ICLG The International Comparative Legal Guide to: Oil & Gas Regulation 2019 14th Edition

A practical cross-border insight into oil and gas regulation work

Published by Global Legal Group, in association with Ashurst LLP, with contributions from:

Advokatfirmaet Simonsen Vogt Wiig AS Miyetti Law ALC Advogados Morais Leitão, Galvão Teles, Soares da Silva & Associados Ashurst LLP Moravčević, Vojnović and Partners in cooperation with Schoenherr Bernitsas Law Nunziante Magrone Blake, Cassels & Graydon LLP Project Lawyers Dentons Rustam Kurmaev and Partners Estudio Randle Schoenherr Faveret Lampert Advogados SSEK Legal Consultants Gjika & Associates Attorneys at Law Stone Pigman Walther Wittmann PLLC González Calvillo, S.C. Torres, Plaz & Araujo HRA Advogados Türkoğlu & Çelepçi in cooperation with Schoenherr Jeantet Unicase Law Firm LPA-CGR Avocats Youssry Saleh & Partners The International Comparative Legal Guide to: Oil & Gas Regulation 2019

General Chapters:

1 Investment Protection: Managing Investment Risk in an Uncertain World – Tom Cummins & Emma Martin, Ashurst LLP 1

2 Developments in the North American Oil and Gas Sector – John P. Cogan, Jr. & Annie G. McBride, Stone Pigman Walther Wittmann PLLC 5

Contributing Editors Philip Thomson & Julia Country Question and Answer Chapters: Derrick, Ashurst LLP 3 Albania Gjika & Associates Attorneys at Law: Gjergji Gjika & Ergys Hasani 11 Sales Director Florjan Osmani 4 Algeria LPA-CGR Avocats: Rym Loucif 20 Account Director Oliver Smith 5 Angola ALC Advogados: Irina Neves Ferreira & João Francisco Cunha 33 Sales Support Manager 6 Argentina Estudio Randle / Stone Pigman Walther Wittmann PLLC: Toni Hayward Ignacio J. Randle & John P. Cogan, Jr. 42 Sub Editor Jenna Feasey 7 Austria Schoenherr: Bernd Rajal & Dagmar Hozová 54 Senior Editors 8 Brazil Faveret Lampert Advogados: José Roberto Faveret Cavalcanti & Carolina Rachel Williams Assano Massocato Escobar 66 Caroline Collingwood 9 Canada Blake, Cassels & Graydon LLP: Kevin Kerr & Christine Milliken 79 CEO Dror Levy 10 Croatia Schoenherr: Bernd Rajal & Petra Šantić 92 Group Consulting Editor Alan Falach 11 Egypt Youssry Saleh & Partners: Maha Ibrahim & Ahmed Salah 109 Publisher 12 France Jeantet: Thierry Lauriol & Martin Tavaut 117 Rory Smith 13 Gabon Project Lawyers: Jean-Pierre Bozec 135 Published by Global Legal Group Ltd. 14 Greece Bernitsas Law: Yannis Seiradakis & Eleni Stazilova 145 59 Tanner Street London SE1 3PL, UK 15 Indonesia SSEK Legal Consultants: Fitriana Mahiddin & Syahdan Z. Aziz 154 Tel: +44 20 7367 0720 Fax: +44 20 7407 5255 16 Italy Nunziante Magrone: Fiorella F. Alvino & Giovanna Branca 164 Email: [email protected] URL: www.glgroup.co.uk 17 Kazakhstan Unicase Law Firm: Zhanar Abdullayeva 176 GLG Cover Design 18 Mexico González Calvillo, S.C.: Jorge Cervantes & Diana María Pineda Esteban 187 F&F Studio Design 19 Moldova Schoenherr: Andrian Guzun 198 GLG Cover Image Source iStockphoto 20 Mozambique HRA Advogados: Paula Duarte Rocha & Tiago Arouca Mendes 210

