reservoir is located may grant concessions 1.2 To what extent are Argentina’s energy requirements met
for a limited period of time, which can be extended. Such time at using natural gas (including LNG)?
Federal level is 35 years, which can be extended for an additional
10-year period. At Federal level, the Secretariat of Energy regulates As explained herein above (see question 1.1), the energy matrix of
exploration and production. Local administrative authorities have Argentina indicates a high presence of oil and gas. Such percentage
similar capacity with respect to fields transferred to the provinces. could reach far beyond 80% of the total energy sources. In this
Various gas fields originally granted under concession by the respect, by 1992 gas reserves were 541 MM dam3. In 2007,
Federal Government have been transferred to the provinces where reserves declined to 394 MM dam3.
they are located.
LNG has started to be used in the local market since 2008, in order
Since the privatisation of the gas industry in the early 1990s, to avoid the serious consequences derived from a shortage of
transportation, distribution and commercialisation is regulated by natural gas production in winter time -when residential
the Gas Enforcement Authority. consumption increases. That resulted in the lease of a vessel by the
Due to a shortage of energy in Argentina during the year 2008, the private company YPF (subsidiary of Repsol), to deliquify imported
Federal Government enacted certain incentives to stimulate LNG. Liquefaction plants are not in operation in the country at the
additional exploration and production of natural gas to be destined time this response is given.
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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1.3 To what extent are Argentina’s natural gas requirements 2.3 If different authorisations are issued in respect of different
met through domestic natural gas production? stages of development (e.g., exploration appraisal or
production arrangements), please specify those
Most of the local demand is satisfied with local production. authorisations and briefly summarise the most important
However imports, mainly from Bolivia, are needed to secure the gas (standard) terms (such as term/duration, scope of rights,
expenditure obligations).
supply requirements. In this respect, the existing import agreement

Argentina
between the Argentine Government -through Energía Argentina
S.A. (“ENARSA”)- and the Government of Bolivia is currently Exploration is conducted under exploration permits, which grant an
been revised. It can be assumed that the main objective for the exclusive right to explore the relevant area and get a concession to
Argentine Government is to secure gas supply for a longer term, exploit the discovered gas fields. The holder of an exploration
and on the Bolivian side is to obtain a better price. Private local permit has to pay a royalty and to comply with the investments
producers claim that prices to be paid for the imported gas would be committed and related obligations.
higher than the ones paid to them for their gas. Certainly, this The exploitation concession entitles the holder of it to extract and
reflects a punctual situation that may vary from time to time. 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,
1.4 To what extent is Argentina’s natural gas production
which continue to belong to the relevant States. Thus, the
exported (pipeline or LNG)?
concessionaire pays a royalty to the States usually equivalent to 12%
of the value of the gas extracted. This percentage could be reduced
Despite the shortage of production mentioned above, there are
under certain circumstances. The concessionaire also undertakes to
export agreements in force pursuant to which natural gas is
carry out the investments committed in the bidding conditions.
exported to Chile and to Uruguay. In 2008, Argentina exported
22.72 MM m3 to Uruguay and 393.30 MM m3 to Chile. 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
2 Development of Natural Gas enter into the property.
As mentioned before, authorisations to survey land can be obtained
2.1 Outline broadly the legal/statutory and organisational with respect to unexplored areas. All information obtained under
framework for the exploration and production such authorisations has to be delivered -at Federal level- to the
(“development”) of natural gas reserves including: Secretariat of Energy.
principal legislation; in whom the State’s mineral rights to Permits for the exploration and concessions for exploitation of areas
natural gas are vested; Government authority or authorities
are usually granted as a result of a bidding process, and
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government
consequently, terms and conditions may vary from one to another.
(if any) in relation to natural gas development. This notwithstanding, such terms contemplate that concessions are
granted by the Executive Branch of the Government prior
Based on the Argentine Constitution as amended in 1994, and on inscription in Registers held by the Secretariat of Energy -at Federal
legislation enacted pursuant to it, property of on-shore gas level- is required to participate in those bidding process. Foreign
reservoirs corresponds to the National State or to the Provincial companies are certainly allowed to be registered.
State where they are located. As a result of that, an important
number of fields originally under the jurisdiction of the Federal 2.4 To what extent, if any, does the State have an ownership
Authorities have been transferred from the Federal State to interest, or seek to participate, in the development of
provincial ones. It is worth mentioning that off-shore oil and gas natural gas reserves (whether as a matter of law or
reservoirs belong to the National State since 12 nautical miles. policy)?

Despite the privatisation process that took place in the early ‘90s, in
2.2 How are the State’s mineral rights to develop natural gas
2004 through Law 25,943, the Federal Government created
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
ENARSA. ENARSA is a state owned company that carries out by
contractual rights under Production Sharing Agreement?) itself or by third parties, not only the exploration and exploitation of
and what is the legal status of those rights or interests oil and gas, but also its distribution and commercialisation.
under domestic law? ENARSA´s goal is to promote the development of energy in the
country.
Mineral rights are vested to private companies for a limited period Furthermore, it is important to mention that as stated in Article 2 of
of time by means of explorations permits or exploitations Law 25,943, since October 2004 ENARSA is the “owner” of the
concessions. Survey authorisations can be requested by private exploration permits and exploitation concessions of all national
companies in connection to areas without sufficient data to be maritime areas that then were not subject to such permits or
subject to exploration activity. Concessions are granted for 35 years concessions.
extendable for 10 years pursuant to the Law on Hydrocarbons.
Partial relinquishments of the granted area are contemplated to
2.5 How does the State derive value from natural gas
occur from time to time.
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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Income Tax and Value Added Tax). Taxes on exports are currently 2.11 In addition to those rights/authorisations required to
in force. explore for and produce natural gas, what other principal
Government authorisations are required to develop natural
Title holders of explorations permits pay a canon until exploitation
gas reserves (e.g. environmental, occupational health and
starts if that would be the case. The canon is calculated on the basis
safety) and from whom are these authorisations to be
of the surface of the land covered under the permit, and paid obtained?
annually.
Argentina

The main governmental authorisations to be mentioned are: (i)


2.6 Are there any restrictions on the export of production? depending on which manner rights are acquired -e.g. acquisition of a
company instead of the eventual need for approval by the Federal
Gas exports require a prior approval of the Federal Government. Antitrust Authority; (ii) if applicable the concession to transport gas
Pursuant to the Law on Hydrocarbons such exports can only take from the production facilities e.g. through a gas pipeline; (iii) the
place to the extent that the supply to domestic market is secured. correspondent provincial environmental permits, and eventually
Since 2004 further regulations in this respect have been enacted due health and safety certificates; and (iv) Court authorisations to have
to the shortage of energy in the local market. For example in 2004, access to private lands in case of lack of agreement with landowners.
a Rationalisation Program for the Exports of Natural Gas has been
put in place. 2.12 Is there any legislation or framework relating to the
abandonment or decommissioning of physical structures
2.7 Are there any currency exchange restrictions, or used in natural gas development? If so, what are the
restrictions on the transfer of funds derived from principal features/requirements of the legislation?
production out of the jurisdiction?
Federal and local regulations contemplate abandonment situations.
Regulations on hydrocarbons enacted back in 1989 based on the The more precisely regulated matter is the one related to the
Law on Hydrocarbons contemplate that exporters have to transfer abandonment of wells. At Federal level, a series of rules have been
back into the Argentine market at least 30% of the export proceeds issued by the Secretariat of Energy. Most of them follow
in foreign currency. international standards.
In addition, since 2002, as a result of the economic and financial With respect to other installations dedicated to the operation of any
crisis that took place in Argentina, there is a general foreign given field, the Law on Hydrocarbons, contemplates that upon
currency exchange control in force in the country. That control has termination of the concession, the same shall pass on -free of any
an impact on trade financing as well. 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
2.8 What restrictions (if any) apply to the transfer or disposal
of natural gas development rights or interests? unproductive. Hence, such wells have been or will be timely
abandoned due to inactivity.
The assignment of rights to explore and exploit gas fields is subject In light of the above, Argentine laws have foreseen the proceedings
to the prior approval of the Enforcement Authority. At Federal level to be carried out by concessionaires for the abandonment of gas
such Authority is the Secretariat of Energy. As established in the wells as well as ecological measures to be taken in order to avoid a
Law on Hydrocarbons, the assignee has to evidence adequate negative environmental impact.
technical and financial capacities to hold such rights. Pursuant to Article 69 of the Law on Hydrocarbons, concessionaires
must adopt all the necessary measures to avoid damages to oil and
2.9 Are participants obliged to provide any security or gas fields, as a consequence of well abandonment. Besides,
guarantees in relation to natural gas development? concessionaires will be responsible for damages caused to the State
or to third parties.
No, exploration and exploitation do not require the granting of Resolution 5/1996 enacted by the Secretariat of Energy states that
guarantees per se. However, as contemplated in the Law on inactive or “to be abandoned” wells shall be categorised by
Hydrocarbons, the granting of guarantees are often required in concessionaires according to their location, status (i.e. active or
bidding process until awarding takes place. 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
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for
abandonment established by the above Resolution.
accounting purposes under domestic law? The above Resolution makes a distinction between the two kinds of
gas well abandonment, the temporary and the definitive, which shall
Certainly, based on the nature of the rights rested, security interests be determined by the concessionaire of the corresponding area where
can be created over rights to explore and exploit gas fields. It is the well is located. Such determination will be made according to
worth mentioning that the Law on Hydrocarbons dedicates some technical, commercial or operative reasons. Abandonment could be
provisions on this matter, providing certainty to the process of temporary when well may be reused in the future.
creation and perfection of security interests on these assets. Prior As regards the techniques to abandon gas wells, the Authority
authorisation of the Enforcement Authority to disposition of rights recommends concessionaires to adopt certain techniques detailed in
is requested, and eventual assignee of such interests shall meet the Resolution 5/1996 for temporary or definitive abandonment. For
technical and financial capacities to exercise those rights in instance, in case that the abandonment is definitive, the well shall be
accordance to local regulation requirements. isolated with cement to prevent further damages to the well area. If
Local laws contemplate rules for the appropriate accounting of the abandonment is temporary, concessionaires may also adopt other
natural gas reserves. 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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requirements regarding environmental security and protection and as The Federal Authority is the one that grants the required
long as the Enforcement Authority does not object them. authorisation in order to construct and operate natural gas pipelines
Concessionaires must provide to the relevant Enforcement when they cross the territory of more than one province or when
Authority with certain information concerning the abandonment of pipes are built to export gas.
a gas well within 45 days from the date in which such abandonment It is mandatory to be granted from the National Authority a concession
took place. title in order to construct and operate natural gas pipelines.

Argentina
Furthermore, the Secretariat of Energy -at Federal level- enacted in
1996 a Resolution stating that concessionaires must file annually 4.3 In general, how does an entity obtain the necessary land
with the Secretariat of Energy a report detailing the activities (or other) rights to construct natural gas transportation
performed within each concessioned field, including the ones pipelines or associated infrastructure? Do Government
related to the abandonment of wells. All the activities connected authorities have any powers of compulsory acquisition to
with well abandonment must be supervised by a qualified inspector facilitate land access?
of the operating company.
In order to construct new gas “sites” or even to expand existing ones,
transporters and distributors must be granted the correspondent
3 Import / Export of Natural Gas (including authorisations issued by the Gas Enforcement Authority.
LNG) 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
3.1 Outline any regulatory requirements, or specific terms, agreement with landowners. These easements can be obtained from
limitations or rules applying in respect of cross-border the Gas Enforcement Authority, and of the same nature of the ones
sales or deliveries of natural gas (including LNG). to be acquired by natural gas producers.

As indicated before (see response to questions posed in section 2 4.4 How is access to natural gas transportation pipelines and
above), export of natural gas requires the prior approval of the associated infrastructure organised?
Secretariat of Energy. Resolution 299/98 regulates natural gas
exports, defining its limitations and the necessary requirements The principle that rules the activity is the open access, without
needed to obtain the Secretariat’s approval to export natural gas. discrimination. Preferences among different parties shall be based
During the last years, Argentina’s Government followed a strong and by objective reasons, before the Gas Enforcement Authority.
policy of intervention in the local gas market. Furthermore, the Carriers have to offer to third parties, the excess capacity of their
Law in Hydrocarbons and the Law on Gas, highlight that natural systems through bidding process. The Gas Enforcement Authority
gas authorisations for exportation will be granted, to the extent that is the one that should resolve conflict among the parties.
it does not affect Argentina’s domestic supply.
As the Law on Gas states in Article 3, as far as natural gas imports 4.5 To what degree are natural gas transportation pipelines
are concerned, they do not require any kind of authorisation. integrated or interconnected, and how is co-operation
Copy of the import and export agreements are to be filed before the between different transportation systems established and
Gas Enforcement Authority. regulated?

As a result of the Privatisation of “Gas del Estado”, in 1992


4 Transportation 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
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines
transportation system is a requirement to be complied with as
and associated infrastructure (such as natural gas contemplated in the Law on Gas, and regulation enacted pursuant to
processing and storage facilities). it.

Natural gas transportation is contemplated in the Law on Gas, and 4.6 Outline any third-party access regime/rights in respect of
subsequent regulations, establishing that gas transportation shall be natural gas transportation and associated infrastructure.
carried out under authorisation -by means of a concession, licence, For example, can the regulator or a new customer wishing
or permit- granted by the Executive Branch of the Federal to transport natural gas compel or require the
Government. operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
The laws in force contemplate that this activity is to be performed
facilities in order to accommodate the new customer? If
by private companies, and that the States could also participate in so, how are the costs (including costs of interconnection,
case of absence of interest from private parties. capacity reservation or facility expansions) allocated?

4.2 What Governmental authorisations (including any As indicated above, the rule is the open access to the transportation
applicable environmental authorisations) are required to system with respect to the capacity that has not been already
construct and operate natural gas transportation pipelines acquired by other parties. Carriers however, could be obliged -
and associated infrastructure? pursuant to the terms of the authorisations granted- to expand their
gas transportation systems to the extent that: (i) such extension is
As indicated above, the transportation of natural gas requires an convenient to the needs of the public transport service; and (ii)
authorisation -by means of a concession, licence or permit- to be applicable tariffs may allow the recovery of the investment and
granted under the Law on Gas usually for a term of 35 years that maintain an adequate profitable business as contemplated in the
could be extended for another 10 years. Law on Gas.
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4.7 Are parties free to agree the terms upon which natural gas 5.4 Can the regulator require a distributor to grant capacity or
is to be transported or are the terms (including costs/tariffs expand its system in order to accommodate new
which may be charged) regulated? customers?

Tariffs are regulated, as well as most of the terms and conditions to The Law on Gas in Article 32 stipulates that distributors can be
render the transportation service. obliged to expand their installations, to the extent that is deemed
Argentina

Pursuant to the Law on Gas, every distributor must apply the same convenient to satisfy the needs of the distribution public service.
gas tariffs for the same service, to all consumers. Tariffs -which are Tariffs will have to allow the recovery of the distributors´ new
originally established in the terms and conditions of the investments, and maintain an adequate profitable business for the
authorisation granted- may vary among different clients when the distributor as contemplated in the Law on Gas.
characteristics of the service that is rendered changes. Tariffs, to be
modified, require the approval of the Gas Enforcement Authority. 5.5 What fees are charged for accessing the distribution
As mentioned, applicable tariffs and its adjustment terms have been network, and are these fees regulated?
settled at the time the privatisation took place. However, after the
Argentine economic and financial crisis of 2002, the effective The Law on Gas dedicates chapter IX to tariffs. Tariffs are
revision of the agreed tariffs -to be adequate at the new situation- originally established in the bidding conditions, and are expected to
has been delayed, jeopardising the gas transportation business. 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.
5 Transmission / Distribution Different tariffs may certainly apply but to the extent it is
economically justified based on differences in the service rendered,
5.1 Outline broadly the ownership, organisational and and approved by the Gas Enforcement Authority.
regulatory framework in relation to the natural gas
transmission/distribution network.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
The gas industry in Argentina is organised in three sectors: (i) assets forming part of the distribution network (whether
production; (ii) transportation; and (iii) distribution. directly or indirectly)?
Distribution through pipelines, are considered a regulated public
service to be rendered pursuant to an authorisation -by means of Effectively, there are restrictions. None of the following gas market
concession, licence or permit- granted by the Secretariat of Energy, players can have control over gas distribution companies: (i) gas
as contemplated in the Law on Gas. The Gas Enforcement carriers and their controlling entities; (ii) consumers that acquire
Authority is the ENARGAS, the same Gas Authority that regulates natural gas from producers; and (iii) operators of storage facilities.
transportation of natural gas. It is contemplated that the service be Due to the fact that the distribution of gas is considered a public
rendered by private companies. service, it is a strongly regulated industry where distributors cannot
In 2006 the Federal Government created a fund to be destined to the dispose their assets and networks in a non-limited way. As a
expansion of energy facilities, including the ones that may be consequence of this, they cannot lease, sublease or assign them to
required to the natural gas transport and distribution services. other uses that are not related with the distribution of gas.

5.2 What Governmental authorisations (including any 6 Natural Gas Trading


applicable environmental authorisations) are required to
operate a distribution network?
6.1 Outline broadly the ownership, organisational and
The Law on Gas stipulates that all companies rendering gas regulatory framework in relation to natural gas trading.
distribution services must obtain in advance the correspondent Please include details of current major initiatives or
authorisation of the Executive Branch and, the correspondent policies of the Government or regulator (if any) relating to
natural gas trading.
provincial authorisations dealing with construction and
maintenance of pipelines. The Executive Branch authorisations are
The legal framework for gas trading is regulated by the Law on Gas
granted for 35 years and can be extended for 10 more years.
and subsequent regulations pursuant to it. Decree 180/2004
Article 16 of this same Law, demands that all gas distributors start updated regulation of the electronic wholesale market for natural
the construction of any facility with the prior authorisation of the gas (MEG). Players on the market are not only traders but also gas
Gas Enforcement Authority. producers. This “entity” creates an Authority in charge of the
coordination of the trading. In this respect, traders must be
5.3 How is access to the natural gas distribution network registered with the Secretariat of Energy.
organised?
6.2 What range of natural gas commodities can be traded? For
Pursuant to the Law on Gas, distribution is a public service example, can only “bundled” products (i.e., the natural
organised on the open access basis with respect to the excess gas commodity and the distribution thereof) be traded?
capacity of the given system. Conflicts with distributors shall be
decided by the Gas Enforcement Authority. In 2004, the Executive Branch of the Federal Government, introduced
All natural gas distributors must respond to every gas consumer’s certain modifications to Argentina’s gas market regulation (different
demand in 30 days. 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 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
7.1 Outline broadly the ownership, organisational and sector, or proposed acquisitions of development assets,
regulatory framework in relation to LNG facilities. transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?

Argentina
There is no regulation related to liquefaction facilities; Argentina How long does it typically take to obtain a decision
lacks these facilities. approving or disapproving the transaction?

As far as the natural gas sector is concerned, the Commission and


7.2 What Governmental authorisations are required to the Gas Enforcement Authority are the ones in charge of analysing
construct and operate LNG facilities?
the different transactions in the gas market.

There is no regulation in this area. 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.
7.3 Is there any regulation of the price or terms of service in
In addition, Article 8 of this Law, states that transactions in this field
the LNG sector?
must be reported to the Commission when the amount of the total
turnover of the undertakings concerned, exceeds the sum of Two
There is no regulation in this area.
Hundred Million Pesos ($200,000,000). Nevertheless, further in
this law, various cases of mergers of these quantities are exempted
8 Competition from notification.

8.1 Which Governmental authority or authorities are 9 Foreign Investment and International
responsible for the regulation of competition aspects, or Obligations
anti-competitive practices, in the natural gas sector?

Antitrust Law 25,156 aims to control and prevent economic 9.1 Are there any special requirements or limitations on
concentrations and all those conducts that jeopardise the market. acquisitions of interests in the natural gas sector (whether
Article 17 of the Law contemplates the creation of an autonomous development, transportation or associated infrastructure,
distribution or other) by foreign companies?
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. No special requirements or limitations on acquisitions of interests in
the natural gas sector exist in the Argentine applicable laws. In
The gas market has a double regulatory check with respect to other words, before the local laws foreign investors are to be treated
eventual antitrust practices. The Gas Enforcement Authority has as well as national ones.
also the capacity to approve or reject concentration of players in the
gas market (see question 8.4 below).
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
8.2 To what criteria does the regulator have regard in or other multinational arrangements?
determining whether conduct is anti-competitive?
Pursuant to the Argentine Constitution, local laws have to conform
As stated in Article 1 of the Antitrust Law, Argentina punishes two to international treaties.
main behaviours: (i) the lessening of competition -by limiting,
Argentina is a party to numerous international treaties for the
restricting and falsifying or distorting competition-; and (ii) the
promotion and protection of foreign investments, e.g. with France
abuse of a dominant position. It is considered a prohibited practise
(Law 24,100), Spain (Law 24,118), Italy (Law 24,122), United
a business that is anticompetitive and inefficient.
States (Law 24,124), Canada (Law 24,125), Switzerland (Law 24,
Article 2 of this Law, contains 14 different types of anti-competitive 099) and Chile (Law 24,342).
practices. This Article contains only a descriptive list of prohibited
In reference to gas commerce, Bolivia and Argentina have signed
conducts. Other undescribed antitrust behaviours will also be
several agreements. Bolivia is Argentina’s best gas supplier. Gas
condemned.
commercialisation between them must respect the terms and
conditions set in the treaties agreed by them.
8.3 What power or authority does the regulator have to Argentina and Chile have agreed to encourage free importation and
preclude or take action in relation to anti-competitive
exportation of natural gas. A few years ago, the energy shortage
practices?
situation in Argentina derived in the interruption of gas supply to
Chile.
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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10 Dispute Resolution 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
10.1 Provide a brief overview of compulsory dispute resolution (including any immunity)?
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the A former Attorney General of the Treasury has stated, while in
Argentina

context of disputes between the applicable Government


office, that awards like the ones issued by ICSID arbitration panels
authority/regulator and: participants in relation to natural
can (sic) be revised by local tribunals. He explains that the “non-
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the ulterior” revision “is incompatible with the Argentine constitutional
transportation, processing or storage of natural gas; and and legal system”. He argues that the “non-ulterior” revision
distribution network owners or users in relation to the confronts the constitutional principle of local judicial control. This
distribution/transmission of natural gas. position seems to have not much supporters currently. However,
neither payments have been made yet in connection to awards
Disputes in the gas market related to the rendering of gas favourable to plaintiffs, nor local Courts have revised those awards.
transportation and distribution must be submitted to the Gas It is worth mentioning that during recent renegotiation of
Enforcement Authority. Its decision can be challenged following authorisations (e.g. gas distribution), plaintiff agreed to waive their
the administrative proceeding contemplated in local Federal laws, claims before ICSID arbitration tribunals.
or directly appealed before the Court of Appeals of the City of
Buenos Aires with jurisdiction on Administrative Federal Matters. 10.4 Have there been instances in the natural gas sector when
The term to appeal is 15 days counted as from the service of process foreign corporations have successfully obtained judgments
of the decision. or awards against Government authorities or State organs
Penalties imposed by the Gas Enforcement Authority can be pursuant to litigation before domestic courts?
directly appealed before the Appellate Court on Administrative
Federal Matters of the City of Buenos Aires, within 30 days since In several cases foreign competitors have been able to invoke
the penalty is notified. bilateral investment treaties and conventions. This resulted in
several arbitration claims. Some gas industry plaintiffs obtained
favourable awards before ICSID arbitration panels. This
10.2 Is Argentina a signatory to, and has it duly ratified into
notwithstanding we are not aware of payments made under such
domestic legislation: the New York Convention on the
awards yet.
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”)?
11 Updates

Argentina has signed the New York Convention on the Recognition 11.1 Please provide, in no more than 300 words, a summary of
and Enforcement of Foreign Arbitral Awards and the Convention on any new cases, trends and developments in Gas
the Settlement of Investment Disputes between States and Nationals Regulation Law in Argentina.
of Other States (“ICSID”). The former one has been ratified by
Law 23,619 and the latter one, by Law 24,353. 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.

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Chapter 4

Australia Angus Jones

Allens Arthur Robinson David Maloney

1 Overview of Natural Gas Sector 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
1.1 A brief outline of Australia’s natural gas sector, including a concluded between Australia and its trading partners include:
general description of: natural gas reserves; natural gas
production including the extent to which production is ExxonMobil and PetroChina Company Limited agreeing on
associated or non-associated natural gas; import and the supply of approximately 2.25 mtpa of LNG sourced from
export of natural gas, including liquefied natural gas (LNG) the Gorgon Project over a 20-year term;
liquefaction and export facilities, and/or receiving and re- ExxonMobil and Petronet LNG Limited agreeing on the
gasification facilities (“LNG facilities”); natural gas pipeline supply of approximately 1.5 mtpa of LNG sourced from the
transportation and distribution/transmission network; Gorgon Project over a 20-year term; and
natural gas storage; and commodity sales and trading. Chevron securing three separate supply agreements for a
total of nearly 3 mtpa of LNG sourced from the Gorgon
Natural gas reserves and production Project to Osaka Gas (25-year term), Tokyo Gas (25-year
As of January 2009, Australia’s natural gas reserves were estimated term) and GS Caltex (20-year term). A further agreement
with Chubu Electric is expected to be confirmed before the
to be over 170 trillion cubic feet with 30 trillion cubic feet being
end of 2009.
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 Transportation and distribution/transmission network
metres in 2009-10. This increase is due to the realisation of new Refer to section 5.
conventional gas fields plus production of methane from coal seams. Commodity sales and trading
Australia’s natural gas is produced from a number of offshore and Refer to section 6.
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 1.2 To what extent are Australia’s energy requirements met
using natural gas (including LNG)?
Australia, the onshore Surat-Bowen Basin in Queensland and the
Timor Sea area to the north of Australia, including the Joint Petroleum
After coal and oil, natural gas ranks as Australia’s third primary
Development Area between the Northern Territory and Timor-Leste.
energy source and accounts for 20% of Australia’s total energy
Appendix 1 provides a summary of Australia’s natural gas reserves
consumption. Of course, Australia is a vast country with substantial
and the transmission and distribution networks for natural gas.
variations in energy profiles between areas depending upon their
Importation and exportation of natural gas access to different fuels. For example, in Western Australia gas
Excluding natural gas sourced from the Joint Petroleum accounts for approximately 60% of energy requirements.
Development Area, no natural gas is imported into Australia. There
are no re-gasification facilities in Australia.
1.3 To what extent are Australia’s natural gas requirements
Natural gas is exported from Australia as LNG. Currently, Australia’s met through domestic natural gas production?
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’s natural gas requirements are met exclusively from local
Australia and the Conoco-Phillips operated LNG Project located at production. Australia’s primary gas consumption has increased
Darwin in the Northern Territory. A significant number of LNG from 688 petajoules in 1989-90 to 1,743 petajoules in 2007-08.
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). 1.4 To what extent is Australia’s natural gas production
exported (pipeline or LNG)?
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 Approximately 50% of Australia’s natural gas production is
72% increase in value from 2007-08 levels. Demand for LNG in Asia exported, all of which is in the form of LNG. Australia is not
and North America is projected to remain strong in the years ahead. connected to its trade partners by a natural gas pipeline. However,
Currently, Australia is the World’s 6th largest LNG exporter and if all having regard to the additional LNG developments noted above, the
the LNG projects scheduled to begin first production in Australia in percentage of gas exported as LNG is expected to increase - but
the next few years eventuate, Australia is projected to become the
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note also the ‘domestic gas reservation’ policies referred to in 2.2 How are the State’s mineral rights to develop natural gas
question 2.6. reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
2 Development of Natural Gas and what is the legal status of those rights or interests
under domestic law?

Australia
2.1 Outline broadly the legal/statutory and organisational
A statutory licensing regime applies to the exploration for, appraisal,
framework for the exploration and production
development and production of natural gas. Relevant petroleum titles
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to are granted to parties meeting certain criteria and these titles permit the
natural gas are vested; Government authority or authorities parties to carry out prescribed activities in a certain area. The award
responsible for the regulation of natural gas development; of an exploration title under the OPA (see question 2.3) is by way of a
and current major initiatives or policies of the Government competitive bidding system over relevant acreage released annually
(if any) in relation to natural gas development. which, consistent with the overarching principle of efficient and
orderly exploitation, awards the permit to the party committing,
Mineral rights to natural gas through minimum work and expenditure commitments, to invest and
A fundamental principle of Australian petroleum legislation is that engage most rigorously in exploration. Geoscience Australia, an
the ownership of natural gas in situ is vested in the Crown (i.e., Australian government body, assists the competitive bidding system
Commonwealth, State or Territory governments). The right to by providing applicants with an overview of the geological formations
explore for and recover petroleum is obtained through the grant of and prospective oil and gas leads and prospects in the acreage areas.
various titles and approvals from the relevant government Certain technical data and analysis is also made available.
department administering the applicable legislation and regulations. Titles are administrative in nature and cannot be obtained as of
Principal legislation right; they lie in grant rather than in possession and are subject to
cancellation in the event of non-compliance with the conditions
Each Australian State and Territory has natural gas legislation. The
subject to which they were granted.
statutory regimes are effectively separated into three distinct
geographical areas: Ownership in natural gas only transfers to a production licence holder
once it has been produced and saved by the licensee at the wellhead.
1. State or Territory onshore;
2. State or Territory offshore (adjacent waters from low
watermark extending seaward three nautical miles and 2.3 If different authorisations are issued in respect of different
including islands and drying reefs with surrounding adjacent stages of development (e.g., exploration appraisal or
waters); and production arrangements), please specify those
3. Commonwealth offshore (waters beyond the three nautical authorisations and briefly summarise the most important
mile mark to the edge of Australia’s continental shelf and (standard) terms (such as term/duration, scope of rights,
incline). expenditure obligations).

The principal legislation applying to the development of natural gas


The most significant titles applying to the different stages of natural
reserves depends upon the location of those reserves. By way of
gas development are as follows:
example, the principal Commonwealth legislation is the Offshore
Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPA). ‘Exploration permit’ - Holders of these titles may explore for
natural gas and carry on operations and works for that
Government authorities responsible for the regulation of natural purpose within a prescribed permit area. The duration of the
gas development permit varies between jurisdictions, however, for example,
Offshore petroleum operations in Commonwealth waters are under the Commonwealth legislation, an exploration permit
administered by a combination of the Joint Authority (which is is for an initial term of six years, with successive five-year
renewals, conditional upon the holder’s surrender of a
comprised of the Commonwealth Government Minister and the
portion of the permit area. The integrity of the work
relevant State or Territory Minister) which is responsible for the grant
programme bidding system is protected by requiring the
of petroleum titles and the Designated Authority (comprised of the successful bidder to perform its minimum work programme.
relevant State or Territory Minister) which has responsibility for the
‘Production licence’ - Holders of a production licence may
more day-to-day petroleum operations. The relevant Commonwealth
recover commercial quantities of natural gas in the licence
Department is known as the Department of Resources, Energy and area and also further explore for natural gas and conduct
Tourism, and for Western Australia the relevant State Department is related operations and activities. Under the Commonwealth
known as the Department of Mines and Petroleum. legislation, production licences will be granted on an
Major policies and initiatives indefinite basis, with the relevant Government department
retaining a discretion to terminate the licence if no operations
Significant recent natural gas policy initiatives in Australia include: have been conducted in the licence area for a continuous
The Commonwealth’s implementation of an assortment of period of five years.
reforms to the Petroleum Resource Rent Tax and its application ‘Retention lease’ - Holders of a retention lease may retain
to natural gas producers to provide incentives to industry. See title to an area in circumstances where the recovery of that
question 2.5 and section 11 for further information. natural gas is not yet commercially viable, but is likely to
Queensland Government’s ‘Gas Scheme’ - Queensland become so within the next 15 years (note recent
electricity retailers and other liable parties are required to developments referred to in question 11.1). The gas can be
source a prescribed percentage (currently 13%, increasing to “stranded” by reason either of market conditions or for
15% in 2010) of their electricity from gas-fired generation. technological reasons (such as the depth of water in which
Western Australian Government’s ‘Domgas Reservation the discovery was made).
Policy’ - the equivalent of 15% of gas production from new Other relevant titles include ‘infrastructure’ and ‘pipeline’ licences
export LNG projects offshore Western Australia must be which are granted for production and transportation activities
reserved for the Western Australian domestic gas market.
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outside the licence area. 2.8 What restrictions (if any) apply to the transfer or disposal
Each of the titles referred to above may be granted subject to of natural gas development rights or interests?
whatever conditions the Joint Authority thinks appropriate. All
titleholders must carry out their operations according to good Generally, the transfer or disposal of a natural gas development
oilfield practices and must meet certain environmental right or interest is of no force until it has been approved by the
requirements. Annual fees also apply in respect of the titles. relevant government authority. An additional layer of approval may
Australia

apply where a foreign entity is involved (see section 9).

2.4 To what extent, if any, does the State have an ownership


interest, or seek to participate, in the development of 2.9 Are participants obliged to provide any security or
natural gas reserves (whether as a matter of law or guarantees in relation to natural gas development?
policy)?
Generally, participants are not obliged to provide any security or
Australian governments adhere to a well-established policy of not guarantees in relation to a natural gas development. However, the
owning or seeking to participate in the development of natural gas Commonwealth, State or Territory legislation provides a broad
reserves. They have an economic interest in natural gas production discretion for the relevant authority to grant a title on whatever
arising from royalties or Petroleum Resource Rent Tax and seek to conditions it thinks appropriate, which may potentially include the
promote the orderly development of the Australian natural gas applicant providing security.
industry for public policy purposes. The Commonwealth, State and Relevant Environmental Protection Authorities may require
Territory governments hold regular meetings and consultations ‘environmental bonds’ in certain circumstances (most likely for
through the Ministerial Council of Mineral Energy and Resources onshore natural gas activities in areas of acute environmental
with the aim of coordinating policy and regulatory requirements in sensitivity). Well control and clean-up insurance is also obligatory
the petroleum resources industry. for drilling operations.
A key aspect of the petroleum legislation applying to both
Commonwealth and State or Territory areas is that certain dealings 2.10 Can rights to develop natural gas reserves granted to a
and transfers are of no force until they have been approved and participant be pledged for security, or booked for
registered by the relevant government department administering the accounting purposes under domestic law?
applicable legislation. Registration fees up to an amount equal to
1.5% of the value of the relevant dealing or transfer may apply. Natural gas titles may be used as security; for example by way of
mortgage or charge. Such encumbrances on title constitute
2.5 How does the State derive value from natural gas ‘dealings’ under most legislation, and are of no force until approved
development (e.g. royalty, share of production, taxes)? and registered by the relevant authority.

Natural gas produced in Commonwealth waters is subject to the 2.11 In addition to those rights/authorisations required to
Petroleum Resource Rent Tax which levies a secondary tax at the explore for and produce natural gas, what other principal
rate of 40% on profits derived from the relevant project. Taxable Government authorisations are required to develop natural
profits are assessed as being the excess of the relevant project’s gas reserves (e.g. environmental, occupational health and
assessable receipts over the project’s deductible expenditure safety) and from whom are these authorisations to be
associated with exploration, development and production. obtained?

State and Territory governments levy royalties on natural gas


Other government authorisations likely to be required to develop
produced within their jurisdiction which is normally set at a rate
natural gas reserves include:
between 10 - 12.5% of the net wellhead value of the natural gas
produced. environment - Australia’s robust environmental protection
regime requires project approvals from the relevant
environmental department;
2.6 Are there any restrictions on the export of production? occupational health and safety - natural gas operations must
comply with requirements imposed by legislation (such as
There are currently no explicit trade restrictions on the export of the need to produce a ‘Safety Case’). Safety requirements
natural gas. However, note the possible effect of Western are administered by authorities such as the National Offshore
Australia’s domestic reservation policy as outlined at question 2.1. Petroleum Safety Authority; and
The State of Queensland has also recently published a discussion native title - natural gas proponents seeking access to land or
paper which, among other measures, contemplates a domestic gas water over which indigenous Australians’ assert customary
reservation policy. Most of Australia’s coal seam methane reserves rights and interests in the form of native title or cultural
are found in Queensland. heritage, must obtain the necessary approvals.

2.7 Are there any currency exchange restrictions, or 2.12 Is there any legislation or framework relating to the
restrictions on the transfer of funds derived from abandonment or decommissioning of physical structures
production out of the jurisdiction? used in natural gas development? If so, what are the
principal features/requirements of the legislation?
There are currently no restrictions on the transfer of funds derived
from production out of Australia. There is legislation, aimed to Abandonment or decommissioning of natural gas facilities and
deter money laundering, which imposes reporting obligations on associated infrastructure must be effected in compliance with
financial institutions and prohibits the transfer in and out of applicable legislation and regulations, generally including the
Australia of cash amounts of AU$10,000 or more (or the foreign principal natural gas and environmental statutes and, for offshore
currency equivalent) however such legislation is unlikely to apply. developments, in accordance with applicable international
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conventions (such as United Nations Convention on the Law of the adjoining land or mining titleholders.
Sea (UNCLOS)). 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.
3 Import/Export of Natural Gas (including
LNG)
4.4 How is access to natural gas transportation pipelines and

Australia
associated infrastructure organised?
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border As the gas transportation pipeline and associated infrastructure are
sales or deliveries of natural gas (including LNG).
typically privately owned, third party access will need to be negotiated
with the pipeline owner. See question 4.6 for further information.
Commonwealth legislation and government policy impacts on the
export of commodities out of Australia. Since 1997 export controls Third party access to natural gas pipelines (see questions 4.6 and
on LNG (such as the requirement for an ‘export licence’) have been 5.3) applies only to “covered” transmission and distribution
abolished. LNG exporters must also consider the possible effect of pipelines downstream of production and processing facilities.
Australia’s bilateral trade agreements with certain countries and Pipelines that are directly associated with production and
trade embargoes imposed from time to time. processing operations are excluded from that regime.

4.5 To what degree are natural gas transportation pipelines


4 Transportation integrated or interconnected, and how is co-operation
between different transportation systems established and
4.1 Outline broadly the ownership, organisational and regulated?
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas Domestic gas transportation systems in the eastern part of Australia
processing and storage facilities). are now largely interconnected. Most major demand centres in
south and eastern Australia can now be supplied with gas from at
Natural gas developments including associated infrastructure are least two major production sources, resulting in gas-on-gas
typically owned by private companies and they will be governed by competition. Interconnection of gas pipeline systems is a matter for
each jurisdiction’s applicable legislation. A separate pipeline negotiation between the respective pipeline owners, subject to
licence or permit is required in each jurisdiction. shipper demand.

4.2 What Governmental authorisations (including any 4.6 Outline any third-party access regime/rights in respect of
applicable environmental authorisations) are required to natural gas transportation and associated infrastructure.
construct and operate natural gas transportation pipelines For example, can the regulator or a new customer wishing
and associated infrastructure? to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
Pipelines or associated infrastructure planned for construction associated infrastructure to grant capacity or expand its
outside the production licence area will require a separate pipeline facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection,
or infrastructure licence. The pipeline licensee will need to obtain
capacity reservation or facility expansions) allocated?
a ‘consent to construct’ and a ‘consent to operate’ licence in each
relevant jurisdiction.
Natural gas pipelines may be subject to a national third party access
and economic regulation regime set out in the National Gas Law
4.3 In general, how does an entity obtain the necessary land (NGL) and the National Gas Rules (NGR). However, where there is
(or other) rights to construct natural gas transportation a competitive gas transmission market, pipelines tend not to be
pipelines or associated infrastructure? Do Government “covered” by the NGL and NGR. The NGL is based on a negotiate/
authorities have any powers of compulsory acquisition to arbitrate model where operators of regulated pipelines must provide
facilitate land access?
key information about the pipeline to access seekers and access
seekers may negotiate terms and conditions of access. If negotiations
The onshore portion of the pipeline and associated infrastructure fail, the access dispute can be referred to the Australian Energy
may traverse land held under different tenure, including private land Regulator (AER) for a binding determination (see question 10.1).
and government land.
The NGL only applies to natural gas pipelines if they are ‘covered’
Access to private land for the purpose of constructing and operating pipelines within the meaning of the NGL. There are a number of
a pipeline will typically require the private land owner to grant, ways a pipeline may become ‘covered’, including:
generally for a negotiated fee, an ‘easement’ over the pipeline route.
by the pipeline operator voluntarily submitting a full open
This allows the pipeline licensee to enter and exit the easement land
access arrangement for approval by the regulator; or
so as to do such things as survey the pipeline route, install and
any person making an application to the National
operate the pipeline and to carry out routine inspections. Subject to
Competition Council for a recommendation that the pipeline
payment of proper compensation and to restrictions on proximity to
be covered, and the designated Minister then determining
improvements, private landowners can be compelled under the that the pipeline should be covered after applying the
pipelines legislation to grant pipeline easements. Where the National interest based statutory criteria.
pipeline traverses government land, a government authority, licence
A covered pipeline may be subject to either ‘light’ or ‘full access
or permit under the applicable land legislation will need to be
arrangement’ regulation. Light regulation essentially involves non-
obtained. Discussions with other interested parties may also need
discriminatory access and price-monitoring, and may be applied
to be undertaken including in regard to native title parties and
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 NGL may be subject to access-related conditions in their pipeline
regulation, the service provider is required to submit a full access licences, but generally speaking, access will only be regulated in
arrangement to the AER for approval, which includes minimum circumstances where the pipeline has a degree of monopoly power
access principles (such as procedures for expanding pipeline that has the potential to affect competition in a relevant market.
capacity and technical gas specifications), conditions and pricing Where no access regulation applies, access to pipeline services will
rules for various firm, interruptible, back-haul and other services. be by commercial negotiation.
Australia

In terms of expansion, the National Gas Rules provide that the AER As noted in question 4.6, the NGL provides for two types of
cannot order the operator of a pipeline subject to light regulation to ‘coverage’, being ‘full access arrangement regulation’ or ‘light
expand its capacity unless the access seeker funds the expansion in regulation’.
its entirety. In the case of pipelines subject to full regulation, the
service provider cannot be required to fund any capacity expansion
5.4 Can the regulator require a distributor to grant capacity or
unless the access arrangement provides otherwise. In any case, a expand its system in order to accommodate new
service provider cannot be required to expand the geographical customers?
range of the pipeline.
The AER can require a distributor to grant access to a specific
4.7 Are parties free to agree the terms upon which natural gas user(s) in relation to an access dispute that has been referred to it
is to be transported or are the terms (including costs/tariffs under the NGL. However, this power is constrained by a number of
which may be charged) regulated? NGL conditions including, for example:
the AER’s access determination must not deprive another
Any access arrangement and pricing terms that have been approved by person of an existing contractual right (e.g. another user’s
the AER (as will always be the case for a covered pipeline subject to right to reserved capacity in the pipeline must not be
full regulation, and may be the case for a covered pipeline subject to reduced);
light regulation) will be a natural starting point for negotiations a distributor can only be required to expand the capacity of
between parties, however the parties are free to depart from the terms the pipeline if the expansion is funded entirely by the
and conditions set out in the access arrangement. If a dispute arises, prospective user, is technically and economically feasible
the AER must give effect to any already approved access arrangement. and is consistent with safe and reliable pipeline operation;
and
the AER cannot require a distributor to extend the
5 Transmission/Distribution geographical range of the pipeline.

5.1 Outline broadly the ownership, organisational and 5.5 What fees are charged for accessing the distribution
regulatory framework in relation to the natural gas network, and are these fees regulated?
transmission/distribution network.
Fees and charges for distribution services are set on an individual
Australia’s domestic gas demand is served by a number of private basis by each service provider. If the network is subject to full
and State-owned transmission pipelines running from the onshore access arrangement regulation, tariffs for the principal haulage
processing facilities to major demand centres. These transmission services will be regulated under the NGL. Regulated tariffs are
pipelines are largely interconnected through the eastern part of the generally set at a level that is designed to allow a service provider
country. Western Australia and the Northern Territory are served by to earn a specified ‘total allowable revenue’, determined using a
separate transmission pipelines. building block approach.
Most distribution networks and some transmission pipelines are Charges for some other services, such as network connection, may
subject to a National third party access regime, regulated by the be specifically regulated, or may be subject to rules that require
AER. Western Australia retains its own economic regulator, but has them to be set on a cost-reflective basis.
adopted a substantially similar access regime.
Service providers and potential users are free to agree alternative
A joint council comprising all Federal and State Ministers for Energy prices, but the regulated tariffs will be applied in any dispute. In
has established an energy market reform programme which is likely to practice, departures from those tariffs are rare.
continue for a number of years. The principal objective is to achieve
full contestability in the retail markets for gas and electricity.
5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
5.2 What Governmental authorisations (including any assets forming part of the distribution network (whether
applicable environmental authorisations) are required to directly or indirectly)?
operate a distribution network?
The transfer of any licences necessary to operate a transmission or
The operation of distribution networks requires compliance with the distribution pipeline will generally be subject to regulatory
licensing regime of the relevant jurisdiction, including obtaining approval. Otherwise, no sector-specific restrictions apply to the
pipeline licences and environmental authorisations. 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
5.3 How is access to the natural gas distribution network
organised? more than one relevant entity across the gas production,
transmission, distribution and retail sectors.
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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6 Natural Gas Trading 7.2 What Governmental authorisations are required to


construct and operate LNG facilities?

