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INTERNATIONAL PIPELINES

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Factors influencing international gas pipelines
Supply push or demand pull or both?
Ultimate demand gas or electricity?

Politics
Major impact on most projects

Market status
Is target market established or new? Traditional or liberalised?

How is transportation tariff guaranteed?
Sale of gas - to whom? Sale of electricity? Can ultimate energy consumers – who may want electricity, not gas – afford the price?
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Project evolution
Project conception by lead sponsor
Supply push - e.g. Algeria, Russia Demand pull - e.g. – Chile, India, China

Consortium formation
Investors, buyers, sellers, government agencies Sales & purchase agreements Land access negotiation & Government agreement

Financing arrangements
Lead bank Other syndicated banks/agencies
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Case studies
Algeria to Spain & Portugal
An exercise in politics & demand

Chile - Argentina
A liberalised approach to a new gas market

Later developments
Relationships suffer after original success

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Algerian gas to Spain and Portugal
12%

MARSELHA VIGO BARCELONA PORTO MADRID LNG

OPERATING MAGHREB PIPELINE (OPERATING) IN PROJECT OR CONSTRUCTION
CARTAGENA LNG

LISBOA LNG HUELVA LNG CORDOBA

> 60%

2.35 bcm by 2003 HASSI R´MEL

Source: Gas Strategies Online

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The Spanish gas network
KEY
Pipeline Network Pipeline capacities

Spain pipeline capacities and contracted supplies
Contracted volumes Pipeline under construction LNG Terminal Under Construction Consumption LNG Terminal Planned LNG Terminal

2005
30.67

2.25 2.10 6.66

2.37 1.00

9.99

0.83

Working Storage Capacity Depleted Gas Field

Serrablo Gaviota

0.64

LNG Terminal
2.91 2.80 0.24

Barcelona Cartagena Huelva Source: © OECD/IEA, 2003

3.74 4.30 0.85 0.85

0.10

4.99

6.00 8.90

Source: Gas Strategies Online

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GME (Gazoduc Maghreb Europe) – The Genesis
Early studies, 1956 to 1980s
Failed over political or economic problems (Algeria-Morocco and Spain-Portugal) Spain imported Algerian gas as LNG Algeria and Italy built TransMed pipeline 1978-1983

Breakthrough
Forecast Spanish supply gap (power generation) in mid 1990’s Algeria & Morocco rapprochement 1989

Planning by Omegaz Etudes
Semi-public company, backed by heads of State, ratified by Parliaments Partners included Sonatrach, SNPP, Enagas, GdP And also Ruhrgas & Gaz de France Spent $7.5million, demonstrated feasibility & was then dissolved
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GME – Organisation
Each country owned pipe & gas in its territory Sonatrach delivered gas at Algeria/Morocco border Enagas bought for power generators
1 Bcm in 1996 rising to 4 Bcm in 2000 Enagas initial commitment 6 Bcm/year Committed to project in 1992

Portugal committed to 2.5 Bcm in 1994
Deliveries started in 1997

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GME project schedule
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Project Planning
Feasibility study Planning Basic Engineering Contracts and Agreements Detailed Design and Purchasing Construction Test and Commissioning

Project Timetable
Morocco / Algeria Feasibility Study Morocco / Algeria Border Dispute Resolved Omegaz-Etudes Set Up Transit Agreements Morocco, Spain, Algeria Survey Straits of Gibraltar Construction of Gibraltar Crossing Construction of Algerian Section Construction of Moroccan, Spanish Sections Gas Flows First Gas Flows to Portugal

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GME – Funding
Total Project $2.3 billion Funded by loans from
Exim Bank, USA, supporting Bechtel European Investment Bank (EIB) Spanish Institute of Official Credit (ICO) Spain & Portugal aided by the European Union. Export credit agencies, Hermes, Coface

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Lessons from GME pipeline
Simplicity pays
A single planning & design company provides focus Single Buyer/Single Seller initiated project

Transit country gains access to gas Electricity major consumer Windows of opportunity can close Incremental sales may follow initial commitment

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Algeria-Iberia - What happened next?