Printed by 21 Nigeria Miyetti Law: Dr. Jennifer Douglas-Abubakar & Fatimah Dattijo Muhammad 221 Ashford Colour Press Ltd January 2019 22 Norway Advokatfirmaet Simonsen Vogt Wiig AS: Bjørn-Erik Leerberg & Frode Vareberg 231 Copyright © 2019 Global Legal Group Ltd. 23 Portugal Morais Leitão, Galvão Teles, Soares da Silva & Associados: All rights reserved Tomás Vaz Pinto & Claudia Santos Cruz 242 No photocopying 24 Russia Rustam Kurmaev and Partners: Rustam Kurmaev & Vasily Malinin 250 ISBN 978-1-912509-53-9 ISSN 2051-3348 25 Serbia Moravčević, Vojnović and Partners in cooperation with Schoenherr: Miloš Laković & Aleksandra Petrović 267 Strategic Partners 26 Turkey Türkoğlu & Çelepçi in cooperation with Schoenherr: Levent Çelepçi & Murat Kutluğ 278

27 United Arab Emirates Dentons: Mhairi Main Garcia & Stephanie Hawes 286

28 United Kingdom Ashurst LLP: Philip Thomson & Julia Derrick 299

29 USA Stone Pigman Walther Wittmann PLLC: John P. Cogan, Jr. & James A. Cogan 320

30 Venezuela Torres, Plaz & Araujo: Juan Carlos Garantón-Blanco & Valentina Cabrera Medina 333

Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720

Disclaimer This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. 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 professional when dealing with specific situations.

WWW.ICLG.COM EDITORIAL

Welcome to the fourteenth edition of The International Comparative Legal Guide to: Oil & Gas Regulation. This guide provides corporate counsel and international practitioners with a comprehensive worldwide legal analysis of oil and gas regulation. It is divided into two main sections: Two general chapters. These are designed to provide readers with an overview of key issues and developments affecting oil and gas regulation. Country question and answer chapters. These provide a broad overview of common issues in oil and gas regulation in 28 jurisdictions. All chapters are written by leading energy lawyers and industry specialists and we are extremely grateful for their excellent contributions. Special thanks are reserved for the contributing editors Philip Thomson and Julia Derrick of Ashurst LLP for their 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.com.

Alan Falach LL.M. Group Consulting Editor Global Legal Group [email protected] Chapter 1

Investment Protection: Managing Investment Risk Tom Cummins in an Uncertain World

Ashurst LLP Emma Martin

We live in an uncertain world, where the risk landscape for Commission on International Trade Law, (UNCITRAL) is common. international investors in the energy industry has seldom been as Those rules typically provide for hearings to be held in private, and challenging. there is little public disclosure of details about the case, the parties’ Political and economic risk factors such as Brexit, import restrictions respective positions, and any awards rendered, although there have in the Middle East, the US-China “trade war” and the high-profile been a number of steps in recent years to promote transparent use of financial sanctions are the daily fodder of the financial press. arbitration of investment disputes. There is also little scope for Arguably, in this environment international investors are in need of the parties to challenge or appeal unsatisfactory awards, which are the protection offered by investment treaties, no matter whether the enforceable globally under either the New York Convention or the location of their investment is in a traditionally stable jurisdiction Washington Convention (in the case of ICSID awards). like the UK or a country with a track record of political instability. However, this need for investment protection comes at a time when The Changing Landscape investor-state dispute settlement (ISDS) is subject to increasing public criticism, giving rise to a shifting landscape in the nature and Over the past decade, there has been a significant increase in the extent of the investment protection available. number of claims brought by foreign investors against the states This chapter considers some of the key global developments which hosting their investments. Many of those claims have been against have the potential to impact foreign investors, and the extent to emerging economies with stretched budgets, and in respect of which investors can mitigate against such risks by restructuring politically controversial projects. They have frequently resulted their investments to take advantage of investor protection rights in states being ordered to pay hundreds of millions, if not billions, and guarantees available under existing bilateral and multilateral of dollars in compensation to multinational corporations. Many of investment treaties. those claims have arisen in the oil and gas, power and renewables industries. Traditional Investor Protection Much has been written both in the press and in academic journals condemning ISDS. Critics have derided ISDS for amounting Foreign investors have long sought to structure their investments so to “hotel room justice”, where arbitration hearings in politically as to take advantage of the investor protection provisions included charged cases take place in private, away from public scrutiny, in bilateral and multilateral investment treaties. in the conference rooms of luxury hotels. Having once justified such treaties as a means of encouraging foreign direct investment, Bilateral investment treaties (BITs) are public international law a number of states are finding it difficult to quantify the economic agreements whereby two states agree to provide reciprocal benefits realised and to justify to their own citizens the benefits of guarantees and protection for investments made by foreign investors remaining a party to BITs and MITs in their current form. within their jurisdiction. States typically agree that foreign investors and their investments will be afforded fair and equitable treatment, This fresh look at BITs and MITs is leading to policy decisions and freedom from discrimination (judged against the treatment that the legal, regulatory and political reform which could, in turn, adversely host state provides to both domestic investors and investors from impact foreign investors. In May 2018, the United Nations third states), and protection against expropriation without adequate Conference on Trade and Development issued a report noting that compensation. Multilateral investment treaties (MITs) often provide investment treaty making had reached a “turning point”. It noted similar guarantees, but have three or more state signatories. One of that the number of new investment treaties concluded in 2017 was the most high-profile MITs is the Energy Charter Treaty. the lowest since 1983 and that, for the first time, the number of effective treaty terminations outpaced the number of new treaties. BITs and MITs typically provide investors with a direct means of enforcing their rights by allowing them to commence arbitration proceedings against the host state. This is particularly valuable as it European Intervention dispenses with the requirement for a separate arbitration agreement between the investor and the state. In Europe, it is perhaps in part because of such growing public The type of arbitration provided for in BITs and MITs varies, scrutiny that the European Commission has taken steps itself to but arbitration under the rules of the International Centre for the condemn bilateral investment treaties. In June 2015, the European Settlement of Investment Disputes (ICSID, a World Bank entity), Commission commenced infringement proceedings against Austria, Stockholm Chamber of Commerce (SCC), or the United Nations the Netherlands, Romania, Slovakia and Sweden, asking them