6.1 Outline broadly the ownership, organisational and Generally, prior to the construction of LNG facilities, it will be
regulatory framework in relation to natural gas trading.
necessary to obtain environmental, works related and potentially
Please include details of current major initiatives or
native title authorisations. The applicable legislative regime will

Australia
policies of the Government or regulator (if any) relating to
natural gas trading. depend upon the jurisdiction in which the facility is located. See
question 2.11 for further information.
Most domestic gas trades continue to be based on bilateral,
negotiated contracts between producer and customer and are 7.3 Is there any regulation of the price or terms of service in
typically contracted on a medium to long-term basis. However, the LNG sector?
shorter term and ‘as available’ gas supply agreements are becoming
more common as contestability in retail markets has been There is no governmental regulation of LNG sales in Australia.
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 8 Competition
term basis.
There has been some movement towards standardisation of gas 8.1 Which Governmental authority or authorities are
contracts for shorter term trades, based on an ISDA® Master responsible for the regulation of competition aspects, or
Agreement, Schedule and Confirmation format, providing for anti-competitive practices, in the natural gas sector?
physical delivery of gas rather than cash settlement.
The Australian Competition and Consumer Commission (ACCC) is
Currently, only Victoria has a regulated wholesale gas spot market,
the regulator of competition law and policy and is responsible for
which operates within its principal transmission system. In mid
enforcing the Trade Practices Act 1974 (Cth) (TPA). Among other
2010, a new short term trading market is scheduled to commence at
things, the TPA prohibits anti-competitive behaviour and misuse of
distribution hubs in Sydney and Adelaide, and may subsequently be
market power, provides a third party access regime for essential
implemented for other major demand centres.
services, and regulates mergers. The ACCC is also responsible for
authorising certain potentially anti-competitive conduct under the
6.2 What range of natural gas commodities can be traded? TPA, such as the joint marketing of gas, by applying a public
For example, can only “bundled” products (i.e., the natural benefit test.
gas commodity and the distribution thereof) be traded?
Under the third party access/economic regulation regime established
by the NGL, the NCC and the relevant designated Minister are
Gas may be traded as a commodity on its own, in which case the
responsible for making decisions regarding coverage and the type of
purchaser is responsible for arranging transportation with the
regulation that applies to covered pipelines, as described under
relevant pipeline service provider(s), or as a delivered product, in
question 4.6 above. Once a pipeline is covered within the meaning
which case the seller arranges for delivery of the gas to the point
of the NGL, the AER is the main regulator for setting prices,
nominated in the contract. The choice will generally depend on the
approving access arrangements, investigating and enforcing
purchaser’s ability to obtain transmission pipeline capacity
breaches of the NGL, and determining any access disputes.
(although for regulated pipelines users will generally be able to
subcontract capacity), and whether or not a spot market operates at
the delivery point. 8.2 To what criteria does the regulator have regard in
determining whether conduct is anti-competitive?
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. 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
7 Liquefied Natural Gas 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
7.1 Outline broadly the ownership, organisational and
service, geographic and functional market and the effect on
regulatory framework in relation to LNG facilities.
competition of conduct in the market as so defined. It is possible to
obtain authorisation of certain anti-competitive practices where the
LNG facilities are generally owned by those companies which hold
public benefit flowing from the relevant conduct outweighs the public
the underlying production licences - but this need not be the case.
detriment which results from the lessening of competition.
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 8.3 What power or authority does the regulator have to
possible for separate processing trains to be owned by different preclude or take action in relation to anti-competitive
interests or in different proportions. practices?

Whilst the specific regulatory framework applicable to a facility


The ACCC has the power to investigate companies and individuals
depends upon where it is located, they are typically subject to
who may be engaging in anti-competitive conduct and seek
environmental, planning, occupational health and safety and
significant penalties against them. For corporations, the maximum
facility-specific regimes.
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 notified to FIRB regardless of size.
corporation. The maximum penalty for individuals convicted of a The Treasurer may prohibit proposals which are adjudged contrary
criminal offence is 10 years imprisonment and AU$200,000 per to the National interest or approve proposals subject to such
offence. For civil offences, individuals face up to AU$500,000 conditions as the Treasurer considers necessary to protect the
pecuniary penalty per offence. Individuals may also be disqualified National interest.
from being a director of a company.
Australia

The ACCC can also seek a range of other court orders, such as an
9.2 To what extent is regulatory policy in respect of the natural
injunction to restrain anticipated or continued anti-competitive gas sector influenced or affected by international treaties
behaviour, or an order that a company conducts a compliance or other multinational arrangements?
programme for its employees.
In 2007, Australia became a signatory to the Kyoto Protocol,
8.4 Does the regulator (or any other Government authority) pursuant to which Australia is obliged to limit its GHG emissions in
have the power to approve/disapprove mergers or other 2008 - 2012 to 108% of its 1990 emissions. Australia will be
changes in control over businesses in the natural gas represented at the United Nations Climate Change Conference in
sector, or proposed acquisitions of development assets, Copenhagen in December 2009.
transportation or associated infrastructure or distribution
At present, Australia does not have an emissions trading scheme;
assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision however, both major political parties broadly support taking
approving or disapproving the transaction? regulatory action on climate change. Climate change matters have,
to date, been regulated indirectly and often through conditional
There is no mandatory notification or pre-approval of mergers in approvals.
Australia. However, as the ACCC has the power to seek injunctions
to restrain acquisitions or divestiture orders to undo transactions post-
10 Dispute Resolution
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 10.1 Provide a brief overview of compulsory dispute resolution
acquisition has the purpose, effect or likely effect of procedures (statutory or otherwise) applying to the natural
substantially lessening competition in the particular market. gas sector (if any), including procedures applying in the
Informal clearance does not provide immunity from third context of disputes between the applicable Government
party actions. authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
2. Formal clearance. A formal clearance provides immunity infrastructure owners or users in relation to the
from third party actions. It can also be the subject of review transportation, processing or storage of natural gas; and
by the Australian Competition Tribunal. distribution network owners or users in relation to the
3. Authorisation by the Australian Competition Tribunal. The distribution/transmission of natural gas.
Tribunal assesses whether the public benefits of the
transaction outweigh the public detriments. Australian law affords parties (including State entities) a high
degree of autonomy to resolve disputes as they see fit.
9 Foreign Investment and International A government authority may also have a ‘sufficient interest’ in a
Obligations 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
9.1 Are there any special requirements or limitations on Tribunal, Australian courts, or sui generis courts such as the New
acquisitions of interests in the natural gas sector (whether South Wales Land and Environment Court in regard to
development, transportation or associated infrastructure,
administrative decisions made in regard to natural gas titles.
distribution or other) by foreign companies?
Internationally, Australia is a signatory to UNCLOS and has
participated in international dispute resolution proceedings with
Foreign investment in Australia is subject to regulation under the
neighbouring States concerning maritime and Continental Shelf
Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA),
delimitations and oil and gas disputes.
associated regulations and Commonwealth Government policy.
Under this regime, foreign investment is subject to review and Natural gas access disputes are determined by the AER, which has
control by the Commonwealth Treasurer, who is advised by the the power to require parties to mediate. If matters are unresolved
Foreign Investment Review Board (FIRB). following mediation, the AER will make a determination on those
matters which is binding. AER proceedings are conducted much
The FATA requires notification of certain acquisitions, transactions
like a desk arbitration, with minimal oral argument and a preference
and proposals which may result in Australian assets or businesses
for written submissions.
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 10.2 Is Australia a signatory to, and has it duly ratified into
example, non-US investors do not require FIRB approval where domestic legislation: the New York Convention on the
they are acquiring an interest in an Australian business with a value Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
of AU$219 million or less and US investors do not require FIRB
Disputes between States and Nationals of Other States
approval where they are acquiring an interest in an Australian
(“ICSID”)?
business (not falling within a prescribed sensitive sector such as
media and telecommunications) with a value of AU$953 million or
Australia acceded to the New York Convention on 26 March 1975
less. All direct investments by foreign governments or their
and this Convention has applied in Australia since 24 June 1975.
agencies, including the establishment of new businesses, must be
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This means that foreign awards may be enforced in any state or involve the sale and allocation of carbon pollution permits. Of note
territory court as if the award had been made in that state or territory to LNG industry stakeholders is the emission-intensive trade-
under its domestic laws. exposed assistance programme which (on the basis of draft
The ICSID Convention was ratified on 2 May 1991 and entered into regulations) will assist industries which are adversely affected to
force on 1 June 1991. Chapters II - VII (inclusive) of the ICSID transition to the CPRS regime. The assistance programme will
Convention have the force of law in Australia under the provide LNG producers with an assistance rate of 66% in 2011-12

Australia
International Arbitration Act 1974 (Cth). financial year, diminishing incrementally to 53.5% by 2020-21.
Carbon capture and storage
10.3 Is there any special difficulty (whether as a matter of law In 2008, the OPA was amended to provide for a carbon capture and
or practice) in litigating, or seeking to enforce judgments storage regulatory regime which creates a licensing framework
or awards, against Government authorities or State organs broadly similar to that currently used for petroleum activities and
(including any immunity)? which specifically includes tenure rights for ocean sequestration.
Retention lease policy review
There is no special difficulty in litigating or seeking to enforce
In 2009, the Commonwealth Government announced that it will
judgments or awards against government authorities or State
more ‘rigorously’ apply the commerciality test to retention lease
organs. The State is essentially in the same position as a private
applications and renewals (see question 2.3) in order to ensure that
litigant in litigation for or against the State and public bodies enjoy
gas fields are developed at the earliest possible time.
no special immunity from litigation.
PRRT amendments

10.4 Have there been instances in the natural gas sector when
In June 2009, a series of amendments were made to the PRRT (see
foreign corporations have successfully obtained judgments question 2.5), including:
or awards against Government authorities or State organs Functional currency translation rules which now permit
pursuant to litigation before domestic courts? proponents whose accounts are kept predominately in a
particular foreign currency, to elect to calculate their tax
Foreign entities have successfully challenged the administrative liability by using that currency (for example, US dollars).
decisions of government authorities in respect of natural gas ‘Look back’ rule amendments which will ensure that all
developments and have also obtained awards against State-owned exploration expenditure is deductible for PRRT purposes
utilities. against the appropriate area’s production licence.
An extension to the frontier exploration tax concession to the
2009 annual offshore acreage release. The concession
11 Updates 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
11.1 Please provide, in no more than 300 words, a summary of acreages’.
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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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 Tel: +61 2 9230 4727
Email: Angus.Jones@aar.com.au Fax: +61 2 9230 5333
URL: www.aar.com.au Email: David.Maloney@aar.com.au
URL: www.aar.com.au
Angus Jones is a partner specialising in the energy industry and its David Maloney is a partner specialising in energy and natural
associations and is based in Perth. He has particular expertise in resources and is based in Sydney. He has advised numerous
contractual issues and negotiations, having advised producers, Australian and international companies on all aspects of oil and gas
generators, operators, purchasers and government and is recognised and mining law, as well as pipeline and power projects, political risk
in independent guides (see Chambers Global 2009) as one of the insurance, taxation, project financing, the environment and native
top oil and gas lawyers in Australia. title. David has been named on numerous occasions by publications
Angus has more than 21 years’ experience as a commercial lawyer, such as Chambers Global, Euromoney, PLC Which Lawyer and Best
including four years working with Slaughter and May in London. Lawyers as one of the World’s leading Energy and Natural Resources
During this time he has been involved in advising in relation to Lawyers. He was recently made a Life Member of AMPLA, the
projects and transactions in the UK, Norway, Indonesia, Japan, Resources and Energy Law Association of Australia.
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.

Allens Arthur Robinson is a full service international law firm with more than 800 lawyer in 14 cities across Australia,
South East Asia and China. The firm’s combination of experience and expertise has been instrumental in successfully
handling some of the region’s highest profile deals.
Our services
Our clients include some of the world’s largest and most significant resources companies, as well as finance arrangers,
lenders and governments. We have advised on many of the pre-eminent gas projects in the Asia region, advising on:

exploration arrangements and drilling contracts


structuring major gas acquisitions and disposals
preparing, negotiating and reviewing farm-ins, farm-outs and joint venture agreements
investment structures and financing
project consultation and development
concession agreements
government regulation and permits
sales agreements and price review arbitrations
taxation
public international law issues
transportation
Fast turnaround, industry knowledge, accessibility and hands-on involvement of our industry specialists are all part of
our service.
For further information, visit www.aar.com.au

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Chapter 5

Austria Christian Schmelz

Schönherr Rechtsanwälte Bernd Rajal

1 Overview of Natural Gas Sector 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 -
1.1 A brief outline of Austria’s natural gas sector, including a TAG GmbH (89% Eni International B.V., 11% OMV) and
general description of: natural gas reserves; natural gas
Baumgarten-Oberkappel Gasleitungsgesellschaft - BOG (51%
production including the extent to which production is
OMV, 35% Gaz de France, 15% E.ON Ruhrgas).
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG) Domestic transmission lines are operated by Transmission System
liquefaction and export facilities, and/or receiving and re- Operators (TSOs) OMV Gas GmbH, EVN Netz GmbH, Gasnetz
gasification facilities (“LNG facilities”); natural gas pipeline Steiermark GmbH, Oberösterreichische Ferngas AG and BEGAS -
transportation and distribution/transmission network; Burgenländische Erdgasversorgungs-AG. Distribution lines are
natural gas storage; and commodity sales and trading. operated by several regional and municipal Distribution System
Operators (DSOs). The Austrian natural gas system has a longitude
In 2007 gross domestic consumption (production + imports - of around 30,000 km and is currently being expanded.
exports + storage variations) of natural gas in Austria amounted to
One third of the annual Austrian natural gas requirement is stored in
7.94 Gm³. Only about 23% of gross domestic consumption may be
secure natural underground storages. It is estimated that the
covered by domestic production of natural gas. (www.e-control.at
Austrian reserves including possible new founds of natural gas
Energiestatistik Berichtsjahr 2007.)
account for 23.9 billion m³ (Energy Report 2003 of the Federal
Austria thus is dependent on the import of natural gas, mainly from Government of Austria, 36). Storage operators are OMV and Crude
Russia, Norway and Germany. Transmission capacity of existing Oil Exploration AG (Rohoel-Aufsuchungs Aktiengesellschaft AG -
transit pipelines such as Trans Austria Gas Pipeline (TAG) or West RAG). Phase II of expansion of RAG underground storage facility
Austria Gas Pipeline (WAG) is scarce. Expansion of the existing Haidach (Upper Austria) is currently in preparation by JV partners
pipeline network and construction of new transit pipelines is RAG, WINGAS GmbH and GAZPROM EXPORT, start of
required in order to diversify Austria’s natural gas import portfolio operation is intended for April 2011.
and to increase security of supply.
Import of gas from Russia (GAZEXPORT) and Norway has been a
Currently planned gas infrastructure joint venture (JV) projects are monopoly of OMV since decades. Within this system OMV handed
such as Nabucco Gas Pipeline, linking Austria and Central Europe over the long-term gas import contracts “back to back” to Austrian
with the Caspian Region / Middle East / Egypt, or TGL regional re-distributors EconGas, which is the dominant supplier in
(Tauerngasleitung - Tauern Gas Pipeline), connecting Austria and the Austrian Control Area East (comprising the Federal States
the central European pipeline system with the Adriatic region and Burgenland, Vienna, Lower Austria, Upper Austria, Salzburg,
major natural gas markets in South-East Europe (SEE) and Italy. Carinthia and Styria), and the former incumbents of Styria
The Austrian gas market is currently not linked with LNG terminals (Steirische Gas Wärme - STGW), Carinthia (KELAG) and Salzburg
outside Austria. Import of LNG gas nevertheless may be an option (Erdgas Import Salzburg - EIS). EconGas is a JV between BEGAS
in the near future as some Austrian companies, together with JV (2.60%), EGBV (13.55%), EVN (15.70%), Linz AG (2.45%),
partners, plan to construct new LNG infrastructures in the Adriatic OMV Gas & Power (50%) and WIEN ENERGIE (15.70%). OMV
region and to build or expand the necessary transport capacity. also acted as the supplier of gas originating from domestic
The Central European Gas Hub (CEGH) in Baumgarten is one of production.
the most important natural gas hubs in Europe. Russian natural gas Since the end of 2006 OMV does no longer act as intermediary.
is transferred from that point via the Austrian pipeline system to Gas import contracts are concluded directly between Austrian
“Europe”. Central European Gas Hub GmbH, a JV of OMV Gas & regional re-distributors and Russian, respectively Norwegian
Power GmbH and GAZPROM, provides hub services such as title producers. While EconGas is able to purchase gas directly from
transfer service, wheeling service or gas auctions (e.g. within the GAZEXPORT, STGW, KELAG and EIS purchase their quantities
context of gas release programmes). from the intermediary GWH Gas- und Warenhandelsgesellschaft
Transit of natural gas is carried out via the TAG and WAG pipeline m.b.H., a JV of GAZEXPORT and Centrex Europe Energy & Gas
systems, the South-East-Gas-Pipeline (SOL), the Hungarian- AG (Federals Competition Authority - FCA; Final Report on Sector
Austria-Gas-Pipeline (HAG), the March-Baumgarten Pipeline Inquiry of the Austrian Natural Gas Sector, Nov 2006, 15).
(MAB) and the PENTA-West pipeline. All of these pipelines are EconGas is the dominant supplier on the market for delivery of
operated by OMV Gas GmbH. OMV Gas GmbH is also the holder local re-distributors and on the wholesale supply market (wholesale
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customers are industrial customers with an annual natural gas Mineral Resource Act (“Mineralrohstoffgesetz - MinroG”, Federal
consumption exceeding 500,000 m³ and power plants; FCA; Law Gazette I 1999/184, as amended). This act is valid for Austria
Interim Report Gas, 79). as a whole and does not only regulate the exploration and
Markets for supply of retail customers (customers with annual production of natural gas but also the search and exploration of
natural gas consumption up to 500,000 m³) are divided into several geological structures which can be used as natural gas storage
geographical areas, which are deemed identical with the facilities. Additionally the act contains provisions concerning the
underground storage of natural gas without tanks and the
Austria

distribution grids (FCA; Interim Report Gas, 77). Thus the “local
players” (incumbents) are the dominant suppliers on the retail purification of stored natural gas.
markets. FCA has identified several barriers to market entry of new On an administrative level the only competent authority is the
suppliers (FCA; Final Report Gas, 45). Federal Ministry of Economics and Labour; the minister is
competent to issue ordinances and to decide on applications.
1.2 To what extent are Austria’s energy requirements met Applicants can introduce remedies against decisions of the Federal
using natural gas (including LNG)? Ministry of Economics and Labour with the Constitutional and also
the Administrative Court.
The Austrian energy supply is based on a balanced mix of energy
sources. In the long run the importance of fossil energy sources has 2.2 How are the State’s mineral rights to develop natural gas
been declining in favour of renewable energy sources. reserves transferred to investors or companies
Nevertheless data of the Austrian Energy Agency for 2005 show (“participants”) (e.g. licence, concession, service contract,
that the share of fossil energy sources in Austria’s energy portfolio contractual rights under Production Sharing Agreement?)
(imports, domestic production and storage) is still very high and what is the legal status of those rights or interests
under domestic law?
(76.2%; Austrian Energy Agency, Energy Flow of Austria 2005,
www.energyagency.at):
Natural gas is one of the federal state owned mineral resources
Oil and oil products 41.8% (695.655 TJ).
which are in possession of the Austrian Federal State (sec 1 no 10
Gas (mixed gas, natural gas) 24.2% (402.938 TJ). MinroG). Therefore the Austrian Federal State has the right to
Coal 10.2% (170.470 TJ). search, explore and produce natural gas (sec 68 para 1 MinroG).
Renewables 19.4% (323.042 TJ). The same is valid for the search of hydrocarbon-bearing geological
Electric energy (imports) 4.4% (73.431 TJ). 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
1.3 To what extent are Austria’s natural gas requirements met
through domestic natural gas production? rights to individuals or legal entities and also groups of persons
based on commercial law which dispose of necessary technical and
Only 20% of gross domestic consumption may be covered by financial means for the establishment and operation of such mining
domestic production of natural gas (see question 1.1 above). In activities (sec 69 para 1 MinroG). The transfer of these rights is
2007 Austrian re-distributors imported gas quantities from Russia stipulated by contract governed by civil law. Therein general rights
(75%), Germany (15%) and Norway (10%; E-Control, Market and obligations and also the consideration for the transfer of such
Report 2008, National Report to the European Commission, 31 July rights e.g. appropriate remuneration or interest payments for the
2008, www.e-control.at). 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
1.4 To what extent is Austria’s natural gas production exported legal differences.
(pipeline or LNG)?
The search, exploration of and the storage in non-hydrocarbon-
bearing geological structures which shall be used as storage for
In 2007 OMV E&P produced about 1.8 Gm³ natural gas in Austria
natural gas is bound on an approval of the competent authority.
(OMV, Business Report 2007, 37). RAG produces about 0.8 Gm³/a
Such approval has to be granted to individuals but also to legal
(FCA, Final Report Gas, 35). Both companies do not provide
persons and groups of persons based on commercial law. In
public information on destinations of delivery. E-Control’s current
contrast to the above, the transfer of the exercise of rights is not
Market Report 2008 reveals that in 2007 0.03 Gm³ natural gas was
possible in order to prevent malpractice; however, the transfer of
exported from Austria (E-Control, Market Report 2008, 8). LNG is
the approval is possible but has to be notified to the authority.
not exported from Austria.

2.3 If different authorisations are issued in respect of different


2 Development of Natural Gas stages of development (e.g., exploration appraisal or
production arrangements), please specify those
authorisations and briefly summarise the most important
2.1 Outline broadly the legal/statutory and organisational
(standard) terms (such as term/duration, scope of rights,
framework for the exploration and production
expenditure obligations).
(“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities The search, exploration and production of natural gas and the
responsible for the regulation of natural gas development; search of geological structures which shall be used as storage for
and current major initiatives or policies of the Government natural gas depend on work plans. Work plans shall provide e.g.
(if any) in relation to natural gas development. information concerning the purpose, scope mode and time of work
and also safety measures and the names of the responsible persons.
According to the Austrian federal system exploration and Work plans as well as fundamental changes of work plans have to
production of natural gas is regulated by the federal legislator in the be approved by the authority.
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An application for a specific production area has to be filed with the by contract (sec 69 para 1 MinroG); this is done against payment of
authority, if the applicant has found natural gas resources. The an appropriate consideration. Therefore the contracting party has to
rights start two months after the access of the filing with the pay:
authority, if the application fulfils all legal requirements. (i) an area interest for the search of natural gas and the search
See question 2.2 with regards to the search, exploration of and the and exploration of hydrocarbon-bearing geological
storage in non-hydrocarbon-bearing geological structures to be structures are to be used as storage for natural gas;

Austria
used as storage for natural gas. (ii) a field interest and production interest for the production
including the right to acquire natural gas; and
The mining beneficiary has to notify the set up of a mining
establishment or an independent section of a mining establishment (iii) a storage interest for the storage of natural gas in
within the authority’s correct period of time to the authority. hydrocarbon-bearing geological structures.

According to sec 119 para 1 MinroG an authorisation is required for Sec 69 MinroG and the ordinance of the Federal Minister for
setting up or construction of mining facilities on the surface, in Economic and Labour on Production Interests - Production Interest
tunnels, mine shafts and the drilling of a drill hole and probes of Ordinance (“Verordnung des Bundesministers für Wirtschaft und
more than 300 m in depth for the purpose of mining activities which Arbeit über Förderzinse für Kohlenwasserstoffe -
start on the surface. Förderzinsverordnung 2006”, Federal Law Gazette II 2006/83)
regulates the calculation of the production interest.
A mining facility is defined as an artificial independent local object
which is used for the search, production, purification in operational Under certain conditions (economic reasons) a liberation from the
connection with the search and production of natural gas and also area, field, production and storage interest is possible and is
the search and exploration of geological structures used for the regulated in a special ordinance based on sec 69 para 1 MinroG.
underground storage of natural gas without tanks and the
operational purification in connection with storage. 2.6 Are there any restrictions on the export of production?
An authorisation for a mining facility can only be granted, if:
(i) it is constructed (set up) on the property of the applicant or The Austrian law does not provide special restrictions on the export
on the property of another person with the owner’s consent of natural gas production. In the event of a crisis certain measures
or on the basis of a legally binding decision of the authority (including export restrictions) can be taken on the basis of the
(sec 148 et seq. MinroG); Energy Steering Act (“Energielenkungsgesetz”, Federal Law
(ii) according to the best available technology avoidable Gazette 1982/545, as amended).
emissions do not exist;
(iii) on the basis of medical or other sciences which come into 2.7 Are there any currency exchange restrictions, or
consideration life or health of persons is not endangered and restrictions on the transfer of funds derived from
no unreasonable disturbance of persons exists; production out of the jurisdiction?
(iv) it is not expected that the property of the applicant which is
not committed to use will be endangered and that there will No specific currency exchange restrictions or restrictions on the
not be any damage of the environment and water; and transfer of funds derived from production out of the jurisdiction can
(v) the operation of the mining facility does not produce any be determined in Austrian law.
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 2.8 What restrictions (if any) apply to the transfer or disposal
recycled economically. of natural gas development rights or interests?

Additionally public interests have to be taken into consideration.


The transfer or disposal of specific natural gas development rights
The authority has the power to impose obligations, terms and (search, exploration and production of natural gas and the search of
conditions and limitations in order to grant an authorisation. hydrocarbon-bearing geological structures and storage therein) can
Generally there is no operating approval required (see sec 119 para only take place with the consent of the competent Federal Minister
8 MinroG). (see question 2.2).
The authorisation to search and explore non-hydrocarbon-bearing
2.4 To what extent, if any, does the State have an ownership geological structures which shall be used as storage for natural gas
interest, or seek to participate, in the development of as well as the storage therein can be transferred by contract; it has
natural gas reserves (whether as a matter of law or to be notified and verified to the authority. The authority has to
policy)?
authorise the transfer of the storage right, if the acquirer disposes of
necessary technical and financial means for the storage of natural
Generally OMV and RAG carry out natural gas development gas in such structures.
activities in Austria.
Currently the Austrian Federal State, namely the Austrian Industry
2.9 Are participants obliged to provide any security or
Holding AG (“Österreichische Industrie Holding AG - ÖIAG”) has
guarantees in relation to natural gas development?
a stake of 31.5% in OMV. Different Austrian states have an indirect
holding in the RAG. The states’ interests have been reduced in
According to sec 69 para 1 MinroG participants are obliged to
recent years.
dispose of necessary technical and financial means for the
establishment and operation of mining activities. Therefore
2.5 How does the State derive value from natural gas securities or guarantees in relation to natural gas development are
development (e.g. royalty, share of production, taxes)? stipulated in civil contracts with the applicants. Existing contracts
are not disclosed to the public.
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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2.10 Can rights to develop natural gas reserves granted to a 4 Transportation


participant be pledged for security, or booked for
accounting purposes under domestic law?
4.1 Outline broadly the ownership, organisational and
There are no special regulations in connection with the pledge for regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
security or the booking for accounting purposes of rights to develop
processing and storage facilities).
Austria

natural gas under the Austrian law; such regulations may be


stipulated in the civil contract with the competent Federal Minister.
As regards ownership of transportation pipelines and storage
facilities see questions 1.1 and 2.2.
2.11 In addition to those rights/authorisations required to
Regulations on the operation of transportation pipelines and storage
explore for and produce natural gas, what other principal
facilities can be found in the GWG.
Government authorisations are required to develop natural
gas reserves (e.g. environmental, occupational health and The Austrian transmission and distribution grid is divided into three
safety) and from whom are these authorisations to be control areas. Transport capacities are managed by the independent
obtained? control area manager. Transit of natural gas is outside the control
area, as well as storage.
Apart from authorisations based on the Austrian Mineral Resource Any person who wants to act on the Austrian natural gas market has
Act (see question 2.3) several other authorisations (of different to be member of a balance group. A balance group representative
authorities) may be required, this depends on the specific project. bears the responsibility for the balance group. He has the obligation
Therefore authorisations e.g. according to the Nature Conservation to develop schedules and transfer them to the clearing and
Act or Water Rights Act) may be required. If a specific project is settlement agent and control area manager. The clearing and
subject to an Environmental Impact Assessment (EIA), the settlement organisation is responsible for the clearing and
competent authority issues a single decision under the EIA Act, settlement between balance groups.
covering all necessary licences (“one-stop-shop”).
Natural gas storage facilities are operated by RAG and OMV Gas
GmbH. Natural gas is stored in hydrocarbon-bearing geological
2.12 Is there any legislation or framework relating to the structures.
abandonment or decommissioning of physical structures
Storage undertakings are obliged to grant access to their storage
used in natural gas development? If so, what are the
principal features/requirements of the legislation? facilities to parties entitled to storage access (producers, natural gas
traders and suppliers domiciled in the European Union) at non-
According to sec 119 para 14 MinroG the abandonment of a mining discriminatory and transparent conditions. Storage utilisation charges
facility has to be notified to the authority. This is not required if the have to be stipulated on a non-discriminatory and cost oriented basis.
abandonment of a mining facility has been indicated to the authority Access can be denied under certain conditions (sec 39 para 2 GWG).
in connection with a closing operating plan. Such closing operating
plan has to be authorised by the authority. The authority is 4.2 What Governmental authorisations (including any
empowered to prescribe safety measures. applicable environmental authorisations) are required to
construct and operate natural gas transportation pipelines
and associated infrastructure?
3 Import / Export of Natural Gas (including
LNG) 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
3.1 Outline any regulatory requirements, or specific terms,
authority has especially to examine life, health, real rights, technical
limitations or rules applying in respect of cross-border
sales or deliveries of natural gas (including LNG).
(safety) and environmental aspects (sec 45 GWG).
The competent authority must be notified of any completion or
According to sec 31c of the Austrian Gas Act (Gaswirtschaftsgesetz permanent shutdown. Generally natural gas pipelines can be
- GWG, Federal Law Gazette I 2000/121, as amended), generally operated after this notification.
the regulations on grid access for domestic customers e.g. non- Depending on the specific project, several other authorisations may be
discriminatory grid access, refusal of grid access, transparency of required (e.g. Nature Conservation Act). If a specific project is subject
system capacities, dispute settlement and arbitration procedure, to an EIA, the competent authority issues a single decision under the
apply. EIA Act, covering all necessary authorisations (“one-stop-shop”).
Generally TSOs and owners of transport rights on transmission Further a licence of E-Control Commission is required to operate
networks have to grant access on the basis of approved general transmission and distribution pipelines (sec 13 GWG). The licence
terms and conditions (GTC) as well as on the basis of fees has to be granted if certain licence conditions are fulfilled. The
calculated according to methods approved ex ante by the regulatory authority may impose obligations and terms or grant the licence
authority (E-Control Commission). temporary.
Transit of natural gas is based on the GTC and on the approved
calculation methods. The OMV Gas GmbH coordinates the use of 4.3 In general, how does an entity obtain the necessary land
transit pipelines of different operators in the event of natural gas (or other) rights to construct natural gas transportation
transit (“one-stop-shop”). 70% of the Austrian import capacities pipelines or associated infrastructure? Do Government
are reserved for transit. 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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application the temporary utilisation of properties belonging to third 4.6 Outline any third-party access regime/rights in respect of
parties with a view to undertaking preliminary works in connection natural gas transportation and associated infrastructure.
with the construction, extension or alteration of a natural gas For example, can the regulator or a new customer wishing
pipeline system. The application shall state the nature and duration to transport natural gas compel or require the
of the intended preliminary work with a work plan attached. The operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
applicant is only legally entitled to obtain such a decision, if the
facilities in order to accommodate the new customer? If
preliminary work begins within one year of the application being

Austria
so, how are the costs (including costs of interconnection,
filed. capacity reservation or facility expansions) allocated?
The party authorised to carry out preliminary work has duly to
compensate the owners of the properties concerned, any parties As stated above the system operator operating the system to which
having a right in rem in these properties (except mortgage creditors) the customer wishes to be connected is obliged to grant non-
and any parties holding mining licences for any restrictions they discriminating access under approved GTC and regulated tariffs.
had at the time when the permit was granted (see further sec 56 para Access may be denied under certain conditions e.g. extraordinary
9 GWG). system conditions, insufficient system capacity or insufficient
Property owners and any other parties having a right in rem in a interconnection of systems. The refusal has to be notified in writing
property may be deprived of or restricted in these property rights, (sec 19 GWG). E-Control Commission can be appealed if the right
provided that this is required with a view to construct a pipeline of access is damaged.
(transmission or distribution line) and that it is in the public interest In the event of insufficient system capacity or insufficient
to do so. In any event no public interest exists, if a natural gas interconnection, access has to be granted in accordance with
pipeline already legally exists or is planned in the area in question following principles provided that the capacity to be utilised is duly
and if the existing or planned capacity is not fully utilised. notified:
Public property has to be used for pipeline routes, except if the (i) transports under terms of existing contracts and of
applicant has concluded agreements on the pipeline routes with all contractual obligations superseding such contracts if this is
property owners concerned prior to submitting its application. The in accordance with the competition rules;
applicant has to prove this to the authority. Only if public property (ii) applications to use additional capacities have to be
is not available private property may be expropriated (see sec 57 considered in chronological order however transports for
GWG). final customers within a control zone area have priority in
relation to miscellaneous transports; and
(iii) transports to supply customers who must perform service
4.4 How is access to natural gas transportation pipelines and obligations.
associated infrastructure organised?
Committed transport capacities which are not used have to be made
The system operator operating the system to which the customer accessible to third parties. If no notice of the required capacity is
wishes to be connected is obliged to grant non-discriminating given, or if it is not given in due time, the respective party’s right of
access under approved GTC as well as regulated tariffs (see in access shall be subject to available capacity.
detail sec 17 et seq. and sec 24 et seq. GWG). The party entitled to system access can apply for the expansion of
In the event that the application for access also concerns natural gas the system in the event of refusal of access because of insufficient
line upstream of the relevant distribution system, the DSO is obliged system capacity or insufficient interconnection of systems for
to pass on promptly the application to the control area manager for transports within a control area. The requested capacity needs have
further action. Applications for access to miscellaneous transports to be considered in the long-term planning by the control area
have to be addressed to the control area manager who communicates manager.
this to the relevant system operators. The control area manager is The application for expansion of the system shall be accepted under
obliged to take steps to ensure transport through the natural gas lines certain conditions when:
upstream of the relevant distribution system which are operated or (i) the long-term planning of the control area manager, which
owned by third-party natural gas undertakings. contains the respective expansion, has been approved by E-
Control Commission; and
The natural gas undertakings shall enter into contracts under civil
law for the benefit of the party entitled to system access. The line (ii) contracts required in order to implement the expansion
capacity formerly used for the customer in the line system shall measures, have been concluded between the affected TSOs
and DSOs and the control are manager.
continue to be available to the customer in the event of a change in
supplier. 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
4.5 To what degree are natural gas transportation pipelines
23 et seq. GWG) has to recognise real and proportionate costs
integrated or interconnected, and how is co-operation
claimed by the respective system operator, arising from
between different transportation systems established and
regulated? implementation of measures contained in the long-term planning of
the control area manager (sec 12e para 8 GWG).
The Austrian natural gas transportation network is disconnected and
consists of three control areas. Transportation of natural gas 4.7 Are parties free to agree the terms upon which natural gas
between different control areas, e.g. from the Eastern part of Austria is to be transported or are the terms (including costs/tariffs
to Tyrol, is only possible by using foreign networks (e.g. via which may be charged) regulated?
Germany). A control area manager is established for each of the
three networks. It is responsible for the network access and GTC for access to the grid have to be approved ex ante by E-
capacity management, the schedule and balance energy Control Commission, which also sets the tariffs for access to the
management and the long-term planning. domestic transport system. Tariffs are paid by the end-consumers
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(“postage stamp tariff”). For the transmission system no tariffs are and utilisation under the general terms and conditions within their
set but costs deriving from transport within the transmission system distribution area (general obligation to connect). The system user’s
are allocated to the downstream distribution systems. facility has principally to be connected to the system at a technically
Tariffs for transits have to be calculated by the TSO respectively suitable point with due regard to the economic interests of the
owner of transportation rights upon a method approved ex ante by system user. The general obligation to connection does not apply if
E-Control Commission (see also questions 4.4 and 5.5). the DSO cannot with any reasonableness be expected to make an
individual connection, considering the interest of all its customers.
Austria

If no agreement can be achieved on whether or not a systems


5 Transmission / Distribution operator is obliged to connect a consumer, the provincial governor
will decide upon application of either party.
5.1 Outline broadly the ownership, organisational and Compare also question 4.6 to insufficient system capacity or
regulatory framework in relation to the natural gas insufficient interconnection.
transmission/distribution network.
5.5 What fees are charged for accessing the distribution
The existing Austrian transit pipelines are owned and operated by network, and are these fees regulated?
OMV Gas GmbH. Domestic transmission and distribution
networks are owned and operated by various TSOs and DSOs (see According to sec 23 para 1 GWG and the Gas Tariff Regulation
question 1.1). 2008 the following tariffs for the usage of the distribution networks
Domestic transmission and distribution networks are subject to are charged:
regulated third party access (TPA), which means that GTC are (i) a grid utilisation charge (price set by E-Control
approved ex ante and tariffs are regulated (see questions 4.1, 4.4, Commission);
4.6 and 5.3). For transit similar provisions do apply (approved (ii) a metering charge (expenditure-based; E-Control
GTC, approved calculation methods; see question 3.1). Commission sets price cap);
(iii) a grid provision charge (currently fixed at €0); and
5.2 What Governmental authorisations (including any (iv) a charge for access to the grid (expenditure-based).
applicable environmental authorisations) are required to
operate a distribution network?
5.6 Are there any restrictions or limitations in relation to
A licence of E-Control Commission is required to operate a acquiring an interest in a gas utility, or the transfer of
assets forming part of the distribution network (whether
distribution network and has to be granted if certain licence
directly or indirectly)?
conditions are fulfilled (e.g. third-party liability insurance). The
authority may impose obligations and terms or grant the
There are no restrictions or limitations in relation to acquiring an
authorisation temporary (sec 13 GWG).
interest in a natural gas utility, or the transfer of assets forming part
DSOs are required to appoint an individual as technical director in of the distribution network.
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). 6 Natural Gas Trading
The managing director is accountable to the authority with regard to
compliance with the provision of the GWG. DSO has to notify the
6.1 Outline broadly the ownership, organisational and
appointment of these two persons to the authority (compare regulatory framework in relation to natural gas trading.
question 4.2). Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
5.3 How is access to the natural gas distribution network
organised?
According to the GWG natural gas traders are natural or legal
The DSO operating the system to which the customer wishes to be persons buying and selling natural gas without carrying out the
connected is obliged to grant non-discriminating access under function of transmission or distribution within or outside the system
approved GTC and regulated tariffs. DSOs are obliged to enter into in which such a natural gas trader is established. Natural gas traders
private-law contracts with consumers on the connection to the buying or selling natural gas for customers in the federal territory of
natural gas distribution system and system utilisation under Austria have to notify their activities to E-Control GmbH, which is
approved GTC within their distribution area (compare sec 25 and the second regulatory body, prior to their commencing.
26 GWG). 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
5.4 Can the regulator require a distributor to grant capacity or
control areas (or may join an existing balance group). Therefore
expand its system in order to accommodate new
customers? contracts with the clearing and settlement centre and the control
area manager have to be concluded. Finally E-Control GmbH
Access to the distribution system may be denied by DSO under grants permission for participation in the Austrian natural gas
certain conditions only, provided by the law. E-Control market after having received certain documents (“Green Card”,
Commission can be appealed if the right of access is damaged (see contract) from the applicant.
question 4.6). Specific regulations exist in relation to consumers. Natural gas traders
DSOs are obliged to enter into private-law contracts with and providers selling natural gas to consumers in the sense of the
consumers on the connection to the natural gas distribution system Austrian Consumers Protection Act (“Konsumentenschutzgesetz -

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KSchG”, Federal Law Gazette 1979/140, as amended) shall always 8.3 What power or authority does the regulator have to
provide for an option to enter into non-interruptible natural gas supply preclude or take action in relation to anti-competitive
contracts. practices?
Finally the GWG regulates minimum requirements for invoices,
E-Control GmbH has within the scope of its surveillance and
information material and advertising and the creation, publication,
control duties and responsibilities the power to request the
alteration and content of general terms and conditions which have
compliance of the market participant with the law within a certain

Austria
to be notified to E-Control Commission. The application thereof
period of time. If the market participant does not comply with the
can be prohibited.
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.
6.2 What range of natural gas commodities can be traded? For Additionally E-Control GmbH has the power to enforce all orders
example, can only “bundled” products (i.e., the natural which are necessary to create a status in accordance with the law.
gas commodity and the distribution thereof) be traded?
Due to Austrian Constitution Law E-Control GmbH is not entitled
to impose any administrative fines in case of non-compliance with
Natural gas may be traded as an “unbundled” product, e.g. at the
its orders.
CEGH (see question 1.1), which is a “virtual” trading platform.
Traded volumes and physical throughput thus differ (E-Control,
Market Report 2007, 87). 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
7 Liquefied Natural Gas sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
7.1 Outline broadly the ownership, organisational and How long does it typically take to obtain a decision
regulatory framework in relation to LNG facilities. approving or disapproving the transaction?

Currently no LNG facility in Austria does exist. Some Austrian According to the Austrian Anti Trust Act intended mergers have
companies plan to construct such terminal in the Adriatic region as generally to be notified to the FCA, if the companies involved
part of a JV (see also question 1.1). reached in the last year before the merger the following turnover:
(i) worldwide more than EUR 300 million;
7.2 What Governmental authorisations are required to (ii) in Austria more than EUR 30 million; and
construct and operate LNG facilities?
(iii) worldwide at least two companies each with more than EUR
5 million.
LNG is not regulated under the Gas Act.
FCA and the Federal Cartel Attorney may within a period of four
weeks from notification either clear a merger or may request the
7.3 Is there any regulation of the price or terms of service in Cartel Court to examine the intended merger.
the LNG sector?
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
No there is not.
expects that the merger leads to the creation or strengthening of a
dominant position.
8 Competition
9 Foreign Investment and International
8.1 Which Governmental authority or authorities are Obligations
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
9.1 Are there any special requirements or limitations on
E-Control GmbH and E-Control Commission are responsible for acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
the regulation of competition aspects, or anti-competitive practices,
distribution or other) by foreign companies?
in the gas sector (sec 10 para 1 no 1 Energy Regulatory Authority
Act (“Energie-Regulierungs-behördengesetz - E-RBG”, Federal
Currently there are no special requirements or limitations on
Law Gazette I 2000/121, as amended)). The competence of other
acquisitions of interests in the natural gas sector by foreign
authorities being responsible for competition aspects, such as FCA,
companies.
the Federal Cartel Attorney and the Cartel Court, remains
unaffected.
9.2 To what extent is regulatory policy in respect of the natural
gas sector influenced or affected by international treaties
8.2 To what criteria does the regulator have regard in or other multinational arrangements?
determining whether conduct is anti-competitive?

The regulatory policy in respect of the natural gas sector is


The regulator has to observe the criteria of the Austrian Anti-Trust
especially influenced and affected by European Law, in particular
Act (“Kartellgesetz”, Federal Law Gazette I 2005/61, as amended),
the EC Treaty.
Art 81 and 82 EC Treaty and also that of the Gas Act and Energy
Regulatory Authority Act.

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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 Austria.
context of disputes between the applicable Government
Austria

authority/regulator and: participants in relation to natural At the beginning of 2009 E-Control Commission has amended the
gas development; transportation pipeline and associated tariffs for the distribution grid for the first time according to the new
infrastructure owners or users in relation to the
system: tariff regulation is exercised within a five-year regulation
transportation, processing or storage of natural gas; and
period. Within this system maximum productivity offsets are
distribution network owners or users in relation to the
distribution/transmission of natural gas. defined ex ante and remain valid for the whole regulation period.
These offsets are applied individually to DSOs, depending on their
No compulsory dispute resolution procedures apply between the efficiency, and lead to annual adjustments of the tariffs. The system
regulator and corporations in the natural gas sector. 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-
10.2 Is Austria a signatory to, and has it duly ratified into
Verordnungs-Novelle 2009”). The regulation contains new
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
guidelines concerning the delivering of data in case of supply
and/or the Convention on the Settlement of Investment shortfall.
Disputes between States and Nationals of Other States In July 2009 the political agreement among the Nabucco transit
(“ICSID”)? countries, Austria, Hungary, Romania, Bulgaria and Turkey has
been signed. This agreement guarantees stable legal framework for
The New York Convention on the Recognition and Enforcement of gas transit.
Foreign Arbitral Awards was ratified 1961 and the Convention on The Third Energy Package will have significant impact on the
the Settlement of Investment Disputes between States and Nationals Natural Gas legislative. At the end of 2009 the first drafts for the
of Other States in 1971. 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, Bernd Rajal is Junior Partner of Schönherr Rechtsanwälte GmbH.
where he specialises in the field of environmental, energy and public His practice focuses on Regulatory issues such as Energy,
law, i.e. constitutional and administrative law. Environment, Waste and Water Management, and Restoration of
Christian Schmelz, who is a member of the Vienna bar, graduated Contaminated Sites. Furthermore he is specialising in Data
from the University of Vienna in 1979. Before entering Schönherr Protection law.
(1984), Dr. Schmelz worked as Assistant Professor and lecturer at Bernd Rajal, who is a member of the Vienna bar, graduated from the
the University of Vienna. University of Vienna in 2001. He is author of the book NATURA
At Schönherr Christian Schmelz has been serving not only national 2000, Das Schutzgebietssystem der Europäischen Union, Manz,
and international corporate clients but also municipalities, and author of various articles on Environmental and Energy Law.
provinces, the federal administration, the Austrian Chamber of Before entering Schönherr Rechtsanwälte Bernd Rajal gained broad
Commerce and the European Commission. He has been member of experience in other renowned law firms. At Schoenherr Bernd Rajal
advisory boards on legislative projects such as amendments to the is also responsible for regulatory issues concerning cross-border
Austrian Waste Disposal Act, the Environmental Impact Assessment transactions in CEE/SEE.
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.