Continued growth in Iberian gas usage Restriction on Algerian share of Spanish market to 60% Algerian expansion plans continue Medgaz pipeline direct from Algeria to Spain Limits on Sonatrach marketing through Medgaz The Gassi Touil / Andaluz fiasco

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Chile: Three unconnected markets - little indigenous gas

Northern mining district (no gas) Central (Santiago) area (no gas) Southern methanol industry (some Chilean and Argentine gas) Huge distances

Source: IEA
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Argentine gas exports to Chile
State to State discussions 1970s & 1980s
Resolution (by the Pope!) of Beagle Channel dispute in 1984 improved climate

Chile a pioneer in utility privatisation in mid 1980s, Argentina post 1989. Chilean Gas Pipeline Law dates to 1934
No monopoly No tariff regulation No specific encouragement or discouragement for gas

1991 Argentina/Chile treaty specified
Open access to pipelines Non-discrimination

Two major power generators in Chile
Endesa (Hydro-electric); Gener (Thermal)

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Central Chile pipelines

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Chile – How did the market decide?
Transgas strategy Seek buyers for gas Endesa led purchase of gas for power generation BG to handle gas distribution

Gas Andes
Seek commitment to TRANSPORTATION capacity Proposed an “Open Season” Forced Transgas to follow Offered lower tariffs

Endesa capitulated and booked capacity Project on project competition drove tariffs below the level a regulator would have demanded
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The Gas Andes project
Funding
Initially equity finance Project finance mid way through construction Underwritten by 15 year Send or Pay contracts

Argentine and Chile pipe companies Tariffs non discriminatory, monitored by powerful anti-monopoly body
Terms same for all No restriction in trading capacity Markets can decide when governments create conditions and then stand aside
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Northern Chile pipelines

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Northern Chile – Pipe on Pipe on Wire competition
Driven by Power Generators Enersis - Gas Atacama
3Bcm/yr, $350MM investment, 928km, tariff $0.85/MMBtu Partnered with CMS interest in TGN pipeline

Edelnor - NorAndino
3Bcm/yr, $330MM investment, 1070km, tariff $1.05/MMBtu Locally dominant thermal plant - Coal Partnered with Tractebel

Gener - built a Transmission link
220kV, 408km, $160MM investment To Argentine power station it built, cost $300MM

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Lessons from Chile
The market can deliver gas without direct Government intervention A specialist regulator is not essential in a developing market – BUT you do need
A strong anti-trust regulator Trust in Rule of Law and a tradition of independence Participants expect regulation to evolve in time

Project on project competition
Drives down rates - below what a regulator would require Can result in building of over-capacity

Competing electricity generators were essential to the market development

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Chile-Argentina - What happened next?
Argentine financial crisis International companies/investment withdraw Argentina gas runs down Argentina restricts exports - Chile suffers Chile looks for other sources
Methanex encourages southern exploration Quintero LNG – 2.5 mtpa

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Argentine gas exports to Chile
400 350 300 M M cm 250 200 150 100 50 0
04 03 05 02 97 98 99 00 01 20 20 20 19 19 19 20 20 20 20 20 06 07

Methanex YPF EGS Norandino Gas Andes

Source: Enargas © Alphatania 22

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Recent restrictions in Argentine exports to Chile

Source: La Comisión Nacional de Energía (CNE)
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REFERENCE

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GME – Technical details
Algerian section
Owned by Sonatrach $675mm, 520km, 48”, from Hassi R’Mel field

Moroccan section
$762mm, 540km, 48”, 2 compressors, potential for additional 6 compressors

Straits of Gibraltar
$146mm, 2x22” lines in 400m water

Spanish sections
$277mm, 274km, 48” to Cordoba $440mm including 250km, 48” to Portugal and Portuguese grid

Design capacity 10Bcm with expansion to 20Bcm/year
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Portuguese primary energy consumption 1992-2002
30 25 20 15 10 5 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Coal Oil HE Gas

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Volumes delivered through GME
Volumes delivered through GME
12 10 BCM 8 6 4 2 0
19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 19 96

Portugal Spain

Source: Gas Strategies Online

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Argentine – Chile pipelines
Nor Andino

North Chile Market
Power Generation for mining

Gas Atacama InterAndes

Salta Gas Basin
TGN Gas Pipelines 28

Central Chile Market
Power generation, industry and gas distribution in cities

Gas Andes Transgas
Gasoducto del Pacifico

Neuquen Gas
Producing Basin

Gas Sur

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