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formally to denounce their intra-EU BITs (BITs concluded between in the Indian courts, and thus that investors will be significantly EU Member States) on the basis they were incompatible with EU delayed in getting their dispute before an international tribunal). law. All but Sweden have since terminated some – if not all – of All of this presents a significant degree of uncertainty and their intra-EU BITs. unforeseeability for investors. Will investments currently benefitting More recently, in March 2018, the European Court of Justice (ECJ) from investor protection guarantees continue to do so in the future? handed down its decision in the Achmea case.1 That case concerned Will the standards and level of protection currently offered remain a Slovak-Dutch BIT, which had been invoked by the Dutch investor the same? Is the level of protection likely to change in the future? against the Slovak Republic in response to the Slovak Government’s None of these questions can be answered with any degree of decision to change its health insurance legislation. The ECJ held confidence. It simply is not yet clear exactly how the landscape will that the BIT violated EU law because it infringed the ECJ’s role as change and what the impacts of such change will be. What is clear the final arbiter of EU law (as it permitted the investor to commence is that we have entered a new period fraught with uncertainty. What international arbitration proceedings in respect of disputes arising can investors faced with such uncertainty do? under the treaty, which would in turn involve an international tribunal determining matters of EU law). Investor Protection – is Restructuring an The Achmea decision concerned the decision of an ad hoc tribunal appointed under an intra-EU BIT, and it is not yet clear whether Option? the ECJ will take a similar stance in relation to ICSID arbitration One issue for consideration by foreign investors who do not commenced under an intra-EU BIT, or with regards to arbitration currently have the benefit of treaty coverage (or who have treaty proceedings (ad hoc or otherwise) commenced under an intra- coverage that is likely to be eradicated or “watered down” in the near EU BIT but seated outside of the EU. The ECJ’s views on the future) is whether the investment can be restructured so as to ensure legitimacy of MITs (such as the Energy Charter Treaty) also remain appropriate treaty coverage in the future. If, for example, intra-EUs unclear. However, what is clear is that intra-EU ISDS, as we have are likely to fall away, can foreign investors revisit the nationality of long known it, will very quickly become a thing of the past. their investment vehicle in order to secure the nationality of a state that retains appropriate treaty coverage with the host state? Treaty Termination Brexit – itself a source of significant uncertainty – may in fact provide an opportunity for European investors in that regard. It The problem is not confined to Europe. A number of states have remains to be seen how the UK’s legal and regulatory landscape sought to amend their BIT and MIT obligations in recent years. will change as a result of Brexit, but in circumstances where the UK Perhaps most famously, the current US President, as part of his will no longer be part of the European Union, and may be outside election campaign, promised to “tear up” the North American of the jurisdictional reach of the ECJ, Brexit may provide investors Free Trade Agreement (NAFTA), the MIT that has regulated trade in Europe with a means of ensuring that their investments remain between Canada, Mexico and the US for around 14 years. NAFTA subject to traditional investor protection and ISDS provisions, is currently being renegotiated, with Mr. Trump continuing to should they re-route their investments into the EU through the threaten to terminate it if the revisions are not to his liking. UK. The availability of that option, of course, depends on the UK NAFTA is only one of the MITs to fall foul of Mr. Trump’s entering into, and in some cases maintaining, investment treaties protectionist policies. The US withdrew from the Trans-Pacific with favourable provisions for investors as well as there being Partnership (an MIT which would otherwise have involved countries no denial of benefits clause in those treaties (which would permit responsible for 40 per cent of the world’s economic output) in states to deny treaty protection benefits to investors who have January 2017, with the remaining state parties continuing with the no substantial business presence in the state in which they claim agreement but narrowing the ISDS provisions. nationality for the purposes of investment protection and impose The US is not the only state looking to reduce the scope for an additional nationality hurdle that some restructurings may not be investors’ claims against it. A number of Latin American states, able to meet). as well as India and South Africa, have terminated their BITs in Putting the UK position to one side, whether restructuring is recent years, many as a result of substantial arbitral awards obtained necessary and appropriate will depend upon the foreign investor’s by investors against them. Some states, including Bolivia, Ecuador current rights and how they are likely to change in the future. Most and Venezuela, have gone a step further and withdrawn from ICSID BITs do not expressly prohibit the restructuring of investments to altogether. The Netherlands has published a new draft investment gain treaty protection. Indeed, it has been held that the restructuring treaty for comment. It significantly restricts the protections afforded of investments through a holding company in a third country in to investors under Dutch BITs. The Dutch Government intends to order to gain treaty protection against a breach of rights by the use the draft treaty to renegotiate its existing BITs with non-EU host state authorities is a “perfectly legitimate goal as far as it states. concern[s] future disputes”2 and that “corporate groups are routinely restructured for a variety of reasons”.3 Protectionist Policies The key point is that treaty protection will be secured only where the restructuring was motivated by an aim to obtain such protection Even in those states where treaties remain in place, the position in respect of “future disputes”. Arbitral tribunals have used the remains uncertain for foreign investors. States are displaying “abuse of rights” doctrine to decline considering investment treaty increased reluctance to enter new treaties and to renew treaties that claims where the restructuring has been motivated wholly or partly are due to lapse. Some have sought to amend their model treaties to by a desire to gain access to investment protection in circumstances “water down” the investor protection obligations they will take on where a specific dispute exists or is foreseeable. in the future. India, for example, now requires investors to exhaust Most notably, in the Philip Morris case,4 the Australian Government all local remedies before commencing arbitration proceedings succeeded in arguing in its defence that the Philip Morris tobacco (meaning that any foreign investment dispute will need to originate company had restructured its investment (so as to route it through