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.

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Chapter 6

Bolivia Adrián Barrenechea

Criales, Urcullo & Antezana Daniel Mariaca

1 Overview of Natural Gas Sector renewed.


Even though in October 2008 YPFB-PetroAndina SAM (a partly
State-owned company YPFB, in association with PDVSA
1.1 A brief outline of Bolivia’s natural gas sector, including a
general description of: natural gas reserves; natural gas (Petróleos de Venezuela S.A.) announced the initiation of
production including the extent to which production is exploration activities in non-traditional hydrocarbons areas in
associated or non-associated natural gas; import and Northern La Paz, to this date no discoveries have been reported.
export of natural gas, including liquefied natural gas (LNG)
liquefaction and export facilities, and/or receiving and re-
1.2 To what extent are Bolivia’s energy requirements met
gasification facilities (“LNG facilities”); natural gas pipeline
using natural gas (including LNG)?
transportation and distribution/transmission network;
natural gas storage; and commodity sales and trading.
Bolivia’s energy requirements are met by various means. By the
Bolivia has the third largest reserves of Natural Gas (NG) in South end of 2009, some 59.5% of all electric power consumed in Bolivia
America, right after Venezuela and Brazil. (in the National Interconnected Grid) was generated using NG.
Also, many of the major industries use NG as an energy source.
Currently 17 oil and gas companies operate 70 gas fields in Bolivia.
Other major sources of energy include:
Bolivia exports around 24 MM cubic meters of NG per day
1. Gasoline (automobile consumption).
(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 2. Diesel (electric generation, agriculture and transportation).
owned by concessionaires. Bolivia produces all the NG required by 3. LPG (domestic consumption).
the domestic market and does not import NG. 4. Kerosene (domestic consumption).
The total NG reserves in Bolivia are estimated to be 26.7 TCFs 5. Fuel Oil (Industrial consumption).
(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
1.3 To what extent are Bolivia’s natural gas requirements met
Report on Reserves dated January 1st, 2005, which is the latest through domestic natural gas production?
report on the matter).
The total NG production, as reported by “Yacimientos Petrolíferos All NG requirements (318 MCF per day) in Bolivia are met entirely
Fiscales Bolivianos” (YPFB), the State-owned hydrocarbons by domestic production.
company, is around 1,474 MCF per day, 100% of which is not
associated with liquids.
1.4 To what extent is Bolivia’s natural gas production exported
There are no liquefaction or re-gasification LNG facilities in (pipeline or LNG)?
Bolivia; therefore, currently there are no LNG importation or
exportation activities. Bolivia exports around 78% of its total NG production through
There are no significant NG storage facilities in Bolivia. pipelines to Brazil and Argentina.
The Bolivian NG Transportation network operates under “open
access” rules, subject to concession and regulation by the
2 Development of Natural Gas
Hydrocarbons Regulatory Authority “Agencia Plurinacional de
Hidrocarburos” (ANH) formerly “Superintendencia de
Hidrocarburos”. The NG pipeline network is 4,262.03 miles 2.1 Outline broadly the legal/statutory and organisational
(6,819.248 kilometres) long, and is operated by 8 companies framework for the exploration and production
throughout the country. (“development”) of natural gas reserves including:
principal legislation; in whom the State’s mineral rights to
There are NG distribution networks in the 6 major cities. During natural gas are vested; Government authority or authorities
2009, YPFB has taken control of distribution activities in 4 of the responsible for the regulation of natural gas development;
aforementioned cities, where up until then private concessionaires and current major initiatives or policies of the Government
performed such activities. It should be noted that no expropriatory (if any) in relation to natural gas development.
or confiscatory actions were taken by the Government, because the
concession contracts reached their respective terms and were not In 2008, as part of the proposed governmental reforms, a new
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Constitution was drafted by a Constitutive Assembly. Such draft 3. Governmental Policy:


was then subject to a referendum held on January 25th 2009 and YPFB was established in 1936 as a State-owned operating
approved by 61.73% of the Bolivian people; consequently, the new company, vertically integrating exploration, production,
Constitution was enacted on February 7th 2009. transportation, trading and distribution activities.
1. Legal Framework: In 1994, the Bolivian Government started a privatisation process,
1.1. The Bolivian Constitution has reformed the entire legal called “Capitalización” through the injection of private capital and

Bolivia
framework applicable to the Natural Gas Sector, some of the major transfer of operations and management to the private sector.
aspects being the following: Law No. 1689, dated April 30th 1996, provided the legal
a) The Bolivian State maintains the ownership over all framework for private operators to perform all hydrocarbons
hydrocarbons reservoirs. Exploration, development and activities. Under this law, YPFB was divided into six different
production activities are subject to a service provision companies (through the vertical and horizontal segregation of
regime. A company intending to perform such activities may
activities in the hydrocarbons sector). Five companies were
only do so by: (i) creating a joint stock company in
association with YPFB; or (ii) entering into a service contract privatised and one (the residual YPFB) stayed under the control of
with YPFB, thereby providing a specific service for a the State, in order to control and monitor exploration and
specific activity. production activities granted to private companies.
b) The abovementioned service contracts entered into by a A national referendum on the hydrocarbons policy was held in
company and YPFB shall need approval of the Bolivian 2004. A substantial majority of the Bolivian people voted to abolish
Congress (called the Legislative Assembly) in order for them Law No. 1689 and to reinstate YPFB as a fully operating company.
to enter into full force and effect.
Law No. 3058 was enacted in 2005; it established a new legal
c) Article 366 provides that in no case shall the State be subject framework, including a tax increase of up to 50% of the NG
to foreign jurisdictions nor shall it be subject to international production (12% royalties, 6% for the National Treasury and 32%
arbitration or diplomatic reclamations, being the only
direct taxes on the relevant production) and an obligation for all
accepted jurisdiction the Bolivian courts.
participants in the NG production to change their existing Joint Risk
d) All existing Agreements for the development of NG Agreements to new YPFB Agreements.
activities shall be renegotiated in accordance with the new
legal framework. Supreme Decree No. 28701 (the “Nationalisation Decree”) was
enacted in 2006 to regulate the change of all existing Joint Risk
By mandate of Transitory Disposition 8th of the new Constitution,
Agreements to new YPFB Agreements. Under such new YPFB
in a term of one year from the election of a new Government (which
Agreements all NG production belongs to YPFB, which is also in
occurred on December 6th 2009) all concessions related to natural
charge of setting prices, volumes and conditions for trading and
resources shall be reviewed and adjusted to the, then enforced, legal
exporting.
framework.
As a result, 44 Operation Agreements were entered between YPFB
1.2. The Hydrocarbons Law (Law No. 3058) dated May 17th, 2005
and 17 oil and gas companies. As established in the Constitution,
establishes that YPFB, the State-owned hydrocarbons company, is
these Agreements were individually authorised and approved by the
in charge of all NG production and trading.
Bolivian Congress, resulting in the passing of 44 different laws.
However, YPFB is authorised to enter into three types of
The current Government has taken over all NG related activities,
agreements with private companies in order to produce NG (the
except for detail distribution.
“YPFB Agreements”) listed below:
Shared Production Agreements. The Government, through YPFB, now holds ownership or interests
in all the key hydrocarbons companies.
Operation Agreements.
Historically in Bolivia, there has been a pattern of alternating
Association Agreements.
periods with Governments that favour open market approaches with
Notwithstanding any of the aforementioned, the Bolivian those that favour greater Government intervention.
Government has recently announced that a new hydrocarbons law
shall be enacted sometime during the first quarter of 2010.
2.2 How are the State’s mineral rights to develop natural gas
1.3. Regulations by the Executive Branch. Supreme Decrees are
reserves transferred to investors or companies
used by the Executive Branch to regulate the Hydrocarbons Law on (“participants”) (e.g. licence, concession, service contract,
matters such as royalties and tax payments, transportation and contractual rights under Production Sharing Agreement?)
trading regulations, and various other technical matters. and what is the legal status of those rights or interests
2. Regulatory Framework: under domestic law?
2.1. The Ministry of Hydrocarbons and Energy, a Department of the
Executive Branch is in charge of setting and developing the Exploration and production activities may only be performed by
Bolivian Hydrocarbons Policy. those participants who have entered into an YPFB Agreement (as
defined herein). YPFB Agreements grant a participant the right to
2.2. YPFB, the State-owned hydrocarbons company is in charge of: (i)
develop NG reserves. Such participants are allowed to transfer
the negotiation, execution and performance of oil and gas agreements;
their rights by means of assignment, subject to previous
(ii) the direct performance of all activities in the NG productive chain
authorisation by (i) the Ministry of Hydrocarbons and Energy and
(exploration, exploitation, transportation, trading and distribution);
(ii) YPFB.
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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2.3 If different authorisations are issued in respect of different IDH); the remaining 50% is divided between the participant (part of
stages of development (e.g., exploration or production an YPFB Agreement) and YPFB.
arrangements), please specify those authorisations and
briefly summarise the most important (standard) terms
(such as term/duration, scope of rights, expenditure 2.6 Are there any restrictions on the export of production?
obligations).
The Hydrocarbons Law No. 3058 establishes that the domestic
Bolivia

The following authorisations are required in the NG sector in Bolivia: market must be given priority over the export of production.
1. Exploration Activities. The right to explore is granted to a Therefore, exports can only take place after the domestic market
participant through an YPFB Agreement, following an demand has been satisfied as certified by the SH.
international tender process. In general, exploration rights
YPFB, as the sole owner of all hydrocarbons in Bolivia (on behalf
may not exceed 7 or 10 years, depending on whether the
of the State), is the only entity allowed to export and, in general,
relevant block is considered to be in a traditional (a
productive area) or non-traditional hydrocarbons area as trade Bolivian NG.
defined in the Hydrocarbons Law No. 3058.
At the end of this term, a participant may request an 2.7 Are there any currency exchange restrictions, or
extension to continue exploration activities, but on an area restrictions on the transfer of funds derived from
not greater than 30% of the original exploration area. production out of the jurisdiction?
However such extension may not exceed 7 years past the
original 7 or 10-year period, as applicable. There are no restrictions currently in force and effect.
2. Production Activities. The right to produce NG from a
relevant field is also granted to a participant through an
2.8 What restrictions (if any) apply to the transfer or disposal
YPFB Agreement (which may be the same Agreement that
of natural gas development rights or interests?
granted the right to explore an area), which includes the
relevant economic and technical conditions.
Development rights, granted through the YPFB Agreements, may not
be transferred or disposed of without prior written authorisation of
2.4 To what extent, if any, does the State have an ownership YPFB and the Ministry of Hydrocarbons and Energy. Any transfer of
interest, or seek to participate, in the development of development rights under the YPFB Agreements may only be
natural gas reserves (whether as a matter of law or perfected by means of assignment of the relevant YPFB Agreement.
policy)?
Voluntary change in control of a company, affecting a participant
By a Constitutional provision, all hydrocarbons reservoirs are which in turn is party to an YPFB Agreement, requires prior written
owned by the State and they may not be transferred at any title. Any authorisation by YPFB and the Ministry of Hydrocarbons and Energy.
private oil and gas companies intending to participate in Any involuntary change in control of a company (such as a hostile
hydrocarbons activities need to enter into YPFB Agreements or takeover) that in turn controls a participant party to an YPFB
obtain the relevant concessions or authorisations from the SH. Agreement, regardless of the manner in which it was performed, will
As established by Law No. 3058 and the existing YPFB be subject to review by YPFB, who can instruct to undo the transfer
Agreements, the State, through YPFB shall have a participation of of the relevant interest, whenever the takeover was undertaken by an
no less than 50% of the profits. 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
2.5 How does the State derive value from natural gas
may result in the termination of the YPFB Agreement.
development (e.g. royalty, share of production, taxes)?

Any participant (either YPFB or any other company) involved in 2.9 Are participants obliged to provide any security or
exploration and production NG activities in Bolivia is subject to the guarantees in relation to natural gas development?
following taxation regime:
1. Royalty, which is imposed on the total production of a field, By constitutional provision, no agreement of any kind (regarding
equivalent to 12% of the relevant production, payable in cash. hydrocarbons) may at any title, report economic loses to YPFB or
2. National Treasury Participation, which is imposed on the the Bolivian State - the extent of this provision or its enforcement is
total production of a field, equivalent to 6% of the relevant not clear at this point.
production, payable in cash. The Hydrocarbons Law No. 3058 establishes that all participants
3. Direct Tax on Hydrocarbons (Impuesto Directo a los that enter into YPFB Agreements shall provide a guarantee to YPFB
Hidrocarburos - IDH), which is imposed on the total for the due performance of its obligations.
production of a field, and is equivalent to 32% of the relevant
The current YPFB Agreements require for the participants to
production, payable in cash.
provide a Parent Guarantee in the form of a letter executed by its
4. Exploration Yearly Excise Tax (Patente), which is payable parent company, undertaking jointly and severally the due
annually on the basis of a sliding scale depending on the
performance of such participant’s obligations.
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, 2.10 Can rights to develop natural gas reserves granted to a
but must be reimbursed by the relevant participant. YPFB participant be pledged for security, or booked for
controls (in representation of the State) all hydrocarbons accounting purposes under domestic law?
production, and it is therefore responsible for paying royalty,
national treasury participation and IDH. Rights to develop NG reserves emerge from an YPFB Agreement,
As described in the foregoing numerals, 50% of the total production granted to a participant on an intuitu personae basis. Those rights
is taxed (12% Royalty, 6% National Treasury Participation and 32% are transferable only by means of assignment previously approved
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by YPFB and the Ministry of Hydrocarbons and Energy. Under with individual concessions granted by the SH (today ANH).
those conditions, such rights are not transferable for purposes of The ANH as the Hydrocarbons Regulatory Agency is in charge of
pledge for security. regulating all matters related to the transport of NG, such as the: (i)
granting of concessions to construct and operate NG transportation
2.11 In addition to those rights/authorisations required to pipelines and associated infrastructure; (ii) approval of the transport
explore for and produce natural gas, what other principal fee charged by the concessionaire; (iii) approval of all agreements
Government authorisations are required to develop natural

Bolivia
entered into by the relevant concessionaire and any consumer relating
gas reserves (e.g. environmental, occupational health and to the transport of NG; (iv) approval of changes in the effective control
safety) and from whom are these authorisations to be of the concession; (v) auditing of concessionaires; (vi) inspection of
obtained? the concessionaires’ infrastructure; and (vii) guaranteeing that the
domestic market is supplied by compelling a relevant concessionaire
The following authorisations are required by a participant: to expand its infrastructure and to grant capacity for new consumers.
Incorporation of a company or a branch in Bolivia and * During 2008, the Bolivian Government forced, via Supreme
registration as a commercial entity before the Registry of
Decrees (Nos. 29541 and 29542), two companies to sell controlling
Commerce.
interests to YPFB, turning one of them into a partially State-owned
Registration as a tax payer before the inland revenue and the other one into a fully State-owned company.
authority (Servicio de Impuestos Nacionales).
Registration as an employer before the Ministry of Labour.
4.2 What Governmental authorisations (including any
Registration as an employer before the relevant social
applicable environmental authorisations) are required to
security entities (including health and pension funds).
construct and operate natural gas transportation pipelines
An Environmental Licence must be obtained for every and associated infrastructure?
project individually from the Vice Ministry of Biodiversity,
Forestal Resources and Environment.
The following authorisations are required:
Incorporation of a company or a branch in Bolivia and
2.12 Is there any legislation or framework relating to the registration as a commercial entity before the Registry of
abandonment or decommissioning of physical structures Commerce.
used in natural gas development? If so, what are the Registration as a tax payer before the inland revenue
principal features/requirements of the legislation? authority (Servicio de Impuestos Nacionales).
Registration as an employer before the Ministry of Labour.
Abandonment or decommissioning of physical infrastructure is
Registration as an employer before the relevant social
subject to (i) the regulation for technical safety norms for the
security entities (including health and pension funds).
activities of exploration and production of hydrocarbons in Bolivia
(Supreme Decree No. 28397, dated October 6th, 2005) and (ii) the An Environmental License must be obtained for every
project, granted by the Vice Ministry of Biodiversity,
environmental regulation for hydrocarbons activities in Bolivia
Forestal Resources and Environment.
(Supreme Decree No. 24335, dated July 19th, 1996).
A concession to construct and operate pipelines and associated
Well abandonment is subject to a programme to be submitted by the
infrastructure, which may be obtained through (i) direct request by
participant to YPFB for approval, such programme should include
the interested entity to the ANH, or (ii) a bidding process conducted
such measures as pipeline stopper placement, cementing and
by the ANH.
signalising to prevent any environmental damages.
When the construction of a pipeline requires crossing lands of
indigenous communities, an additional authorisation must be
3 Import / Export of Natural Gas (including obtained from the relevant indigenous community.
LNG)
4.3 In general, how does an entity obtain the necessary land
3.1 Outline any regulatory requirements, or specific terms, (or other) rights to construct natural gas transportation
limitations or rules applying in respect of cross-border pipelines or associated infrastructure? Do Government
sales or deliveries of natural gas (including LNG). authorities have any powers of compulsory acquisition to
facilitate land access?
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. There are three basic ways to obtain the necessary land rights to
construct NG transportation pipelines:
As the sole owner of all hydrocarbons in Bolivia, YPFB (on behalf
1. A concessionaire may obtain land directly though the
of the State) is the only entity capable of exporting and (if needed)
purchase from the relevant land owner.
importing NG.
2. A concessionaire may request the granting of a voluntary right
of way to an individual or individuals whose land the pipeline
4 Transportation 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
4.1 Outline broadly the ownership, organisational and the Ministry of Hydrocarbons and Energy and by the Ministry
regulatory framework in relation to transportation pipelines of Rural Development, Farming and Environment (Ministerio
and associated infrastructure (such as natural gas de Desarrollo Rural, Agropecuario y Medio Ambiente).
processing and storage facilities). 3. A concessionaire may obtain easement of access, whenever
an agreement with the land owner cannot be reached, before
Six Private and two State-owned* companies own and operate the a civil judge, who may award a compulsory acquisition of
pipeline network in Bolivia (about 4,262.03 Km), in accordance the needed land.
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4.4 How is access to natural gas transportation pipelines and wishes to transport hydrocarbons. Therefore, both the ANH and a
associated infrastructure organised? new consumer (through such regulator) can compel a pipeline
operator to grant capacity or expand its facilities in order to
NG transportation pipelines and associated infrastructure are accommodate the new customer, subject to a formal written request
operated under “open access” rules, and as such, access is subject to as described in question 4.4 above.
the approval by the ANH of transport agreements executed between The expansion costs are included in the transport fee charged by the
transport companies and shippers or costumers.
Bolivia

transportation company.
Open Access is regulated by the ANH through specific Open Access
Norms, which provide the guidelines for accessing the Bolivian NG
4.7 Are parties free to agree the terms upon which natural gas
transportation system.
is to be transported or are the terms (including costs/tariffs
The Open Access Norms allow transport companies to provide 2 which may be charged) regulated?
types of services (i) Firm Service, characterised by the granting of
specific capacity to the relevant user by the transport company, The general terms and conditions of the service, tariffs, fees and
which anticipates no interruptions and (ii) Interruptible Service, templates of transport agreements for each transportation company
which anticipate and permit interruption by reason of the claim of are approved by the ANH for each individual case.
Firm Service customers.
Access to transportation pipelines may be requested by a user
directly to the transport company by means of a written formal
5 Transmission / Distribution
request, specifying (i) the type of service, (ii) the term,
commencement and termination dates, and (iii) the maximum daily 5.1 Outline broadly the ownership, organisational and
load. Thereon, the transport company, whenever there is available regulatory framework in relation to the natural gas
capacity in the relevant pipeline, may execute a transportation transmission/distribution network.
agreement and submit it to the ANH for approval. Should there not
be any available capacity the transport company shall summon The ANH is in charge of regulating distribution activities and the
interested customers to enter into transportation agreements in order granting of concessions to transport companies. There are distribution
to finance an expansion of the pipeline system. networks in eight out of the ten principal cities in Bolivia.
However, under the Hydrocarbons Law No. 3058, transport The NG domestic distribution infrastructure in Bolivia is divided
companies are not allowed to contract the total load capacity of their into (i) Primary networks, entirely owned by YPFB and (ii)
pipelines system, having to reserve 15% of such capacity for other Secondary networks, also owned and operated by YPFB in charge
costumers, who may use NG for industrialisation projects in Bolivia. of the NG distribution, as follows:
In appliance of the Hydrocarbons Law No. 3058 and the taking over 1. Primary networks are in place in eight cities: La Paz; El Alto;
of property of all hydrocarbons by the State, through YPFB, the Cochabamba; Santa Cruz; Oruro; Potosí; Sucre; and Tarija.
They are owned and operated by YPFB.
Executive Branch enacted Supreme Decrees Nos. 29129, dated May
13th, 2007, 29325, dated October 28th, 2007, 29510, dated April 9th, 2. Secondary networks are installed in the same eight cities.
2008, and 29709, dated September 17th, 2008, whereby YPFB, as the They are also owned and operated by YPFB*.
sole owner of all NG produced in Bolivia, was instructed to enter into Ministry of Hydrocarbons and Energy Resolution No. 196/2006
new transport agreements with transport companies. As a result, from August 16th 2006, determines that all private concessionaries
YPFB is currently the only shipper in Bolivia. 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
4.5 To what degree are natural gas transportation pipelines
of their NG distribution networks in the relevant concession area.
integrated or interconnected, and how is co-operation
between different transportation systems established and *As of 2009, YPFB has taken control of distribution activities in all
regulated? of the cities where up until then private concessionaires performed
such activities. It should be noted that no expropriatory or
The NG transportation systems installed and in operation today are confiscatory actions were taken because the concessionaires
fully interconnected within the Bolivian territory. contracts reached their respective terms.
Cooperation between different transportation systems is established
through agreements executed between concessionaires (transport 5.2 What Governmental authorisations (including any
companies), such as: (i) balancing agreements; and (ii) applicable environmental authorisations) are required to
interconnection agreements, which may be freely negotiated and operate a distribution network?
executed by and between the transport companies.
The following authorisations are required for any participant:
4.6 Outline any third-party access regime/rights in respect of Incorporation of a company or a branch in Bolivia and
natural gas transportation and associated infrastructure. registration as a commercial entity before the Registry of
For example, can the regulator or a new customer wishing Commerce.
to transport natural gas compel or require the Registration as a tax payer before the inland revenue
operator/owner of a natural gas transportation pipeline or authority (Servicio de Impuestos Nacionales).
associated infrastructure to grant capacity or expand its Registration as an employer before the Ministry of Labour.
facilities in order to accommodate the new customer? If
Registration as an employer before social security entities
so, how are the costs (including costs of interconnection,
(including health and pension funds).
capacity reservation or facility expansions) allocated?
An Environmental Licence must be obtained for every
The Hydrocarbons Law No. 3058 defines transportation of NG as a individual project, granted by the Vice Ministry of
Biodiversity, Forrestal Resources and Environment.
public service and as such it may not be denied to any person who
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A concession to perform the distribution of NG is necessary, which 5.6 Are there any restrictions or limitations in relation to
may be obtained through (i) direct request by the interested entity to acquiring an interest in a gas utility, or the transfer of
the ANH, or (ii) a bidding process conducted by the ANH. assets forming part of the distribution network (whether
directly or indirectly)?

5.3 How is access to the natural gas distribution network NG transportation companies may not, at any title, directly or
organised?
indirectly acquire interests in distribution companies.

Bolivia
The NG distribution network operates under “open access” rules, All physical assets that form part of a distribution network belong
and as such, access may not be denied and is subject to the to the concessionaire who is in charge of NG distribution by virtue
execution of supply agreements between distribution companies of a concession granted by the ANH. As NG distribution is
and NG consumers (being them residential, commercial or considered a public service, the transfer of such assets is limited to
industrial), which in turn require the approval of the ANH. the assurance of the provision of such public service, which in turn
may only be performed by a concessionaire.
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 6 Natural Gas Trading
request. In case of a negative response, on the basis of lack of
capacity, an expansion schedule must be submitted by the distribution
6.1 Outline broadly the ownership, organisational and
company for the consideration and approval of the ANH.
regulatory framework in relation to natural gas trading.
Interconnection works and costs are assumed by each consumer and Please include details of current major initiatives or
must be executed under the supervision of the relevant distribution policies of the Government or regulator (if any) relating to
company. natural gas trading.
Each category of consumer (residential, commercial or industrial) is
determined by: a) the operating pressure of the system to which The only entity legally allowed to trade NG whether in the domestic
such consumer is connected; b) the maximum NG flow demanded; or export markets is YPFB.
and c) the average NG consumption volume. In the domestic market the NG price is set by the ANH. The priorities
As a result of the enactment of the Nationalisation Decree and the for the distribution (trading) of the Bolivian NG production are as
taking over the property of all hydrocarbons by the State through follows (in this specific order): (i) the domestic market must be fully
YPFB, the Ministry of Hydrocarbons and Energy enacted supplied; (ii) the Brazilian demand must be met, in accordance with a
Ministerial Resolution No. 196/2006, dated August 16th 2006, Gas Supply Agreement executed between PETROBRAS and YPFB in
whereby YPFB, assumes control of the entire existing NG 1996; (iii) the Argentinean demand must be satisfied, in accordance
distribution network in Bolivia. with a Gas Supply Agreement entered into by ENARSA (the
Argentinean public NG company) and YPFB in 2006; and (iv) any
During 2009, YPFB took control of distribution activities in all of
other market as may be secured by the Bolivian Government.
the cities, where up until then, private concessionaires performed
such activities.
It should be noted that in this regard no expropriatory or 6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
confiscatory actions were taken. The take over of control by YPFB
gas commodity and the distribution thereof) be traded?
was due to the completion of the term of all concession agreements
in force and effect up until 2009.
YPFB, being the only entity allowed to trade NG in Bolivia, is
authorised to set the conditions for such trading. Therefore there
5.4 Can the regulator require a distributor to grant capacity or are no other NG wholesalers in Bolivia.
expand its system in order to accommodate new
However, once a company has purchased NG from YPFB, it can
customers?
sell it, but only in the domestic market.
The ANH can require a distributor to expand its distribution system
within its concession area in order to accommodate any new 7 Liquefied Natural Gas
consumer.
The costs of such system expansion are assumed by the distributor 7.1 Outline broadly the ownership, organisational and
but are included in the distribution tariff paid by the consumers and regulatory framework in relation to LNG facilities.
approved by the ANH.
There are no such facilities in Bolivia or applicable legislation.
5.5 What fees are charged for accessing the distribution
network, and are these fees regulated? 7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
To access the distribution network a consumer must pay
interconnection costs. Once connected to the distribution network To this date, there is no legislation regarding the construction and
a consumer must pay a distribution tariff approved by the ANH, operation of LNG facilities in Bolivia.
which includes the NG price (measured by volume), the distribution
costs charged by the distributor and, whenever applicable, the
system expansion costs. 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 8.4 Does the regulator (or any other Government authority)
regulations regarding LNG. 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,
8 Competition 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
8.1 Which Governmental authority or authorities are
Bolivia

approving or disapproving the transaction?


responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
The SIRESE Law No. 1600 expressly prohibits mergers and/or
changes in control of whatever type, which may cause any given
Up until 2009, the regulatory system in Bolivia (SIRESE) included company to gain a dominant position in a relevant market.
five sector specific (autonomic) regulators responsible for
telecommunications, hydrocarbons, transport, electricity and basic Supreme Decree No. 24504, dated February 21st 1997, provides
sanitation, respectively, and a General Superintendence acting as that any company operating in a regulated activity may request to
the hierarchic superior regulation entity of the system. the specific regulator (in the case of NG, the ANH), before the
execution of any agreement, contract or merger, an opinion
With the enactment of Supreme Decree No. 29894 dated February regarding the feasibility of such agreement contract or merger under
7th 2009, four of the five sector superintendences where eliminated, free competition principles. In answering such request, the ANH
and specific authorities (dependent of different ministries) where shall apply the criteria established by the SIRESE Law No. 1600
created to replace them. The only sector superintendence that was and the Hydrocarbons Law No. 3058.
not eliminated was the Superintendence of Hydrocarbons, today
named ANH. According to Supreme Decree No. 24504, a total maximum term of 75
business days is provided for the ANH to resolve the matter. However,
In the first instance, the ANH directly regulates, supervises and typically, the ANH will resolve such requests in a shorter term.
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 9 Foreign Investment and International
authority in charge of resolving appeals against the ANH’s decisions. Obligations

8.2 To what criteria does the regulator have regard in 9.1 Are there any special requirements or limitations on
determining whether conduct is anti-competitive? acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
The SIRESE Law No.1600, dated October 28th 1994, considers the distribution or other) by foreign companies?
following activities as anti-competitive practices:
a) Direct or indirect joint setting of prices (collusion). By Constitutional provision, foreigners may not acquire, own or be in
possession of land within 50 kilometres of Bolivian international
b) Unfair limitation to competitors, through the control of
production, relevant markets, supply lines or investments borders, unless a specific “National Need” is determined and
(abuse of a dominant position). approved by the Legislative Branch through passage of a specific law.
The Hydrocarbons Law No. 3058 tasks the ANH with the prevention The Investments Protection Law No. 1182, dated September 17th
of economic concentrations between and amongst competitors so that 1990, establishes the principle of equal treatment for foreign and
such concentrations do not contradict free or open market principles local investors from all Bolivian authorities.
contained in the aforementioned SIRESE Law No. 1600. The Bolivian Commercial Code determines that companies that
regularly operate in Bolivia shall be subject to Bolivian Law.
8.3 What power or authority does the regulator have to The Hydrocarbons Law No. 3058 requires that any foreign
preclude or take action in relation to anti-competitive company that enters into an YPFB Agreement must renounce to any
practices? diplomatic complaint.

The ANH may apply sanctions to participants, whom it determines 9.2 To what extent is regulatory policy in respect of the natural
are participating in anti-competitive practices, such sanctions are gas sector influenced or affected by international treaties
primarily economic. or other multinational arrangements?
According to article 20 of the SIRESE Law No. 1600, any
agreement executed in contradiction of the dispositions of said Law There are no international treaties or conventions nor multinational
is considered null and void and shall have no effect over the parties arrangements signed by Bolivia in respect of NG regulatory policies.
or any third party whatsoever. However, there are bilateral agreements signed by Bolivia with
In the case of NG transportation, the specific regulation states that Brazil and Argentina that facilitate NG exports and assist the
if a transportation company does not act in compliance with the avoidance of double taxation.
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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10 Dispute Resolution 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
10.1 Provide a brief overview of compulsory dispute resolution effective on December 3rd 2007, according to Article 71 of the
procedures (statutory or otherwise) applying to the natural
ICSID Convention.
gas sector (if any), including procedures applying in the
context of disputes between the applicable Government

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

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 Daniel Mariaca was born in La Paz in 1980. He graduated from
most of his life, but finished High School in The U.S. where he took Law School at the Universidad Católica Boliviana.
Law classes. He graduated from the Universidad Privada Boliviana. Daniel holds diplomas on Taxing procedures awarded in 2007,
Adrián has attended various courses in actualisation, the most Commercial Law in 2006, Administrative and Regulatory Law
relevant being a course in “Infrastructure Financing” in Ryad, Saudi awarded in 2005. He is currently attending an LL.M programme at
Arabia in 2003, where he learned about different ways to involve the Universidad Privada Boliviana.
the private sector in the financing of infrastructures typically in the Daniel has worked in the Superintendencia de Hidrocarburos, the
charge of the State, such as roads, basic sanitation and rural Bolivian Hydrocarbons Regulatory Agency as part of the commission
electrification. He also holds a diploma on negotiation, mediation of open access and free competition, where he participated in the
and conflict management awarded in 2006 from the Universidad elaboration of regulatory norms for the hydrocarbons sector and the
Mayor de San Andrés and the Universidad Autónoma de Barcelona. review of numerous contracts.
Adrián joined Criales, Urcullo & Antezana in 2004 and has since Daniel joined Criales, Urcullo & Antezana in 2006 and has since
become an Associate. His practice focuses on corporate matters, become an Associate. His practice focuses on hydrocarbons and
including the negotiation of various agreements, especially in the corporate matters including the analysis of various aspects of the
Energy sector. 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 -
The World´s Leading Lawyers for Business, 2007 The Client’s Guide (www.chambersandpartners.com/global)
In 2008 the Firm was designated the leading law firm in Bolivia for Corporate/M&A by PLC Which lawyer? 13th Edition,
Yearbook 2008 (www.practicallaw.com/whichlawyer).
Both the Law Firm and its Partners have been ranked as Leading Firm and Leading Individuals by Chambers Global -
The World’s Leading Lawyers for Business, 2008 The Client’s Guide (www.chambersandpartners.com/global).

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Chapter 7

Brazil Maria João C. P. Rolim

Rolim, Godoi,Viotti & Leite Campos Advogados Vitor dos Santos Henriques

1 Overview of Natural Gas Sector 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
1.1 A brief outline of Brazil’s natural gas sector, including a operate in a monopolistic regime in their respective concession
general description of: natural gas reserves; natural gas
areas.
production including the extent to which production is
associated or non-associated natural gas; import and In terms of transportation infrastructure, Brazil currently counts
export of natural gas, including liquefied natural gas (LNG) with a total of around 7.4 milion km of pipelines network divided
liquefaction and export facilities, and/or receiving and re- into two main systems: 3,939 km transporting national gas; and
gasification facilities (“LNG facilities”); natural gas pipeline 3,465 km (2,900 km in operation) for imported gas from Bolivia
transportation and distribution/transmission network; with a transportation capacity of around 77 million m3/day.
natural gas storage; and commodity sales and trading.
Proved national reserves are 364 billion m3, mainly located in the
Federal states of Rio de Janeiro, Sao Paulo and Espirito Santo,
Worldwide gas has been linked to oil production as a by-product. In
representing less than 0,2% of world production. National
the eighties, however, and mostly due to the oil price crises, natural
Production is 60,000 million m3/day with a net production of
gas has become an important energy source and a market has
34,482 million m3/day and an importation of 30,917 million
emerged As an example: from 1973 to 2007, the world gas
m3/day, totalling an offer of 65,399 m3/day.
production has doubled from 1,227 to 3,031 billion m3 (Key World
Energy Statistics -IEA-2008). Recently, Brazil has discovered two important oil and gas reserves,
Jupiter and Tupi, which contain approximately 176 and 256 billion
Historically Brazil has never figured among the major natural gas
m3 of gas yet to be explored. Such future potential will imply many
producing countries, producing approximately 18-19 billion m3 gas
changes on Brazilian oil and gas production and consumption. In
per year. Its main primary sources of energy have been oil and
addition, in 2010, the Mexilhao Campo (with an estimated capacity
markedly hydro sources for electricity. Gas represents 9.3% of the
of 15 million m3/day) shall start its operation, being the first
Brazilian Energy matrix (BP Statistical Review of World energy
Petrobras’s gas extraction asset non-associated to oil.
2008), figuring as 5th place in the matrix. Thus, since 1999 the
national demand is supplied in a large amount by means of imports The increase of natural gas availability and the ongoing process of
from Bolivia. change in the Brazilian regulatory framework shall stimulate the
growth of the Brazilian gas trade market, which is still relatively
The interest for the gas market has emerged as a response to the
small given Brazil’s potential and domestic demand.
environmental pressures as well as from the need to search for less
costly alternatives to the oil. This movement has stimulated an LNG technology is being recently implemented in Brazil not only
emergent gas market with an expansion in terms of volume and as an option to reduce dependence on the importation from Bolivia,
geographical areas explored. The result has been a crescent but also to supply areas where the transportation system is still poor.
technological progress in the field and also an incentive to develop The LNG market is still a premature one with a reduced number of
the transportation facilities. facilities. Currently, there are three facilities. The first one, Projeto
The market in Brazil has been led by the company Petroleo Gemini, was implemented in 2005. Located in Paulinia, Sao Paulo
Brasileiro SA - Petrobras which, since its creation in 1953 until state, it has a capacity of 380 million m3/day. The other two
1995, performed its activities in a monopolistic regime. projects are in Pacem, Ceara State and another in Guanabara Bay,
Constitutional Amendment No. 09, of 1995 has lifted the monopoly in the state of Rio de Janeiro. Both are re-gasification facilities and
regime and opened the market to the participation of private aim to increase security of supply as an alternative to importing
investors. Since then Federal Law 9478 /97 (Petroleum Law) has from Bolivia. The projects have not yet initiated operation (source:
been the main act regulating the oil and gas sector and allows the Ministry of Energy, 2008).
private participation to explore, produce, import and transport
natural gas through a concession or an authorisation regime. In 1.2 To what extent are Brazil’s energy requirements met using
March 2009, Law No. 11,909 (“Gas Law”) was enacted. Although natural gas (including LNG)?
still pending of further regulation, it establishes the main legal and
institutional framework to be applicable specifically to the gas Natural Gas represents 9.3% of the country’s energy matrix and
sector. represents 7.2% of the country’s energy requirements. Considering
Nowadays, exploration and transportation of natural gas is 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% (iv) maritime transport of crude oil of national origin and its
in 2008. derivatives as well as transportation trough pipeline of crude
oil, its derivatives and natural gas regardless its origin; and
Gas contributes 3.3% of the power generated in Brazil which is
85.5% dependent on hydroelectric energy and has a hydroelectric (v) research and development of mineral and nuclear resources.
potential still to be explored. A crescent national demand and a Law No. 11,909 enacted on March 3, 2009 (“Gas Law”), although
need for increasing security of supply through diversification, still pending further regulation, establishes the main legal and
however, tend to expand the role of gas in the country’s electricity institutional framework to be applicable to the transportation,
Brazil

generation considerably (source: EPE 15/04/2009). 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
1.3 To what extent are Brazil’s natural gas requirements met
through domestic natural gas production?
applicable, regulated these activities. The last, however, refers
mostly to the particular aspects of the oil sector.
Approximately 60% of the country’s natural gas requirement are Institutionally Brazilian energy policy is established by the National
met through domestic production. According to EPE, in 2008, Council for Energy Policy (“CNPE”), which is directly
Brazil had a consumption of 26.8 billion m3 which was met through subordinated to the president of Brazil and headed by the Ministry
a domestic production of 21.5 billion m3 and a volume of of Mines and Energy.
importation of 11.3 billion m3 (the difference between the total The oil and gas sectors are currently regulated by the National Oil
offer and consumption represents loss in the process is around and Gas Agency (Agência Nacional do Petróleo, Gás Natural e
20%). Most of the domestic offer is channelled to the industry Biocombustíveis) - ANP, created by Federal Law No. 9478/97. The
consumption and thermo power generation (source: EPE Brazilian sector-specific regulator is responsible for, amongst other
Energetic Balance 2009/ year 2008). competencies, inspecting, judging, and starting administrative
procedures and enacting normative rules regarding such a sector. A
1.4 To what extent is Brazil’s natural gas production exported particular aspect of the Brazilian gas sector is that according to the
(pipeline or LNG)? federative pact, competencies regarding the gas exploration are
shared between the states and the union. Under the constitutional
Brazil currently does not export natural gas. 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
2 Development of Natural Gas powers. Therefore, ANP actions shall be coordinated with the state
regulatory bodies.
2.1 Outline broadly the legal/statutory and organisational Future normative rules concerning the newly enacted Brazilian Gas
framework for the exploration and production Law may set a more detailed discipline for the ANP regulatory
(“development”) of natural gas reserves including: activity in the gas sector. The Law, still pending future regulation,
principal legislation; in whom the State’s mineral rights to brings relevant changes in the regulatory framework for the gas that
natural gas are vested; Government authority or authorities will be discussed throughout the questions.
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. 2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
The Brazilian Federal Constitution establishes that the activity of (“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
exploring petroleum, mineral resources and potential hydro sources
and what is the legal status of those rights or interests
constitute a Federal monopoly but can be performed by third parties
under domestic law?
through a concession or authorisation regime depending on the
case. The government owns the reserves which represent a property
The Brazilian Federal Constitution sets forth the monopoly by the
distinct from the property of the land. The concessionaire,
Federal Government of the natural gas reserves and of the research
however, is entitled to the production after a measure point to be
and exploration of gas. The development of natural gas reserves
determined in the concession agreement.
shall be carried out directly by the Federal Government or
The concession shall be granted in the public interest, through a transferred to participants by means of a concession regime or
public bidding procedure and can be granted to Brazilians or authorisation, subjected, in the concession case, to a compulsory
companies incorporated under Brazilian Law with head-office and public bidding process.
administration in Brazil regardless the nationality of their
The rules applicable to the bidding process are established in the
shareholders.
Petroleum law as well as in the Bid invitation. The procedure
Article 177, as amended by Amendment No. 9/95, lists the activities follows the following main steps: (i) the “expression of interest”
that are considered a Federal monopoly. State owned companies or from the company; (ii) payment of participation fee and receipt of
private ones throughout the celebration of a specific agreement and preliminary seismic data; (iii) legal, technical and financial
according to specific legislation, which, currently, is the Petroleum qualification; (iv) presentation and tender of bids; (iv) awarding and
Law and the recently enacted Gas Law, still pending further confirmation of the awarding; and (v) execution of the concession.
regulation, can carry out these activities. The activities are as
The grant of a concession may be awarded to national or foreign
follows:
companies. The last, however, if awarded the concession, must
(i) the exploration of crude oil, natural gas and other fluid constitute a company with head office and administration in Brazil
hydrocarbon; which shall be subjected to Brazilian Law regardless the nationality
(ii) refining; of its shareholders. Brazilian Corporate Law (Law No. 6,404/76
(iii) import and export of the products and its derivatives and amendments) establishes specific rules for consortiums. A
resulting from the above listed activities; worthy highlight is that according to Petroleum Law, consortium
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members are jointly liable for the execution of the concession 12 months before the end of the initial period, subject to ANP’s
agreement. approval.
Finally, the bidding procedure, according to constitutional and The concession implies to the concessionaire the obligation to
specific legislation (Law No. 8666/93), shall follow an objective explore the activity on their own account and risk as well as the
and non discriminatory criteria and must be subjected to general obligation to comply with all the concession agreement’s
constitutional principles of equality. conditions.

Brazil
Under domestic law, the concession agreement has a status of an Private companies may also enter into different concession
administrative contract and the relationship between concessionaire agreements or receive authorisation for transportation and storage
and the government will be regulated by this contract as well as the of gas, or even for the construction/expansion and operation of
specific legislation applicable to the sector executed by the sector- pipelines, as well as receive an authorisation for the processing,
specific independent regulator - ANP. treatment, liquefaction, and regasification of gas (the trade of gas
In the view of the constitutional (Article 25 of the Federal requires only the registration of the respective Gas Trade
Constitution) shared competencies between Federal Government Agreements before ANP).
and states, the distribution of piped gas to the final consumers is All of these concession agreements are regulated by Brazilian law
considered a local service to be performed by the states directly or (which comprises in this case of the Concession Law - Law No.
by means of concession granting. 8.987/1995, the Bidding Law - Law No. 8.666/1993, and the above
Only producers and importers are allowed to commercialise gas mentioned Federal Laws, Law No. 11,909/2009 and Law No.
subject to a licence procedure before the ANP. 9,478/1997).
According to the present regime, in case of concession regarding
exploration, the granted company owns the extracted gas (as it is 2.4 To what extent, if any, does the State have an ownership
defined in the concession agreement), as well as the facilities used interest, or seek to participate, in the development of
in the extraction activity, while the government receives royalties natural gas reserves (whether as a matter of law or
and other kind of payments. (Please refer to question 2.5.) policy)?

The recent discovery might bring about relevant changes in the


According to the Brazilian Federal Constitution, the exploration of
rules governing the future rounds to award new concessions. In
gas is a federal monopoly which can, at the government’s
light of these new reserves, in November 2007 the Brazilian
discretion, be the object of a concession. Therefore, the Brazilian
government removed some blocks from ANP’s 9th bid round in
state may explore gas either through Semi-public Companies
order to discuss a new regulatory framework aimed at increasing
(Sociedades de Economia Mista) or Public Companies (Empresas
the government take in of the sector. The new gas law has emerged
Públicas). Currently, Petrobrás, which is a semi-public and openly
under this review process and the ongoing discussion has been
held company, holds a dominant position in the gas and oil sector.
around the benefits and disadvantages of changing the concession
to a production sharing agreement regime. In addition, the Constitutionally, the Federal Government owns the reserves and the
Brazilian government aims to apply the additional revenue to boost product of the exploration. According to the concession’s terms,
other sectors. This objective may bring about changes in terms of however, the concessionaire acquires rights over the production. In
the establishment of bidder’s commitments to acquire local goods addition, the Brazilian Federal Government has an exclusive
and services as well as in the minimum investment level legislative competence in the energy field. (Article 22, IV).
requirements. Other potential changes include the creation of a Public interest, promoting the development and environmental
Sovereign Wealth Fund to support domestic investment strategies considerations are principles and objectives of the national energy
as well as social policies and the strengthening of the role of policy which must be reconciled with the need to attract investment
Petrobras in the new discoveries. Although controversial, the new and promote competition.
proposals affecting both the oil and gas sectors has been openly
discussed with the sectors participants and the government has
2.5 How does the State derive value from natural gas
always reassured that the previously concessions are not to be development (e.g. royalty, share of production, taxes)?
affected by upcoming legislation.
Currently, the Brazilian State derives value from the natural gas
2.3 If different authorisations are issued in respect of different exploration (governmental takes) according to the “Petroleum
stages of development (e.g., exploration appraisal or Law” (and by-laws) which provides for an obligation of payment to
production arrangements), please specify those the Federal Government of: (i) a signing bonus; (ii) royalties; (iii) a
authorisations and briefly summarise the most important special participation; and (iv) a payment for the occupation or
(standard) terms (such as term/duration, scope of rights, withholding of the explored area (Decree No. 2,705/1998).
expenditure obligations).
The signature bonus is the offer placed in the bidding process and
has its minimum amount established in the invitation. It is paid
The concession agreement comprises two main stages: exploration;
before the signature of the concession.
and production/development (Petroleum Law, Article 24).
The royalties are paid monthly at a value equivalent to 5-10% of the
The exploration phase involves the preliminary evaluation of the
reference price of the extracted gas (as defined in Federal Decree
potential discovery to determine its commercial viability and this
No. 2,705/1998) times the amount of gas actually extracted by the
phase may last from three to eight years. Once the exploration
grantee.
phase is completed, the concessionaire will submit to ANP an
approval of the plan and project to develop the production - The The special participation depends on the volume production and its
Evaluation and Development Plan. The terms and conditions of this value corresponds to a percentage (defined according to Article 21
phase are detailed in the concession agreement. of Decree No. 2,705/1998) incident over the total amount of gas
extracted.
The production and development phase may last to 27 years and can
be extended for an equal period if requested by the concessionaire The payment for the area occupation or retention shall be paid
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annually on January 15 as from the date of the signing of the control, mergers, split-off, change of corporate form or corporate
Concession Agreement, and its amount due is calculated according capital reduction depends on the previous approval by ANP.
to the criteria defined in Article 28 of Decree No. 2,705/1998 based
on the block surface.
2.9 Are participants obliged to provide any security or
In addition, the activity is subject to the domestic tax system. guarantees in relation to natural gas development?
Currently, companies are subjected to a corporate income tax of
around 34% over the net profits, social contributions worked out ANP requires guarantees during the bidding procedure which may
Brazil

over the revenue and Value Added Taxes. vary from round to round and apply to all participants as a way to
Considering the potential rising in the oil and gas reserves, the ensure that the bidder will execute the concession agreement if
Brazilian government has set forth proposals, currently under awarded the right accordingly. The analysis of the latest
debate, aiming at increasing its participation on the gas and oil Concession Agreements entered into by ANP indicates that the
exploration and also to better control the exploration of such agency has frequently requested a number of guarantees, such as a
resources. The main discussion in terms of governmental takes is letter of credits, guarantee of insurance, performance bonds,
to replace the current concession regime for a sharing production operational, liability, personnel and property insurance policies.
agreement regime in the new reserves, so-called pre-salt given their
location. According to this regime, the production is shared 2.10 Can rights to develop natural gas reserves granted to a
between the concessionaire and the government according to participant be pledged for security, or booked for
contract. Other changes include the constitution of a State Owned accounting purposes under domestic law?
Company - “Petro-sal” - which would be in charge of representing
the state in consortiums and committees involved in the pre-salt It is possible to pledge the rights arising out of the concession,
extraction. Finally, there is also a proposal to strengthen Petrobrás’s especially to enable the project finance of large gas projects, such
position in the exploration of the new reserves and the constitution as the construction or extension of pipelines. Also, all rights,
of a special funding to promote social policies. turnovers, revenues and costs related to the right to develop natural
gas can be booked for accounting purposes. It is worthy to notice,
2.6 Are there any restrictions on the export of production? however, that any transfer of the shares emerged from the share
pledge agreement will depend on ANP’s approval.
Any company or consortium of companies incorporated under
Brazilian Law with their head office and administration in Brazil 2.11 In addition to those rights/authorisations required to
can obtain authorisation from ANP to import and export natural and explore for and produce natural gas, what other principal
condensed gas (Article 5, Law 9,478/97), subject to compliance Government authorisations are required to develop natural
with the CNPE established energy policy, particularly regarding the gas reserves (e.g. environmental, occupational health and
justified protection of the domestic market, transparency and non- safety) and from whom are these authorisations to be
discrimination conditions. Please refer to question 3.1 below. obtained?

Despite all regular corporate registers (such as the ones to be made


2.7 Are there any currency exchange restrictions, or before the Board of Trade and Social Security, amongst others) and
restrictions on the transfer of funds derived from
the mentioned regulatory concessions, approvals and registers, it is
production out of the jurisdiction?
required for the company to obtain some other registers and
authorisations.
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 Under Brazilian Environmental Law, any activity that can
amendments. Accordingly, foreign investments shall be registered potentially affect the environment may undergo an evaluation of its
in the Brazilian Central Bank as well as all offshore remittance of impact and obtain a previous environmental licence (Federal Law
funds. The procedure is, however, only declaratory, being No. 6,938/81). This evaluation in the area of gas and oil are: (i)
unnecessary any approval. Despite such a declaration, there are no Preliminary Environmental Impact Study; (ii) Report of
other restrictions to the offshore remittance of funds derived from Environmental Impact - RIMA; and (iii) Report of Environmental
gas production in Brazil. Evaluation.

The law also establishes rules applying to the reinvestment of CONAMA’s Resolutions No.’s 23/94 and 237/97 regulate the
profits, payments of royalties and fees abroad. Remittances abroad environmental licence procedures regarding the exploration of
are also subject to domestic tax rules. Currently, dividends are natural gas applicable to the different stages of the activity.
exempt from tax and other payments are, in general, subjected to Accordingly, the companies responsible for gas exploring in Brazil
withhold tax at the rate of 15%. 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
2.8 What restrictions (if any) apply to the transfer or disposal Renováveis/IBAMA, in case of interstate activity) for each stage of
of natural gas development rights or interests? development in order to carry on its activities:
(i) Provisory Licence for research and exploration drilling, (Pre-
Brazilian Law and the Concession Agreement currently set forth the drilling and reserarch licence).
possibility for the grantee to assign its contractual position to
(ii) Installation Licence.
another company. There are, however, some restrictions on such an
assignment, which, in general, are: (i) the previous approval by (iii) Operational Licence.
ANP; (ii) the assignee must fulfil all technical, economic and legal CONAMA’s Resolution No. 350/2004 also establishes the
requirements set forth in law; and (iii) in the assignment it must be requirement of specific Seismic licences (Seismic Research
preserved the subject matter and all other contractual provisions of Licence and Operating Licence for Seismic Activities), when the
the current Concession Agreement. Also, all transferring of share exploration activity will comprise of offshore areas or transitional
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areas (involving offshore and onshore area). Monopoly which can, nevertheless, be carried out by third parties
In case of onshore activities with environmental impacts comprised throughout a concession or authorisation regime, as it may be the
within the area of a specific state, specific state licensing legislation case.
applies. The activity is governed by Law 9,478/97 as recently amended by
It may also be necessary to obtain some other specific Law No. 11,909/2009 (“Gas Law”) and regulated by ANP which
environmental licenses or authorisations, depending on the has the power, among others, to establish criteria for the calculation
of tariffs and also to set up the rules for open access.

Brazil
verification of deforestation, or protected or preserved Indian lands,
amongst others. The objective of the new legislation, “Gas Law”, still pending
General rules on Occupational Health and Safety Obligations are regulation, is to create a more competitive environment through the
established by the Ministry of Labour and involve, as an example, establishment of an open third part access to the transportation
the establishment of a specific preventive program to control health facilities. Accordingly, it is optional for any interested part to
and work environment risks. 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-
2.12 Is there any legislation or framework relating to the discriminatory basis and it needs to comply with the terms and
abandonment or decommissioning of physical structures
conditions set by ANP, which also has the power to define priority
used in natural gas development? If so, what are the
of the use of such facilities aiming at maximising the capacity use.
principal features/requirements of the legislation?
The activity can be carried out by any company or consortium of
ANP Ordinances (Portarias) No.’s 114/2001, 25/2002 and 27/2006 companies incorporated under Brazilian Law with headquarters in
regulate the abandonment and decommissioning of physical the country at its own account and risk throughout a concession or
structures used in natural gas development, setting forth rules authorisation regime, as it may be. The bidding process to grant the
related to costs, deactivation and asset reversion, amongst others. concession will be organised by ANP and the transportation
Thus, the government usually requires from the grantee (in the Gas company must allow the interconnection of other facilities,
Exploring Concession Agreements) a guarantee regarding the according to ANP’s regulation.
abandonment or decommissioning of physical structures, such as Law No. 11,909/2009 has defined a 30-year concession right to the
insurance or a letter of credit. 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).
3 Import / Export of Natural Gas (including The concession must be granted through a public bidding which
LNG) rules are yet to be defined by regulation to be enacted by ANP.
Finally, in order to promote the expansion of the transportation
3.1 Outline any regulatory requirements, or specific terms, network, the Ministry of Energy, jointly with ANP, shall entitle the
limitations or rules applying in respect of cross-border initial operators with a period of exclusivity.
sales or deliveries of natural gas (including LNG). 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
Under Brazilian Law, any company that carries on activities in the must respect all pre-existent agreements and rights, as well as
gas sector may require an authorisation to the Ministry of Energy maintain all kind of licenses (whether concession, permission,
for the import or export of gas. Private investors are required to authorisation or approval), regarding pipelines and gas
constitute a special Purpose Legal Entity, incorporated under the transportation (notwithstanding some adjustments - yet to be
laws of Brazil, which must have its head office and administration defined by ANP`s further regulation - and to be made in the
located inside Brazilian territory (Article 4, Law No. 8,176/91). previous agreements in order maintain a competitive environment).
ANP Ordinance 43/98 establishes the application requirements Also, regarding the remaining term of the previous licenses, it has
related to the transaction volume of gas, the market to be supplied been set forth a 30-year concession renewal for the concession
and other aspects concerning the gas specification. ANP Ordinance already granted, and a 30-year concession term for the projects with
16/2008 set forth rules of quality control over the gas and LNG pending environmental licences. Please refer to question 1.1 for the
commercialised in the domestic Market. current transportation infrastructure.
The National Council of Energetic Policy and ANP can also apply
more specific restrictions for the importation and exportation of 4.2 What Governmental authorisations (including any
gas, usually regarding the maintenance of a desirable domestic level applicable environmental authorisations) are required to
of gas supplying. Therefore, ANP’s Concession Agreements for gas construct and operate natural gas transportation pipelines
exploring usually contains a clause imposing the stoppage of gas and associated infrastructure?
exportation by the grantee under certain circumstances that may put
the Brazilian internal market supply at risk. 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
4 Transportation 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
4.1 Outline broadly the ownership, organisational and
regulatory framework in relation to transportation pipelines registration of the respective Gas Trade Agreements before ANP).
and associated infrastructure (such as natural gas The construction and operation of natural gas transportation
processing and storage facilities). pipelines and associated infrastructure requires the company to seek
all environmental licenses mentioned in question 2.11. In addition,
Gas transportation in Brazil is constitutionally listed as a Federal the construction and operation of gas pipelines (including LNG)
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involves obtaining a Construction Licence and an Operation 4.7 Are parties free to agree the terms upon which natural gas
Licence before ANP. is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?

4.3 In general, how does an entity obtain the necessary land


Currently, ANP’s Ordinance No. 27/2005 regulates the terms of the
(or other) rights to construct natural gas transportation
Transportation Services Agreement and ANP’s Ordinance No.’s
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to 27/2005 and 29/2005 regulate costs and tariffs applicable to the
Brazil

facilitate land access? transportation of gas based on non-discriminatory criteria.


The “Gas Law”, Article 13.2, pending ANP’s regulation, has
Brazilian Law No. 11,909/2009 allows ANP to declare the public established that the transportation tariffs in the pipeline concessions
interest of a specific area required to construct the pipeline in order will be fixed by ANP considering the annual revenue of the carrier
to allow the expropriation of such an area, by which the owner shall established in the bidding procedure and the maximum annual
be duly indemnified. revenue established in the bidding invitation.
The expropriation process is to be carried out by the developer upon
the government decree of public interest declaration and also to
5 Transmission / Distribution
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 5.1 Outline broadly the ownership, organisational and
regulatory framework in relation to the natural gas
kind of lease.
transmission/distribution network.

4.4 How is access to natural gas transportation pipelines and The Brazilian Constitution (Article 25) defines the supply of piped
associated infrastructure organised? gas to end-costumers as a local service to be carried out by the
states on an exclusive basis, directly or through a concession.
Please refer to question 3.1. Accordingly, each state should have its own gas distribution system,
and regulate it at its discretion (according to the administration
4.5 To what degree are natural gas transportation pipelines principles set out in the Brazilian Constitution).
integrated or interconnected, and how is co-operation Based on this shared competency, Federal States have organised
between different transportation systems established and their distribution systems by the establishment of their distribution
regulated? companies and state regulatory framework. In order to promote a
more competitive environment, considering this shared competency
Brazilian gas industry has just moved from a legal monopoly to a between the federal and state sphere, the new “Gas Law” has
more competitive regime, encouraging the entrance of new players introduced new players in the natural gas market: the “free
and the expansion of the actual infrastructure. Considering the consumers” (consumers allowed to acquire natural gas directly
discovery of new gas reserves and the entrance of new competitors from any supply agent, importer or trader, as per federative
to the sector and in order to ensure the free access regime entitled regulation [still to be enacted]); the “self-producers” (the agent
by Brazilian Gas Law in the transportation segment (please refer to engaged in the exploration and production activities which uses part
question 3.1), Gas Law sets forth that any gas carrier must allow the or the totality of the gas in its own industrial activities); and the
interconnection of other transportation structures to its own, “self-importers” (the agent that carries a licence for importing
respecting the pre-existent rights of all carriers. natural gas and applies part of the totality of such an imported
product in its own industrial activities).
4.6 Outline any third-party access regime/rights in respect of Under the new regulation, these players can construct and install
natural gas transportation and associated infrastructure. gas facilities and pipelines whenever the state-owned gas
For example, can the regulator or a new customer wishing distribution utilities are unable to meet their needs and provided that
to transport natural gas compel or require the they enter into operation and maintenance contracts with these
operator/owner of a natural gas transportation pipeline or utilities, upon payment of O&M tariffs to be set forth by the state-
associated infrastructure to grant capacity or expand its
owned regulators. Facilities built according to these rules shall be,
facilities in order to accommodate the new customer? If
however, reverted to the state-owned gas distribution utilities upon
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated? payment of the correspondent indemnification. Furthermore, the
state-owned utility can request these players to construct facilities
Law No. 11,909/2009 has brought a free third party access regime large enough to allow their use by other consumers, negotiating
to the gas transport segment. Such third party access requires the additional cost increases with such players upon arbitration of the
signing of a gas transportation services agreement, and the access to state regulatory bodies. This mechanism balances the private needs
the pipeline must necessarily be firm, extraordinary (on an available of particular users with the pace of the previously planned
capacity basis) and interruptible (on an idle capacity basis). expansion. However, this mechanism will still need to be
harmonised with state legislation and with the concession
The access to firm capacity will be allocated through a public
agreements of the state-owned utilities.
procedure of offering (Chamada Pública), regulated by ANP
according to rules established by the Ministry of Energy. Access to Liquefied Natural Gas does not require the distribution by the
extraordinary and discontinued capacity will be subjected to criteria states, being regulated by ANP and therefore possible to trade by
established by ANP, according to the principles of publicity, the parties who obtain all necessary licences.
transparency, right to access and no discrimination.

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5.2 What Governmental authorisations (including any Brazilian laws and regulations). ANP shall inform the origin and
applicable environmental authorisations) are required to define the reserves that shall support the gas supply on such
operate a distribution network? agreements. It is important to mention that “Gas Law” allows for
the parties to set forth an arbitration clause in Gas Trade
As already mentioned above, it will depend on specific Federal Agreements for dispute resolution.
State legislation but, as a general rule, a company entering into a
concession agreement for gas distribution will need to provide
6.2 What range of natural gas commodities can be traded? For

Brazil
licences for the construction (Installation Licence) of natural gas
example, can only “bundled” products (i.e., the natural
distribution systems and for the rendering of distribution services
gas commodity and the distribution thereof) be traded?
(Operation Licence), besides all environmental licences already
mentioned in question 2.1.
Natural Gas may be traded on each of its possible transportation
forms. Therefore, it is possible to enter into trade agreements in
5.3 How is access to the natural gas distribution network relation to bundled gas (GNC), liquefied (LNG) or piped gas.
organised?

Each Federal State has its own regulation regarding access to gas 7 Liquefied Natural Gas
distribution systems. Notwithstanding this diversity, the basic rule
is a non-discriminatory open access to third parties subject to 7.1 Outline broadly the ownership, organisational and
payment of compensation. regulatory framework in relation to LNG facilities.

5.4 Can the regulator require a distributor to grant capacity or LNG in Brazil is regulated by ANP Normative Rule (Portaria) No.
expand its system in order to accommodate new 118/2000. Such rules set forth that the activities related to LNG
customers? must follow the standards of ABNT (Associação Brasileira de
Normas Técnicas), OIML (International Organisation of Legal
Brazilian Federal State regulations concerning gas distribution and Metrology), ISO (International Organisation of Standardisation),
Gas Distribution Concession Agreements define as obligations of NFPA 59-A (National Fire Protection Association), as well as some
the grantee the improvement and expansion of its gas distribution other national standards. LNG has been largely implemented in
system, in order to ensure the current and future demand for gas. Brazil since the middle of the last decade, and has emerged as an
This obligation, however, is evaluated by the regulators (state and alternative to the lack of full covering of the current gas distribution
federal in coordination), considering economic viability and grid, as well as an alternative for the pipeline gas imported from
priority of demand for the expansion. The concession agreements Bolivia, which has recently faced political instability, affecting
also regulate this aspect. Brazilian gas supply. Please refer to question 1.1 on current
Brazilian LNG infrastructure.

5.5 What fees are charged for accessing the distribution


network, and are these fees regulated? 7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
The access requires the payment of connection. Those fees are
freely negotiated between parties but the connection contract shall For the construction and operation of LNG facilities, as well as for
be registered in the name of the state regulator. After connection, LNG distribution inside the Brazilian market, it is currently
the supply is subject to a regulated tariff. 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
5.6 Are there any restrictions or limitations in relation to
necessary environmental licences before state and also federal
acquiring an interest in a gas utility, or the transfer of
environmental bodies, when applicable. Please refer to question 2.1
assets forming part of the distribution network (whether
directly or indirectly)? for the licences.

All transfers of share control, mergers, split-off, change of 7.3 Is there any regulation of the price or terms of service in
corporate form or corporate capital reduction depends on the the LNG sector?
previous approval by the current regulatory entity of the gas
distributor. Along with all other laws and rules regarding Brazilian gas sector,
ANP Normative Rule (Portaria) No. 118/2000 specifically
regulates LNG activities in Brazil.
6 Natural Gas Trading

6.1 Outline broadly the ownership, organisational and


8 Competition
regulatory framework in relation to natural gas trading.
Please include details of current major initiatives or 8.1 Which Governmental authority or authorities are
policies of the Government or regulator (if any) relating to responsible for the regulation of competition aspects, or
natural gas trading. anti-competitive practices, in the natural gas sector?

Under the new regulatory framework created by the time of the The Brazilian Competition regulatory framework comprises the
enactment of “Gas Law”, gas trade in Brazil occurs by means of the Administrative Council of Economic Defence (CADE), acting in
signing of a Gas Trade Agreement between the carriers, which must conjunction with the Economic Law Secretariat (SDE) and the
be registered before ANP (who will check the compliance with all Economic Monitoring Secretariat (SEAE). According to Law No.
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8,884/94, these bodies are the empowered entities for the analysis 9 Foreign Investment and International
of all anticompetitive practices and M&A activities, regardless of
Obligations
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 9.1 Are there any special requirements or limitations on
competition and regulatory system shall be duly coordinated. The acquisitions of interests in the natural gas sector (whether
current practice indicates that the transaction shall be presented to development, transportation or associated infrastructure,
Brazil

distribution or other) by foreign companies?


both bodies.

Companies that carry out activities must be incorporated under the


8.2 To what criteria does the regulator have regard in Brazilian laws and must have their headquarters located therein.
determining whether conduct is anti-competitive? Acquisitions of share control of such companies (either by a foreign
investor or not) are subject to approval by the antitrust authorities,
The competition authorities can assess any practice or transaction by ANP and by any state regulatory body, as the case may be.
that potentially may harm competition. Article 21 (combined with
Foreign companies shall organise a special purpose company and
article 20) of Law No. 8,884/1994 (Brazilian Antitrust Law) lists
need to obtain the respective register of the foreign investor and of
acts that may be considered potentially harmful to the competition
the amount invested in the Brazilian Central Bank electronic system
in a specific relevant market. Those practices include, but not only:
(SisBacen). Please refer to question 2.8.
(i) Tied-in sales.
(ii) Dumping.
9.2 To what extent is regulatory policy in respect of the natural
(iii) Refusal to deal. gas sector influenced or affected by international treaties
(iv) Price discrimination. or other multinational arrangements?
(v) Cartel practices.
Relevant to notice, however, is that Brazilian case law has indicated Under Brazilian Constitutional Law, international treaties are
that the assessment has been based on the “rule of reason”, which mandatory upon ratification by Brazilian Congress. (Federal
considers the effects of the practice and allows for justified Constitution, Article 84, VIII.)
restriction on competition based on gains of efficiency.
10 Dispute Resolution
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
10.1 Provide a brief overview of compulsory dispute resolution
practices?
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the
Both ANP and CADE have the power to monitor, judge and order context of disputes between the applicable Government
the cease of anti-competitive practices, and it is also possible for authority/regulator and: participants in relation to natural
them to charge fines of up to 30% of the violating company’s gross gas development; transportation pipeline and associated
turnover on the previous year. Please refer to question 8.2. 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
8.4 Does the regulator (or any other Government authority) distribution/transmission of natural gas.
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,
Disputes in the gas sector - general over unitisation agreements or
transportation or associated infrastructure or distribution transportation access - will be discussed before ANP as an
assets? If so, what criteria and procedures are applied? administrative sphere, assured, however, future access to the
How long does it typically take to obtain a decision judiciary. Brazilian Law No. 9,307/1996 (Arbitration Law) has
approving or disapproving the transaction? prompted a movement of the adoption of arbitration clauses in
infrastructure contracts. Thus, recent agreements in the natural gas
In the view of the mentioned (question 8.1 above), competence to sector (including the concession agreements) tend to set forth an
judge all mergers, acquisitions, split-offs, transformation, arbitration clause for the resolution of conflicts involving
consolidation, capital reduction and change on corporate control in disposable property rights. While the Brazilian Supreme Court has
the gas sector, it is possible for Brazilian authorities to approve or already acknowledged the possibility of Government authorities
disapprove all corporate acts that trigger the current antitrust being subjected to Arbitration Law, the Brazilian Arbitration Law
notification criteria. provides that arbitration shall not apply to “non-disposable rights”.
Transactions that might constitute an economic concentration must The exact meaning of the restriction and its relation to the energy
be notified before the competition authorities within 15 days after sector in general has been a contentious issue still not completely
the closing of the agreement. The criteria to notify a transaction is discussed. The “Gas Law” expressly authorises state-owned
as following: (i) the market share of the companies involved must companies to submit to arbitration. This, however, does not clarify
account for 20% of a relevant market; or (ii) the companies the aspect related to the restriction mentioned above.
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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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.

Brazil
New York Convention on the Recognition and Brazil has discovered two important oil and gas reserves, Jupiter
Enforcement of Foreign Arbitral Awards: Ratified by and Tupi, which contain approximately 176 ad 256 billion m3 of
Brazil in 2002. gas yet to be explored. The discoveries have determined major
(http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYC changes not only in Brazilian oil and gas production and
onvention_status.html) consumption, but also in its current regulatory framework.
Convention on the Settlement of Investment Disputes In this context, the implementation of a sharing production regime
between States and Nationals of Other States: Not alternatively to the current concession/authorisation regime has
ratified by Brazil. been under discussion. Concerning the gas sector, in particular, the
(http://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSI recently enacted Law No. 11,909/2009, “Gas Law”, is still pending
DDocRH&actionVal=ShowDocument&language=English) 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.
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments The increase of natural gas availability and the change in the
or awards, against Government authorities or State organs Brazilian regulatory framework should stimulate the growth of the
(including any immunity)? Brazilian gas market as a whole, which represents investment
opportunities in prospecting, exploring, transportation distribution
The government has some procedural advantages (e.g., a longer and the trade of natural gas.
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.

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

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 Kostadin Sirleshtov

CMS Cameron McKenna in cooperation with


Petkova & Sirleshtov Law Office Pavlin Stoyanoff

1 Overview of Natural Gas Sector v) construction of the second gas storage in ‘Galata’ and
extension of the gas storage facility ‘Chiren’.

1.1 A brief outline of Bulgaria’s natural gas sector, including a


general description of: natural gas reserves; natural gas 1.2 To what extent are Bulgaria’s energy requirements met
production including the extent to which production is using natural gas (including LNG)?
associated or non-associated natural gas; import and
export of natural gas, including liquefied natural gas (LNG) According to the latest data, the structure of electricity generation is
liquefaction and export facilities, and/or receiving and re- as follows: (i) coal power plants - 51.5%; (ii) nuclear power plants
gasification facilities (“LNG facilities”); natural gas pipeline - 33.9%; (iii) natural gas power plants - 5.7%; and (iv) renewables
transportation and distribution/transmission network; - 7.7%.
natural gas storage; and commodity sales and trading.
Currently 47% of the gross natural gas consumption in Bulgaria is
used in the energy sector, 50% in the industry (mainly in the
Bulgaria imports most of its natural gas from Russia (exceeding 92-
chemistry, metallurgy and construction), about 2% in the public
94%). The only existing offshore natural gas production concession
sector and about 1% of the natural gas was used domestically.
“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 1.3 To what extent are Bulgaria’s natural gas requirements
concessions signed in 2010 providing an excess of 10% of the met through domestic natural gas production?
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, The Bulgarian dependency from natural gas imports equals to about
mainly by district heating and CHP plants. In the industry, natural gas 92-94% of the total consumption. In 2006, the domestic production
is used mainly as a raw material. Certain quantities of Russian natural peaked 295 mln. m3 compared to about 3,427 mln. m3 imported
gas (e.g. over 17 billion m3 annually) are transited through the natural gas and has decreased ever since. About 0.6 bil. m3 is
territory of Bulgaria to Turkey, Greece and Macedonia. currently the annual storage capacity in the country.
‘Bulgartransgaz’ EAD, a wholly state-owned company, is the sole All imported natural gas to Bulgaria comes from Russia.
entitled natural gas transportation network operator in Bulgaria
(www.bulgartransgaz.bg). The total length of its main gas pipelines 1.4 To what extent is Bulgaria’s natural gas production
is 2,645 km. One company holds a licence as a public supplier of exported (pipeline or LNG)?
natural gas (‘Bulgargaz’ EAD, also wholly state-owned) and there are
about 36 companies carrying out gas distribution and transmission The limited quantities of natural gas produced in Bulgaria are
activities. Currently the transmission and distribution network is currently sufficient only to cover a small portion of the internal needs
underdeveloped; most of the transmission and distribution companies of the country and no export is being realised. The country ensures
are just about to start their investment programmes. transportation of Russian natural gas to its neighbouring countries.
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,
2 Development of Natural Gas
most likely by turning the nearly depleted gas field ‘Galata’ located
in the continental shelf of Bulgaria into a gas storage (in access of 2.1 Outline broadly the legal/statutory and organisational
1.6 bil. m3). framework for the exploration and production
(“development”) of natural gas reserves including:
The development of any LNG terminal(s) is still within the
principal legislation; in whom the State’s mineral rights to
unforeseeable future.
natural gas are vested; Government authority or authorities
The most significant future gas projects for Bulgaria are: responsible for the regulation of natural gas development;
i) ‘South Stream’; and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
ii) ‘Nabucco’;
iii) inter-system connection Bulgaria-Turkey-Greece-Italy;
The main legislation regulating the development of natural gas
iv) pipeline Bulgaria-Romania; and includes the following acts: the Underground Resources Act 1999; the
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Energy Act 2003 and the secondary legislation for its implementation, Only resources of established quantities of natural gas and within a
including the Ordinance for the licensing in the energy sector etc.; the defined area could be granted for production under a concession
Concessions Act 2006 and the Regulation for its implementation; the agreement. The concession includes rights over the production
Property Act 1951; the State Property Act 1996; the Protection of the installations.
Environment Act 2002; Waters Act 1999 and others. The concession agreements are signed with a maximum term of 35
According to the Bulgarian Constitution, the underground resources years, subject to an option for a single extension of up to 15 years.
Bulgaria

found within the territory of Bulgaria are exclusive state property The granting of exploration and prospecting permit and concession
and their development could be granted to investors only through a is preconditioned by a positive environmental impact assessment of
concession, according to the Concessions Act 2006. the activities. The developer must observe the environmental
The main authorities responsible for the regulation of the natural legislation requirements, as well as the obligations for provision to
gas development include: the State Energy and Water Regulatory the state of detailed and exact information about the natural gas
Commission; the Ministry of Economy, Energy and Tourism; and resources. The developers are usually obliged by the concession
the state-owned Bulgarian Energy Holding EAD. agreement to make certain minimal levels of investments
With regard to future projects currently considered by the throughout the validity of the concession agreement.
government, please refer back to question 1.1.
It is expected that within 2010 the Government will finalise and 2.4 To what extent, if any, does the State have an ownership
publish the Bulgarian Energy Strategy until 2020. In addition there interest, or seek to participate, in the development of
is an initiative for development of a programme for speed natural gas reserves (whether as a matter of law or
gasification of the country, preconditioned by the current poor policy)?
domestically produced natural gas.
The current single major producer of natural gas - Melrose
Resources is a fully private company. The state is the sole owner,
2.2 How are the State’s mineral rights to develop natural gas through the national company Bulgarian Energy Holding EAD, of
reserves transferred to investors or companies the presently only operative gas storage facility in Bulgaria
(“participants”) (e.g. licence, concession, service contract,
‘Chiren’. The state’s ownership rights over the gas storage facility
contractual rights under Production Sharing Agreement?)
are historically predetermined and not due to any special law
and what is the legal status of those rights or interests
under domestic 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).
Exploration of natural gas is granted to investors under an In general, the Concessions Act 2006 gives an option to the state to
exploration agreement. determine a certain state share in the concession rights as a
The production of natural gas is granted under a concession condition for obtainment of a concession. However, it is an option
agreement signed between the investor and the state (under the currently not used in the natural gas production sector.
Concessions Act 2006 and Underground Resources Act 1999), The Governmental policy is not to interfere in the production
generally following a competitive procedure. process, so there is no any current or envisaged Governmental
Upon discovery of natural gas resources under an exploration equity participation and/or joint development projects.
agreement, the investor is entitled to concession for production
without a tender, if it duly registers the discovery. The concession 2.5 How does the State derive value from natural gas
agreement grants to the investor the right of exploitation of the development (e.g. royalty, share of production, taxes)?
natural gas against the obligation to construct and maintain the
object of the concession for up to 35 years. The ownership rights The exploration activities are subject to annual fee, determined on
over the produced natural gas are vested to the investor upon the basis of the granted exploration area.
extraction of the natural gas from the natural reservoir. In consideration of the right to produce natural gas, the
concessionaire pays royalties to the state, calculated on the basis of
2.3 If different authorisations are issued in respect of different the produced quantities of natural gas and specific conditions for
stages of development (e.g., exploration appraisal or production (in which point the value may vary).
production arrangements), please specify those The royalties are monetary, there are no share production
authorisations and briefly summarise the most important
agreements and other schemes of involvement of the Bulgarian
(standard) terms (such as term/duration, scope of rights,
Government in the production.
expenditure obligations).

An exploration agreement may be granted, following a competitive 2.6 Are there any restrictions on the export of production?
procedure, to a person registered as a trader who has a sufficient
management and financial capacity. The permit is granted for a There are no legal restrictions on the export of natural gas from
specific territory within which the permit holder has the right to Bulgaria, subject to transportation pipelines capacities. Nevertheless
perform all necessary activities for exploration and prospecting of export so far has been considered as economically unfeasible.
natural gas resources.
The exploration agreement is granted for a period of up to five 2.7 Are there any currency exchange restrictions, or
years, subject to two options for extension by two years each. restrictions on the transfer of funds derived from
Upon discovery of natural gas, the permit holder may register the production out of the jurisdiction?
discovery (as a commercial discovery) with the Ministry of
Environment and Waters. Upon such registration, the investor may There are no currency exchange restrictions or restrictions on the
apply (within six months) for signing of a concession agreement, transfer of funds derived from natural gas production out of
thus avoiding the general competitive procedure. Bulgaria. Bulgaria further benefits from fixed exchange rate with
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the Euro, which remains unchanged since 1997 due to the Currency 2.12 Is there any legislation or framework relating to the
Board, introduced in the country. Government plans for Bulgaria to abandonment or decommissioning of physical structures
join the Euro-zone by 2012-2014. used in natural gas development? If so, what are the
principal features/requirements of the legislation?

2.8 What restrictions (if any) apply to the transfer or disposal The Underground Resources Act 1999 regulates the management of
of natural gas development rights or interests?

Bulgaria
mining waste resulting from activities of production of underground
resources. In respect of exploitation of the sea bed, the general
The rights under an exploration agreement or under a concession applicable law is the Waters Act 1999.
agreement may be transferred to third parties that are compliant
with the general requirements of the law, however only after Principally, the developer shall be responsible for protecting the
approval of the public authority that has issued the permit or environment for any pollution caused by the natural gas
granted the concession, respectively. development activities. The developer is liable for ensuring the
proper collection, keeping, transportation and deposition of waste.
Transfer of concession rights requires prior approval by the The specific obligations and application of particular plans for
Government. mining waste management are stipulated in the natural gas
development agreements (e.g. the concession agreement).
2.9 Are participants obliged to provide any security or Abandonment and decommissioning matters are usually agreed
guarantees in relation to natural gas development? under the concession agreements. Bulgarian legislation provides
that the ownership rights remain with the Bulgarian state after the
The development of natural gas is subject to certain requirements expiration of the concession term.
on the guarantees to be provided by the participant. Such could be
one or more of the following:
(i) bank guarantee; 3 Import / Export of Natural Gas (including
(ii) escrow account payment; LNG)
(iii) insurance; and
(iv) others permitted by law. 3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
Usually the developer provides a bank guarantee ensuring the
sales or deliveries of natural gas (including LNG).
payment of the royalties or the exploration fee and the fulfilment of
its other obligations. The developer is also obliged to maintain the
The producers, the public supplier, the public and end distributors, the
insurance policies that are common for the natural gas
gas storage operators, gas traders and consumers may freely enter into
development.
gas trade deals with local persons or such located in a member state of
A separate guarantee, of any of the above mentioned types, should the EU, or with other states with which Bulgaria has signed an
be provided in relation to covering the expenses for the ultimate international treaty for mutual application of the EU regulations.
liquidation, conservation and recovery of the exploited terrains. Otherwise, the natural gas traders may freely enter into gas trade deals
with production companies in or outside the country, with consumers,
2.10 Can rights to develop natural gas reserves granted to a other traders, the public supplier and gas storage operators. The
participant be pledged for security, or booked for consumers may freely choose whether to purchase natural gas from
accounting purposes under domestic law? local or foreign persons, subject to a prior notification thereof to the
transportation or transmission network operator.
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 4 Transportation
sale of the natural gas could be pledged.
The proceeds/receivables of the natural gas development activities 4.1 Outline broadly the ownership, organisational and
can be booked for accounting purposes. Developer’s shares could regulatory framework in relation to transportation pipelines
also be pledged for financing purposes. and associated infrastructure (such as natural gas
processing and storage facilities).

2.11 In addition to those rights/authorisations required to As mentioned, the single transportation operator is the state owned
explore for and produce natural gas, what other principal company ‘Bulgartransgaz’ EAD. It owns the main gas pipelines in
Government authorisations are required to develop natural
the country. In 2007 the company initiated construction of an 80
gas reserves (e.g. environmental, occupational health and
km high-pressure natural gas pipeline from the town of Dobrich to
safety) and from whom are these authorisations to be
obtained? the town of Silistra, aiming the connection of Silistra to the
transportation network and the town’s consequential gasification.
The granting of natural gas exploration rights is subject to a positive In respect of international projects, please refer to question 1.1.
environmental impact assessment of the Ministry of Environment
and Waters. 4.2 What Governmental authorisations (including any
The developer shall follow the general occupational health and applicable environmental authorisations) are required to
safety requirements and shall be registered with the national construct and operate natural gas transportation pipelines
revenue and social security authorities. 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 4.6 Outline any third-party access regime/rights in respect of
transportation licence granted by the State Energy and Waters natural gas transportation and associated infrastructure.
Regulatory Commission (“SEWRC”), where only one such licence For example, can the regulator or a new customer wishing
may be issued for the country. to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or
The construction of transportation pipelines is subject to the rules of associated infrastructure to grant capacity or expand its
the Spatial Development Act 2001. First, there should be an facilities in order to accommodate the new customer? If
Bulgaria

approved Detailed Development Plan (“DDP”) setting up the so, how are the costs (including costs of interconnection,
parameters of the future construction within certain area. The DDP capacity reservation or facility expansions) allocated?
is approved by the relevant Municipal Council or the District
Governor (if more municipalities are concerned), or by the Minister The connection to the natural gas transportation network is subject
of Regional Development and Infrastructure in cases when the to connection agreements signed with the transportation network
pipeline is announced by the Government as an object of national operator and the users of the network. The transportation operator
importance. On the basis of a DDP and an approved investment is obliged to connect to the network the transmission/distribution
design of the project, a construction permit is granted (the networks, the production and gas storage companies. The
competent authorities being the same as the above mentioned). At transportation company may refuse connection on the basis of lack
completion of the construction, a technical testing of the pipeline of network capacity or economical inexpedience, in which cases the
system is performed after which the construction is permitted to person applying for connection may suggest constructing at its own
operation by a compound commission. expense the facilities necessary for the connection. If the
The DDP and the investment designs are subject to a positive transportation company unlawfully refuses connection, it shall be
decision on the environmental impact of the project. subject to administrative sanctions and compulsory measures
(namely to provide connection), as prescribed by the SEWRC.
After signing of the connection agreement, the transportation
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation operator assures at its expense the approval of the project for
pipelines or associated infrastructure? Do Government construction. The construction of the connection installations is
authorities have any powers of compulsory acquisition to carried by the transportation operator, unless in the hypothesis
facilitate land access? where it has refused connection on the basis of economical
inexpedience and lack of capacity.
Only a Bulgarian person (a locally registered legal entity) may
acquire land or property rights over land. The right to construct is
4.7 Are parties free to agree the terms upon which natural gas
secured either by acquisition of land or by granting of a right to is to be transported or are the terms (including costs/tariffs
construct, together with necessary easement zones. Since the which may be charged) regulated?
transportation operator is an energy company, it receives by
operation of law rights to necessary easements over surrounding The law requires inclusion of certain compulsory types of clauses in
properties, necessary for extension of existing and/or construction the connection contract (such as the term for the construction of the
of new gas transportation facilities. connection facilities and beginning of operation, description and
The state may expropriate properties owned by private persons only technical parameters of the installations to be constructed, points of
on the basis of an entered into force DDP and only for the purposes connection etc.), where the very content of them is subject to
of state needs that cannot be satisfied otherwise, against a fair negotiations between the parties. The connection to the
monetary consideration. 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
4.4 How is access to natural gas transportation pipelines and
associated infrastructure organised?
through the transportation pipelines are also regulated by the
SEWRC (currently, BGN 19.73 per m3).
Please see question 6.4 below.
5 Transmission / Distribution
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
5.1 Outline broadly the ownership, organisational and
between different transportation systems established and
regulatory framework in relation to the natural gas
regulated?
transmission/distribution network.

As mentioned, the whole natural gas transportation pipeline is


The functions of natural gas transmission and natural gas distribution
operated by ‘Bulgartransgaz’ EAD, responsible for the overall
should be legally and organisationally split. However, until the final
operation and maintenance of the network.
split of these functions, the transmission companies could carry out
The regional networks are constructed and operated by the distribution services as well. The public and end distribution activities
companies that hold licenses for natural gas supply of the respective are carried out by the same persons. There are about 36 licences for
territories. The state monopolies and the private licence holders transmission and distribution of natural gas. There are four regional
sign agreements for the interconnection and the supply of natural licences for transmission and distribution granted. As mentioned, the
gas. 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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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

Bulgaria
procedures for permission of construction as described in question 6.1 Outline broadly the ownership, organisational and
4.2. There cannot be issued more than one transmission and regulatory framework in relation to natural gas trading.
distribution licences for a certain territorial region in the country. Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
natural gas trading.
5.3 How is access to the natural gas distribution network
organised?
The legal framework of the natural gas trading consists of the
Energy Act 2003 and the Rules for Natural Gas Trading adopted by
The natural gas transmission network operator is obliged to connect
the SEWRC.
the consumers. The junctions and connection installations are the
transmission network operator’s property. The participants in the market of natural gas are:
Connection may be refused if: (i) the public supplier;
(i) there is no capacity of the network; or (ii) the production companies;
(ii) the connection is not envisaged or is envisaged to be realised (iii) the gas storage operator(s);
on a later stage. (iv) the transportation company;
The transmission operator may connect the consumer upon (v) the transmission operator;
agreeing on the bearing the responsibility for the connection (vi) the natural gas traders;
construction works and costs. The terms and conditions of the (vii) the consumers; and
connection are set up in an agreement between the consumer and
(viii) the distributors.
the transmission company.
The natural gas trading is realised under regulated or freely
negotiated prices, with an operation of a balancing market as well.
5.4 Can the regulator require a distributor to grant capacity or
The natural gas market has been liberalised. Since 1 July 2007 all
expand its system in order to accommodate new
customers? consumers may freely choose their supplier of natural gas on freely
negotiated prices.
The transmission operators are obliged to construct at its expense The main priority for the country is the lack of sufficient
the necessary installations for connection to the transportation development of the transmission/distribution network and
network at points as determined by the natural gas transportation extension of the whole market. Only about 15% of the
network operator. municipalities are currently supplied with natural gas. The political
Upon a request, the SEWRC may require from the transmission initiative in this respect is implemented in the operational
operator, if there are legal basis for this, to connect certain programme Regional Development 2007-2013.
customers, subject to the rules concerning the capacities and The major forthcoming initiatives include:
economical expedience of the connection (see question 5.3 above). i) development of the natural gas transmission/distribution
network;
5.5 What fees are charged for accessing the distribution ii) creation of a low pressure natural gas market; and
network, and are these fees regulated? iii) construction of inter-systematic connections with the
neighbouring countries, etc.
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
7 Liquefied Natural Gas
transmission network to which the consumer is connected.
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities.
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 Unfortunately, there are no LNG facilities developed in the country
directly or indirectly)? so far. During the Russian - Ukrainian Gas Crisis in January 2009
the Government announced plans of connecting the Bulgarian gas
There are no specific legal restrictions for acquiring equity in supply system with the Greek LNG terminal, but no further steps
privately owned gas utilities. The merger of a gas company with have been taken.
another company, or its split up is allowed by the SEWRC only if
the company formed after the corporate restructuring is compliant 7.2 What Governmental authorisations are required to
with the requirements for holding the relevant licence. Merger and construct and operate LNG facilities?
acquisitions are also subject to competition compliance. The
transfer of assets of a natural gas utility is allowed if the assets are The legislation does not envisage any specific rules in relation to
transferred as a whole, subject to permission by the SEWRC. The LNG operations. Therefore, the main rules regulating the natural
transferee must obtain a licence for carrying out the natural gas gas development, storage, trading etc. shall apply in this respect.
activities in question or the existing licence of the transferor shall
be amended accordingly with the permission of the SEWRC,
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7.3 Is there any regulation of the price or terms of service in 8.4 Does the regulator (or any other Government authority)
the LNG sector? have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
There is no specific LNG regulatory framework yet. The general sector, or proposed acquisitions of development assets,
rules regulating the natural gas market shall be applied until more transportation or associated infrastructure or distribution
assets? If so, what criteria and procedures are applied?
specific legislation is introduced.
How long does it typically take to obtain a decision
Bulgaria

approving or disapproving the transaction?