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Hong Kong) primarily for the purpose of gaining access to the ISDS Restructuring may allow investors to position their investment under provisions in the Hong Kong-Australia BIT once it became likely the protective umbrella of a different BIT or MIT, but they may fail that tobacco plain packaging laws would be introduced, which it in subsequent attempts to seek redress from the state hosting their would want to dispute. As a result, the tribunal held that Philip investment if they restructure for the sole or dominant purpose of Morris was not entitled to rely upon the investment protection securing rights against the host state to pursue a foreseeable dispute. standards set out in the Hong Kong-Australia BIT. Early consideration of the factors likely to impact a foreign direct Philip Morris is not the only case on the topic. Other tribunals investment, and a careful approach to any restructuring, will be have also provided guidance on the extent to which a restructured crucial if investor protection rights are to be preserved. Therefore, investment will be subject to investment treaty protection. The key if restructuring is considered necessary, it should be conducted in a question is whether the dispute was in existence or foreseeable at the timely manner, long before any specific dispute arises or becomes time of the restructuring. If there was a very high probability of a likely. Properly documenting the reasons for the restructuring will specific future dispute, and not a mere possible future controversy, also be key. the restructuring to take advantage of a specific treaty will likely be It may be that it is too late to restructure with any real benefit. held to constitute an abuse of rights. In those circumstances, investors may want to consider seeking While there is no system of binding precedent in public international additional contractual protections from the state and/or lobbying the law, publicly available investment treaty awards are often considered host Government to reconsider its actions (or intended actions). persuasive, if not de facto precedent. Together with the increased In either case, early legal advice should be sought to ensure that the public scrutiny to which ISDS is subject, it is likely that arbitral steps taken do not undermine the investment and to ensure that the tribunals faced with claims by companies that have restructured investor is properly able to seek redress against the state should it their investments will give careful consideration to the reasons need to do so. underpinning any such restructuring and the abuse of rights doctrine. Endnotes What Next? 1. Case C-284/16, Slovak Republic - v - Achmea BV, Judgment Foreign investors should think carefully about their existing of the court on 6 March 2018. investments as well as any new commitments under consideration 2. Mobil - v - Venezuela (ICSID Case No. ARB/07/27) (Decision now or in the future. They should consider whether those investments on Jurisdiction). are at risk. Do they currently benefit from treaty protection? Is 3. Philip Morris Asia Limited - v - The Commonwealth of legislative change likely in the future which will impact the Australia (PCA Case No. 2012-12) (Award on Jurisdiction investment? Is the investor reliant upon protective measures set out and Admissibility). in a treaty that may now be considered unenforceable, or which may 4. Ibid. be terminated, in the future?

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Tom Cummins Emma Martin Ashurst LLP Ashurst LLP Broadwalk House Broadwalk House 5 Appold Street 5 Appold Street London, EC2A 2HA London, EC2A 2HA United Kingdom United Kingdom

Tel: +44 20 7859 1051 Tel: +44 20 7859 1356 Email: [email protected] Email: [email protected] URL: www.ashurst.com URL: www.ashurst.com

Tom Cummins is a partner in Ashurst’s London Dispute Resolution Emma Martin is a senior associate in Ashurst’s London Dispute team. Tom has advised clients on a range of disputes with an Resolution team. Emma focuses on large-scale contractual and emphasis on the energy and resources sectors. An international treaty-based international arbitration and has significant ICC and arbitration specialist, Tom’s experience includes disputes under the Scandinavian arbitration experience, including conducting her LCIA, ICC, UNCITRAL, SCC, and DIS rules. He also advises on court own advocacy. Emma has particular experience in the oil and gas proceedings, expert determination and ADR. As a member of Ashurst’s sector, including gas price reopeners, as well as experience in the Business Conduct & Risk Group, Tom regularly advises clients on renewables, construction and telecoms sectors. Emma’s practice also managing investment risk, from the perspective of investment treaties, focuses on public international law and investment treaty disputes and financial sanctions and anti-bribery and corruption. she has experience of ICSID arbitration as well as having acted in proceedings before the International Court of Justice.

Ashurst is a leading global law firm with core businesses in advising on corporate, finance and the development and financing of assets in the energy, resources, transport and infrastructure sectors. We have an international network of 26 offices in 16 countries and our specialist team of experts span the globe, with a significant presence in global energy hubs. With more than 1,600 partners and lawyers working across 10 different time zones, we are able to respond to our clients wherever and whenever they need us. As leading industry advisors, we are renowned for our proven track record of delivering on major projects and transactions across the oil and gas sector and have a team of lawyers who are dedicated to, and work exclusively in, the industry. We provide an end-to-end specialist advisory service covering the full value chain, from upstream oil and gas, LNG (including liquefaction, regasification and LNG sales arrangements) to pipelines, refining, petrochemicals and the marketing and trading of fuels. In addition to our full sector service, we draw on the practice specialisms of lawyers across the team to advise on all aspects of work of relevance to your business, including M&A, corporate finance, joint ventures, commercial agreements, project financing and development, environmental law, maritime/shipping law and dispute resolution together with associated areas such as competition and regulation, tax and international law. As a result, we have a deep understanding of the oil and gas industry and how it works from a number of different perspectives.