8 Competition
The CPC is the competent authority that shall approve mergers
between enterprises of the gas sector in cases when the EU
8.1 Which Governmental authority or authorities are competition law does not apply. According to the Protection of
responsible for the regulation of competition aspects, or Competition Act 2009, a concentration is a merger of or acquisition
anti-competitive practices, in the natural gas sector?
between one or more independent companies or a case when one or
more related persons exercising a control over at least one company
The competent authority in respect of regulation of competition
acquire the direct or indirect control over another company or a part
aspects in the natural gas sector is the main competition body: the
thereof, in all cases if a permanent change of control is established.
independent Competition Protection Commission (“CPC”).
Concentrations are subject to preliminary CPC’s approval if the
total last year’s income of the participating enterprises in Bulgaria
8.2 To what criteria does the regulator have regard in is more than BGN 25 millions and:
determining whether conduct is anti-competitive?
(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
The general competition principals apply in respect of the million; or
competition in the natural gas sector, where the criteria for
(ii) the income of the target enterprises for the last year is more
determining anti-competitive conduct refer to: restrictive vertical than BGN 3 million.
and horizontal agreements and coordinated practices; abuse of
The concentration shall be allowed if:
monopoly or dominant market position; merger control; sector
analysis and protection of the competition; prohibition of unfair (i) it does not lead to establishment or increase of a dominant
competition; as well as compliance with Articles 81 and 82 of the position that would seriously hinder the effective
competition on the market; or
Treaty Establishing the European Community. In this regard, the
natural sector is not subject to any legally determined special (ii) even if (i) is not complied with, the concentration contributes
regulatory regime, taking of course into consideration the natural to the positive development of the market.
monopolies established for the activities of natural gas
transportation and public supply.
9 Foreign Investment and International
Obligations
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
practices? 9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
For establishing committed violations of the competition rules, the
distribution or other) by foreign companies?
CPC has the power to carry out an investigation. The measures
within the inspections that the regulator may undertake include:
At present, foreign companies are not restricted in acquiring interest
i) demand of evidence and information; in the natural gas sector. There should be, however, considered that
ii) interrogation of witnesses; foreign companies that are not members of the EU or the EEA may
iii) at-site checks; not directly apply for a licence for natural gas activities unless
iv) assignment of expert examinations; and through a locally registered (or in another EU/EEA Member State)
v) request of information from the competition regulatory commercial entity.
authorities of the other EU member states and the European
Commission. 9.2 To what extent is regulatory policy in respect of the natural
The possible sanctions that the CPC has powers to impose include gas sector influenced or affected by international treaties
sanction of up to 10% of the company’s last year’s annual income. or other multinational arrangements?
The CPC may further impose on the violating companies certain
restrictive measures, or such compelling undertaking of actions for The main driving force of the recent development of the natural gas
avoiding further violations or restoration of the normal competition sector in Bulgaria is the country’s obligation for implementation of
on the market. For enforcing execution of its compulsory rulings, the EU law in the sector. In this context, the most significant are the
the CPC may be imposing further periodical fines if the sanctioned gas Directive 2003/55, Energy Chapter Treaty and the Energy
companies omit to act accordingly. Any person that has suffered Community Treaty of 2006.
damages from a violation of the competition rules has the right to Further significance has the bilateral agreement for supply of
be compensated by the offender. natural gas between Bulgaria and the Russia.

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10 Dispute Resolution 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
10.1 Provide a brief overview of compulsory dispute resolution pursuant to litigation before domestic courts?
procedures (statutory or otherwise) applying to the natural
gas sector (if any), including procedures applying in the Unfortunately, there has not been significant investment appetite by
context of disputes between the applicable Government

Bulgaria
foreign corporations to invest in the Bulgarian gas sector, mainly
authority/regulator and: participants in relation to natural
due to the considerable lack of sufficient natural gas reserves.
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the Despite of the fact that in the recent years the situation is changing,
transportation, processing or storage of natural gas; and there are a limited number of international players involved in the
distribution network owners or users in relation to the Bulgarian gas sector.
distribution/transmission of natural gas. Among the leading participants in the market are companies, such
as: Gazprom and its various subsidiaries, Melrose Resources;
Generally, the contracts entered into between the participants on the Rimini Gas, Black Sea Gas Company and others.
natural gas market include dispute resolution clauses.
There were various cases in which Gazprom related entities in
With respect to the agreements between the state and natural gas Bulgaria has been successful in litigating the Bulgarian
developers, the Underground Resources Act 1999 provides that the Government and the SEWRC before the Supreme Administrative
contract must include a dispute resolution clause. The venue, Court.
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 11 Updates
arbitration in addition to the other terms and conditions in this
respect. Further, the parties to such agreement may agree to refer 11.1 Please provide a summary of any new cases, trends and
certain disputes for resolution by experts. developments in Gas Regulation Law in Bulgaria.

10.2 Is Bulgaria a signatory to, and has it duly ratified into It is very likely that the Bulgarian natural gas sector will develop
domestic legislation: the New York Convention on the rapidly in the following 3-5 years. Within 2010 the Government
Recognition and Enforcement of Foreign Arbitral Awards; has planned to announce its long-anticipated Energy Strategy to
and/or the Convention on the Settlement of Investment 2020 and to amend the Energy Act 2003 following the Third Energy
Disputes between States and Nationals of Other States Package of the EU.
(“ICSID”)?
The Minister of Economy, Energy and Tourism has receintly
announced the plans to privatise a minority package of
Bulgaria has signed and ratified both the New York Convention on
“Bulgartransgas” EAD within 2010, which is going to be the most
the Recognition and Enforcement of Foreign Arbitral Awards and
significant privatisation deal in the Bulgarian gas sector to date.
the ICSID. The basic principles and provisions of the latter are
incorporated in the Bulgarian Law on International Commercial In 2009 the Government appointed the leading gas expert Mr. Angel
Arbitration 1988. 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
10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments offshore Bulgaria and that their “Galata” concession agreement will
or awards, against Government authorities or State organs be converted into gas storage project for the benefit of the security
(including any immunity)? of the gas supply.
Both leading international gas pipeline projects “Nabucco” and
Enforcement of any judicial or arbitral awards against government “South Stream” are supported by the Bulgarian Government and it
authorities and state organs is subject to special rules, thus avoiding is likely to continue its development. In parallel, it is likely that the
the general ones in this respect. Recognised monetary court smaller scale interconnections with the neighbouring countries are
judgments or arbitral awards shall be submitted to the financial developed as well.
organ of the particular state institution. The sum shall be paid to the There are plans by EVN and CEZ to develop highly efficient CHP
entitled person out of the relevant state institution’s budget. If the projects in Bulgaria thus increasing the need for gas supply (import)
current budget funds are not sufficient to satisfy the whole sum, the for the country.
obligation must be paid from the next budget, and not later.

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

CMS is the leading European provider of legal and tax services.


Our lawyers provide advice across all types of commercial law; banking and finance, competition, corporate and M&A,
dispute resolution, employment & pensions, environment, immigration, intellectual property, private equity, public
procurement, real estate and tax. With our focus on client service, we were one of the first law firms to embrace the
need to also structure our business along industry sector group lines. We have eight industry sector groups; consumer
products, energy, hotels & leisure, infrastructure & project finance, insurance and funds, lifesciences, real estate &
construction and technology, media & telecoms.
We focus on relationships, not deals, and we are considered more approachable and accessible than many of our
competitors. Our clients tell us they like working with us and that we’re often seen as the human face of the law.

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Chapter 9

Chile Gonzalo Delaveau

Guerrero, Olivos, Novoa y Errázuriz Ltda. Marcos Zavala

1 Overview of Natural Gas Sector 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
1.1 A brief outline of Chile’s natural gas sector, including a
general description of: natural gas reserves; natural gas company was created to encourage the construction and operation
production including the extent to which production is of a Liquefied Natural Gas Plant in the town of Mejillones, in the
associated or non-associated natural gas; import and Region of Antofagasta (“Mejillones LNG”).
export of natural gas, including liquefied natural gas (LNG) Mejillones LNG project involves an investment of nearly $500
liquefaction and export facilities, and/or receiving and re- million and is designed to deliver up to 5.5 million cubic metres per
gasification facilities (“LNG facilities”); natural gas pipeline
day of natural gas, which will generate up to 1,100 megawatts. This
transportation and distribution/transmission network;
project involves the construction of a dock that can receive ships
natural gas storage; and commodity sales and trading.
with LNG producers from different countries such as Trinidad and
Tobago, Yemen and Qatar. The date of first delivery of natural gas
Chile is basically a natural gas importer. Since 1997 and until 2004
through LNG imports is expected in the first quarter 2010.
the main source of natural gas supply came from Argentina. In 2004,
imports were made from Argentine basins “Northwest” (21.8%), The production and domestic supply of natural gas is limited only
“Neuquen” (40.7%) and “Southern” (37.6%) and in order to supply to oil fields in the Magallanes Basin in Region XII.
the Chilean demand five natural gas pipelines were built. In June 2007, the Ministry of Mining announced an international
After the energy and economic crisis suffered by Argentina, the bid to attract gas and oil exploration and production investments in
supply was decreasing drastically coming at a time to be close to ten geographic blocks located in the Magallanes Basin. On October
zero. In 2007 the Chilean authorities reacted to this situation and 10, 2007, a total seven companies and/or consortiums presented
began promoting the construction and operation of LNG terminals offers for nine of the ten blocks under bidding. On November 15,
and natural gas exploration. 2007, the Government granted nine blocks to six international
companies. ENAP participates with 50% of the rights in three of
In response to this situation, two consortia decided to build LNG
these blocks. On April 30, 2008 the awarded officially entered into
projects, one in the central area of the country and other in the
the agreements with the Chilean Government.
northern region.
The blocks granted, the awarded companies and consortiums were:
GNL Quintero SA is the terminal for receiving, storing and
Tranquilo Block, IPR- Manas; Russfin Block, Apache; Brótula Isla
degasification of Liquefied Natural Gas. Since the second half of
Magdalena and Porvenir Blocks, (all three granted to Greymouth).
2009 this terminal is operating in the Bay of Quintero, supplying
The awarded companies participate in a 50% association with
natural gas to the central Chile. Its partners are BG Group, Empresa
ENAP in the three remaining blocks, el Coirón (Pan American
Nacional de Petroleo (“ENAP”), Endesa Chile and Metrogas,
Energy), Caupolicán (Greymouth) and Lenga (Apache).
whom have invested more than $1.1 billion in this project.
In the natural gas distribution sector, there are currently six gas
Quintero LNG meets the demand of natural gas to date which it
distribution network companies, three trading firms and eight
used to be supplied by pipeline from Argentina. BG Group supplies
transportation companies.
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 1.2 To what extent are Chile’s energy requirements met using
contract, such as Trinidad and Tobago, Egypt, Nigeria, Equatorial natural gas (including LNG)?
Guinea and other producing countries.
Quintero LNG Terminal has three storage tanks allow the discharge As a consequence of the lack of supply from Argentina most of the
of LNG with a total capacity of 334,000 cubic metres. The first natural gas consumption it is used in supplying domiciliary and
LNG tank has a capacity of 14,000 cubic metres and is operational industrial use. Nevertheless, the natural gas installed capacity in the
since June 2009. The second and third ponds have a capacity of Chilean Central Interconnected System (SIC) represents 24% and in
160,000 cubic metres each and will be operational in the winter of the North Interconnected System (SING) represents 58% of the
2010. A regasification plant with three vaporisers that can process total capacity. LNG is now accounting for 13% of the power
2.5 million tonnes per year of LNG, producing about 10 million produced on the SIC. The amount of imported LNG used to fuel
cubic metres of natural gas per day on base and 15 million cubic thermo power plants on Chile’s central SIC could double in 2010.
metres per day at peak, which is injected into the pipeline network
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1.3 To what extent are Chile’s natural gas requirements met important features of DS 263 is the concept of open access
through domestic natural gas production? system, which means that the service offered by the
companies must be made in equal economic, commercial,
The domestic national production is limited and it is basically used technical and informational terms, with regard to available
in the Magallanes Region. transport capacity.
c) Supreme Decree No. 254 of October 30, 1995 of Ministry of
Economy, which contains the regulations on safety in the
1.4 To what extent is Chile’s natural gas production exported
Chile

transport and distribution of natural gas (“SD No. 254”).


(pipeline or LNG)?

Chile’s natural gas production is not exported. 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,
2 Development of Natural Gas contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law?
2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production As provided in the Constitution, the exploration, exploitation and
(“development”) of natural gas reserves including: processing of deposits containing liquid or gaseous hydrocarbons
principal legislation; in whom the State’s mineral rights to
cannot be given in concession to third parties. Notwithstanding, the
natural gas are vested; Government authority or authorities
Constitution itself provides that these activities can be undertaken
responsible for the regulation of natural gas development;
and current major initiatives or policies of the Government directly by the State through its companies or through contracts
(if any) in relation to natural gas development. with third parties called special operating agreements.
The general rules for the making of the so-called Special Operating
The Political Constitution of the Republic of Chile (the Agreements for the exploration and exploitation or working of
“Constitution”), established that the State has absolute, exclusive, hydrocarbon deposits (“SOC” or “CEOPS”) are contained in
inalienable and imprescriptibly ownership of all hydrocarbon Statutory Decree No. 1089 of 1975 (“DL 1089”), as amended.
deposits and other fossil substances. This principle is reproduced in DL No. 1089 sets the general framework governing this type of
the law governing ENAP and the Chilean Mining Code (“CMC”) agreement since the requirements and specific operating conditions
embodies this in the same way. for each case are set by the President of the Republic pursuant to a
In this way, the Constitution gives the State ownership of all Supreme Decree (“SD”). A SOC is understood as an agreement by
hydrocarbon deposits and also reserves, therefore, any initiative to and between the State of Chile and a contractor for the exploration,
explore, exploit and benefit from liquid or gaseous hydrocarbons in exploitation or processing of hydrocarbon deposits. The contractor
Chile. may be a Chilean or foreign individual or body corporate. Under
The Constitution provides that liquid or gaseous hydrocarbons, the SOC, the contractor is empowered to develop exploration
unlike other substances the ownership of which the Constitution and/or exploitation activities in the territorial areas established in
also reserve exclusively for the State, cannot be the subject of the respective SD.
exploration or exploitation concessions. Moreover, the Execution of the SOC does not in any case affect the State’s
Constitution and the CMC provide that the exploration and ownership of the hydrocarbon deposits and other elements and
exploitation of hydrocarbons can be performed directly by the State chemicals compounds accompanying them and does not in any way
or by its companies or through administrative concessions or constitute a concession nor confer any right regarding the
special operating agreements. hydrocarbons, elements and compounds that are found, nor does it
On the other hand, storage, transport, distribution, processing, grant powers of appropriation or of use regarding the same.
transformation, refining, sale and marketing of oil or gas, as well, The payments received by the contractor for hydrocarbon
as the development of any other industrial activity related to exploration and exploitation activities performed thereby can be
hydrocarbons, the products and derivatives thereof, can be made either in legal tender or foreign currency or in hydrocarbons
developed and managed by the private sector. under the conditions stipulated in the SOC.
The regulatory framework of the gas industry in Chile is comprised Likewise, Chilean regulation contemplates Specific Oil Service
essentially by: Agreement (“SOSA”), to be entered into by a SOC contractor
a) Statutory Decree 323 of 1931 (the “Gas Services Law”), as whereby commissions a service or execution of a specific work from
amended, that governs: (i) the transport and distribution of a third party under payment of compensation in order for such third
gas; (ii) the concession and easement for the gas transport party to cooperate in the execution of special hydrocarbon exploration
and distribution system; (iii) gas pipeline exploration and or exploitation work. The person providing the service or executing
operation; (iv) gas sales; and (v) the gas industry rate-setting the work is called the subcontractor. Authorisation for the contractor
system. to enter into one or more SOSA’s and the rights and benefits of the
According to the Gas Service Law, pipe gas is understood as subcontractor must be contained in the SD approving the SOC.
any combustible gaseous fluid that is carried or distributed
Special Rights of a Contractor under a SOC
through piping, whether natural gas, gas derived from coal,
naphtha or coke, propane and butane in a gaseous state and a) Rights contained in the CEOP cannot be modified by a
any other type or mix of the above. subsequent law.
b) Supreme Decree 263 of July 8, 1995 of the Ministry of The CEOP is what is known in Chilean law as “Contract Law”,
Economy, which contains the regulations on provisional and therefore a subsequent law cannot modify or affect the rights
definitive concessions for the distribution and transport of contained therein, unless due indemnification is paid.
gas (“SD No. 263”). SD No. 263 sets forth the procedure and b) Access to Foreign Currency.
requirement to obtain a provisional or definitive concession
of gas distribution or gas transport. Among the most 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 amount of such compensation, the rate of which will be 20% and
upon in foreign currency, the Central Bank of Chile will provide the will replace any other direct or indirect tax that may be assessed on
foreign currency necessary, for which purpose the SOC must be the compensation or the subcontractor by virtue of the same.
recorded with such bank. The President of the Republic may order a reduction in this tax
If hydrocarbons will be received, the contractor may export them equal to 10%, 20%, 30%, 40%, 50%, 60%, 70% or 75%. The
freely and keep the foreign currency received in exchange without reduction will be inserted in the respective SOC and will be
any obligation to convert it to pesos, the Chilean legal tender. invariable for the period for which it is granted.

Chile
When a SOC is subscribed, the State guarantees the contractor The regime in subparagraph fourth of article 5th granted by the
access to the foreign currency market called the formal exchange President of the Republic to the contractor will be legally applicable
market (free bank market) for currency conversion and subsequent to the subcontractors in a SOC.
remittance abroad of proceeds from the sale of equipment or other Finally, the machines, devices, instruments, equipment, tools and
assets or of the compensations received under the SOC. parts or components of the same required performing exploration
c) Tax and Customs Benefits under a SOSA or SOC, whether or not owned by the subcontractor
The contractor will be subject to a tax calculated directly on the or contractor, may enter the country under the system of temporary
amount of compensation equal to 50% of the same; or it may be admission established in the Customs Ordinance. This merchandise
subject to the general tax system under the Chilean income tax law as will enter under the system indicated for a period of up to 5 years,
determined by the President of the Republic, currently 17% if it is a extendible annually by the National Customs Director according to
company or person domiciled and resident in Chile, or 35% if not. the needs and features of the respective SOSA or SOC, as the case
may be.
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%, 2.3 If different authorisations are issued in respect of different
30%, 40%, 50%, 60%, 70%, 80%, 90% or 100%, when the stages of development (e.g., exploration appraisal or
difficulties in the territory of exploration or exploitation referred to production arrangements), please specify those
in the agreement, the non-existence of agreements avoiding authorisations and briefly summarise the most important
international dual taxation between the country of origin of the (standard) terms (such as term/duration, scope of rights,
expenditure obligations).
investment and Chile, and the assessments that may be applied to
the contractor under the other terms of the agreement make it
See above.
advisable.
Moreover, DL 1089 provides that the President of the Republic may
release the fees, taxes, duties or assessments and in general the 2.4 To what extent, if any, does the State have an ownership
payments or encumbrances in the same percentages indicated above, interest, or seek to participate, in the development of
natural gas reserves (whether as a matter of law or
regardless of the authority or agency that collects them, including the
policy)?
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
See above.
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 2.5 How does the State derive value from natural gas
exploitation of hydrocarbons under the SOC or SOSA. development (e.g. royalty, share of production, taxes)?
These powers of the President of the Republic shall be exercised in
the same SD in which the requirements and conditions of the See above.
special operating agreement are set.
It is important to highlight that the owners, shareholders and 2.6 Are there any restrictions on the export of production?
partners in the respective companies will exempt from the
aggregate complementary or additional tax, as the case may be, Chile has small reserves of natural gas and therefore it produces a
regarding the income received or approved under the SOC or minimum amount, which is for local consumption. SOC
SOSA, as well as, any other tax that may be assessed on such agreements have established that the contractor has an obligation to
income and the ownership, possession or holding of rights or bearer give priority to meet the Chilean internal demand of natural gas
securities of the same companies, notwithstanding the tax to which with the commercial natural gas of the area of CEOP and that sales
the transfer or transmission of such rights or instruments is subject. must be made through a public bid entered by the State of Chile.
The assets admitted under benefits granted by provisions in DL
1089 may not be conveyed for 10 years following the date of 2.7 Are there any currency exchange restrictions, or
clearance through customs unless all taxes and fees, the payment of restrictions on the transfer of funds derived from
which was deferred, are first paid, which will be applicable on the production out of the jurisdiction?
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 Under the SOC, the State of Chile guarantees to the contractor the
respective service for this purpose. right to access the exchange market to buy foreign currency at any
If the compensation consists of hydrocarbons, the transfer of time as well as the right to retain abroad the foreign currency
hydrocarbons made by the contractor and the documents evidencing generated by their exports, equipment sales, or from his own goods,
the same will be exempt from any tax or encumbrance. The export made in accordance with the terms and conditions of the CEOP,
of hydrocarbons will also be exempt from any tax or encumbrance. compensation for damages or payments received by virtue of
insurance and general contracts, for any amount the contractor may
Moreover, compensation of foreign subcontractors not domiciled in
receive and has the right to remit abroad.
Chile under a SOSA will be subject to a tax calculated on the

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2.8 What restrictions (if any) apply to the transfer or disposal countries, essentially Argentina, and in order to avoid a
of natural gas development rights or interests? discriminatory treatment in the delivery of natural gas to Chilean
consumers, Chile subscribed a gas protocol with Argentina.
As mentioned in question 2.1 above, the execution of the SOC does However, in general, there are no specific limitations on imports of
not affects the State’s ownership of the hydrocarbon deposits and other natural gas. One limitation refers maybe that only Chilean
elements and chemicals compounds accompanying them and does not individuals or legal entities may file applications for gas transport
in any way constitute a concession nor confer any right regarding the concessions. Moreover, there are no limitations in relation to the
Chile

hydrocarbons, elements and compounds that are found, nor does it ownership of the Chilean company requesting the concession,
grant powers of appropriation or of use regarding the same, and meaning by this that the company can be wholly-owned by foreigners
therefore it is not possible to transfer or dispose such rights or interest. with the sole limitation of the existence of at least to partners in order
The SOC agreements can be assigned with prior notification and to incorporate and maintain the corporation in good standing.
approval from the Government. Normally the assignee will have to
fulfil with certain requirements set forth in the SOC.
4 Transportation
2.9 Are participants obliged to provide any security or
4.1 Outline broadly the ownership, organisational and
guarantees in relation to natural gas development?
regulatory framework in relation to transportation pipelines
and associated infrastructure (such as natural gas
Indeed, a bank guarantee or letter of credit has been requested an processing and storage facilities).
included in the SOCs in order to secure the minimum investments
agreed in the agreements. Likewise, in some cases a parent Regulatory Framework
guarantee has been requested to guarantee proper financial backing
As already mentioned, the transport of pipe gas in Chile is regulated
for its affiliate regarding due fulfilment thereby of the obligations
by the Gas Services Law and in particular by SD No. 263 and SD
related to exploitation.
No. 254.
Provisional and Definitive Transport Concessions
2.10 Can rights to develop natural gas reserves granted to a
participant be pledged for security, or booked for In order to provide public gas transport service, and therefore build
accounting purposes under domestic law? and operate gas pipelines, a gas transport concession must be obtained,
which may be provisional or definitive according to whether the
There are no specific limitations in the regulation but should be purpose of the same is to prepare information for a future final
expressly contemplated in the SOC and prior notification and concession or purely and simply to protect the construction, operation
approval from the Government will be normally requested. 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
2.11 In addition to those rights/authorisations required to
explore for and produce natural gas, what other principal concessions, the duration of which is indefinite, empower the
Government authorisations are required to develop natural concessionaire to build, maintain and operate a public gas transport
gas reserves (e.g. environmental, occupational health and system (“Gas Pipelines”) to provide gas transport service, and grant
safety) and from whom are these authorisations to be the right to obtain rights-of-way through the public or private land
obtained? crossed by the route.
One or more Gas Pipeline concessions may exist in a certain
It will require further approvals or licences for operation and geographic area as determined by the authority.
construction (at municipal level), environmental (regional or
We must highlight that gas transport public service concessions
national environmental agency), health and safety (health and
protect not only the gas pipeline as such but also its auxiliary works
municipal authorities), and other permits.
such as pump stations, pressure reducing centres, access roads, etc.
Another very important consideration is that concessions can be
2.12 Is there any legislation or framework relating to the conveyed or transferred in compliance with the requirements of the
abandonment or decommissioning of physical structures
Gas Services Law and may also be mortgaged or encumbered in
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
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.
Specific regulation on this regard has been included in the CEOPS
executed in April, 2008, between the Chilean Government and Forfeiture of Concessions
several companies according to international standards. These Notwithstanding the indefinite nature of definitive concessions, they
kinds of limitations and obligations are also normally included and may be forfeited by a Supreme Decree of the President of the
contemplated in the environmental authorisations. 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
3 Import / Export of Natural Gas (including same in the Official Gazette. The Ministry of Economy may also
LNG) request that the respective Court of Appeals declare a serious default
on the obligations of the concession if two-thirds of the works have
3.1 Outline any regulatory requirements, or specific terms, not been executed in the established terms. Once default has been
limitations or rules applying in respect of cross-border declared, the President of the Republic will decree forfeiture.
sales or deliveries of natural gas (including LNG). Once exploitation of the gas transport concession begins, there are
no specific rules in the actual regulations to decree forfeiture of
In the past, when the natural gas was imported from neighbouring 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 We must state that the permits for the gas pipeline to cross streets,
on the issue of forfeiture of transport concessions. Until the Bill is squares, sidewalks, avenues, roads and other national public assets
passed, we believe that the same rules in the case of forfeiture of are considered to be granted under the transport concession,
distribution concessions are applicable to the forfeiture of transport notwithstanding the need to obtain the other permits stated by
concessions. special laws. The corresponding authority must also be asked to
evaluate environmental impact studies together with the foregoing.
4.2 What Governmental authorisations (including any

Chile
applicable environmental authorisations) are required to 4.4 How is access to natural gas transportation pipelines and
construct and operate natural gas transportation pipelines associated infrastructure organised?
and associated infrastructure?
SD No. 263 embodies operation of gas pipelines under the open
Concession Application Procedure access system. Open Access is define as “the offer made by gas
A concession (provisional or definitive) is requested from the transport concessionaires for their transport services under arm’s
Superintendency of Electricity and Fuel (“SEF”), which is a length economic, commercial, technical and reporting conditions
technical service within the Ministry of Economy, Development regarding their available transportation capacity”. Open access
and Reconstruction. The requirements for such request are set implies that each firm transport agreement is entered into after a
down in articles 5 and 6 of SD No. 263, which refer principally to public bid among the parties interested in contracting this service.
identification of the requester, the type of concession being Through Opinion 933-198, the then Antitrust Resolutory
requested, a general drawing on the works, the point of origin and Commission (the “Antitrust Commission”), ruled that “in
destination between which gas transport is requested, identification concessions to gas transport companies, operation of the service
of the fiscal, municipal or private property that will be affected and must necessarily be subject to the open access system or method
the corresponding drawings thereof. where the supply of services is proposed under arm’s length
This concession request is analysed by the SEF, which proposes a conditions for all users and there is always a public supply of
draft decree granting the concession to the Ministry of Economy available transport capacity by the concessionaire, which shall also
upon approval of the project. govern expansions of such capacity that may be planned”.
In turn, the Ministry reviews the draft decree and sends it to the The features of the open access system therefore lie:
President of the Republic for signature upon approval. Once such (a) In having the supply of service proposed under arm’s length
decree is signed, it is analysed legally by the Controllership General conditions to all users.
of the Republic, which is concerned with ensuring that no legal (b) In the concessionaire having an ongoing public supply of
defects are present therein. available transport capacity.
Subsequently, the Ministry will send the decree granting the The Antitrust Commission also stated that “services supplied in
concession to the Official Gazette of the Republic of Chile for transport and distribution concessions must be made under general
publication, while the interested party will have a period of 30 days objective and non-discriminatory conditions regarding users to
as of the date of publication to execute the same to public deed. whom public and updated information must be provided on the
Once these proceedings have been completed, the interested party structures and levels of rates governing the service thereof.”
will have the possibility of judicially requesting the creation of In another query, Antitrust Commission stated that open and non-
easements on the private land affected by the gas pipeline as discriminatory access “means that all parties interested in
established in article 22 of the actual Gas Services Law, transporting gas through a certain gas pipeline can do so by paying
notwithstanding the possibility to create voluntary gas easements as the corresponding transport rates”, and added that “this therefore
well. facilitates direct access by consumers to producer markets, with the
It will require further approvals or licences such as municipal, consequent benefits in terms of competition”.
Health and Safety and environmental authorisations and other These principles have been embodied in SD No. 263.
permits granted by Municipal authorities and Safe and Safety and
environmental agencies. Regulators are also closely involved.
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
4.3 In general, how does an entity obtain the necessary land between different transportation systems established and
(or other) rights to construct natural gas transportation regulated?
pipelines or associated infrastructure? Do Government
authorities have any powers of compulsory acquisition to The current existence pipelines are not interconnected and each
facilitate land access? serves specific final areas or users.

Chilean law defines easements as “an encumbrance imposed on


4.6 Outline any third-party access regime/rights in respect of
land in use of other land owned by another”. Moreover, there are
natural gas transportation and associated infrastructure.
established by law, by mere operation of the same, and in general
For example, can the regulator or a new customer wishing
for reasons of public order. These include easements established in to transport natural gas compel or require the
accordance with articles 22 B and 22 F of the Gas Services Law and operator/owner of a natural gas transportation pipeline or
with the provisions in SD No. 263. associated infrastructure to grant capacity or expand its
Easements, the exercise thereof and the corresponding facilities in order to accommodate the new customer? If
compensation must be set in a judicial resolution or agreement so, how are the costs (including costs of interconnection,
between the interested parties. Determination of the amount of capacity reservation or facility expansions) allocated?
compensation payable for all the damage caused to the landowner
must be made in accordance with article 22 J of the Gas Services Please see question 4.4.
Law.
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4.7 Are parties free to agree the terms upon which natural gas 5.2 What Governmental authorisations (including any
is to be transported or are the terms (including costs/tariffs applicable environmental authorisations) are required to
which may be charged) regulated? operate a distribution network?

The parties are to agree the terms upon which natural gas is to be In addition to the concession, it will be necessary to obtain further
transported. approvals or licences such as municipal, health and safety and
environmental authorisations and other permits granted by
Chile

Municipal authorities and Health and Safety and environmental


5 Transmission / Distribution agencies.

5.1 Outline broadly the ownership, organisational and 5.3 How is access to the natural gas distribution network
regulatory framework in relation to the natural gas organised?
transmission/distribution network.
The current regulations do not establish limitations regarding the
Gas distribution in Chile is regulated by the rules established in the number of concessions per geographic area. Notwithstanding the
Gas Services Law, SD No. 263 and in SD No. 254. foregoing, it is also possible, although less clear than in the case of
A public gas distribution service is defined as “the supply of gas transport, to establish local monopolies, mainly because there are
made by a distribution concessionaire to clients or consumers already gas networks installed in the area of largest consumption,
located in concession areas, or to clients or consumers located which will be apt for natural gas distribution.
outside of such areas that are connected to the concessionaire’s Pursuant to article 23 of the Gas Services Law, “Companies will be
distribution facilities by their own mains or those of third parties”. obligated to supply gas for electric lighting, heating and any other
Provisional and Definitive Distribution Concessions purposes to whoever requests the same inside the service areas of
A definitive gas distribution concession must be granted in order to their concession, provided the consumption is compatible with the
provide public gas distribution service in a certain geographic area. capacity and safety of their production and distribution facilities.”
Under this concession, the concessionaire may provide gas
distribution services and may build, maintain and operate a gas 5.4 Can the regulator require a distributor to grant capacity or
distribution network in the respective geographic area. expand its system in order to accommodate new
A provisional concession may also be requested if the objective of customers?
the same is to prepare the information on a future definitive
distribution concession. Under this concession, the concessionaire Pursuant to article 23 of the Gas Services Law, “Companies will be
may perform routing studies on the transport or distribution obligated to supply gas for electric lighting, heating and any other
pipelines. purposes to whoever requests the same inside the service areas of
The system and requirements to obtain a provisional or definitive their concession, provided the consumption is compatible with the
gas distribution concession are the same as those discussed in capacity and safety of their production and distribution facilities.”
previous point.
Companies may convey, encumber, mortgage and give in guarantee 5.5 What fees are charged for accessing the distribution
their assets, rights and concessions. The foregoing may in no event network, and are these fees regulated?
hinder public gas distribution service.
Under current legislation, gas distributors are empowered to set
Moreover, forfeiture of definitive concessions arises in the same
their rates freely, based on determining distribution sectors where
events indicated above, and on special grounds as contained in
sale prices to like consumers are the same so that there is no
articles 44, 46 and 58 of the Gas Services Law, which in general
discrimination between them. This same principle of rate-setting
refers to deficient operation of the public gas distribution service,
freedom has been extended to natural gas transport rates.
default on orders or sanctions decreed by the SEF and disruption of
the service. If forfeiture of a distribution concession is decreed by Notwithstanding the foregoing, rates may be set by the Ministry of
the President of the Republic, the concession should be disposed of Economy when so determined by the Antitrust Commission
by a public invitation to tender, which shall adhere to the terms and (currently the Antitrust Court). To do so, there must be proof that
conditions established in article 22 of the Gas Services Law. the rate-setting system established by the concessionaire for public
gas distribution service generates sufficient operating revenues
It is important to state that no type of concession is required for the
throughout the calendar year so as to obtain an economic rate of
distribution of liquefied petroleum gas and it is distributed mainly
return on the assets in the concessionaire that is five percentage
in cylinders.
points higher than the annual capital cost rate defined in article 32
The distribution companies are regulated by principles such as non- of the Gas Services Law.
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 5.6 Are there any restrictions or limitations in relation to
acquiring an interest in a gas utility, or the transfer of
consumptions below 100 Gigajoule.
assets forming part of the distribution network (whether
It is important to state that permits are considered to be granted directly or indirectly)?
under a distribution concession for the gas pipeline to cross streets,
squares, sidewalks, avenues, roads and other national public assets, There are none.
notwithstanding the need to obtain the other permits indicated in
special laws.

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6 Natural Gas Trading anticompetitive effects of the conduct or matter under investigation.

6.1 Outline broadly the ownership, organisational and 8.2 To what criteria does the regulator have regard in
regulatory framework in relation to natural gas trading. determining whether conduct is anti-competitive?
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to In this market there is not fixed criteria and the antitrust authority
natural gas trading.

Chile
evaluate it case by case. However, It is important to highlight that
through opinion 933-198 of April 28, 1995, the Antitrust authorities
Gas trading it is not regulated and the free market rules apply. 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
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural sole and exclusive purpose of which is to perform only one of such
gas commodity and the distribution thereof) be traded? activities. The opinion recommends limitations on ownership and
reciprocal control of companies acting as distribution and transport
See above. 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
7 Liquefied Natural Gas 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
7.1 Outline broadly the ownership, organisational and
regulatory framework in relation to LNG facilities. that must exist in the ownership of capital of transport companies by
distributors and by large buyers and vice versa. This opinion is not
See above. 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.
7.2 What Governmental authorisations are required to
construct and operate LNG facilities?
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
There are no limitations on liquefaction activities, except for those
practices?
generally applicable to any company wishing to establish itself in
Chile, such as municipal, security and environmental authorisations
The Antitrust Court can:
and other permits. Normally, these kind of facilities also include
ports and maritime concessions and zoning amendments. a) modify or terminate the acts, contracts or agreements that are
contrary to the free competition;
b) order the modification or dissolution of partnerships,
7.3 Is there any regulation of the price or terms of service in corporations and other private legal entities who have
the LNG sector? participated in the acts, contracts or agreements referred to
the previous letter; and
According to Chilean law, gas companies can freely determine their c) impose fines and takes corrective measures or prohibitive
prices. Only gas distribution companies are ruled by principles with regard to facts, events or conventions it considers anti-
such as non-discriminatory prices to customers. Moreover, the competitive and can be arranged in each case.
Antitrust Commission may request the Ministry of Economy to fix
tariffs in certain circumstances mentioned above. Therefore, the
8.4 Does the regulator (or any other Government authority)
Government does not intervene in price determination of import,
have the power to approve/disapprove mergers or other
transportation and export of gas. changes in control over businesses in the natural gas
Law 20.063 established a mechanism of price compensation that will sector, or proposed acquisitions of development assets,
operate through a public reserve fund in order to maintain the balance transportation or associated infrastructure or distribution
of relative prices of liquefied natural gas and liquefied oil and diesel assets? If so, what criteria and procedures are applied?
oil in accordance with the provisions determined in that regulation. How long does it typically take to obtain a decision
approving or disapproving the transaction?

8 Competition 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
8.1 Which Governmental authority or authorities are
affect the free market and competition. This consultation and
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector? decision process may take between 3 months and a year.

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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9 Foreign Investment and International 10.2 Is Chile a signatory to, and has it duly ratified into
domestic legislation: the New York Convention on the
Obligations Recognition and Enforcement of Foreign Arbitral Awards;
and/or the Convention on the Settlement of Investment
9.1 Are there any special requirements or limitations on Disputes between States and Nationals of Other States
acquisitions of interests in the natural gas sector (whether (“ICSID”)?
development, transportation or associated infrastructure,
Chile

distribution or other) by foreign companies? Yes it is.

No there are not.


10.3 Is there any special difficulty (whether as a matter of law
or practice) in litigating, or seeking to enforce judgments
9.2 To what extent is regulatory policy in respect of the natural or awards, against Government authorities or State organs
gas sector influenced or affected by international treaties (including any immunity)?
or other multinational arrangements?
No there is not.
It is not. The Chilean experience in this regard has been a quite
disappointing base of the fact that the Treaties and Complimentary 10.4 Have there been instances in the natural gas sector when
agreements with Argentina were breached. foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
pursuant to litigation before domestic courts?
10 Dispute Resolution
Not that we are aware of.
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 11 Updates
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
11.1 Please provide, in no more than 300 words, a summary of
gas development; transportation pipeline and associated
any new cases, trends and developments in Gas
infrastructure owners or users in relation to the
Regulation Law in Chile.
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
distribution/transmission of natural gas. The government must establish clearer rules and regulations for the
distribution of compressed natural gas (CNG) for vehicles (aka
There are no specific dispute resolution procedures. Disputes vehicular natural gas) in order to create a market and spur private
among private parties can be submitted to local courts or local sector investment.
arbitration. It can also be submitted to foreign arbitration and in the Regulations are required to cover business, environmental and
case of international agreements such as supply agreements, taxation aspects. For the moment Chile has a single annual tax for
international agreements, they can be subject to foreign law and natural gas, which is applied for industrial clients as well as buses
foreign courts. 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 Marco Zavala is member of the firm’s energy and natural resources
Resources He specialises in electricity regulation merger and and litigation areas, and specialises in project development as well
acquisitions and project finance. He has a law degree from Pontificia as civil and commercial litigation, constitutional actions, arbitration
Universidad Católica de Chile School of Law, Santiago, Chile. He and dispute resolution.
also attended the Academy of American and International Law, Universidad Diego Portales, Santiago School of Law, Chile. Post
International and Comparative Law Center of the Southwestern Legal graduate Degree in Tax Law, Universidad de Santiago de Chile
Foundation, Dallas, U.S.A. (1993). Publications: Chilean Foreign (1991). International Practice Diploma in International Joint
Investment Laws (LatinFinance Magazine, 1994), The Chilean Gas Ventures, The College of Law, London and International Bar
Legal Framework (CERI, 1997), Marco Regulatorio del Sistema Association (2004).
Sanitario Chileno (Privatización del Sistema Sanitario Chileno, Partner at Zavala Abogados (1993- 2002). Consultant at
different authors, 2000), and Chile’s New Electricity Law: An Hammonds, London, United Kingdom. (2002-2003). Head of
Analisys of Law 19,940 (Latin America Energy Report, May 2004). Latin America Practice at Hammonds, London UK, (2004- 2009).
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.

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 Sophie da Cunha

JeantetAssociés AARPI Thierry Lauriol

1 Overview of Natural Gas Sector 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
1.1 A brief outline of France’s natural gas sector, including a
general description of: natural gas reserves; natural gas non conventional gas. The objective of five of these permits is gas
production including the extent to which production is carbon and for one of the permits it is “trapped gas”. (Long-term
associated or non-associated natural gas; import and indicative plan of investments in the gas sector, Period 2009-2020,
export of natural gas, including liquefied natural gas (LNG) Ministry of Ecology, Energy, Sustained Development and the
liquefaction and export facilities, and/or receiving and re- Development of the Territory, http://www.developpement-
gasification facilities (“LNG facilities”); natural gas pipeline durable.gouv.fr/energie/politiqu/pipgaz_2009.pdf.)
transportation and distribution/transmission network;
Importations/Exportations of Natural Gas in France:
natural gas storage; and commodity sales and trading.
Gas supply in France is very diverse: in 2008, 33% of gas imported
The Portion of Natural Gas in the French Energy Balance: by France came from Norway; 18% from the Netherlands; 17%
from Algeria; and 15% from Russia
Natural gas represents around 14 to 15% of the national energy
(www.statistiques.developpement-durable.gouv.fr; “Report on the
balance. The demand for natural gas has undergone a considerable
Supply of Natural Gas”; n°26; October 2009).
expansion over the last twenty years: in France, this demand has
increased by 52% between 1990 and 2006, whilst the total Net importation of gas has increased in 2007, in parallel with the
consumption of primary energy has only gone up by 20%. There increase in real consumption (+3.7% for total primary
was a very marked increase between 1990 and 2004 but it appears consumption): it has gone from 480 TWH in 2007 to 504 TWh in
that it has since stabilised (www.statistiques.developpement- 2008, namely, an increase of 5.8%, following -5.6% in 2007 and -
durable.gouv.fr; “Summary on Natural Gas Supply”; n°26; October 3.1% in 2006.
2009). The portfolio of imports has been amended somewhat in 2008 as
National Production of Natural Gas: compared to 2007:
France currently produces around 1.1 million tonnes, per year, of the importation of liquefied natural gas represents one
petrol (crude oil and liquids extracted from natural gas). This quarter of net imports;
production comes from about ten small deposits located in the Paris the importation under long-term contracts has, in global
basin (mostly in the Marne and Seine-et-Marne areas) and in terms, increased by 2.8%; importation from Russia, which
Aquitaine (in the area of the Landes, Gironde and the Atlantic had greatly decreased in 2007, advanced by 14% but does
not attain the level reached in 2006: importations coming
Pyrenees).
from Norway have increased by 7%, and they represent
The gas production traded comes almost entirely from Aquitaine, with nearly one third of the total net importations; and
the Lacq field, operated by the French oil company Total, representing importations coming from the Netherlands and Algeria have
around 75%, but whose operation is coming to an end. been subject to more modest variations. The new supply
If the French production of petroleum and gas covers only a small part sources of Egypt and Qatar remain fairly unimportant as they
have not varied much between 2007 and 2008; and
of the needs for the country, the presence of around ten companies,
which are active in the two principal basins, shows the economic value short-term contracts have been sought after a little more in
2008; they represent 6.6% of the net entries of natural gas in
of this production. At current crude oil prices, this production is
2008, as compared to 4.8% in 2007 and 5% in 2006.
profitable and would remain so even at slightly lower prices.
By reason of its geographical position, the French territory is a
National production continues to drop: -11% in 2008, representing
place for the transit of gas between the North and the South of
10.5 TWh and around 2% of the (real) national primary
Europe, and 16% of the gas coming into France merely transits
consumption (www.statistiques.developpement-durable.gouv.fr;
through the country.
“Natural Gas in France: the principal results for 2008”).
Gas arrives in France through six (6) principal points of entry
Potential National Reserves of Natural Gas:
(Tasnières, Dunkirk, Obergailbach, Fos on Sea, Fos Tonkin,
The fact that new requests for research permits are regularly lodged Montoir of Britanny, Biriatou). The gas entering in transit or
indicates that the potential of French basins, both on-shore and “exported” in France are principally through two points (towards
offshore, is still capable of creating interest. In comparison with Switzerland via Oltingue, towards Spain via Larrau).
other basins, certain zones appear to be under-explored and
The gas is transported in France by two operators, GRTgaz
following a history of exploration and production which has lasted
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(subsidiary of GdF Suez) and, for the South West of France, TIGF market is totally open to competition, including with regard to
(subsidiary of TOTAL). where individuals are concerned. In 2008, around twenty (20)
The net balance of entries-exits of natural gas in France has passed suppliers in addition to Gaz de France and twenty-two local
from 510 TWh in 2006 to 480 TWh in 2007 and 504 TWh in 2008 distribution companies sold gas in France to end clients.
(www.statistiques.developpement-durable.gouv.fr; “Annual The sales of gas which had considerably decreased in 2007, as a
investigation relating to the natural gas market: principal results for result of the mild climate and the stagnation of the number of

France
2008”, figures and statistics; n°63, September 2009). residential customers, increased slightly in 2008, as compared to
Storage of Natural Gas in France (www.statistiques. 2006 (+0.8%).
developpement-durable.gouv.fr; “Annual investigation relating to The sales of gas to professionals, at 330 TWh in 2008 as compared
the natural gas market: principal results for 2008”, figures and to 318 TWh in 2006 and 322 TWh in 2007, have increased by 2.4%
statistics; n°63, September 2009): in one year. The opening up of the market of professionals
Today, France has two types of storage: in water layers; and in salt advances regularly: the alternative suppliers have seen their share
caverns. The underground French storage facilities are operated by go from 15% of sales in 2005 to 33% in 2008. As regards
Gaz de France (79% of French capacity) which manages twelve (12) individuals, their share remains marginal. Seven regions (out of
storage facilities, nine (9) of which are in water layers (focused on the twenty-two) represent 62% of the gas sold.
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 :
1.2 To what extent are France’s energy requirements met
Izaute; and Lussagnet (21% of French capacity).
using natural gas (including LNG)?
There are currently projects for the transformation of former deposits
of hydrocarbons, which today are exhausted, into storage capacity. See answer to question 1.1.
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
1.3 To what extent are France’s natural gas requirements met
stable in 2008. Before the period when general heating commences through domestic natural gas production?
(30 September) the necessary stocks were at the same level in 2008 as
in 2007. See answer to question 1.1.
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
1.4 To what extent is France’s natural gas production exported
TWh in April 2007 and 31.8 TWh in April 2006.
(pipeline or LNG)?
Methane Terminals in France (http://www.cre.fr/fr/acces_
aux_reseaux/infrastructures_gazieres/terminaux_methaniers, 4
See answer to question 1.1.
December 2009):
There are currently two methane terminals in France, the “Fos
Tonkin” terminal in Fos-sur-Mer, near to Marseilles and the 2 Development of Natural Gas
“Montoir” terminal, near Saint-Nazaire. These two terminals are
managed by Elengy, a subsidiary of GdF Suez and they have
2.1 Outline broadly the legal/statutory and organisational
respective capacities for re-gasification of 7 and 10 Gm3/per framework for the exploration and production
annum. (“development”) of natural gas reserves including:
A third terminal is currently being built, also situated at Fos-sur- principal legislation; in whom the State’s mineral rights to
Mer. It will have a re-gasification capacity of 8.25 Gm3/per annum natural gas are vested; Government authority or authorities
and shall be operated by “STMFC” (Methane Terminals Company), responsible for the regulation of natural gas development;
held 70.2% by GdF Suez and 29.8% by Total. and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
These infrastructures are accessible to third parties.
In 2008, the terminal for Fos Tonkin received 142 methane ships 2.1.1 Applicable legislation
and re-gasified 58 TWh of gas, and the Montoir terminal received The principal texts applicable to the exploration and the production
91 ships and re-gasified 80,5 TWh of gas. The terminals receive of natural gas in France are, notably, the Mining Code, Law n°2003-
around 30% of the natural gas used in France. 8, dated 3 January 2003, relating to the gas and electricity markets
Distribution (www.statistiques.developpement-durable.gouv.fr; and to the public service of energy, as well as Law n°2004-803,
“Annual investigation relating to the natural gas market: dated 9 August 2004, relating to the public service of electricity and
principal results for 2008”, figures and statistics; n°63, gas and to electrical and gas companies and their texts of
September 2009):
application, Law n°2006-1537, dated 7 December 2006, relating to
The distribution of natural gas which is assured by Gaz de France the energy sector.
and twenty-two local distribution companies is an activity which is
2.1.2 The holders of the rights to explore and to produce natural gas
managed by public bodies through concession contracts or through
service regulations. In order to have the right to explore or produce natural gas in
France, it is necessary to comply with the prescriptions of the
Around 9,550 French towns, and almost all of the towns with more
Mining Code.
than 10,000 inhabitants are supplied with natural gas; this enables
nearly 80% of the French population to have access to gas. Thus, article 7 of the Mining Code provides that “research for the
discovery of mines may be undertaken:
Marketing, sales of natural gas (www.statistiques.
developpement-durable.gouv.fr; “Annual investigation relating either by the owner of the surface area in question or with his
to the natural gas market: principal results for 2008”, figures agreement, following a declaration to the Prefect (“Préfet”);
and statistics; n°63, September 2009): in the absence of agreement, with the authorisation of the
The sale of gas is open to competition. Since July 2007, the gas 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 2.2 How are the State’s mineral rights to develop natural gas
State (“Conseil d’Etat”); or reserves transferred to investors or companies
in accordance with an exclusive research permit.” (“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?)
In the scope of research carried out concerning liquid or gas and what is the legal status of those rights or interests
hydrocarbons, article 8 of the Mining Code provides that the person under domestic law?
that has conducted the research has the right to dispose freely of these
France

products. The exclusive research permit and concession are subject to a


The persons entitled to proceed with the production of natural gas specific regime provided for in the Mining Code.
must be holders of a concession, which accords them the right to 2.2.1 The research regime
operate the mines, in accordance with article 21 of the Mining Code.
The Mining law distinguishes between three research regimes:
2.1.3 Authorities
research carried out by the owner of the land or his
The Prime minister and the Minister responsible for mines who is successors in title;
also responsible for energy (the latter being, in fact, the current research authorised by the administration; and
Minister of Economy, Finance and Industry) set the regulations
research carried out pursuant to an exclusive research permit.
applicable regarding the development of natural gas. Within the
Ministry of Economy, Finance and Industry there is a department 2.2.1.1 The research carried out by the owner of the land or his
specialised in energy and raw materials (in French “DGEMP”) successors
whose function is, notably, to define and put into operation the The right to carry out research, which belongs to the owner, is a
energy policy of France and the supply of raw materials. consequence of the latter’s right of ownership and a normal use of
Presided over by the Minister responsible for mines, the General this right. He cannot carry out research in the event that his land is
Council of Mines is composed of general mine engineers, as well as within the perimeter of a concession, of an exploitation permit or an
several other top civil servants and leaders of public companies. exclusive research permit.
There are two sections: the legal section and the technical section. 2.2.1.2 Research authorised by the administration
The council is assisted by the general inspectorate of the ministry The procedure for the request for authorisation is provided for in the
department which supports the general engineers and carries out Decree dated 14 August 1923. Any person or legal entity, whatever
missions at the request of the council. the nationality, may ask for a research authorisation.
2.1.4 Regulatory Authority The request, sent to the Prefect (“Préfet”), indicates the operation, the
The French energy sector, since 2000, also has a regulator. This nature of the substance that is sought and the likely size of the deposit,
regulator is the Energy Regulatory Commission (“ERC”). As as well as the numbers of the parcels of land concerned, and the
regards natural gas, the ERC: owners, and the attempts at amicable settlement. After having been
is the guarantor of the right of access to the networks and sent to the mines department, the request is addressed to the mayor of
natural gas installations; the local authority where the owners are domiciled in order to enable
monitors the proper functioning and the development of the the latter to be made aware of the contents of the request.
networks and natural gas infrastructures and liquefied natural The owners then have 15 days, as from notification of the request,
gas; and to make known any comments that they may have. At the end of
is the guarantor of the independence of the network this delay the file is returned to the Prefect (“Préfet”) who forwards
managers. it to the Minister responsible for mines, the latter taking the final
In a more general manner, the law confers upon the ERC the task of decision by order.
monitoring the proper functioning of the electricity and gas 2.2.1.3 The exclusive research permit
markets. The ERC ensures the monitoring of the organised The exclusive research permit regime is provided for in articles 7 to
electricity and natural gas markets, as well as exchanges at the 19 of the Mining Code, as completed by the provisions of the decree
frontier of both gas and electricity. of application of the Mining Code n°95-427 dated 19 April 1995,
2.1.5 Indicative Long-Term Plan for Investments in the Gas Sector: relating to mining titles.
2009-2020 The exclusive research permit for substances that may be conceded
The drawing-up of this plan is provided for by article 18 of the Law is accorded by the administrative authority, after a competitive bid
dated 23 January 2003, referred to above. This is in fact a report, process, for a period of five years at the most.
presented to the National Assembly which describes the foreseeable The request, with a completed file, is sent to the Minister responsible
evolution of the demand for natural gas over the next ten (10) years, for mines by registered letter with acknowledgment of receipt.
the adequacy of gas infrastructure (underground storage, methane
The request is evaluated in accordance with criteria laid down in the
terminals, transport canalisations, inter-connection works), as well
Mining Code and its decree of application. The applicant must in
as the contribution of long-term contracts for the supply of the
particular justify its technical and financial capacities by providing
French market.
all of the documents referred to in articles 3 to 5 of the decree n°95-
The 2009-2020 plan is the second report, the first had been 427 dated 19 April 1995.
transmitted to the National Assembly in 2006.
The permit confers on its holder the exclusivity of the right to carry
The investment decisions in the gas sector belong to the operators out all works of research within the perimeter of the aforesaid
even though public authorities have several ways to support the permit and to dispose freely of the products extracted during the
development of new infrastructures that are essential for the course of the research.
security of national supply, such as tariff incentives or temporary
2.2.2 The Concession
derogations to the access of third parties to the infrastructures.
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 company and owned by the State.
exclusive research permit in force may obtain a concession, within The Law dated 9 August 2004, referred to above, has opened up to
the perimeter of the research permit and for the substances the private sector the shares of GDF, which has become a private
mentioned by the permit. In addition, the holder of the exclusive limited company in which the State holds more than 70% of the
research permit has the right, if he asks before the expiry of the shares.
permit, to the granting of concessions over the deposits that have
The Law of 7 December 2006 has modified this participation of the
been discovered and may be exploited within the perimeter of this

France
State, which has been reduced to over one third of the share capital
permit during the period of the validity of the aforesaid permit.
of GDF (article 39 of the Law n°2006-1537 dated 7 December
Article 14 of decree n°95-427 dated 19 April 1995 provides a list of 2006).
the documents to be provided by the request, which is then sent,
In July 2008, GDF merged with Suez to create the group, GdF Suez.
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 2.5 How does the State derive value from natural gas
development (e.g. royalty, share of production, taxes)?
period of thirty days.
In accordance with article 36 of the Mining Code: “The institution
In accordance with article 31 of the Mining Code, the holders of the
of a concession, even for the benefit of the owner of the land in
concessions for liquid or gas hydrocarbon mines are bound to pay,
question, creates a real property right distinct from the ownership
on an annual basis, a royalty payment to the State at a progressive
of the surface area. This right may not be made subject to a
rate and calculated on the production.
mortgage”.
Scale for Gas (former and new productions (former productions
The duration of mining concessions is fixed in the concession
refer to quantities extracted, in accordance with traditional methods,
document. The duration can not exceed fifty (50) years.
from wells that were brought on line before 1st January 1980.
2.2.3 Mining Permits Other quantities extracted constitute new productions) in
Mention should be made of another mining title, the “Mining percentage of the production value coming from the field):
Permit”, and to the regime which applies to it. However, this Per tranche of annual production (in millions of cubic metres):
regime (articles 50 to 63 of the Mining Code) only applies to Less than 300: 0% (former productions) / 0% (new
permits that are in effect as at the date of the entry into force of Law productions).
n°94-588 dated 15 July 1994 and to the requests for mining permits More than 300: 20% (former productions) / 5% (new
which are submitted before this date. It does not therefore apply for productions).
future requests.
The methods for the application of this royalty are specified in the
2.2.4 Specific Provisions Decree n°81-373 dated 15 April 1981, relating to the royalty on the
Mention should also be made that the Mining Code sets out a production of liquid or gas hydrocarbons.
regime and specific provisions for French overseas territories.
2.6 Are there any restrictions on the export of production?
2.3 If different authorisations are issued in respect of different
stages of development (e.g., exploration appraisal or Compliance with obligations of public services and notably the
production arrangements), please specify those security of supply in France.
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights,
expenditure obligations). 2.7 Are there any currency exchange restrictions, or
restrictions on the transfer of funds derived from
See answer to question 2.2. production out of the jurisdiction?

This is not applicable in France.


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 2.8 What restrictions (if any) apply to the transfer or disposal
policy)? of natural gas development rights or interests?

Mines or Deposits Belonging to the State: We would note that mining titles in France are provided on an
In accordance with the Mining Code and with its articles 64 to 67, the intuitae personae basis and are only transferable with the approval
mines or deposits belonging to the State may be operated, whether of the State.
directly or by State-run entities or by any other method. The State may
also allocate new mining titles on these mines or deposits. 2.9 Are participants obliged to provide any security or
The mines which are not operated and which belong to the State may guarantees in relation to natural gas development?
be replaced, by order of both the Minister of Finance and the Minister
responsible for mines, where the deposit is open for research. See answer to question 2.2.
The administrative bodies, which are responsible for the
management of mines that are operated by the State are subject to 2.10 Can rights to develop natural gas reserves granted to a
the same rights and obligations as private holders of concessions. participant be pledged for security, or booked for
accounting purposes under domestic law?
Participation of the State in Gaz de France:
“Gaz de France” (hereafter referred to as “GDF”) was created in Article 36 of the Mining Code provides that a concession may not
1946 following the adoption of a Law dated 8 April 1946 on be mortgaged.
nationalisation of electricity and gas. GDF was a public utility
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However, it is also provided that mines are immovable property, as end of the operation. These regulations are taken up in article 91 of
well as buildings for the operation of the mines, machines, wells, the Mining Code, which provides for the procedure for the
galleries and other works carried out on site. The machines and cessation of mining works.
tools which are used for the mining are fixtures. Shares or interests The procedure for the cessation of works provides for a certain
in a company or business for the operations of mines are movable number of declarations.
property. Raw materials that are mined, supplies and other movable
The operator or the entity carrying out the research must, in
objects are movable property (article 24 of the Mining Code).
France

particular, make known the measures that it envisages to put into


In the absence of any express prohibition provided for by the text, operation in order to preserve the interests referred to in article 79
it should be possible for these elements to be the subject of of the Mining Code (safety of the personnel, safety and public
guarantees/sureties. health, conservation of the surrounding area and the environment),
in order to stop or prevent the risk of disorder created by its
2.11 In addition to those rights/authorisations required to activities and in order to, if necessary, manage the possibility of the
explore for and produce natural gas, what other principal resumption of operations.
Government authorisations are required to develop natural In view of the declaration for the cessation of works, the
gas reserves (e.g. environmental, occupational health and administrative authority prescribes, if necessary, the measures to be
safety) and from whom are these authorisations to be
carried out and the methods of termination, which have been
obtained?
omitted or inadequately provided for and the time for execution.
Automatic execution is provided for as and when necessary.
In accordance with article 79 of the Mining Code, “the research
works or operation of a mine must comply with the constraints and Following the execution of measures provided for or recommended,
the obligations relating to the safety and health of the personnel, the administration gives official notice to the operator. This
safety and public health, to the essential characteristics of the formality brings an end to the policing of the mines provided for in
surrounding area, land or at sea, to the solidity of public and the Mining Code.
private buildings, to the conservation of ways of communication,
the mine and other mines, and more generally, to the interests of
3 Import / Export of Natural Gas (including
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, LNG)
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 3.1 Outline any regulatory requirements, or specific terms,
protection of nature, as well as to the agricultural interests of the limitations or rules applying in respect of cross-border
sites and the places affected by the works and by the installations sales or deliveries of natural gas (including LNG).
relating to the operation”.
2.11.1 The control and monitoring of the administration It is to be noted that since the Law dated 3 January 2003, the
monopolies of importation and exportation of gas have been
In accordance with the provisions of article 77 of the Mining Code,
removed (article 62 of the aforesaid law).
the administration is invested with the task of controlling and
monitoring mining activities. Transparency and Regulation:
The Prefect (“Préfet”) is responsible for policing the mines. He is Historically constructed under the authority of public bodies (the
under the authority of the Minister responsible for the mines and is State and local authorities), the works of transportation and
assisted by the regional director for industry, research and the distribution of natural gas, as well as the liquefied natural gas
environment. installations, constitute the key for the opening up to competition of
the gas market. Indeed, competition may only be effected on the
In the exercise of its authority, the Prefect possesses a right of
markets if the operators and the eligible consumers are able to
injunction and a right of prohibition.
access these networks, works and installations in conditions that are
More specifically, the works that are undertaken by the prospector fair and non-discriminatory.
or the operator may be submitted to authorisation.
In this context, the ERC is the guarantor of access to the networks
2.11.2 The regulations governing research works and the operation and installations of natural gas. It monitors the proper functioning
of mines and the development of the networks and infrastructures for natural
Article 83 of the Mining Code provides that the commencement of gas and the installations for liquefied natural gas and it thus assures
research works and the operation of mines are subject to a monitoring of the organised markets for natural gas, as well as
administrative authorisation, granted following public enquiry and exchanges at the frontiers for natural gas. Thus, decisions regarding
consultation with the local authorities that are concerned by the tariffs are taken jointly by the ministers of the economy and energy
works. upon the proposal of the ERC, and notably upon the request of the
The regime for this authorisation is determined by decree n°95-696 operators, for the tariffs for the use of the transportation and
dated 9 May 1995 relating to the commencement of mining works distribution networks of gas and the installations of liquefied
and to the policing of mines. 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
2.12 Is there any legislation or framework relating to the natural gas and methane terminals and it ensures that the tariffs for
abandonment or decommissioning of physical structures the use of infrastructures are applied in a transparent and non-
used in natural gas development? If so, what are the
discriminatory manner for all users, including as regards the
principal features/requirements of the legislation?
traditional suppliers.
The order for mining works is governed by the Law n°99-245, Public Service Obligations:
dated 30 March 1999, relating to liability as regards damage caused The Law dated 3 January 2003 puts in place a certain number of
by the mining operation and the prevention of mining risks after the public service obligations which are imposed:
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on the operators of the transportation and distribution to the type of project in question, this may be an authorisation given
networks of natural gas and to the operators of the by way of ministerial order (Minister of Energy) or by order of a
installations of liquefied natural gas referred to in article 2 of Prefect (or “Préfet”) or pursuant to a simplified procedure of
the aforementioned law; authorisation given by a Prefect.
on the suppliers and the distributors referred to in articles 3 In addition, there are authorisations to be obtained as far as the
and 5; and
environment is concerned in application of articles L 511-1 et seq.
on the holders of concessions for underground storage of

France
of the Environment Code on installations that are classified for the
natural gas regulated by the Mining Code. protection of the environment.
These obligations are, in particular, upon:
the security of persons and upstream installations for the
4.3 In general, how does an entity obtain the necessary land
linking-up to ultimate customers;
(or other) rights to construct natural gas transportation
the continuity in the supply of gas; pipelines or associated infrastructure? Do Government
the security of supply; authorities have any powers of compulsory acquisition to
facilitate land access?
the quality and the price of products and services provided;
the protection of the environment;
As indicated in questions 4.1 and 4.2 above, the construction of the
energy efficiency; and pipelines for the transportation of natural gas is subject to
the balanced development of the territory. authorisation.
The criteria for the granting of authorisations are fixed in an
4 Transportation 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
4.1 Outline broadly the ownership, organisational and environment, the criteria also concern the compatibility of the
regulatory framework in relation to transportation pipelines projects with the principles and the missions of a public service.
and associated infrastructure (such as natural gas
processing and storage facilities). The owners of land which is crossed by a gas transportation or
distribution pipeline must refrain from any action which would
Until very recently, the transportation of natural gas in France was harm the construction, the proper usage and the maintenance of the
organised in the form of a concession. A new legal regime of pipeline, in accordance with the conditions fixed by the texts which
authorisation for the transportation of natural gas has been have been produced in application of the Law dated 15 June 1906
implemented in the context of the new gas legislation, and namely, concerning the distribution of energy and article 35 of the Law
the Law dated 3 January 2003. The authorisation for transportation dated 8 April 1946 referred to above.
is henceforth granted in the conditions fixed by Decree n°2003-944 In the event of a threat to the safety of personnel, to the environment
dated 3 October 2003. or, more generally, in the event of non-compliance with the
There are today two managers of the transportation networks for conditions imposed by the Law dated 3 January 2003, the State,
natural gas in France: “GRT Gaz” (GDF Suez group) and “Total through its representative, has the right to issue an injunction
Infrastructures Gaz France” (“TIGF”). The management of a gas against the operator or the entity responsible for the building works,
transportation network must be carried out by a legal entity, which or, in the event of urgency, a power to suspend operations.
is separate to the entities which ensure the production or the supply
of gas. The transportation companies, which are the result of this 4.4 How is access to natural gas transportation pipelines and
legal separation, may carry out directly in France any gas storage associated infrastructure organised?
activity. The scope of the activities of these companies is
determined in accordance with the by-laws of the companies (Law Access of third parties to the gas transportation networks is
dated 9 August 2004). guaranteed by the Law dated 3 January 2003. Articles 3 and 5 of
As mentioned under section 3 above, and as far as tariffs are this law specify the persons that are entitled to access to works for
concerned, decisions are taken jointly by the ministers of finance the transportation of natural gas, namely and principally, eligible
and energy, upon proposals of the ERC, and notably at the request clients and suppliers.
of the operators, for the tariffs for the use of the gas transportation Any transporter of natural gas, any distributor of natural gas and
and distribution networks and for the use of the natural liquefied gas any operator of liquefied natural gas installations may negotiate
installations (article 7 of the Law dated 3 January 2003). freely with the supplier(s) its choice of contract for the supply of
The current tariffs for the use of the gas transportation and natural gas and electricity necessary for the operation of its
distribution networks came into force on 1st January 2009, in installations, in accordance with competitive procedures, which are
application of the Order dated 6 October 2008, and thereby non-discriminatory and transparent, such as, notably, public
endorsing the tariff proposals of the ERC of 10 July 2008. consultations or recourse to organised markets.

4.2 What Governmental authorisations (including any 4.5 To what degree are natural gas transportation pipelines
applicable environmental authorisations) are required to integrated or interconnected, and how is co-operation
construct and operate natural gas transportation pipelines between different transportation systems established and
and associated infrastructure? regulated?

The construction and operation of natural gas transportation The transportation of natural gas is effected by gas pipelines. Gas
pipelines are subject to a procedure of authorisation, together with may also be transported by gas tankers as regards liquefied natural
specifications, as provided for by the Law dated 3 January 2003 and gas (“LNG”).
by the Decree, dated 3 October 2003 referred to above. According 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 the Law dated 7 December 2006), and notably, articles 13 to 15, the
network in the north of the country, and “Total Infrastructures Gaz management of a network for the distribution of natural gas which
France” (“TIGF”) manages the network in the south west of the supplies more than 100,000 clients on the mainland is assured by
country. entities that are separate to those that carry out activities of
production or the supply of natural gas.
4.6 Outline any third-party access regime/rights in respect of The Law dated 7 December 2006 has therefore (and as compared to
France

natural gas transportation and associated infrastructure. the Law dated 9 August 2004) reinforced the idea of the legal
For example, can the regulator or a new customer wishing separation of activities providing not for a service or a separate
to transport natural gas compel or require the management but distinct legal entities in order to assure the
operator/owner of a natural gas transportation pipeline or management activities of the distribution networks and the
associated infrastructure to grant capacity or expand its production activities or the supply of natural gas.
facilities in order to accommodate the new customer? If
so, how are the costs (including costs of interconnection, Today, there are more than 9,200 (out of a little more than 36,000)
capacity reservation or facility expansions) allocated? French towns supplied with natural gas, which represents only a
fairly small proportion of the total number of towns in France but
Access of third parties to the gas transportation networks is which allows 77% of the French population to have access to gas.
guaranteed by the Law dated 3 January 2003. However, it may be Nearly all the towns with more than 10,000 inhabitants are supplied
limited or indeed, prevented, if the infrastructures lack adequate with gas. The distribution networks for natural gas represent a total
available capacity. Any refusal to conclude a contract of access to length of 193,700 km, which places them in second place in Europe
a method of transportation or distribution of natural gas or an (the first place being held by Germany). They are operated through
installation of liquefied natural gas, including the installations concession contracts binding managers to local bodies, by GRDF (a
providing ancillary services, must set out the reasons for the refusal subsidiary of GDF Suez), the twenty-two local distribution
and this is notified to the applicant and to the ERC. companies (located for the most part in the South West and in the
East) and by Antargaz (a company which has been recently
The development of a competitive gas market therefore necessitates
accredited) (long-term indicative plan for investments in the gas
that all the market players can have access, in transparent and non-
sector, Period 2009-2020, Ministry of Ecology, Energy, Sustained
discriminatory conditions, to detailed information regarding capacity.
Development and for the Development of the Territory;
Thus, the ERC has asked operators, through its decision of 28 May
http://www.developpementdurable.gouv.fr/energie/politique/pipgaz
2003, to publish on their internet site, information relating to their
2009.pdf), that is to say, 24 managers of the distribution networks
different capacities. This information is published with respect to all
for natural gas, of differing size, with GRDF responsible for
entry and exit capacities and in relation to links between balancing
distribution to more than 96% of the market.
zones.
The Law dated 7 December 2006 specifies the missions of the
The ERC has also asked operators to produce a general note
manager of the distribution network.
describing the method of calculation for the maximum capacities that
may be sold and to provide the detail of this method of calculation, as The Decree 2008-740 dated 28 July 2008 (notably taken in
well as the calculations leading to the published results. application of article 36 of the Law dated 7 December 2006), now
gives the possibility to the licensor authorities to make a financial
Finally, the ERC has asked operators to publish their forecast
contribution to the managers of public distribution networks, to
programme, for the following six-month period, reduction in
render profitable the operations which increase the density of
capacity due to maintenance works, with at least a monthly update
existing networks and the creation of new public distribution
(http://www.cre.fr/fr/acces_aux_reseaux/infrastructures_gazieres/tr
networks.
ansport; 30 December 2009).
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
4.7 Are parties free to agree the terms upon which natural gas from transportation networks of natural gas because they are cut-off
is to be transported or are the terms (including costs/tariffs
from their surroundings, the development of the public distribution
which may be charged) regulated?
network of propane gas may constitute a veritable alternative. The
Law of 3 January 2003 confirms the possibility given in 1988 to
See answer to question 4.4 paragraph 2.
local bodies and to their public institutions of cooperation to have
In accordance with article 7 of the Law dated 3 January 2003, the new businesses for the distribution of propane by the public
decisions regarding the tariffs for the use of the transportation network, after a period of public consultation, subject to obtaining
networks are taken jointly by the Ministers responsible for the the approval of the Minister for Energy.
economy and for the energy, on the basis of the Energy Regulatory
Perspectives for the development of distribution networks: The
Commission. A notice, an order and a decree, all dated 27 May
development of the distribution networks is largely complete. The
2005, complete the provisions of the Law dated 3 January 2003
enactment of the Decree of 28 July 2008 should encourage the
concerning the tariffs of use of the natural gas transportation
creation of new concessions. However, this potential remains fairly
network and their rules.
limited. The essential interest is to be found today in increasing the
See also answer to question 4.1 concerning tariffs. 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,
5 Transmission / Distribution Period 2009-2020, Ministry of Ecology, Energy, Sustained
Development and the Development of the Territory,
5.1 Outline broadly the ownership, organisational and 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 /
regulatory framework in relation to the natural gas politique/pipgaz_2009.pdf).
transmission/distribution network.

In accordance with the Law dated 9 August 2004 (as modified by


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5.2 What Governmental authorisations (including any 5.4 Can the regulator require a distributor to grant capacity or
applicable environmental authorisations) are required to expand its system in order to accommodate new
operate a distribution network? customers?

Article 15 of the Law dated 3 January 2003 specifies, notably, that In the context of the general monitoring and proper functioning of
the public service of the distribution of natural gas is organised, by the natural gas market, the ERC examines refusals regarding access
the State and the local authorities or by their public institutions of and the contracts or agreements for access to the transportation

France
cooperation. works and distribution of natural gas, the installations for the
These provisions have been completed and detailed by the Law storage of natural gas and the installations of liquefied natural gas.
dated 9 August 2004 and by the policy Law n°2005-781 dated 13
July 2005, which sets the principal guidelines for energy policy. 5.5 What fees are charged for accessing the distribution
The gas “distributors” carry out their activities in accordance with network, and are these fees regulated?
conditions fixed by their authorisation of supply, as well as by the
specifications in the concessions or the service regulations of local In accordance with article 7 of the Law dated 3 January 2003, and
public bodies referred to in article L.2224-31 of the General Local as for the tariffs for the use of the transportation networks, the
Authorities Code. decisions relating to the tariffs for the distribution of natural gas are
Article L.2224-3 of the abovementioned Code recalls that the local taken jointly by the Minister responsible for the economy and the
authorities or, if necessary, their public institutions of cooperation, Minister responsible for the energy, following a proposal of the
negotiate and conclude concession contracts and monitor the due ERC, and notably, at the request of the operators. A decree dated 11
fulfilment of the public service mission fixed, as regards the January 2005 and an order dated 14 January 2005 complete the Law
granting authorities, by the specifications of these concessions. of 2003 concerning the tariffs for the use of public distribution
networks, as well as the rules applying to these tariffs.
The granting authorities assure, in particular, the control of the
public distribution networks for gas. The following third tariffs for the use of public distribution
networks for natural gas have entered into force:
In accordance with the provisions of article 36 of the Law n°46-628
for GRDF: on 1st July 2008, in application of the Order
dated 8 April 1946, on the nationalisation of electricity and gas, the
dated 2 June 2008, which approved the tariff proposal of the
authorities and institutions referred to above may also be Energy Regulatory Commission dated 28 February 2008;
responsible for the works for the development of public networks and
for the distribution of electricity and gas.
for the local distribution company: on 1st July 2009, in
The local authorities, their institutions of cooperation between such application of the Order dated 24 June 2009, approving the
local authorities, or their syndicates which do not possess a public tariff proposal of the ERC dated 2 April 2009.
distribution network for natural gas, or in relation to which the
works are not in the process of being carried out, may grant the
5.6 Are there any restrictions or limitations in relation to
public distribution of gas to any company duly accredited for these acquiring an interest in a gas utility, or the transfer of
purposes by the Minister responsible for energy, in the conditions assets forming part of the distribution network (whether
specified in article 25-1 of the Law n°2003-8 dated 3 January 2003 directly or indirectly)?
referred to above (modified by the Law 13 July 2005). These local
authorities and these institutions may create a public body accepted See answer to question 5.2.
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”). 6 Natural Gas Trading
The acceptance goes also for the firms that wish to distribute natural
gas or any other combustible gas through a public distribution 6.1 Outline broadly the ownership, organisational and
network. The approval is delivered according to technical, regulatory framework in relation to natural gas trading.
economical and financial capacities of the business. The conditions Please include details of current major initiatives or
and methods for the issue, the maintenance, the withdrawal and the policies of the Government or regulator (if any) relating to
publicity of the approval are specified by a Decree issued in the natural gas trading.
Council of State n°2007-684 dated 4 May 2007.
The activity of the sale of gas to end consumers, which concerns the
interface between the distributors and end consumers is open to
5.3 How is access to the natural gas distribution network competition. It consists either in the retail sale of gas which is
organised?
purchased wholesale, namely within the context of a long-term
supply contract, of between 15 to 20 years, or in the context of a
See answer to question 5.2.
short-term agreement.
The clients that are eligible (article 3 of the Law dated 3 January
The sale of gas may be completed by the supply of services linked
2003), have a right of access to the works for the distribution of
to energy (for example, maintenance, advice regarding the control
natural gas.
of consumption) (http://www.developpement-durable.gouv.fr/
Any refusal to conclude a contract for access to a distribution energie/gaz/fle_gaz.htm).
network for natural gas, including the installations which provide
Retail trade:
ancillary services, must provide reasons and be addressed to the
applicant and to the ERC. 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. In addition, there is a possibility of extension in relation to the three


Contracts with a market price (proposed by historical suppliers terminals.
and alternative suppliers). The possibility to choose this Potential sites for the installation of a new methane terminal are being
contract is subject to the exercise by the clients of its eligibility. studied today by several operators. The criteria for qualification are
The market prices are freely fixed by the suppliers. both technical (notably as regards the capacity of reception of a
There are two types of regulated tariffs: subscription tariffs; and public methane gas tanker, to the link-up to the principal transportation
distribution tariffs.
France

network, to the proximity of a high tension electrical network) and


Wholesale trade: financial (particularly as regards openings on the national or regional
markets, to the part reserved for access of third parties) (“Plan
As specified in the reply to question 6.1, France is supplied for the
Indicatif Pluriannuel des Investissements dans le secteur du gaz
most part on the basis of long-term contracts (between 15 and 25
(Période 2006 - 2015)”; Ministry of the Economy, Finance, and
years).
Industry; http://www.energie.minefi.gouv.fr/ energie/gaz/pdf/rapport-
The price of gas in the context of long-term contracts evolves PIP-gaz.pdf).
principally in accordance with the price of oil products (domestic fuel
and heavy fuel oil), with a delay of between three to six months.
7.2 What Governmental authorisations are required to construct
Exchanges on the wholesale market are operated at the Gas Exchange
and operate LNG facilities?
Points (“GEP”), virtual points at the level of each tariff area where the
following are operated:
In order to operate in the liquefied natural gas sector, it is necessary to
the exchange of gas between suppliers; and follow the authorisation procedure provided for by the Law dated 3
the gas supply for the network administrators in view of the January 2003.
management of the network, for the balance of daily statements
It is also necessary to obtain a planning permit, in accordance with the
for the senders, for the functioning of gas compressor; the
constitution of the stock on its way for new installations. Planning Code. Of course, this concerns an installation which is
classified for the protection of the environment. Accordingly, all the
The transactions at the GEP are operated on a day-by-day basis or are
provisions relating to the environment must be complied with and the
subject to long-term contracts.
appropriate authorisations must be obtained.
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
7.3 Is there any regulation of the price or terms of service in the
GEP South and South West.
LNG sector?
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. In accordance with article 7 of the Law dated 3 January 2003, the
tariffs and commercial conditions of use of the liquefied natural gas
6.2 What range of natural gas commodities can be traded? For installations are drawn up jointly by the Ministers responsible for the
example, can only “bundled” products (i.e., the natural economy and for energy, upon the recommendation of the ERC
gas commodity and the distribution thereof) be traded? depending on public criteria which are objective and non-
discriminatory, bearing in mind the characteristics of the service
Natural gas commodities can be traded subject to administrative rendered and costs linked to this service.
authorisations. We are not aware of any legal restrictions A decree dated 21 September 2004, completes the provisions of the
concerning trading of unbundled products. Law dated 3 January 2003, concerning the tariffs of the use of
transportation networks and installations of liquefied natural gas.
7 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
7.1 Outline broadly the ownership, organisational and the economy and energy.
regulatory framework in relation to LNG facilities.
On 24 July 2009, the ERC proposed a new set of tariffs for the use of
As far as liquefied natural gas (“LNG”) is concerned, we would methane terminals of Fos Cavaou, Fos Tonkin and Montoir (which
mention that since 2009 (the year when the first methane terminal appeared in the Order of 20 October 2009, approving the tariffs for the
became operational), France has a new operational methane Terminal, use of methane terminals).
“Fos-Cavaou” with a capacity of 8.25 Gm3 per year, belonging to the These new tariffs applied for a period of three (3) years as from 1st
company, “STMFC”, which was created following the conclusion of January 2010 for the Fos Tonkin and Montoir Terminals and as
a partnership between Total (30%) and Elengy (“Elengy” is a Gaz de from the date of its commercial being online as regards the Fos
France - Suez group company, created on 31 December 2008) (70%). Cavaou terminal (http://www.cre.fr/fr/acces_aux_reseaux/
The operator is Elengy. infrastructures_gazieres/terminaux_methaniers; up to date as at 16
Two other methane terminals are operational in France, “Fos Tonkin” December 2009).
and “Montoir”, which have, respectively, a capacity of 7 Gm3 per year
and 10 Gm3 per year, belonging to and operated by Elengy. 8 Competition
The operation of the methane terminal of “Fos Tonkin” is initially
planned to end in 2014. Elengy’s decision regarding an extension in
8.1 Which Governmental authority or authorities are
its activity is not yet known publically, and studies are currently in
responsible for the regulation of competition aspects, or
process. anti-competitive practices, in the natural gas sector?
At Montoir, renovation and adaptation of the terminal will be
necessary in order to ensure its operation until 2021, at a cost of Created by the Law on the modernisation of the economy n°2008-
around Euros 110 millions. 776 dated 4 August 2008, the Competition Authority (the
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“Authority”) replaces the Competition Council which had been a dominant position on an internal market or with regard to a
established by the Order of 1st December 1986. This Order had substantial part of such market is prohibited in accordance with the
been codified in 2000 in the fourth section of the Commercial Code conditions provided for in article L 420-1. Such abuse may notably
The Competition Council had itself replaced the Competition consist in a refusal of sale, related sales, or sales subject to
Commission (instigated in 1977), which replaced the Technical discriminatory conditions, as well in the breach of established
Commission on Cartels and Dominant Positions. Articles 95, 96 commercial relations, for the sole reason that the partner refuses to
and 97 of the Law on the modernisation of the economy n°2008- submit to unjustified commercial conditions.

France
776 dated 4 August 2008 focus on this new Authority and, in this In addition, the abusive exploitation by a company or by a group of
regard, amend the aforementioned provisions of the Commercial companies of the state of financial dependency in which a client
Code. company or supplier finds itself is prohibited when such
This transformation, which aimed to close the gap between the exploitation is likely to affect the functioning or the structure of the
French system for regulating competition and the European norm, competition. Such abuse may consist in a refusal of sale, in related
gathers together responsibilities and means within a single sales, in discriminatory practices referred to in article L 442-6 or
independent authority (http://www.autoritedelaconcurrence.fr/user/ product range agreements.”
standard.php?id_rub=273).
The Authority is therefore an independent administrative authority, 8.3 What power or authority does the regulator have to
which is specialised in the monitoring of anti-competitive practices, preclude or take action in relation to anti-competitive
expertise in the operation of markets and the control of merger practices?
operations. At the service of the consumer, it has as an objective to
monitor the free operation of market forces and help with the The dispute jurisdiction of the Authority (http://www.autorited
competitive operation of the markets at European and international elaconcurrence.fr/user/standard.php?id_rub=273):
levels. When the financial players infringe competition law the matter may
The Law on the modernisation of the economy transfers to the new be brought before the Authority, or the latter may assume
Authority the powers of the former Competition Council and jurisdiction to deal with the matter upon its own initiative. It will
accords new powers: the Competition Authority replaces the examine the facts and, at the end of a process where each side is
Minister of the Economy as regards the monitoring of merger heard, it will take, if necessary, all the steps necessary for the
operations. In addition, the Competition Authority is henceforth practices in question to be stopped.
able to itself carry out investigations and possesses the possibility to At the end of the process, several decisions are possible:
decide itself upon recommendations as regards competition
decision of non-suit (and there is therefore no need for the
questions and to issue recommendations to the Minister who is process to continue);
responsible for the sector, which aim to improve the competitive
rejection (on the basis that there are inadequate supporting
functioning of the markets.
documents);
Order n°2008-1161 dated 13 November 2008, which modernises pronouncement of conservatory measures: (faced with an
the regulation of competition, confers upon the Competition emergency situation, before a decision on the merits has been
Authority reinforced powers. taken - in the event of a serious and immediate infringement
as regards a financial sector or as regards a company);
8.2 To what criteria does the regulator have regard in financial sanction (up to 10% of the world-wide turnover of
determining whether conduct is anti-competitive? the company);
injunction (to cease an anti-competitive practice or to comply
Anti-competitive practices may take different forms. They are with competition law);
generally classified into two groups: cartels on the one hand; and decision concerning non compliance with an injunction
abuse of dominant position on the other hand. (possibly accompanied by fines);
They are defined in articles L 420-1 and L 420-2 of the Commercial injunction against publishing (of the sanction in the media);
Code. and
“Concerted actions, agreements, express or implied cartels or decisions accepting undertakings: an alternative to litigation,
the process of undertakings enables the company which has
coalitions are prohibited, even when through the direct or indirect
doubts to present to the Authority undertakings which are
intermediary of a company of a group located outside France, when such as to put an end to these preoccupations, and before any
they tend to: notification of contentions.
1) Restrict access to the market or the free operation of market Consulting Role:
forces by other companies.
The opinions and recommendations rendered at the initiative of
2) Hinder the fixing of prices through the free operation of
market forces by favouring artificially their increase or their the Authority
decrease. Without it being necessary for a matter to be brought before it, the
3) Limit or control the production, outlets, investments or Authority can render opinions upon its own initiative with regard to
technical progress. any questions of competition and to issue general recommendations
4) Share out the markets or sources of supply.” 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.
There are so-called “horizontal” cartels, which involve several
competing firms for the same type of product or service and so- This possibility is crucial to the extent that it enables the Authority
called “vertical” cartels, which are concluded between operators to exercise an advisory and warning role, well before the role of a
situated at different levels of the economic chain as, for example, sanctioning authority which is also its role.
between suppliers and distributors. Opinions rendered on matters brought before it
“The abusive exploitation by a company or a group of companies of Compulsory referral to the Authority

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The Authority must be consulted when a draft legislative or at the end of this phase, the Authority commences phase 2, in order
regulatory text envisages regulating prices or restricting to proceed with an in-depth analysis of the operation. In particular,
competition (articles L.410-2 and L.462-2 of the Commercial the Authority will examine whether the operation is such as to
Code). The Authority renders a reasoned decision to public bodies, impede competition and notably, through the creation, or the
in which it formulates its observations on the proposed text and strengthening of a dominant position or through the creation or the
suggests, if need be, alternative solutions which are more strengthening of a purchase power which would place the suppliers
compatible with competition. in a situation of economic dependency. The Authority also
France

Option referral to the Authority examines whether the operation is justified by gains in efficiency
which compensate for prejudicial effects that may possibly be noted
Upon the request of public bodies (such as the government and
as far as competition is concerned.
Parliament), local authorities, jurisdictions, or trade union
organisations, consumers or professionals, the Competition At the end of this examination (normally 65 business days as from
Authority may be called upon to render opinions on any issue of the commencement of phase 2), the Authority renders a collegiate
competition. decision which may either authorise the operation without any
specific conditions, or authorise it subject to the provision of
The sectorial authorities such as the Audiovisual High Council, the
undertakings, or prohibit it.
Energy Regulatory Commission and the Authority for the
regulation of electronic communications and posts, also have the The parties, as well as interested third parties have two months
possibility of referring matters before the Authority. within which to seek an annulment of the decision or an amendment
of the decision before the Council of State.
Following an examination of the competition situation of the market
in question, the Competition Authority proposes any measure that is On an exceptional basis, the Minister of the Economy may pass
helpful as far as strengthening competition is concerned over the decision of the Authority, adopting a decision on the basis
(http://www.autoritedelaconcurrence.fr/user/standard.php?id_rub=29 of reasons of public interest (http://www.autoritedela
4). concurrence.fr/user/standard.php?id_rub=273).
Leniency:
It should also be noted that there is a policy of leniency. Leniency 9 Foreign Investment and International
is a tool which enables national competition authorities to have Obligations
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 9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
cooperate in the proceedings that are instigated with regard to such
development, transportation or associated infrastructure,
cartels.
distribution or other) by foreign companies?

8.4 Does the regulator (or any other Government authority) 9.1.1 As regards development
have the power to approve/disapprove mergers or other As far as development is concerned, the law does not impose any
changes in control over businesses in the natural gas
specific conditions of nationality, and thus foreigners are likely to
sector, or proposed acquisitions of development assets,
transportation or associated infrastructure or distribution
obtain an exclusive research permit or a concession.
assets? If so, what criteria and procedures are applied? 9.1.2 As regards access to the networks of natural gas
How long does it typically take to obtain a decision The Law dated 3 January 2003 has opened up the French market of
approving or disapproving the transaction?
natural gas to competition and offers, in this context, a right of
access to the networks of natural gas to eligible clients and
See answer to question 8.3. suppliers, as defined in articles 3 and 5.
In addition, and as regards merger operations (a merger operation In light of the context and the objectives of the law, it appears that
occurs when two companies that were formerly independent merge, eligible clients are necessarily French. On the other hand, all
when they create a common company, or when a company takes persons that are domiciled in the territory of a Member State of the
control of one of several other companies), there are thresholds of European Union or, in the context of international agreements, on
turnover which trigger the obligation to notify the operation to the the territory of another State may be suppliers provided that the
Authority (article L 430-2 of the Commercial Code). person in question is the holder of an authorisation delivered by the
Once the operation has been notified to the Authority, the latter Minister responsible for energy.
proceeds with an examination of the operation, within a delay
which will depend upon the nature of the operation and the
9.2 To what extent is regulatory policy in respect of the natural
problems that it comes across during the course of the examination
gas sector influenced or affected by international treaties
(and for further details regarding the time periods within which the
or other multinational arrangements?
Authority reaches a decision, reference should be made to articles
L. 430-5 and L 430-7 of the Commercial Code).
The legislation applicable to the gas sector is widely influenced by
In the event that no particular competition problems are identified community undertakings given by France. Thus, recent laws,
or if the undertakings that are presented by the parties rectify the which have provided a new legal context for the natural gas market,
problems that have been noted, the operation may give rise to an have been enacted in order to transpose European Directives into
authorisation with or without undertakings at the end of a quick French law.
examination, called, phase 1. The decision is rendered within 25
On an environmental point of view (because of its impact in the gas
business days as from the date of receipt of a complete file of
legislation and operation), France is also of course influenced by its
notification.
international undertakings such as the Kyoto Protocol as well as its
If, on the other hand, a serious infringement of competition remains European undertakings.

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10 Dispute Resolution 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;
10.1 Provide a brief overview of compulsory dispute resolution and/or the Convention on the Settlement of Investment
procedures (statutory or otherwise) applying to the natural Disputes between States and Nationals of Other States
gas sector (if any), including procedures applying in the (“ICSID”)?
context of disputes between the applicable Government

France
authority/regulator and: participants in relation to natural France has ratified these two conventions.
gas development; transportation pipeline and associated
infrastructure owners or users in relation to the
transportation, processing or storage of natural gas; and 10.3 Is there any special difficulty (whether as a matter of law
distribution network owners or users in relation to the or practice) in litigating, or seeking to enforce judgments
distribution/transmission of natural gas. or awards, against Government authorities or State organs
(including any immunity)?
10.1.1 The settlement of disputes by the Energy Regulatory
Commission This is not applicable in France.
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 10.4 Have there been instances in the natural gas sector when
relating to access to transportation works, or works concerning the foreign corporations have successfully obtained judgments
distribution of natural gas and to liquefied natural gas installations, or awards against Government authorities or State organs
or in relation to the storage of natural gas. After an examination pursuant to litigation before domestic courts?
during which the parties are duly heard, and after possibly an
enquiry, the Commission reaches a decision within a time period of We are not aware of any instances of this kind.
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
11 Updates
Commission may be appealed before the Court of Appeal of Paris,
which may order the suspension of execution of a sentence. 11.1 Please provide, in no more than 300 words, a summary of
10.1.2 The settlement of disputes by a judge any new cases, trends and developments in Gas
Regulation Law in France.
Chapter X of the Mining Code provides for the offences and
penalties in mining matters. In view of the mixed character of
We are not aware of new cases in Gas Regulation Law in France.
mining legislation, certain questions fall within the jurisdiction of
administrative judges, whilst others fall within the competence of
civil judges.