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Developments in the

North American Oil John P. Cogan, Jr. and Gas Sector

Stone Pigman Walther Wittmann PLLC Annie G. McBride

American Free Trade Agreement (“NAFTA”). Rebranded as the The Continent Taken as a Whole United States-Mexico-Canada Agreement (“USMCA”), this new trade agreement preserves several NAFTA benefits, albeit in a Since the dramatic decline in the global price of crude oil began in 2014, somewhat revised form. Specifically, USMCA includes provisions the North American Oil & Gas Sector has suffered commensurately. that prohibit tariffs on raw and refined oil and gas products. A wave of declining capital budgets, job losses and bankruptcies has Departing from NAFTA, USMCA limits investor-state dispute given vent to much pessimism, at least for the short term. However, settlement (“ISDS”), with the exception of maintaining ISDS in the it is our view that the fundamentals exist for a revival of a healthy Oil Mexican oil and gas market. Currently, USMCA is awaiting Senate & Gas Sector in North America going forward. The price for West approval before it can take effect. Texas Intermediate (“WTI”) crude oil, the benchmark price for North American crude, hit a 12-year low in the early part of 2016 at the mid- What happens in the energy sector in each country in North America 20-dollar level. More recently, the WTI price climbed to a four-year has a profound impact on the energy scene in the rest of the world. In high of 76 dollars per barrel before slipping back to the low 60-dollar the United States, the big news focuses around new discoveries and range. The WTI price has consistently remained above 60 dollars a exports. In Canada, pipeline constraints brought on by physical and barrel throughout 2018. The general consensus is that the Oil & Gas political barriers have kept a lid on too much optimism for the short Sector can recover fully if the price remains at this level or higher for term. Much has been written about these developments, but one of the significant periods. most noteworthy events in the North American energy scene has been the opening of the Mexican energy sector to private investment at the In fact, as drilling costs decline, an acceptable supply/demand end of 2013 and the continued development of the Mexican energy equilibrium may be reached at a lower price. These costs have indeed sector since then. This is truly a monumental event for all of North declined significantly in recent times due to stiff competition for the America and, indeed, for the world. provision of oil field services and increased efficiencies. The shale revolution in the United States was considered a miracle in terms of its contribution to the goal of making North America Mexico relatively independent of foreign-sourced supplies but, ironically, it has also contributed to the short-term glut of supplies, exacerbating More than seven-and-a-half decades after the nationalisation of its the price declines. In response, Canadian producers are looking to oil industry, Mexico finally put an end to the monopoly of State develop Canada’s shale fields to rival shale from the United States. oil company Pemex, and opened its upstream, midstream and The United States-Mexico energy trade relationship has recently downstream sectors to private domestic and foreign investment. undergone a dramatic change – Mexico is now a net importer of The scope of the constitutional reform enacted in December 2013 hydrocarbons from the United States. About 16% of U.S. oil product reached farther than expected. Most significantly, private and exports go to Mexico. The United States’ energy exports to Mexico foreign companies are now allowed to engage in exploration and are now more than twice the value of its imports from Mexico. Mexico production activities. sells crude to the United States, while the United States sells natural Since December 2014, Mexico’s National Hydrocarbon Commission gas and fuels to Mexico (more than half of Mexico’s consumption). (“CNH”) has been conducting international E&P bidding rounds In 2015, Mexico increased its volumetric net natural gas pipeline (both licensing rounds and farm-outs) successfully and transparently, imports by almost 50% (the largest increase worldwide). Mexico awarding a total of 107 contracts (31 production sharing contracts has been building an extensive pipeline network to import even more (“PSCs”) and 76 licences). Mexico’s average government take from natural gas from the United States. Mexico is expected to increase licence contracts is 63 per cent and 75 per cent from PSCs. its natural gas liquids imports (propane, methane and ethane) from Successful international bidders include BHP, BP, Chevron, CNOOC, the United States and Canada. At the same time, oil companies from DEA, Ecopetrol, ENI, ExxonMobil, Fieldwood, Lukoil, Murphy, the United States and Canada have won several big E&P contracts in Ophir, Pan American, Petronas, Premier Oil, Repsol, Shell, Statoil, Mexico’s new bidding rounds. United States and Canadian firms also Talos, and Total. A number of contracts have also been awarded have substantial investment plans in Mexican natural gas distribution, to Mexican companies, such as Carso Oil & Gas, Citla Energy, power generation and downstream projects in Mexico. Diavaz, Jaguar, Sierra, Petrobal, and Pemex. CNH has worked The United States’ biggest energy trading partners are not members toward standardising and simplifying the administration of bidding of OPEC, but Canada and Mexico. Recently, these three countries procedures in general. For example, allowing potential bidders to came to a consensus in the renegotiation of the 23-year-old North nominate blocks for future bidding rounds, using a standard size for