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Sophie da Cunha Thierry Lauriol


JeantetAssociés AARPI JeantetAssociés AARPI
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France France

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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 Thierry LAURIOL, admitted in 1991 to the Paris Bar, with a
the French law firm Jeantet Associés AARPI since 2003 and specialisation at the Bar in Economic Law and International
member of the Energy and Natural Resources Department headed Relations Law. University of Paris-Sceaux : PhD in 1989 with
up by Thierry Lauriol. Areas of practice include international trade distinction “très honourable” (Henri Capitant award). Joined Jeantet
and contracts, arbitration, energy and natural resources (oil and gas, Associés AARPI in 1992, founder and head of the Energy and
electricity, renewable energy sources and mining), as well as African Natural Resources Department. Previously spent five years with
business law (OHABLA). Languages: French and English. 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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2 Development of Natural Gas 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
2.1 Outline broadly the legal/statutory and organisational 20 to 30 years is common.
framework for the exploration and production
(“development”) of natural gas reserves including: Both licences have to be granted in case the applicant satisfies the
Germany

principal legislation; in whom the State’s mineral rights to requirements for exploration resp. production. In order to ensure
natural gas are vested; Government authority or authorities compliance with legal conditions (e.g. environmental, safety) the
responsible for the regulation of natural gas development; authority may couple the licence with auxiliary conditions which
and current major initiatives or policies of the Government need to be fulfilled by the applicant.
(if any) in relation to natural gas development.
No separate licence is issued for the appraisal of natural gas. As
long as the gas quality or the extension of resources is examined
Companies willing to explore or produce natural gas on Germany’s
without extraction of the gas the permit is incorporated in the
territory or on Germany’s continental shelf have to seek prior
exploration licence. If extraction is necessary the appraisal is
authorisation from the competent national authority. The
subject to the production licence.
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 2.4 To what extent, if any, does the State have an ownership
States. If gas development takes place on the continental shelf an interest, or seek to participate, in the development of
allowance by the Federal Office for Navigation and Hydrography natural gas reserves (whether as a matter of law or
policy)?
might be needed in addition.
The BBergG has not been subject to major changes lately and there
In Germany, the State does not have any ownership shares to the gas
are still no political tendencies pointing towards legal changes in
developed nor is it - apart from the granting of licences - involved
regard to the gas development.
in the development process. The production licence grants the
applicant the exclusive right to acquire full ownership.
2.2 How are the State’s mineral rights to develop natural gas
reserves transferred to investors or companies
2.5 How does the State derive value from natural gas
(“participants”) (e.g. licence, concession, service contract,
development (e.g. royalty, share of production, taxes)?
contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
under domestic law? 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
The right to develop gas is granted to the production company with located. The charge is calculated by the square kilometres explored
the issuance of the licence mentioned in question 2.1. The licence and increases each year in order to intensify and accelerate the
is an administrative act; it might contain conditions which have to exploration process. Expenditures for the exploration can be
be complied with during the development process and might be credited against the field charge.
withdrawn in case the requirements are not (anymore) met. The The holders of production licences have to pay a mineral royalty for
licensing process is normally purely administrative and does not the gas produced. According to Sec. 31 BBergG the royalty
establish any contractual relationships. amounts to 10% of the market price of the developed resource, but
the Federal State may determine a different mineral royalty.
2.3 If different authorisations are issued in respect of different Further taxes may arise, for example under the Energy Tax Law
stages of development (e.g., exploration appraisal or (Energiesteuergesetz) when the gas is delivered to purchasers.
production arrangements), please specify those
authorisations and briefly summarise the most important
(standard) terms (such as term/duration, scope of rights, 2.6 Are there any restrictions on the export of production?
expenditure obligations).
There are no restrictions on the export of natural gas.
Different licences are granted for exploration and production of
natural gas: According to Sec. 7 BBergG an exploration licence is 2.7 Are there any currency exchange restrictions, or
required which grants the exclusive right to explore specified restrictions on the transfer of funds derived from
resources within a certain area (“Licence Area”). The term of such production out of the jurisdiction?
authorisation is subject to the authority’s discretion but must not
initially exceed five years. It might, however, subsequently be There are currently no exchange restrictions or restrictions on the
extended for another three years. The licence includes the right to transfer of funds derived out of Germany.
construct facilities necessary for the duly exploration of the area.
Prior to their operation, however, the applicant has to submit an
2.8 What restrictions (if any) apply to the transfer or disposal
operation plan which has to satisfy certain legal requirements such
of natural gas development rights or interests?
as environmental and safety issues and which needs to be approved
by the authority.
The transfer of exploration or production licences is subject to the
According to Sec. 8 BBergG a further licence has to be issued in approval by the competent authority. It has to consent to the
regard to the production of natural gas. This licence grants the transfer unless the legal requirements for development are not met
exclusive right to explore and product the resources of the specified by the transferee.
area. It includes the right to acquire ownership to the designated
It is not a case of transfer if a third person is merely financially
resource and other resources found during production. The
involved in the development (e.g. investors). No restrictions apply
operation of production facilities also require an operation plan
for such investment.
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2.9 Are participants obliged to provide any security or prohibited. Accordingly, no explicit limitations for gas import/export
guarantees in relation to natural gas development? within the EU exist. However, in the view of the European
Commission energy trade and competition between Member States is
In principal, no securities have to be provided by the participants. still not very developed. This is why the European Union recently
They have to submit an operation plan, however, which needs to issued a new legislative package on the further integration of the
demonstrate the financial ability and strength to duly operate the energy market, the so-called “Third Energy Package” consisting of

Germany
production. Furthermore, the Federal Mining Act requires two directives and three regulations (cf. section 11).
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 4 Transportation
clean-up activities, the competent authority may demand a security.
4.1 Outline broadly the ownership, organisational and
2.10 Can rights to develop natural gas reserves granted to a regulatory framework in relation to transportation pipelines
participant be pledged for security, or booked for and associated infrastructure (such as natural gas
accounting purposes under domestic law? processing and storage facilities).

Both, the licence for exploration and the licence for production can Networks as well as associated facilities are in the ownership of or
be pledged for security. leased by the respective operators.
The legal framework for the transportation of gas in pipelines is the
German Energy Act (Energiewirtschaftsgesetz- EnWG) and its
2.11 In addition to those rights/authorisations required to
associated regulations. Under these provisions, which are partly based
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural on European Union directives, grids cannot be operated by legal
gas reserves (e.g. environmental, occupational health and persons who are as well involved in energy production or energy trade.
safety) and from whom are these authorisations to be Networks must be operated independently from production or other
obtained? energy activities. Even though the production entity and the network
operator may still belong to the same corporate group, they must
Exploration and production licences and permits for operation do, operate independently (“Legal Unbundling”). Full separate
on principal, not include all administrative decisions required for ownership is so far not obligatory in Germany. Furthermore,
production and exploration activities. As the case may be, in ownership unbundling will not be required by the EC Directive
addition to these licences, construction permits may be required by 2009/73/EC (“Unbundling Directive”) which is part of the “Third
the local building authority, permits under the Water Protection Act Energy Package” (cf. section 11) as sole option; Germany will most
(Wasserhaushaltsgesetz) or the Forest Protection Acts probably implement these provisions so as to further allow vertically
(Waldgesetze). However, in case of bigger production sites (more integrated companies (cf. section 11). The unbundling provisions
than 500,000 cubic metres daily) an environmental impact apply not to pipelines belonging to production sites and/or connecting
assessment is required under the Environmental Impact Assessment the production site to the network by direct lines. Further, the
Act (Gesetz über die Umweltverträglichkeitsprüfung) which is unbundling provisions neither apply to pipelines of a local network
executed in a plan-approval procedure. The obvious disadvantage which supply predominantly one economic entity within a confined
of this procedure is that the planning process - which involves area (Objektnetze).
public participation - requires a longer time until the respective Beyond the guidelines of the European Energy Regulators
permission is granted. On the other hand, with the issuance of the (“ERGEG”), currently no legal obligation exists to unbundle
plan-approval all necessary permits are granted in a single decision. storage operators. However, the Unbundling Directive, implements
mandatory rules as to the legal unbundling of storage operators.
2.12 Is there any legislation or framework relating to the The directive’s provisions on unbundling of storage operators must
abandonment or decommissioning of physical structures be implemented by 3 March 2011.
used in natural gas development? If so, what are the
principal features/requirements of the legislation?
4.2 What Governmental authorisations (including any
applicable environmental authorisations) are required to
For the abandonment or decommissioning of facilities a special construct and operate natural gas transportation pipelines
abandonment plan has to be submitted to the competent authority and associated infrastructure?
ensuring - amongst other things - that materials are orderly
disposed, effective measures for the rehabilitation of the surface and As with the licences for exploration and production of gas, also the
for the safety of workers and the public are undertaken. 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
3 Import / Export of Natural Gas (including to be applied for separately.
LNG) The operation of the pipeline has to be authorised and can only be
dismissed in case the applicant does not have the necessary
3.1 Outline any regulatory requirements, or specific terms, economic and technical ability or personal reliability.
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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4.3 In general, how does an entity obtain the necessary land network the gas is taken at destination (Exit). In addition, a
(or other) rights to construct natural gas transportation balancing contract with the market area operator is required to
pipelines or associated infrastructure? Do Government balance feed-in and off-take of gas. Should a customer whish to
authorities have any powers of compulsory acquisition to transport gas outside the respective market area he must conclude
facilitate land access? separate entry- and exit-agreements for all the networks involved.
It can, however, authorise the operator responsible for the market
Germany

A company planning to build a gas pipeline will try to agree area to conclude these contracts in his name.
contractually on a usage right with the respective land owners of the
This does not apply to pipelines belonging to a production site
premises the pipeline will cross, generally secured by an easement
and/or connecting the production site to the network by direct lines.
(beschränkt persönliche Dienstbarkeit) in the meaning of Sec. 1090 et
Further, pipelines of a local network supplying predominantly one
seq. German Civil Code (Bürgerliches Gesetzbuch). Such easement
economic entity within a confined area (Objektnetze) are exempted
grants the right to the company to lay the pipeline through the
from these requirements.
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 4.6 Outline any third-party access regime/rights in respect of
to Sec. 45 EnWG, to tolerate the use of their real estate and can even natural gas transportation and associated infrastructure.
For example, can the regulator or a new customer wishing
be expropriated. The project developer might have to pay
to transport natural gas compel or require the
compensation if this is stipulated by the authoritative decision.
operator/owner of a natural gas transportation pipeline or
associated infrastructure to grant capacity or expand its
4.4 How is access to natural gas transportation pipelines and facilities in order to accommodate the new customer? If
associated infrastructure organised? so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated?
Network operators have to grant everyone access to their pipeline
infrastructure on a non-discriminatory basis. Access fees have to be As stated above, network operators are obliged to grant any third
published in the internet as well as the necessary technical person access to the transportation system, as well as to storage
requirements for access. Fees and conditions of access have to be facilities, on a non-discriminatory basis. This right is enforceable
transparent, non-discriminatory and may not be unfavourable and can only be refused in case the access is not possible for
compared to those applied vis-à-vis affiliated companies. technical or economic reasons. The operator has to notify such
refusal to the German Federal Network Agency.
The same applies in regard to the grid connection: the network
operator of a transmission pipeline has to connect any third person Refusal is justified if there are not enough capacities available. The
to its network subject to non-discriminatory conditions. network or storage operators are not obliged to expand their nets or
facilities so as to be able to accommodate new customers. The
The network operators conclude grid connection and grid access
allocation of capacities must be executed on a non-discriminatory
agreements with the third person seeking access. Access can only
basis. Capacities must not preferentially be allocated to affiliated
be refused if such is technically or economically impossible or
companies, but have to be granted in the order in which they had
unreasonable. The German Federal Network Agency
been requested (“First Come, First Served”).
(Bundesnetzagentur) may review such decisions and may, in case of
an unjustified refusal, order the granting of access. This access regime does not apply to pipelines belonging to a
production site and/or connecting the production site to the network
This regulatory framework does not apply to pipelines belonging to a
by direct lines. Further, such pipelines of a local network which
production site and/or connecting the production site to the network by
supply predominantly one economic entity within a confined area
direct lines. Furthermore, also local networks supplying energy
(Objektnetze) are exempted from the access regime. These
predominantly within a confined area to one economic entity
pipelines do not underlay any regulatory regimes, their use by third
(Objektnetze) are exempted from the regulatory requirements.
persons, if relevant, is subject only to general civil law.

4.5 To what degree are natural gas transportation pipelines


4.7 Are parties free to agree the terms upon which natural gas
integrated or interconnected, and how is co-operation
is to be transported or are the terms (including costs/tariffs
between different transportation systems established and
which may be charged) regulated?
regulated?

In general the terms and conditions upon which gas is to be


As stated above, Germany has a very well developed pipeline
transported are set out in the above-mentioned co-operation
infrastructure which can be used by the transportation customer.
agreement and each network operator is forced to apply those terms
Under the German Energy Act, network operators are forced to
and conditions.
cooperate to minimise balance zones. Network operators have
therefore agreed on the so-called co-operation agreement; the most The situation is different for the fees to be charged for the
recent is the third version dated 29 July 2008. The co-operation transportation of natural gas. Operators have to notify their fees based
agreement in particular governs the co-operation within and across on a cost plus regime to the relevant network agency and have to wait
balancing zones, so-called market areas, and sets out the grid access for an ex ante approval. Since 1 January 2009 the cost plus regime
conditions to be applied by each network operator. The German provides for incentives to minimise costs, and thus to minimise
network is currently divided into six market areas each consisting transportation fees. Supra-regional long-distance pipeline operators
of transportation and transmission/distribution networks and a hub, have had the opportunity to apply for an exemption and accordingly to
where title to the gas can be transferred to third parties. The charge fees independently from the cost situation, so-called
customer does not have to specify the exact transportation route benchmark fees. Benchmark fees to be offered to third parties must
within the market area anymore but only concludes two contracts be non-discriminatory, so that each party gets access to a specific
(“Entry-Exit-System”): A contract with the pipeline operator the gas transmission network based on the same fees. Benchmark fees were,
is fed-in (Entry) and another contract with the operator from whose however, allowed only to the extent that competition in performance
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exists between these operators. In October 2008 the German Federal 5.5 What fees are charged for accessing the distribution
Network Agency decided that these supra-regional operators were not network, and are these fees regulated?
exposed to competition. Following this judgement, the provisions of
the incentive regulations will also apply to supra-regional pipeline Access fees to the distribution network are governed by the same
operators as from 1 January 2010 onwards. regulatory regime as access fees to the transportation pipelines (cf.
The fees for access to storage facilities are currently not subject to above question 4.7).

Germany
regulatory approval and the storage operator is free to enact its own
terms and conditions. Nonetheless, the fees and terms to be offered 5.6 Are there any restrictions or limitations in relation to
to third parties must be non-discriminatory, such that each party acquiring an interest in a gas utility, or the transfer of
may get access based on the same terms and fees. assets forming part of the distribution network (whether
directly or indirectly)?
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 Beyond anti-trust law restrictions there are currently no special
predominantly one economic entity within a confined area restrictions or limitations to acquiring or transfer interests or assets
(Objektnetze) are exempted from regulatory requirements. 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
5 Transmission / Distribution “Gazprom-Clause”). In case they do not fulfil the unbundling
requirements or in case security of energy supply is not guaranteed
5.1 Outline broadly the ownership, organisational and anymore, the State may refuse granting the permit (cf. question 11.1
regulatory framework in relation to the natural gas for details).
transmission/distribution network.

6 Natural Gas Trading


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 6.1 Outline broadly the ownership, organisational and
networks are sometimes owned by public entities - municipal regulatory framework in relation to natural gas trading.
energy suppliers - but may also belong to private entities. Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
The regulatory framework is the German Energy Act which calls natural gas trading.
for “Legal Unbundling” (cf. above question 4.1) also in regard to
distribution networks if more than 100,000 customers are connected Gas trading is not regulated in Germany and underlies the concept
to the distribution network. The German Energy Act will have to of “freedom of contract”. Validity of the contract is assessed
be amended during 2011 following the EC’s Third Energy Package according to the provisions of the German Commercial Code
(cf. section 11), but due to the Unbundling Directive Member States (Handelsgesetzbuch) and/or the German Civil Code.
remain free to exempt small distribution operators from the
Beyond trading at the European Energy Exchange (“EEX”), gas
unbundling requirements.
trading is effected on the basis of business relationships and by
brokered transactions. It is very common to use the EFET General
5.2 What Governmental authorisations (including any Agreement for flat transactions.
applicable environmental authorisations) are required to
The most important initiative of the German Federal Network
operate a distribution 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
For the authorisation to operate a distribution network, basically the
no major initiatives on the legislative level.
same provisions apply as in regard to transportation pipelines (cf.
above question 4.2).
6.2 What range of natural gas commodities can be traded? For
example, can only “bundled” products (i.e., the natural
5.3 How is access to the natural gas distribution network gas commodity and the distribution thereof) be traded?
organised?

The EEX provides for one and two day ahead as well as derivatives
Access to the distribution network underlies the same regulations as
trading with a minimum contract size of only 1 MW. It is not
access to the transportation pipelines (cf. above questions 4.4, 4.5
possible to trade bundled products at the EEX, but there are two
and 4.6).
online platforms, which facilitate the secondary marketing of
transportation (“Track-X”) and storage capacities (“Store-X”).
5.4 Can the regulator require a distributor to grant capacity or
expand its system in order to accommodate new
customers?
7 Liquefied Natural Gas

As with regard to distributors the same regime applies as it is 7.1 Outline broadly the ownership, organisational and
applicable for transportation networks, so distributors are not regulatory framework in relation to LNG facilities.
required to expand their network in case of insufficient capacities
(cf. above question 4.6). 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 fines or skim off the profits resulting from anti-competitive
construct and operate LNG facilities? conduct.
The German Act against Restraints of Competition applies to anti-
Authorisation of construction and operation of LNG facilities also competitive behaviour of all economic sectors with the energy
underlies the provisions of the German Energy Act. Certain market additionally being subject to special provisions (cf. above
authorisations are necessary such as a construction permit or question 8.2).
Germany

environmental permits.

8.4 Does the regulator (or any other Government authority)


7.3 Is there any regulation of the price or terms of service in have the power to approve/disapprove mergers or other
the LNG sector? changes in control over businesses in the natural gas
sector, or proposed acquisitions of development assets,
The German Energy Act does not provide for specific regulations as transportation or associated infrastructure or distribution
regards the LNG sector. The applicability of the unbundling assets? If so, what criteria and procedures are applied?
provisions in the German Energy Act depends on the fact, whether the How long does it typically take to obtain a decision
LNG facilities are necessary for realising grid access- then applicable approving or disapproving the transaction?
- or for liquefaction and re-gasification only - then not applicable. As
far as LNG facilities are necessary for the access to the grid, they Merger control is executed by the Federal Cartel Office or - as an
belong to the gas grid according to Sec. 3 No. 20 German Energy Act exclusive competence - by the EC Commission in case of a merger
and are regulated alike regarding access and usage conditions. 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
8 Competition dominant position.
A proposed merger must be notified to the Federal Cartel Office
8.1 Which Governmental authority or authorities are prior to its consummation. The Federal Cartel Office has an initial
responsible for the regulation of competition aspects, or one month period and must then decide whether to open an in-depth
anti-competitive practices, in the natural gas sector? investigation or not. Straight forward cases are normally cleared
within a one month period. In case of an in-depth investigation the
The general responsibilities in Germany for applying the Federal Cartel Office has a period of four months at its disposal.
competition rules lie with the competition authorities, namely the The Federal cartel Office may also approve a merger subject to
Federal Cartel Office (Bundeskartellamt) for cases which conditions.
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. 9 Foreign Investment and International
In regard to gas pipelines the network operators’ market behaviour Obligations
is furthermore monitored by the German Federal Network Agency.
It is exclusively responsible for the authorisation of access fees and 9.1 Are there any special requirements or limitations on
for lifting hindrances to network access. In cases affecting only one acquisitions of interests in the natural gas sector (whether
Federal State this state’s regulator is the competent authority. development, transportation or associated infrastructure,
distribution or other) by foreign companies?

8.2 To what criteria does the regulator have regard in


Currently, there are no such special limitations on acquisitions in the
determining whether conduct is anti-competitive?
gas sector. Restrictions for companies from inside the European
Union would be invalid due to the EC Treaty. However, as regards
The material rules for the regulators to assess whether a certain
foreign investors, the European legislator has issued an amendment of
conduct is anti-competitive or not, stem from both the German Act
the gas directive 2003/55/EC which was published in the Official
against Restraints of Competition (Gesetz gegen
Journal of the European Union on 14 August 2009 as directive
Wettbewerbsbeschränkungen) and also the EC competition law.
2009/73/EG. According to its Article 10 transmission system
A market conduct is generally considered to be anti-competitive if it operators must be certified by the regulator before operating. In case
constitutes an abuse of a dominant market position. In this respect, of operators which are controlled by persons from a third country the
for instance, excessive pricing vis-à-vis consumers and specific certification will, as a principle, be refused. Only if the operator fulfils
long-term gas supply contracts have recently been in the focus of the the directive’s unbundling provisions (see question 11.1) and the
Federal Cartel Office and were deemed anti-competitive. For the operator has proved vis-à-vis the German Federal Network Agency
energy market a special provision sets particularly strict limits for that the security of supply in the Member State and the Community is
market dominant suppliers. It prohibits introducing fees or other not endangered the certification will be granted. The directive will
conditions which are less favourable than those of comparable have to be implemented by the Member States until 3 March 2011.
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. 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?
8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive The German energy market is highly influenced by the European
practices? legislator. Many changes in the national energy law are prescribed
by European directives.
The Federal Cartel Office may prohibit the anti-competitive
conduct, issue preliminary injunctions to stop it, impose significant
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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 Germany.

Germany
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural In 2008 a national legislative package containing energy and
gas development; transportation pipeline and associated climate related regulations has been passed; the major part of these
infrastructure owners or users in relation to the
national laws entered into force on 1 January 2009 and does not
transportation, processing or storage of natural gas; and
affect gas regulation. A smaller part of the legislative package came
distribution network owners or users in relation to the
distribution/transmission of natural gas. into force in 2008 which regulates the right to privileged network
access for biogas (also called “Greengas”). This can have indirect
No statutory compulsory dispute settlement procedures apply in the effects for natural gas as well, as in case of capacity constraints a
gas sector. The co-operation agreement described in question 4.5 priority feed-in must be granted for biogas even in case capacities
above contains an arbitration clause whereby all disputes arising for natural gas have been booked previously.
from the co-operation agreement will be decided by an arbitral On the European level, the “Third Energy Package”, which also
tribunal. Such arbitration clauses are common also in the majority contains the Unbundling Directive, has finally been passed. There
of commercial contracts for the supply of gas. If no such arbitration has been a long hassle since 2007 about ownership unbundling
clause is agreed upon the ordinary court applies the regular civil which - according to the Commission - was necessary for full
proceeding order. 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
10.2 Is Germany a signatory to, and has it duly ratified into
finding a common position on the topic. Only in June 2009 the
domestic legislation: the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards;
Council formally issued the new legislative acts which have been
and/or the Convention on the Settlement of Investment published in the Official Journal on 14 August 2009. The package
Disputes between States and Nationals of Other States contains five legislative acts of which two concern gas: the directive
(“ICSID”)? on common rules for the internal gas market; and the regulation on
conditions for access to natural gas transmission networks. The
Germany signed and ratified both conventions. 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
10.3 Is there any special difficulty (whether as a matter of law
regulator. TSOs must each year submit a 10-year net development
or practice) in litigating, or seeking to enforce judgments
plan. As for the unbundling provisions there are now three options
or awards, against Government authorities or State organs
(including any immunity)? for TSOs for fulfilling the unbundling provisions: full ownership
unbundling, an independent system operator (“ISO”) and an
There is no special difficulty in litigating and enforcing titles independent transmission operator (“ITO”). The regulator’s
against State organs. The regular procedural and material competences are strengthened and operators controlled by persons
regulations apply before administrative courts. In case of damages from outside the EU will be certified only under restrictive
claimed from a State organ, the ordinary courts have jurisdiction. 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).
10.4 Have there been instances in the natural gas sector when
As for the access to gas networks German Ministry of Economics
foreign corporations have successfully obtained judgments
or awards against Government authorities or State organs
has issued a corner stone paper in April 2009 concerning the
pursuant to litigation before domestic courts? implementation of new rules on capacity allocation mechanisms
and further merger of market areas. Moreover the Federal Network
There have been successful judgments initiated by foreign Agency has initiated a consultation process concerning new rules
corporations against State organs in the past. As judges work on capacity allocation and congestion management. The main
independently from the administrative power and foreign persons - purpose is to free-up capacity at congested import- and market area
whether individual or legal - are granted access to courts, claims of connection points by imposing stricter rules concerning calculation
foreign corporations cannot be judged any differently. of available technical capacities by transmission grid operators,
stricter “use-it-or-lose-it” rules and obligations to offer unused
Also in practice, no cases are known of factual discrimination of
capacity on a day-ahead basis. As those ideas have not yet been
foreign entities before German courts.
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 Violetta Pudell, EMLE (Rotterdam/Hamburg) is based in our
2000 and became a partner in May 2007. During a secondment to Hamburg office and has worked for Lovells since 2001. She was
the legal department of an oil major he has gained in depth energy appointed as a Counsel in 2007. Violetta specialises in Energy Law
industry expertise (in particular in the oil and gas sector) and has and has a wide experience in advising domestic and international
ever since specialised on legal advice in the energy sector. He is the companies on Energy - specific matters such as energy trading,
Head of the German part of Lovells´ international Energy, Natural unbundling and regulation issues. She has also substantial
Resources & Infrastructure Practice Group, which specialises in all expertise in transportation and storage matters (in particular gas).
energy sector related legal issues, in particular energy sector related In addition, she has been involved in energy related mergers and
domestic and cross-border mergers and acquisitions, takeovers, acquisitions, takeovers, joint ventures.
joint ventures, as well as general energy law and regulatory advice. Violetta was seconded for two years to the law department of an
The practice also has substantial expertise in the development of international oil & gas major and has since then advised on several
energy supply and transportation agreements of any kind (in projects in the energy sector.
particular gas) as well as general regulatory compliance aspects
(including meetings with the Bundesnetzagentur).

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 Dhritiman Bhattacharyya

IndoJuris Dinesh Singh

1 Overview of Natural Gas Sector 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
1.1 A brief outline of India’s natural gas sector, including a
general description of: natural gas reserves; natural gas Gujarat. A smaller quantity of NG is also produced in Tripura, Tamil
production including the extent to which production is Nadu and Rajasthan.
associated or non-associated natural gas; import and B. Alternative Sources:
export of natural gas, including liquefied natural gas (LNG) (i) Coal Bed Methane (‘CBM’): The GOI adopted CBM Policy in
liquefaction and export facilities, and/or receiving and re- 1997 to have an additional supply of gas apart from the
gasification facilities (“LNG facilities”); natural gas pipeline conventional NG reserves to reduce the greenhouse effect with
transportation and distribution/transmission network; carbon credit earnings. The estimated CBM resource in India
natural gas storage; and commodity sales and trading. is around 4.6 Trillion Cubic Metres (‘TCM’). So far, three
rounds of international competitive bidding have awarded 26
A. Natural Gas Sector in India: blocks for CBM exploration. The estimated CBM resources in
The Geological Survey of India during the 1950s undertook a these awarded blocks are 1,374 BCM with a production
comprehensive survey and mapping to locate structures suitable for potential of 38 Million Standard Cubic Metres per Day
the exploration of oil and gas that led to an initial discovery at (‘MMSCMD’).
Jwalamukhi (Punjab) and Cambay (Gujarat) in 1958. Amongst the (ii) Gas Hydrate (‘GH’): India is among the four countries that
later discoveries, the giant Bombay High field discovered in 1974 have the world’s richest GH reserves. Total prognosticated gas
resources from the GH in India are placed at 1,894 TCM. GOI
has significantly boosted the oil and gas production in India.
formulated a National Gas Hydrate Programme (‘NGHP’) in
Prior to 1991, Oil and Natural Gas Commission (‘ONGC’) and Oil 1997 for exploration and development of GH resources.
India Limited (‘OIL’), being government owned entities (‘GOE’), NGHP had made significant discoveries of fully developed GH
were involved in exploration and production (‘E&P’) activities. In system in the Mahanadi basin of the Bay of Bengal, Andaman
1991, the Government of India (‘GOI’) took initiative to liberalise Islands, and Krishna-Godavari Basin (“KG Basin”).
the petroleum E&P policy by inviting private companies, both C. Liquefied Natural Gas (‘LNG’) Terminals:
overseas and domestic, to participate in oil and gas field (i) PLL at Dahej-LNG: According to Integrated Energy Policy:
development. In order to introduce new technologies and improve Report of the Expert Committee issued by the Planning
production, GOI entered into various Production Sharing Contracts Commission of GOI in August 2006 (‘IEPR’), demand for NG
(‘PSC’) with joint ventures/private companies. in the year 2019-20 would climb to 356 MMSCMD (as per
Integrated Research and Action for Development Report and
Pursuant to the New Exploration Licensing Policy (‘NELP’)
PWC based on an assumption of ‘Business as Usual’ and the
published in the official gazette on 10th February 1999, the GOI put
base year being 2003-04), leaving a huge gap between demand
an end to mandatory state participation through ONGC/OIL, and and supply. To ensure sufficient supply of LNG, GOEs such as
introduced a grant of Petroleum Exploration Licence (‘PEL’) Gas Authority of India Limited (‘GAIL’), ONGC, Indian Oil
through international competitive bidding. However, ONGC and Corporation Limited (‘IOCL’) and Bharat Petroleum
OIL can still compete with others for a licence. To date, pre-NELP Corporation Limited (‘BPCL’) in strategic partnership with
and six rounds of NELP bidding have together awarded 167 blocks, GAZ de France entered into a JV to form Petronet LNG
among them 155 blocks are still under operation. As on 1st April Limited (‘PLL’). PLL set up its first LNG Terminal at Dahej,
2008, 125 gas fields and 261 oil and gas fields are involved in E&P. Gujarat, with capacity of 5 Million Metric Tonnes per annum
The bidding for the seventh round of NELP was opened on 13th (‘MMTPA’). RasGas of Qatar is supplying LNG to Dahej
terminal. The capacity of this plant is being doubled to 10
December 2007 and on 20th November 2008 the Cabinet
MMTPA and the expanded capacity would be operational by
Committee on Economic Affairs of the GOI gave its approval for
the first quarter 2009. PLL has planned another project at
the awarding of 44 blocks. Further, the bidding for the eighth round Kochi in Kerala with a capacity of 2.5 MMTPA scalable to 5
of NELP was opened on August 2009. The GOI has offered a total MMTPA.
of 70 oil and gas blocks under NELP VIII and 10 blocks under
(ii) Hazira-LNG Project: The Hazira project of Hazira LNG
CBM IV (coal bed methane) exploration policy. Out of these 70 Private Limited is one of the largest greenfield foreign direct
exploration blocks on offer, there will be 18 on land blocks investments (‘FDI’) projects in the energy sector in India. The
(including 10 Type-S blocks), 28 shallow water blocks and 24 LNG terminal and its infrastructure have a nominal capacity of
deepwater blocks. The bid closing date for NELP VIII and CBM 5 MMTPA, though the initial throughput is 2.5 MMTPA. The
IV is 12th October 2009. 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 demand and the consumption is expected to rise. Growing demand
respectively in the project. of NG is usually met by LNG imports (almost 30%) supplemented
In the future, Ratnagiri Gas Power Projects Limited is planning to by domestic production. Cumulative domestic Natural Gas
set up an LNG terminal at Dhabol. IOC and ONGC are also production during April 2008-February 2009 was 30,019 MCM
planning to set up LNG terminals at Ennore and Mangalore (according to Centre for Monitoring Indian Economy). During the
respectively, for an initial capacity of 5 MMTPA. same period, the demand for NG stood at 34,062 MCM. Demand
D. Pipelines: for gas in India is expected to increase to 283 MMSCMD in 2012
India

whereas domestic supply, including gas extracted from the KG


As of 1st April 2008, the existing length of petroleum and
basin, will add up to only 180 MMSCMD.
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 1.4 To what extent is India’s natural gas production exported
JV’s of GAIL or with private players. (pipeline or LNG)?
E. City or Local Natural Gas Distribution Networks
(‘CGD’): 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
During the last decade, various CGD projects were under
Model Production Sharing Contract (‘MPSC’) entered between
implementation and their success has changed the scenario of
GOI and other parties to undertake E&P activities, to sell in the
energy supply in India. Mumbai City Gas Distribution Project of
Indian market all of its entitlement to NG. .
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), 2 Development of Natural Gas
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 2.1 Outline broadly the legal/statutory and organisational
framework for the exploration and production
natural gas to residential, transport and commercial consumers.
(“development”) of natural gas reserves including:
F. Utilisation: principal legislation; in whom the State’s mineral rights to
The gas produced in the western offshore fields is brought to Uran, natural gas are vested; Government authority or authorities
Maharashtra for use in and around Mumbai and partly in Gujarat. responsible for the regulation of natural gas development;
After sweetening, the gas is partly utilised at Hazira and the rest and current major initiatives or policies of the Government
(if any) in relation to natural gas development.
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 By virtue of Article 297 of the Constitution of India, petroleum in
predominantly utilised within the respective states. its natural state is vested in the GOI. MoPNG is the administrative
body entrusted with responsibilities relating to E&P of oil and NG,
NG is currently the source of half of the LPG produced in the their refining, distribution, marketing, and import-export. MoPNG,
country. LPG is now being extracted at Duliajan in Assam, Bijaipur constituted the office of the Director General of Hydrocarbon to
in Madhya Pradesh, Hazira and Vaghodia in Gujarat, Uran in ensure optimum exploitation, review/approve development plans,
Maharashtra, Pata in Uttar Pradesh and Nagapattinam in Tamil work programmes, budget, reservoir evaluation, and advise on mid-
Nadu. Plants have been set up at Lakwa in Assam, at Ussar in course corrections in connection with discovered fields.
Maharastra and at Gandhar in Gujarat. NG contains C2/C3, which
is a feedstock for the petrochemical industry, used for Maharashtra The regulation for the granting of exploration licences and mining
Gas Cracker Complex at Nagothane, IPCL in Gujarat and Pata leases in respect of NG is covered under the Oilfields (Regulations
Petrochemicals complex of GAIL in Uttar Pradesh. and Development) Act, 1948 (‘Oilfields Act’), together with
Petroleum and Natural Gas Rules, 1959 and Petroleum and Natural
G. International Pipelines Project:
Gas Rules, 2002 (‘PNG Rules’) (framed under the Oilfields Act).
The negotiations are underway to import NG from gas producing The Petroleum Act, 1934, along with the PNG Rules, regulates the
countries through Transnational Gas Pipelines. The proposal is to transmission, distribution, and marketing of NG. The Oilfields Act
import NG from Myanmar, Iran, and Turkmenistan to supplement provides for the regulation of oilfields (the definition of which
India’s domestic production. Government level discussions are covers gas fields) and for the development of mineral oil (the
being held to conclude agreements regarding the same. definition covers NG) resources. The PNG Rules, 1959 regulates
the granting of PEL and Petroleum Mining Leases (‘PML’). The
1.2 To what extent are India’s energy requirements met using regulation for exploration and exploitation of resources in the
natural gas (including LNG)? continental shelf and exclusive economic zone is governed by the
Territorial Waters, Continental Shelf, Exclusive Economic Zone
Presently, NG comprises approximately 9-10% of the total share of and Other Maritime Zones Act, 1976. NELP provides for a
primary commercial energy consumption in the country. Though competitive bidding structure for E&P based on the MPSC. GOI
the primary commercial energy consumption of NG has grown offers 100% foreign participation for E&P and grants attractive
significantly during the past decade from approximately 12.77 concessions such as an income tax holiday for seven years from the
BCM during the year 1990-91 to approximately 34.328 BCM start of commercial production.
during the year 2009. 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
1.3 To what extent are India’s natural gas requirements met
through domestic natural gas production? (‘Regulatory Board Act’) which is effective from 1st October
2007. It has provisions to promote competitive markets by
NG produced in India is not adequate to cater to the total domestic regulating refining, processing, storage, transportation, distribution,
marketing, and the sale of petroleum, petroleum products and NG,
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excluding production of crude oil and NG. As per the Policy issued 2.4 To what extent, if any, does the State have an ownership
by GOI in 2006 relating to Development of Natural Gas Pipelines interest, or seek to participate, in the development of
and City or Local Natural Gas Distribution Networks, PNGRB has natural gas reserves (whether as a matter of law or
to ensure and regulate the procedures to develop pipeline policy)?
infrastructure and standards for interconnectivity, common
carriage, capacity for transmission and regulation of tariffs for LNG The GOI is the sole owner of petroleum underlying a contract area
transportation. PNGRB is working on policy to allow companies to except as regards that part of petroleum, the title of which is passed

India
use the unutilised capacity at LNG terminals. The draft regulations to the party in accordance with the PSC. In pre-NELP PSC’s, the
are published by PNGRB (please refer to question 4.1 for details). GOI had the option of acquiring 30% participating interest in a
block. The same has been discontinued in the post-NELP PSC’s.
The Oil and Industrial Development Board was formed under the
However, GOI also has the right to nominate two members at the
Oil Industry (Development) Act, 1974 wherein the board is invested
MC formed in accordance with PSC, who are an integral part of the
with the powers to lay down conditions of granting financial
decision making process.
assistance for R&D, etc.

2.5 How does the State derive value from natural gas
2.2 How are the State’s mineral rights to develop natural gas
development (e.g. royalty, share of production, taxes)?
reserves transferred to investors or companies
(“participants”) (e.g. licence, concession, service contract,
contractual rights under Production Sharing Agreement?) In addition to royalties refereed to in question 2.3, the MPSC
and what is the legal status of those rights or interests provides for a detailed mechanism of production sharing and the
under domestic law? GOI’s right in the share of petroleum. The GOI has the option to
receive its entitlement either in cash or in kind.
PNG Rules require a PEL for the exploration of NG and PML for
the production of NG. According to the provisions of NELP, GOI 2.6 Are there any restrictions on the export of production?
transfers the right of developing NG to investors through PSC on
negotiations based on MPSC. The provisions of the PSC’s are Please refer to question 1.4.
binding on the parties and are legally enforceable.

2.7 Are there any currency exchange restrictions, or


2.3 If different authorisations are issued in respect of different restrictions on the transfer of funds derived from
stages of development (e.g., exploration appraisal or production out of the jurisdiction?
production arrangements), please specify those
authorisations and briefly summarise the most important
MPSC provides that the relevant exchange control laws and
(standard) terms (such as term/duration, scope of rights,
expenditure obligations). procedures shall govern a party other than a foreign party.
However, each foreign party has the right to repatriate in any freely
Under the PNG Rules, PEL is granted for operations in the allotted convertible currency the net proceeds of sales of petroleum in India
block/area and it is valid for a period of four years which is and freely import, through normal banking channels, funds
extendable for two further periods of one year each. Commercial necessary for carrying out the petroleum operations.
exploitation of discovery in the allotted block/area requires
obtaining a PML. The GOI or a GOE is a party to the PSC. The 2.8 What restrictions (if any) apply to the transfer or disposal
participating interest of each consortium member under the PSC is of natural gas development rights or interests?
required to be a minimum of 10%. MPSC contains specific
provisions dealing with commercial exploitation of associated and The licensee or the lessee of a PEL or PML, as the case may be,
non-associated gas. Some of the standard terms and conditions of cannot assign or transfer its rights, title or interest thereunder,
MPSC includes the following: without the prior consent of the government. Further, a party may
The parties are required to commence petroleum operations assign or transfer, a part (unless it falls below 10%, which can be
not later than six months from the effective date as defined approved only in special cases) or all of its participating interest
under the PSC. under the PSC, with prior written consent of the GOI, which shall
Total exploration period is generally for seven years (eight not be unreasonably withheld. If the GOI does not respond to a
years, in case of deepwater and frontier area blocks) from the request for assignment within 120 days, consent shall be deemed to
effective date. have been granted. Change of control of a party is also deemed to
The GOI is entitled to have representation in the be an assignment under the MPSC requiring consent of the GOI.
management committee (‘MC’) by nominating two
members of whom one will be the Chairman and the other
2.9 Are participants obliged to provide any security or
will be the Deputy-chairman. All matters requiring the
guarantees in relation to natural gas development?
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 The participants are required to provide an irrevocable,
percent (70%) or more with the GOI representative having a unconditional bank guarantee in favour of the GOI for the total
positive vote in favour of the decision. estimated annual expenditure; normally it is 35% of the total
Royalty shall be determined in accordance with the PNG estimate of the minimum work programme. Further, submission of
Rules, usually it is 10% (12.5% for crude and 10% for NG if financial and performance guarantee from the parent company or,
the blocks are located in the onshore areas). where there is no such parent company, the financial and
Exchange Control Regulations, Environmental and other performance guarantee from the company is required.
authorisations are mentioned below (please refer to
questions 2.7 and 2.11).

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2.10 Can rights to develop natural gas reserves granted to a withdrawn and to such extent, as is necessary, to meet any
participant be pledged for security, or booked for expenditure to be incurred towards removal of all equipments and
accounting purposes under domestic law? installations or towards all necessary site restoration.

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 3 Import / Export of Natural Gas (including
obtaining finance to the extent required for performing its LNG)
India

obligation under the MPSC. The encumbrance is subordinate to the


rights of the other parties in the MPSC.
3.1 Outline any regulatory requirements, or specific terms,
limitations or rules applying in respect of cross-border
2.11 In addition to those rights/authorisations required to sales or deliveries of natural gas (including LNG).
explore for and produce natural gas, what other principal
Government authorisations are required to develop natural In terms of the Foreign Trade Policy 2004-2009, import of NG
gas reserves (e.g. environmental, occupational health and (including LNG) is placed under the open general licence category
safety) and from whom are these authorisations to be i.e. the importation does not require any specific licence. The
obtained?
Customs Act, 1962 along with the provisions of Customs Tariff Act,
1975 governs the customs duty payable on importation of NG at
Development of NG reserves requires various authorisations from 10% and an educational cess of 2%. However, LNG imports
the GOI or from concerned state government departments. An currently enjoy an exemption in relation to the basic customs duty,
overview is provided below: for importation on an FOB basis and the effective rate as of
Environment: Pursuant to the Environment Protection Act, 1986 September 2009 is 5.1% (5% basic duty plus an education cess of
read with the Environment (Protection) Rules, 1986, the GOI has 2%). Regarding exports please refer to question 1.4.
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 4 Transportation
commencement. The 1994 Notification mandates for a prior
approval of an environmental clearance before commencement of 4.1 Outline broadly the ownership, organisational and
E&P activities from the Ministry of Environment and Forests. It regulatory framework in relation to transportation pipelines
also requires approvals from the Central and/or the State Pollution and associated infrastructure (such as natural gas
Control Board under the provisions of Air (Prevention and Control processing and storage facilities).
of Pollution) Act, 1981 and Water (Prevention and Control of
Pollution) Act, 1974. In addition, a separate environmental The Petroleum and Mining Pipeline (Acquisition of Right of Users
clearance is required for drilling activities. Development of NG in Land) Act, 1962 (‘Pipeline Act’) provides regulatory framework
reserves affecting the Coastal Regulation Zones also requires and provisions for acquisitions of right of way for laying
approval from the relevant State Government authority under the transportation pipelines. The party is required to publish a notice
Coastal Regulation Zone notifications. with details of land requirements, right of use and description of the
Labour Laws: The Industrial Disputes Act, 1947 governs land to be crossed. After the publication of notice, the party is
provisions of termination (retrenchment) and lay-offs of workmen required to obtain approval from the GOI. Further, it needs to
and resolution of disputes between the industrial establishment and obtain environment, pollution, and safety clearances depending on
workmen. Requirement of registration under the Factories Act, the nature of the project and comply with other applicable
1948 and other provisions of the labour related statues will be legislations (please refer to question 2.11).
applicable, such as: Payment of Wages Act, 1936; Payment of Under the provisions of the Regulatory Board Act, PNGRB has
Gratuity Act, 1972; Payment of Bonus Act, 1965; the Employers’ issued various regulations (some of which are still in the draft
Liability Act, 1938; Employees Provident Fund and Miscellaneous stages) to organise and regulate transportation pipelines and
Provisions Act, 1952, etc. associated infrastructure, as enlisted below:
Safety Related Laws: The provisions of Petroleum and Natural (a) Regulation for Determination of Pipeline Tariff for Natural
Gas (Safety in Offshore Operations) Rules, 2008, Explosives Act, Gas Pipelines published in November 2007.
1884; Manufacture, Storage and Import of Hazardous Chemical (b) Access Code for Natural Gas Transmission Pipelines and
Rules, 1989, etc. are applicable. City or Local Natural Gas Distribution Networks published
in December 2007 (‘Regulation for Access Code’).
Local Laws: The local and municipal laws of the state in which the
exploration area is located, needs to be complied with. (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
2.12 Is there any legislation or framework relating to the Contract Carrier published in November 2007 (‘Regulation
abandonment or decommissioning of physical structures for Transportation and Marketing’).
used in natural gas development? If so, what are the (d) Regulation for Fostering Fair Trade and Competition
principal features/requirements of the legislation? amongst entities by Sharing of Infrastructure published in
October 2008 (‘Regulation for Competition’).
The PSC requires preparation of a proposal for site restoration (e) Regulation for Determination of Network Tariff for City or
including an abandonment plan and requirement of funds for the Local Natural Gas Distribution Networks published in
consideration and approval of the MC. An annual contribution is March 2008, etc.
required to be deposited by the parties in the Site Restoration Fund (f) PNGRB (Authorising Entities to Lay, Build, Operate or
established by the GOI pursuant to the Site Restoration Fund Expand Natural Gas Pipelines) Regulations published in
Scheme, 1999. The amounts standing to the credit of such account October 2008.
is not permitted to be pledged or offered as security and can only be
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(g) Regulation for Authorising Entities to Lay, Build, Operate or amongst entities by facilitating access to certain identified
Expand Petroleum, Petroleum products Pipelines published infrastructure in a non-discriminatory manner. Under the
in January 2009. regulation, PNGRB can declare the infrastructure required for
(h) Regulation: Registration for establishing and operating refining, processing, storage, transportation, distribution, marketing
Liquefied Natural Gas (LNG) Terminals published in March and sale of petroleum, petroleum products or natural gas as a
2009. common user facility (‘CUF’) which makes its mandatory for the
entity controlling the infrastructure to share its use with other

India
4.2 What Governmental authorisations (including any entities under a mutually agreed CUF sharing arrangement. The
applicable environmental authorisations) are required to entity that controls the infrastructure constituting CUF, shall have
construct and operate natural gas transportation pipelines right of first use for its own requirement provided it is not
and associated infrastructure? detrimental to consumer interest. The entity seeking sharing must
first submit to the entity that controls the infrastructure a written
The Regulatory Board Act contains comprehensive provisions for request to negotiate a mutually agreed arrangement for such
authorisations, to lay, build, and operate or expand any pipeline. sharing. If the entities are unable to reach a mutually agreed sharing
(Please refer to questions 1.1-D, 2.11, & 4.1.) 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
4.3 In general, how does an entity obtain the necessary land
(or other) rights to construct natural gas transportation
entities are unable to negotiate a voluntary sharing and
pipelines or associated infrastructure? Do Government compensation agreement, the PNGRB may institute a compensation
authorities have any powers of compulsory acquisition to mechanism for CUF so as to ensure a reasonable rate of return of
facilitate land access? 12% post tax on the capital employed.

The Land Acquisition Act, 1894 governs the acquisition of land for 4.7 Are parties free to agree the terms upon which natural gas
public purposes by the GOI. In addition, the Pipeline Act provides is to be transported or are the terms (including costs/tariffs
for acquisitions of right of way for laying transportation pipelines. which may be charged) regulated?

4.4 How is access to natural gas transportation pipelines and Please refer to question 4.6.
associated infrastructure organised?

The Regulatory Board Act empowers the PNGRB to regulate open


5 Transmission / Distribution
access and transportation rates for the common carrier or contract
carrier. A Draft Regulation of Access Code has been issued setting 5.1 Outline broadly the ownership, organisational and
out the guidelines regarding open access to transportation pipelines. regulatory framework in relation to the natural gas
Generally, the limit of open access is a derivative of the contractual transmission/distribution network.
relationship between parties in accordance with the Regulation of
Access Code. GAIL regulates access of the NG transportation PNGRB under the provisions of the Regulatory Board Act regulates
system on a commercial basis as far as it relates to supply through the transmission and distribution of NG. GAIL and ONGC hold the
its pipelines. 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.)
4.5 To what degree are natural gas transportation pipelines
integrated or interconnected, and how is co-operation
between different transportation systems established and 5.2 What Governmental authorisations (including any
regulated? applicable environmental authorisations) are required to
operate a distribution network?
Interconnectivity between the different pipeline networks has been
cited under the Regulation for Transportation and Marketing and The Regulatory Board Act empowers PNGRB to provide for
Regulation for Access Code that proposes a non-discriminatory authorisation and registration to lay, build, operate, or expand any
open access basis for booking of pipeline capacity as well as for any pipeline as a common carrier or contract and to lay, build, operate
available excess capacity. Once fully implemented, it will regulate or expand any CGD network. Further, party/ies needs to obtain
the open access and transportation rates for the common carrier or environment, pollution, and safety clearances depending on the
contract carrier. nature of project and provisions of applicable laws. (Please refer
to questions 2.11 and 4.1.)

4.6 Outline any third-party access regime/rights in respect of


natural gas transportation and associated infrastructure. 5.3 How is access to the natural gas distribution network
For example, can the regulator or a new customer wishing organised?
to transport natural gas compel or require the
operator/owner of a natural gas transportation pipeline or The Regulation for Access Code, aims at establishing industry wide
associated infrastructure to grant capacity or expand its transparent and uniform principles for allowing entities to
facilities in order to accommodate the new customer? If
gain/allow access to the pipeline systems and CGD networks. The
so, how are the costs (including costs of interconnection,
Regulation for Competition, aims at removing and minimising any
capacity reservation or facility expansions) allocated?
form of impediment to competition among entities by sharing of
infrastructure.
PNGRB has issued a draft Regulation for Competition aimed at
removing or minimising any form of impediment to competition

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5.4 Can the regulator require a distributor to grant capacity or 7.2 What Governmental authorisations are required to
expand its system in order to accommodate new construct and operate LNG facilities?
customers?
Please refer to questions 2.1, 2.11, and 4.1.
The Regulations for Access Code promotes development of a
competitive gas market by establishing uniform principles,
7.3 Is there any regulation of the price or terms of service in
preventing abuse of monopoly power, and to allow transparent and
the LNG sector?
India

non-discriminatory access of the gas pipelines and CGD networks.


As mentioned earlier, PLL being co-promoted by GOE’s is subject
5.5 What fees are charged for accessing the distribution to the supervision of the GOI. As per information, the GOI has
network, and are these fees regulated? 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
Distribution fees are subject to the terms of contract between the purchases or to private sector organisations.
parties; the Regulations for Access Code requires approval of fees
charged for accessing distribution network from PNGRB, to
promote non-discriminatory open access. 8 Competition

5.6 Are there any restrictions or limitations in relation to 8.1 Which Governmental authority or authorities are
acquiring an interest in a gas utility, or the transfer of responsible for the regulation of competition aspects, or
assets forming part of the distribution network (whether anti-competitive practices, in the natural gas sector?
directly or indirectly)?
Under the Monopolies and Restrictive Trade Practices Act, 1969
A company authorised to set up or build a NG pipeline in terms of (‘MRTP Act’), the MRTP Commission is entrusted with the
the PNGRB (Authorising Entities to Lay, Build, Operate or Expand responsibility of promoting fair trade practices and to take suitable
Natural Gas Pipelines) Regulations 2008, cannot transfer the action to discourage anti-competitive practices.
authorisation by way of sale, assignment or surrender during a A new law, the Competition Act, 2002 (‘Competition Act’) has
period of three years from the date of issue of such authorisation been enacted to repeal the MRTP Act. Under the Act, the
without obtaining prior consent of PNGRB. 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
6 Natural Gas Trading functioning. Further, safeguards are also provided under
Companies Act, 1956 (‘Companies Act’), where approval from
6.1 Outline broadly the ownership, organisational and central government is required for acquisition of shares (more than
regulatory framework in relation to natural gas trading. 25%) of any dominant undertaking.
Please include details of current major initiatives or
Further, the Competition (Amendment) Act, 2007 has been enacted
policies of the Government or regulator (if any) relating to
to amend the provisions of The Competition Act, 2002. The GOI
natural gas trading.
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,
Natural gas trading policy is still under progression; however, Multi
appointed 20th May 2009 as the date on which certain sections of
Commodity Exchange of India Limited started online trading in NG
the Act shall come into force. The section relating to anti-
in June 2006. In addition, GAIL and Natural Commodity and
competitive agreements, inquiries into certain agreements and
Derivatives Exchange Limited has signed a memorandum to work
dominant position of the enterprise have come into force by virtue
jointly for developing a spot market for NG that is still waiting for
of the above notification.
approval of the board of directors of GAIL.
The Petroleum and NG sector (excluding production of crude oil
and NG) is regulated by PNGRB constituted under the Regulatory
6.2 What range of natural gas commodities can be traded? For
Board Act. One of the important functions of PNGRB is to protect
example, can only “bundled” products (i.e., the natural
the interest of consumers by fostering fair trade practices. Recently
gas commodity and the distribution thereof) be traded?
private oil companies (Reliance Industries Limited (‘RIL’), Essar
Oil, and Shell India) have filed a petition before the PNGRB against
Natural gas is currently traded as a bundled product and the pitfalls
GOEs for indulging in unfair and restrictive trade practices in the
and advantages of unbundled trading are currently under
sale of transportation fuel, which is pending adjudication.
consideration.

8.2 To what criteria does the regulator have regard in


7 Liquefied Natural Gas determining whether conduct is anti-competitive?

7.1 Outline broadly the ownership, organisational and The criteria which the regulator applies under the Competition Act
regulatory framework in relation to LNG facilities. and MRTP Act are, in case of agreement/arrangement having
appreciable adverse effect on competition:
There are no specific laws or ownership regulations for LNG (a) creation of barriers to new entrants;
terminals. The Regulatory Board Act provides for registration of (b) driving existing competitors out of market;
entities for establishing, expansion, and operating LNG terminals. (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 9.2 To what extent is regulatory policy in respect of the natural
position, directly or indirectly, (b) unfair or discriminatory gas sector influenced or affected by international treaties
conditions in determining the price for purchase/sale of goods, (c) or other multinational arrangements?
limitations or restrictions in production and development of goods,
(d) denial of market access, and (e) making conclusion of contracts International convention, treaties, agreements and multinational
subject to acceptance by other parties of supplementary obligations arrangements have an effect on the domestic policies under the
which have no connection with the subject of such contracts, also Constitution of India. Presently, there is no major international

India
have a bearing. 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.
8.3 What power or authority does the regulator have to
The key objectives of IEA-India cooperation signed on 30 April
preclude or take action in relation to anti-competitive
1998 are to assist India in its transition to a market-based economy,
practices?
to integrate India into the IEA’s energy policy framework and to
obtain in-depth knowledge of India’s energy and environmental
The MRTP Commission, on a complaint or on its own, initiates
system.
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 10 Dispute Resolution
aggrieved party that is prejudiced by such unfair trade practices.
The CCI may suggest modification to agreements, impose penalty,
10.1 Provide a brief overview of compulsory dispute resolution
direct the enterprise concerned to abide by such orders or grant
procedures (statutory or otherwise) applying to the natural
compensation to the aggrieved party. The PNGRB has powers gas sector (if any), including procedures applying in the
similar to that of a civil court to grant injunction and damages. context of disputes between the applicable Government
authority/regulator and: participants in relation to natural
gas development; transportation pipeline and associated
8.4 Does the regulator (or any other Government authority)
infrastructure owners or users in relation to the
have the power to approve/disapprove mergers or other
transportation, processing or storage of natural gas; and
changes in control over businesses in the natural gas
distribution network owners or users in relation to the
sector, or proposed acquisitions of development assets,
distribution/transmission of natural gas.
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 The MPSC provides for resolution of disputes through arbitration.
approving or disapproving the transaction? Further, licences granted by the relevant state government or the
GOI under the PNG Rules provides for an arbitration mechanism.
Regarding change in control of a party under the MPSC, change of In addition, PNGRB is also empowered to adjudicate upon any
control is deemed to be an assignment requiring consent of the GOI matter concerning refining, processing, storage, transportation,
(please refer to question 2.8). marketing, selling, or distribution, unless the relevant agreement
provides for arbitration.
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 10.2 Is India a signatory to, and has it duly ratified into
Companies Act governing M&A are applicable. Approval of domestic legislation: the New York Convention on the
shareholders and creditors, as well as a sanction from jurisdictional Recognition and Enforcement of Foreign Arbitral Awards;
High Court is required. In addition, permission from the GOI is and/or the Convention on the Settlement of Investment
required for the acquisition of shares beyond a certain threshold in Disputes between States and Nationals of Other States
(“ICSID”)?
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 India being a signatory has incorporated the provisions of the New
companies. Further, CCI may also investigate the probabilities of York Convention in the Arbitration & Conciliation Act, 1996 to
an adverse effect on competition. recognise the foreign awards; however, it is not a signatory to the
ICSID.

9 Foreign Investment and International 10.3 Is there any special difficulty (whether as a matter of law
Obligations or practice) in litigating, or seeking to enforce judgments
or awards, against Government authorities or State organs
(including any immunity)?
9.1 Are there any special requirements or limitations on
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure,
The GOI does not enjoy any sovereign immunity in contracts and is
distribution or other) by foreign companies? subject to conditions of reason and fair play. There are no
procedural difficulties in suing or enforcing judgments or seeking
100% FDI is permitted under an automatic route (i.e. no approval awards against the GOI excep, that, before instituting any suit
required) for the Petroleum and NG sector (including refining by against the GOI, a statutory notice of two months is required to be
private companies) subject to guidelines issued by MoPNG. given. Further, unsatisfied decrees passed against the GOI can only
However, subject to approval being obtained from the GOI, 49% be executed after three months.
FDI is permitted in GOE’s engaged in refining.

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10.4 Have there been instances in the natural gas sector when Since June 2005, Reliance Industries Limited (‘RIL’) and Reliance
foreign corporations have successfully obtained judgments Natural Resources Limited (‘RNRL’) are in a battle regarding
or awards against Government authorities or State organs supply of NG, what should it be priced at, how much of it should be
pursuant to litigation before domestic courts? supplied and for how long. The issue being whether the GOI’s
approval is generally required for the gas sale price or that such
The Indian courts do not differentiate between foreign and Indian approval is only needed for the price for calculating royalty, the
entities and the courts are not hesitant to decide against the GOI’s profit share and income tax. The GOI asserts by way of
India

government or state organs if they are found to be non-compliant to affidavit that it has explicit role in approving sale prices and gas
applicable law or to their contractual obligations. 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
11 Updates before Hon’ble Supreme Court.
In March 2008, private oil companies, including RIL, Essar Oil and
11.1 Please provide, in no more than 300 words, a summary of Shell India Marketing, filed a joint petition at PNGRB, against the
any new cases, trends and developments in Gas
GOE (ONGC, OIL, IOCL, Hindustan Petroleum, BPCL) for
Regulation Law in India.
indulging in unfair and restrictive trade practices in the trade of
transportation fuels. The complainants asked PNGRB to initiate
PNGRB constituted under the Regulatory Board Act, has been
adjudication proceedings against the GOE under Section 11 and 12
mandated to regulate the refining, processing, storage,
of the Regulatory Board Act. On the complaint, a bench has been
transportation, distribution, marketing and sale of petroleum,
constituted to look into the matter.
petroleum products and NG, excluding production of crude oil and
NG. PNGRB also protects the interests of consumers and entities Currently, disputes are pending before the Bombay High Court,
and ensures uninterrupted and adequate supply of NG in all parts of where the role of government on pricing of NG is in question.
the country to promote competitive markets in the specified In a major policy decision, the GOI has floated a proposal to enact
activities relating to petroleum, petroleum products and NG. legislation on pool pricing of gas, to be supplied to Ratnagiri Gas &
Recently, various regulations (some of which are in draft stages) Power Private Limited in particular, and to other sectors. Essar and
have been published by PNGRB to regulate specific activities GSCPL have challenged before the Courts, the decision of GOI on
relating to petroleum, petroleum products and NG (please refer to gas pool pricing. The matter is likely to come up before the
question 4.1). Currently, PNGRB and the GOI are in an impasse Supreme Court in December 2008.
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 Disclaimer:
Regulatory Board Act. The matter is being sorted out internally. All the data cited in the document are taken either from the “Annual
Additionally Indraprastha Gas Limited (‘IGL’), promoted by GAIL Report 2007-2008” or from “Basic Statistics” of MoPNG or the
and BPCL (both being government companies for undertaking Planning Commission. Documents are available at the official
CGD) has in a writ petition before the Delhi High Court, challenged website of MoPNG, i.e. http://petroleum.nic.in/ or the Planning
that in the absence of a notification for the provision relating to the Commission, i.e. http://planningcommission.nic.in.
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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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. Dinesh Singh completed his law from the National Law School of
He has also done an international legal course on cross-border India University, Bangalore in 1996 and has worked with leading
transactions in New York. Dhritiman started his career with a Law Firms in India. His core area of specialisation is Mergers and
leading law firm in 1994 and became a partner in 2001. Acquisitions, Joint Ventures, Oil & Gas, Asset and Project Finance
Dhritiman specialises in Corporate and Commercial laws, Mergers with special thrust on Aircraft Financing.
and Acquisitions, Foreign Direct Investment, Privatisation, Oil & Dinesh represents both international and domestic clients across
Gas, IT and Telecom. He has worked on some of the most strategic various sectors and has advised on some of the most strategic
transaction including acting for companies involved in the oil and transactions including advising and assisting clients on over two
gas sector. He is currently advising entities undertaking E&P dozen aircraft financing transactions.
operations in India and a French entity having interest in the oil and Dinesh regularly contributes to various publications and has
gas sector in India. published several papers/articles on different areas of law, including
He has attended and presented several papers at various Corporate Laws, Competition Law, Information Technology and
international conferences at Durban, Cancun, Singapore, Malaysia Property Laws in legal Journals, Magazines and Newspapers
and London. Dhritiman has been rated as one of the leading lawyer including in Economic Times and Financial Express. Dinesh is
in India by Asia Law & Practice in its 2001 edition. Dhritiman is a member of various national and international bar associations.
member of various bar associations and is a guest lecturer with
Institute of Chartered Accountants of India.

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,
mergers and acquisitions, real estate, oil and gas, media, entertainment and technology, regulatory and compliance,
inbound and outbound investment and joint ventures. The firm has experienced and effective dispute resolution team
advising on complex litigation and international arbitrations.
Our key attorneys are seasoned legal professionals who bring a wealth of professional experience and expertise with
them. Each of our partners has years of experience and an impeccable reputation of having engineered varied complex
transactions and providing effective legal solutions to businesses across sectors and continents. The firm has offices in
New Delhi and Chennai.

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Chapter 13

Indonesia

Ali Budiardjo, Nugroho, Reksodiputro Philip Payne

1 Overview of Natural Gas Sector 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
1.1 A brief outline of Indonesia’s natural gas sector, including through the conversion of natural gas to LPG.
a general description of natural gas reserves; natural gas
production including the extent to which production is In 2008, Indonesia’s gas consumption was 36.5 billion cubic
associated or non-associated natural gas; import and meters. The fertilizer, petrochemical and power generation are the
export of natural gas, including liquefied natural gas (LNG) principal domestic consumers of natural gas in Indonesia.
liquefaction and export facilities, and/or receiving and re- However, Indonesia’s limited natural gas transmission and
gasification facilities (“LNG facilities”); natural gas pipeline distribution network remains an obstacle to further domestic
transportation and distribution/transmission network; consumption.
natural gas storage; and commodity sales and trading.
Historically, natural gas transmission and distribution activities are
carried out by the state-owned utility Perusahaan Gas Negara
As at 2007, Indonesia had traditional proven natural gas reserves of
(PGN).
112.47 TSCF and probable reserves of 57.60 TSCF. Indonesia is
the eleventh largest holder of proven reserves in the world and the The Government announced a “Masterplan” in 2006 for the
single largest in the Asia-Pacific region. development of a natural gas transmission and distribution network
and subsequently, following a public tender process, the
More than 70 percent of the country’s traditional natural gas
downstream regulator, BPH Migas, awarded concessions (“Special
reserves are located offshore, with the largest reserves found off
Rights”) to construct and operate a Trans Java and a Kalimantan to
Natuna Island, East Kalimantan, South Sumatra, and West Papua.
Java pipeline to non PGN consortia.
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 1.2 To what extent are Indonesia’s energy requirements met
development projects such as those in South Sumatra and Tangguh using natural gas (including LNG)?
LNG in Papua came on stream in 2009 and reached full production.
Currently, approximately 15 percent of Indonesia’s total energy
Indonesia is also rich in coal-bed methane (CBM), with proven
requirements are met using natural gas (including LNG).
reserves put at 453 TSCF - the world’s second largest. The CBM
reserves are located principally in East Kalimantan and South The Government is seeking to increase natural gas use to 30 percent
Sumatra. of the total energy use by 2025.

Two of Indonesia’s LNG production plants, Arun and Bontang,


have experienced declining production in recent years. To help 1.3 To what extent are Indonesia’s natural gas requirements
make up for this shortfall, Indonesia has vigorously engaged in met through domestic natural gas production?
natural gas exploration activities, as it strives to meet its long-term
LNG contract obligations and also to satisfy increasing domestic Indonesia does not import natural gas. All domestic gas demands
demand. are met solely by its domestic gas production.
The Tangguh LNG project in West Papua commenced production in
mid 2009. The Tangguh fields contain 14.4 TCF of proven natural 1.4 To what extent is Indonesia’s natural gas production
gas reserves found onshore and offshore at the Wiriagar and Berau exported (pipeline or LNG)?
blocks. The 2 onshore liquidification trains each have an annual
production capacity of 3.8 million tonnes of LNG. The project is Indonesia exported about 33.5 billion cubic meters of gas mainly in
led by its operator BP (37.16 percent stake) and a consortium the form of liquefied natural gas (LNG) or 47 percent of national
including the China National Offshore Oil Corporation (CNOOC, production to Japan, South Korea, and Taiwan. Indonesia also
16.96 percent), Mitsubishi (16.3 percent), Nippon Oil (12.23 exports natural gas via a pipeline to Singapore and Malaysia from
percent), KG (10 percent), and LNG Japan (7.35 percent). the West Natuna fields and by another pipeline from South Sumatra
Historically, Indonesian natural gas production has been geared to Singapore, which reached 350 MMCFD maximum capacity
toward export markets, but the country has made an effort to shift during 2006.

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Ali Budiardjo, Nugroho, Reksodiputro Indonesia

2 Development of Natural Gas natural gas upstream business activities of the implementing
body (BP Migas).
Government Regulation No. 35 of 2004 as amended by
2.1 Outline broadly the legal/statutory and organisational Government Regulation No. 34 of 2005 and Government
framework for the exploration and production Regulation No. 55 of 2009 regarding upstream oil and gas
(“development”) of natural gas reserves including: business activities.

Indonesia
principal legislation; in whom the State’s mineral rights to
natural gas are vested; Government authority or authorities Decree of the Minister of Energy and Mineral Resources No.
responsible for the regulation of natural gas development; 036 of 2008 regarding development of coal bed methane.
and current major initiatives or policies of the Government Decree of the Minister of Energy and Mineral Resources No.
(if any) in relation to natural gas development. 02 of 2008 regarding implementation of the obligation of
domestic oil and gas demand by the contractor.
Under the 1945 Constitution, the Republic of Indonesia (that is, the
Government) owns all oil and gas rights within its territory. 2.2 How are the State’s mineral rights to develop natural gas
Regulation of natural gas exploration and production is based on reserves transferred to investors or companies
Law No. 22 of 2001 (the “Law”) and its implementing regulations. (“participants”) (e.g. licence, concession, service contract,
Following the enactment of the Law, the State oil and gas company, contractual rights under Production Sharing Agreement?)
and what is the legal status of those rights or interests
Pertamina, which previously had also been responsible for
under domestic law?
regulating upstream oil and gas activities, lost its regulatory role.
This has now been assumed by BP Migas, a State agency, and the
PSCs, (referred to in the Law as a “cooperation contract”) are
Ministry of Energy and Mineral Resources. Downstream activities
entered between the participants and BP Migas. The PSC is a
(which include processing, transportation, storage and trading) are
legally binding contract governed by, and enforceable in
the responsibility of BPH Migas.
accordance with, Indonesian law.
Private sector companies participate in oil and gas activities through
As noted in question 2.1 the 1945 Constitution provides that the
a Production Sharing Contracts (PSC), entered into with BP Migas.
Republic of Indonesia (that is, the Government) owns all oil and gas
Under the PSC, a contractor is entitled to a certain percentage of oil
rights within its territory.
and/or gas production. Upstream activities may be undertaken by
either an Indonesian legal entity or a foreign legal entity, however, Ownership of natural gas remains with the Government through
one entity may only have an interest in a single upstream PSC. production until delivery to a third-party purchaser.
Downstream gas activities, must be carried out by an Indonesian
legal entity. In practice, this means that a foreign company must 2.3 If different authorisations are issued in respect of different
establish a local subsidiary and obtain a downstream licence from stages of development (e.g., exploration appraisal or
the Government. production arrangements), please specify those
authorisations and briefly summarise the most important
In recent years, the Government has offered more attractive
(standard) terms (such as term/duration, scope of rights,
production splits and other fiscal terms for new gas blocks and expenditure obligations).
marginal gas fields to try to attract more investment in the
development of natural gas reserves. The PSC covers exploration through production. BP Migas is
As noted in question 1.1, since 2006, the Government has been required to approve a Plan of Development (POD) before the
encouraging the use of natural gas for domestic use. participants can proceed with development. A POD will be in
As the upstream regulator, BPMIGAS has the authority to do the respect of a specific field within a PSC.
following: The general features of PSCs since the enactment of the Law in
To render recommendation to the Minister of Energy and 2001 include:
Mineral Resources (MEMR) in relation to the preparation A term of 30 years.
and tendering of working areas and cooperation contracts.
An initial exploration period of 6 years which may be
To sign PSCs. extended (if no commercial discovery within the exploration
To analyse and render recommendation to the MEMR with period, the PSC may be terminated).
respect to the first Plan of Development (POD) for approval A requirement to submit exploration work programmes to
by the MEMR. BP Migas for approval in accordance with the PSC and
To approve subsequent PODs. adhere to the approved work programmes;
To approve work programmes and budgets. The participants to appoint an operator responsible for
To monitor the implementation of cooperation contracts. managing the works under the PSC.
To appoint seller of the Government’s (oil/gas) entitlement The Government of Indonesia is entitled to a share of the
(BP Migas may collect the Government’s share of gas but production from the PSCs, subject to adjustment in
must appoint another party to sell the gas). accordance with expenditure formulas:
the general distribution for crude oil production after
As a regulator, BP Migas receives a “fee” to fund its activities
recovery of investors’ costs is: participants 62.5%; and
which is 1 percent of State revenue from upstream activities. Government 37.5%; and
The principal legislation for the exploration and production of the general distribution for natural gas production
natural gas are the following: after recovery of investors’ costs is: participants
Law No. 22 of 2001 regarding oil and natural gas (Law 22). 71.4%; and Government 28.6%.
Government Regulation No. 17 of 1974 regarding BP Migas may require participants to offer up to 10% of the
supervision of the implementation of offshore oil and gas participant’s interest to Indonesian interests, under recent
exploration and exploitation. changes to promote greater regional government
Government Regulation No. 42 of 2002 regarding the oil and involvement; BP Migas may require this interest to be
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offered to companies controlled by regional governments in 2.7 Are there any currency exchange restrictions, or
the area in which the PSC is located. The Indonesian restrictions on the transfer of funds derived from
investor is required to pay the cost of acquiring the interest production out of the jurisdiction?
and to meet all financial commitments in the same manner as
other participants. No regulation applies such restrictions.
The PSCs may contain certain income tax and import duty
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concessions, including “tax holidays” for agreed periods.


2.8 What restrictions (if any) apply to the transfer or disposal
Operators are required to follow tender and procurement of natural gas development rights or interests?
rules designed to promote transparency in the tender process.
Participant’s interests in the PSCs may be transferred or A participant has the right to sell/assign/transfer/convey/otherwise
assigned.
dispose all or any part of its participating interest to any affiliate or
Disputes under the PSCs are resolved by international non-affiliate with prior written consent of BP Migas and the
arbitration. MEMR. Any assignee/transferee shall not hold any participating
interest in any other PSC at the same time.
2.4 To what extent, if any, does the State have an ownership During the first three years of the PSC, however, the initial
interest, or seek to participate, in the development of participants shall remain a majority (greater than 50%) holder of the
natural gas reserves (whether as a matter of law or participating interest and shall hold the operatorship. As a rule, the
policy)?
participants shall obtain approval of BP Migas and the MEMR prior
to any direct or indirect change of control.
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.
2.9 Are participants obliged to provide any security or
Additionally, the terms of the PSCs require participants to offer a
guarantees in relation to natural gas development?
10% participating interest in the Production Sharing Contract to an
Indonesian Regional Government-owned company (“BUMD”)
The most recent PSCs require participants to provide a performance
upon first approval of a POD.
bond to cover their seismic shooting commitments during the first
In the most recent tenders for PSCs, Pertamina has been given the three years of the exploration phase. The bond is for 3 years from
right to acquire a 15% Participating Interest over the tendered the effective date of the PSC and the Director General will be
working area on business to business terms with the winners of such entitled to draw down on the bond at any time if the participant
tenders. cannot fulfill its seismic obligations during this 3-year period.

2.5 How does the State derive value from natural gas 2.10 Can rights to develop natural gas reserves granted to a
development (e.g. royalty, share of production, taxes)? participant be pledged for security, or booked for
accounting purposes under domestic law?
State revenues comprise tax and non-tax revenues. The tax
revenues include the applicable corporate and withholding taxes. Indonesian law requires that for effective security to be taken over
Non-tax revenues include the State’s production entitlement and the PSC, BP Migas (as the counterparty to the PSC) must
other revenues in the form of exploration fees and other bonuses acknowledge the security interest.
(e.g. production bonuses).
BP Migas views that a participating interest under a PSC is not a
Generally the current split is: 65 (Government); and 35 property right, as such it will not approve the contractor to pledge
(participants). In theory, the participants can negotiate the its right for security.
production split. Both the Government and the participants may
In practical terms, as BP Migas will acknowledge the security, no
receive their respective production portion in kind.
effective security can be granted over the PSC.
In addition to the production share the Government also taxes the
profits and income of the participants.
2.11 In addition to those rights/authorisations required to
The effective tax rate is 44% for participants. Operating costs, explore for and produce natural gas, what other principal
capital expenditures and bonuses are deductible from taxable Government authorisations are required to develop natural
income. Losses are carried forward indefinitely. gas reserves (e.g. environmental, occupational health and
The Government may also receive a signature bonus and production safety) and from whom are these authorisations to be
bonus based on the terms of the PSC. obtained?

PSC participants must conduct an environmental


2.6 Are there any restrictions on the export of production? monitoring/management assessment (UKL/UPL), and in some
circumstances, may need to conduct an environmental impact
Yes - upstream contractors are required to make at least 25% of assessment (AMDAL) in relation to the proposed development,
their natural gas entitlement available for the Domestic Market which should then be approved by the relevant government
Obligation (DMO). DMO commences five years from the authorities. The participants must monitor and submit regular
production start of each field. reports on its compliance with the UKL/UPL or AMDAL.
If BP Migas does not notify the participants of any potential All participants are required to comply with applicable Indonesia
domestic buyers or the negotiation with the potential domestic occupational health and safety regulations.
buyers fails, the participant may request BP Migas’ approval to sell
the DMO quantity in the international market.

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2.12 Is there any legislation or framework relating to the may only conduct downstream activities if these form part of their
abandonment or decommissioning of physical structures upstream activities.
used in natural gas development? If so, what are the
A separate downstream general business licence from the Minister
principal features/requirements of the legislation?
is required in order to carry out each type of downstream activity,
e.g. for transportation, a Transportation Business Licence is
Upon the termination of the PSC, or the relinquishment or
required. However, if a company performs downstream activities

Indonesia
abandonment of any field or exploratory well, participants must
that overlap with other downstream activities, the company will
remove all equipment in a manner acceptable to BP Migas and the
only be required to obtain a single business licence.
Minister, and must perform all necessary site restoration activities.
In addition to the general business licence issued by the Minister,
In the annual Work Programme and Budget (WP&B), the
gas transportation through a section of transmission pipelines or
participants shall include an estimate of removal and restoration
through a gas distribution network requires an additional Special
costs for each exploratory well. All expenditures incurred by the
Right issued by BPH Migas. The Special Right is granted for the
participants for removal and restoration of their drill sites shall be
term of the transportation business licence or for a maximum of 20
treated as operating costs.
years if no term is stated in that licence. The Special Right is issued
Also in the POD, the participants shall include the required removal through a tender process conducted by BPH Migas, which will
and restoration programme together with a funding procedure. evaluate the bids submitted by the bidders based on their
All restoration funds shall be deposited in an escrow account in a administrative, technical and financial qualifications. A single
state-owned bank. Any amount deposited shall be treated as Special Right will be issued to a company for an area of a
operating costs and any interest earned shall become part of the transmission segment or a distribution network.
escrowed amount.
If the escrow account is not sufficient to finance the removal and 4.2 What Governmental authorisations (including any
restoration activities, the participants shall, at their own account and applicable environmental authorisations) are required to
expense, be responsible and liable for completing activities. construct and operate natural gas transportation pipelines
and associated infrastructure?

3 Import / Export of Natural Gas (including A downstream business licence is required from the MEMR and to
LNG) transport natural gas through pipelines a Special Right from BPH
Migas must also be obtained.
3.1 Outline any regulatory requirements, or specific terms, Construction and operation of these facilities will be subject to the
limitations or rules applying in respect of cross-border regional, provincial and national regulations generally applicable to
sales or deliveries of natural gas (including LNG). the construction and operation of industrial facilities.
The pipeline operator must also prepare of an environmental
BP Migas agrees that the DMO policy (see question 2.6) shall not monitoring/management assessment (UKL/UPL), and in some
be implemented as to prevent or impede the participants from cases, an Analysis of Environmental Impact (AMDAL) study,
fulfilling its obligations pursuant to any pre-existing which must be approved by the relevant government agency. Once
commitment/agreement to sell gas, or to materially erode the agreed in operation, the pipeline operator must submit periodic reports on
economic of the gas project. the environmental impact.
All natural gas sold to any third parties shall be valued at actual
contract sales price.
4.3 In general, how does an entity obtain the necessary land
If BP Migas elects to take any of its portion of gas share in kind, it (or other) rights to construct natural gas transportation
shall advise the participants in writing. The election shall not pipelines or associated infrastructure? Do Government
interfere with proper performance of any sales agreement which the authorities have any powers of compulsory acquisition to
participants have executed prior to the notice. facilitate land access?

In general, land rights will be obtained by negotiating with owners


4 Transportation and occupiers in accordance with prevailing laws.
To the extent these facilities are used for upstream activities within
4.1 Outline broadly the ownership, organisational and the framework of a PSC, the participants are responsible for the
regulatory framework in relation to transportation pipelines payment of these rights and the land that is purchased for a facility
and associated infrastructure (such as natural gas will become the property of the Government, title to which will be
processing and storage facilities). held in the name of BP Migas, while land that is leased for a facility
will be leased in the name of the participants.
As noted in question 1.1, PGN has historically operated the Title to land purchased for facilities used for downstream activities
transmission and distribution networks in Indonesia. outside of a PSC may be held in the name of the business entity
Private companies may own and operate pipelines and storage engaging in the transportation or storage activity.
facilities and for that they must pay a defined contribution or toll to In most cases, the operator procures the land by entering into
BPH Migas, the downstream oil and gas regulatory body, based on agreements with (and paying compensation to) the landowners or,
volumes of transported or sold gas. if the land is owned by the State, through a long term lease
Gas transportation (if this is intended to be a profit centre) is agreement. This is a time-consuming process, both for commercial
considered a downstream oil and gas activity. As such, it must be reasons, and because not all land is certified/registered land. There
carried out by an Indonesian legal entity (which may be are no special rights of compulsory purchase for gas pipeline
domestically or foreign-owned). Foreign-incorporated companies projects.

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4.4 How is access to natural gas transportation pipelines and proposed tariff to BPH Migas together with its justification for the
associated infrastructure organised? tariff.
The proposed tariff should take account of:
BPH Migas has the authority to determine access to natural gas
(i) the direct cost to construct the pipelines;
transportation systems and interconnection of, and cooperation
between, pipeline systems. BPH Migas is authorised to oversee and (ii) the projected income, based on the anticipated gas to be
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transported;
supervise the organisation of gas pipelines and associated
infrastructure. The Special Rights holders are also required to (iii) operational and maintenance costs of the pipeline; and
submit periodical reports to the Minister (copied to BPH Migas) (iv) depreciation.
regarding the planning and development of their business plans. 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
4.5 To what degree are natural gas transportation pipelines to determine its reasonableness.
integrated or interconnected, and how is co-operation
between different transportation systems established and
regulated? 5 Transmission / Distribution

To date, most pipelines that have been built are project-specific and 5.1 Outline broadly the ownership, organisational and
are not interconnected. regulatory framework in relation to the natural gas
PGN has interconnected its pipelines from Sumatra and West Java. transmission/distribution network.

The Masterplan issued by the Government proceeds on the basis of


IBPH Migas has awarded Special Rights to operate transmission
an integrated national transmission and distribution network,
and distribution pipelines to private sector participants.
however, the Masterplan does not specify how this is to occur.
PGN is listed on the Indonesian Stock Exchange but remains
majority Government owned. PGN has entered into a number of
4.6 Outline any third-party access regime/rights in respect of joint ventures with private sector participants in respect of the
natural gas transportation and associated infrastructure. construction and operation of specific pipelines.
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 5.2 What Governmental authorisations (including any
associated infrastructure to grant capacity or expand its applicable environmental authorisations) are required to
facilities in order to accommodate the new customer? If operate a distribution network?
so, how are the costs (including costs of interconnection,
capacity reservation or facility expansions) allocated? Essentially the same as for transmission pipelines - see question 4.2.

BPH Migas has issued regulations requiring third party access to


transportation facilities held by a Special Rights holder. 5.3 How is access to the natural gas distribution network
organised?
The regulations provide that a Special Rights holder must allow
third party access to its natural gas transportation facilities under A Special Right to operate a transmission segment or a section of a
specific terms to be agreed by Special Rights holder and the third gas distribution area will be granted through a tender process
party. carried out by BPH Migas. The Special Right holder must give
If a Special Right holder refuses to give third-party access to its gas third parties access to its distribution network.
transportation pipeline, it will need to justify the reasons for its The third-party access will be regulated based on an agreement
decision to BPH Migas. If BPH Migas determines that the Special between the Special Right holder and the user, under the
Right holder is acting unreasonably, it may revoke the Special supervision of BPH Migas.
Right.
If a Special Right holder has no more capacity, and there is a gas
5.4 Can the regulator require a distributor to grant capacity or
supply shortage, then it may ask BPH Migas’s approval to expand
expand its system in order to accommodate new
its capacity or, if the Special Right holder cannot satisfy the
customers?
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
There is no specific power given to BPH Migas to require a Special
special rights over the existing segment will still continue to have
Rights holder to expand its capacity.
the Special Right over its own segment.

5.5 What fees are charged for accessing the distribution


4.7 Are parties free to agree the terms upon which natural gas network, and are these fees regulated?
is to be transported or are the terms (including costs/tariffs
which may be charged) regulated?
Special Rights holders are required to pay a monthly tariff to BPH
Migas, based on the amount of natural gas transported multiplied by
By regulation, BPH Migas has the power to set the tariff that will
a percentage of the transportation tariff per thousand cubic feet.
be charged by the Special Rights holder. The Special Rights holder
The percentage to be applied to the transportation tariff varies
may charge the same tariff for customers at any delivery point
among the segments.
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 Special Rights holders may be liable to pay a Special Rights fee to
customer. BPH Migas, however, the amount of this fee has not yet been set.
In order to fix the tariff, the Special Right holder will submit the
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5.6 Are there any restrictions or limitations in relation to 7.3 Is there any regulation of the price or terms of service in
acquiring an interest in a gas utility, or the transfer of the LNG sector?
assets forming part of the distribution network (whether
directly or indirectly)? The Government effectively determines prices through the LNG
facility marketing the Government’s production share of the gas
Special Rights to operate a section of the gas transmission network (and LNG) and the Government approving the sale price - this

Indonesia
or a section of the gas distribution area are not directly transferable. approved price will flow on the participants LNG.
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 8 Competition
required if the Special Rights holder company is an Indonesian
incorporated company with foreign shareholders). 8.1 Which Governmental authority or authorities are
responsible for the regulation of competition aspects, or
anti-competitive practices, in the natural gas sector?
6 Natural Gas Trading
The Business Competition Supervision Commission (KPPU) is the
6.1 Outline broadly the ownership, organisational and governmental authority responsible for the regulation of
regulatory framework in relation to natural gas trading. competition.
Please include details of current major initiatives or
policies of the Government or regulator (if any) relating to
8.2 To what criteria does the regulator have regard in
natural gas trading.
determining whether conduct is anti-competitive?

For natural gas trading, the entity must be granted a licence from the
The main criteria applied by the KPPU to determine if conduct is
Minister. The licensed trader must:
uncompetitive are:
(i) ensure a continued supply of natural gas through pipelines in
(i) the occurrence or potential occurrence of monopolistic
its trading distribution network;
practices; essentially control over the relevant market by a
(ii) maintain adequate trading facilities; and business to such an extent that it is able to set prices and
(iii) submit a monthly activity report to the Minister, with a copy harm the public interest; or
delivered to BPH Migas. (ii) unfair competition; essentially, adverse competitive
conditions which bar or prevent competition or competition
which is unlawful or fraudulent.
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? 8.3 What power or authority does the regulator have to
preclude or take action in relation to anti-competitive
The regulations do not specify which commodities can be traded. practices?

The KPPU has a wide discretion to decide whether to take action in


7 Liquefied Natural Gas relation to anti-competitive practices.

7.1 Outline broadly the ownership, organisational and 8.4 Does the regulator (or any other Government authority)
regulatory framework in relation to LNG facilities. have the power to approve/disapprove mergers or other
changes in control over businesses in the natural gas
LNG facilities may either be operated as upstream as part of the sector, or proposed acquisitions of development assets,
PSC to produce product to be sold under the PSC, or downstream transportation or associated infrastructure or distribution
as independent profit centres. assets? If so, what criteria and procedures are applied?
How long does it typically take to obtain a decision
An operator of a downstream LNG facility requires a processing
approving or disapproving the transaction?
business licence from the Minister.
The most recent PSCs provide that changes in control in the
7.2 What Governmental authorisations are required to upstream sector need to be approved by BPMIGAS and the
construct and operate LNG facilities? Minister.
A transfer of a participating interest in a PSC requires an approval
The legal entity operating the downstream processing facilities
from BPMigas and the Minister. The approval process can take 4-
must be an Indonesian legal entity (which may have foreign
8 weeks or longer.
shareholders).
Changes in control in the downstream sector do not need to be
An Indonesian legal entity having foreign shareholders and
approved by BPH Migas. However a Special Right is not, itself,
operating in the downstream sector must firstly be approved by the
transferable.
Investment Coordinating Board.
Any Indonesian legal entity having foreign shareholders and
General law licences and approvals to build and operate large scale
operating in the downstream sector must firstly be approved by the
facilities will be required for an LNG facility.
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 10.2 Is Indonesia a signatory to, and has it duly ratified into
trillion (about US$ 260 million) of combined assets value, Rp 5 domestic legislation: the New York Convention on the
trillion (about US$520 million) of combined revenues, or Recognition and Enforcement of Foreign Arbitral Awards;
maintaining more than 50% of market share. KPPU has circulated and/or the Convention on the Settlement of Investment
a government regulation draft on this and has stated its aim to have Disputes between States and Nationals of Other States
(“ICSID”)?
the regulation issued in 2010.
Indonesia

Indonesia is a signatory to the NY Convention, ratified by


9 Foreign Investment and International Presidential Decree No. 34/1981. The provisions of the NY
Obligations 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
9.1 Are there any special requirements or limitations on satisfy the required conditions.
acquisitions of interests in the natural gas sector (whether
development, transportation or associated infrastructure, Indonesia is also a signatory to the ICSID convention.
distribution or other) by foreign companies?
10.3 Is there any special difficulty (whether as a matter of law
Investment in the upstream sector can be carried out directly by a or practice) in litigating, or seeking to enforce judgments
foreign company. or awards, against Government authorities or State organs
(including any immunity)?
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 There is no special difficulty. There have been cases where the
its shareholders). There is no foreign shareholding limitation in the Government has been sued before the local courts.
downstream natural gas sector. 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
9.2 To what extent is regulatory policy in respect of the natural
those powers are exercised. Consequently, Indonesian judges can
gas sector influenced or affected by international treaties
or other multinational arrangements? sometimes be influenced by factors, issues and evidence which may
not be immediately apparent on the face of the court documents in
On 5 July 2002, Indonesia signed a memorandum of understanding question.
with a number of ASEAN (Association of South East Asian Nation)
members to develop an inter-ASEAN natural gas pipeline network. 10.4 Have there been instances in the natural gas sector when
The participating countries are Brunei, Malaysia, Philippines, foreign corporations have successfully obtained judgments
Singapore, Thailand and Vietnam. or awards against Government authorities or State organs
pursuant to litigation before domestic courts?

10 Dispute Resolution We are not aware of any specific cases relating to the natural gas
sector.
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
11 Updates
context of disputes between the applicable Government
authority/regulator and: participants in relation to natural 11.1 Please provide, in no more than 300 words, a summary of
gas development; transportation pipeline and associated any new cases, trends and developments in Gas
infrastructure owners or users in relation to the Regulation Law in Indonesia.
transportation, processing or storage of natural gas; and
distribution network owners or users in relation to the
The Government has introduced the following policies in the past
distribution/transmission of natural gas.
year:
PSC’s will generally specify the dispute resolution procedures and (i) prioritising the use of natural gas for the domestic energy
sector;
forum.
(ii) the development of a domestic transmission and distribution
Under Indonesian law, the parties are free to select the forum they system of natural gas pipelines (with the intention that these
wish to use. This means that the parties are free to submit their claims be integrated and assist in the development of the domestic
either to Indonesian or to non-Indonesian courts, or