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contractual areas by type, simplifying the certification of capabilities for proposals (bases). Round 1.1 included 14 contractual areas and bidder pre-qualification processes, and standardising the for exploration and extraction of hydrocarbons in shallow waters schedule of bidding rounds. CNH’s bidding rounds are discussed under production sharing contracts; 25 bidders (individually or as a in more detail below. consortium) pre-qualified for the historic first round. In July 2018, Mexico elected a new president, Andrés Manuel The event for the opening of the bids took place on July 15, 2015, López Obrador. López Obrador has been a vocal critic of private resulting in the awarding of two contracts, both of which were investment in Mexico’s oil sector. Nevertheless, the president-elect awarded to a consortium formed by Sierra, Talos and Premier. In recently assured energy executives that contracts awarded under 2017, this consortium made a discovery of prospective resources CNH’s bidding programme thus far will be honoured. While there between 1.4 and 2 billion BOE. is some indication that he may suspend future bid rounds until Round 1.2 started on February 27, 2015; nine shallow-water these contracts start producing, there is room for cautious optimism fields were grouped in five contractual areas. Bids were opened that López Obrador will continue implementing the previous on September 30, 2015, resulting in the awarding of only three administration’s energy reform measures when he takes office in production sharing contracts. The winning bidders were: ENI; the December 2018. consortium formed by Pan American and E&P Hidrocarburos y Mexican energy reform under the previous administration has Servicios; and the consortium formed by Fieldwood and Petrobal. attracted the attention of the industry worldwide. Mexico’s ENI recently made an important discovery of light crude in its abundant resources, strategic location and stable economy make awarded area. ENI estimates the prospective resources discovered the country particularly attractive to investors. Oil majors are at 1 billion BOE – exceeding the expectations that CNH had for this interested in Mexico’s vast offshore reserves, particularly those in field, considering that Pemex had explored the area several years deep waters in the Perdido Fold Belt, where a trio of discoveries ago and that Pemex operates a contiguous block. were confirmed in October 2015 and where there has been very little In Round 1.3, CNH offered 25 onshore mature fields under licence activity as compared to the U.S. side of the border, due to lack of contracts, all of which were awarded on December 15, 2015. Sixty technical and financial capabilities. Likewise, independent shale- companies (40 Mexican) registered for this bidding process. focused companies are interested in the Burgos Basin located in Round 1.4 comprised 10 deep-water contractual areas in Mexico’s north-eastern Mexico, bordering the prolific Eagle Ford shale play exclusive economic zone in the Gulf of Mexico – four of which in Texas. In July 2017, Mexico’s national energy ministry (SENER) are located in the Perdido Fold Belt, near the United States-Mexico opened the onshore portion of the Burgos Basin to exploration and maritime boundary. Prospective resources in these areas amount to development by private companies for the first time since Pemex 10.8 billion BOE. Twenty-six companies have pre-qualified (16 as was created in 1938. operators). CNH awarded eight licence contracts in December 2016 Pemex’s oil production has been in a continuous and rapid decline to: CNOOC (two contracts) and the consortia formed by Total and after reaching its peak of 3.4 million bpd in 2004. Average Mexican ExxonMobil; Chevron, Pemex and Inpex; Statoil, BP and Total (two oil production in August 2018 was 1.82 million bpd. However, contracts); PC Carigali and Sierra; and Murphy, Ophir, PC Carigali Mexico continues to be blessed with abundant resources and is still and Sierra. a world-class crude oil producer and exporter. In October 2018, Pemex announced the discovery of reserves with up to 180 million Round 2 barrels of crude oil in seven reservoirs in the shallow waters of the southern Gulf of Mexico. Round 2.1 concluded in March 2017. This was the third bidding Mexico is interested in attracting international companies to reverse round for shallow-water fields. The blocks offered for exploration and its declining production, and has sufficient proved oil reserves to do production were larger in comparison to those in previous shallow- so (over 8 billion barrels, the 19th largest in the world). Mexico’s water rounds (594 km2 on average, as opposed to 300 km2). CNH oil-production rate in 2016 was 2.1 million barrels per day and fell improved numerous terms of the production sharing contract to attract to 1.95 million barrels per day in 2017. However, new players are more bids. The relevant 15 blocks were in the Gulf of Mexico off expected to increase production in the upcoming years. Moreover, the States of Veracruz, Tabasco and Campeche, and were chosen López Obrador campaigned on a goal of resuscitating oil production considering the industry’s feedback. The blocks had aggregate in Mexico and plans to implement measures to reach that goal early prospective resources in the region of 1,587 million BOE. CNH in his presidency. awarded 10 contracts among: ENI, Lukoil and the consortia formed by Pemex and DEA; PC Carigali and ECP Hidrocarburos; ENI, Capricorn Energy and Citla Energy; Pemex and ECP Hidrocarburos; Round 1 Capricorn Energy and Citla Energy; Repsol and Sierra; ENI and Citla Energy; and Total and Shell. The first bidding round for oil and gas exploration and production Under Round 2.2, CNH offered 12 onshore contractual areas under (“E&P”) contracts (“Round One”) was launched in the last quarter of licence contracts, nine of them for gas exploration and production 2014. Round 1 originally offered 169 blocks to bidders – 109 blocks near the U.S. border (in the State of Tamaulipas) and three for oil for exploration and 60 blocks for production, covering an area of and gas exploration and production near the Guatemala border (in 2 around 28,500 km . The resources originally offered were estimated the States of Tabasco and Chiapas). CNH commenced this bidding at around 3.8 billion BOE of 2P reserves and about 14.6 billion round in August 2016 and announced the winners in July 2017. The BOE of prospective reserves. The areas were chosen due to their consortium formed by Jaguar and Sun God won six contracts, and potential to increase the production of oil and gas in the short term, the one formed by Iberoamericana and PJP4 won an additional one. to incorporate new reserves and to increase prospective resources. Round 2.3 resulted in the awarding in July 2017 of 14 licence Round 1 was split into four phases, namely Rounds 1.1, 1.2, 1.3 and contracts for onshore blocks. The winners were Carso Oil & Gas 1.4. and Jaguar (five contracts) as single bidders, as well as the consortia Round 1.1 commenced on December 11, 2014 by the publication formed by Iberoamericana and PJP4 (two); Newpek and Verdad by CNH of the relevant call for bids (convocatoria) and request Exploration (two); and Shandong, Sicoval and Nuevas Soluciones.

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CNH opened its ambitious Round 2.4 for bids on January 31, 2018. field count toward the fulfilment of the minimum work obligations in Under this round, CNH offered 29 deep-water blocks (under licence all the contractual areas involved, irrespective of the location of the contracts) distributed between the main Mexican oil provinces in the wells and the operator of the unit. Gulf of Mexico. CNH awarded 19 of the 29 blocks. Shell was the In March 2018, SENER published its unitisation rules, which elaborate biggest winner, taking nine of the blocks, four on its own, one in on the procedures for achieving the unitisation of common reservoirs, consortium with Pemex, and four in consortium with Qatar Petroleum as well as the terms, conditions and principles applicable to unitisation International Ltd. Shell will operate all nine blocks, which cover a orders and agreements. total area of 18,996 km2. Other winning bidders include PC Cargali, The rules make it clear that the parties to a unitisation agreement Qatar Petroleum, and Pemex. may agree on any methodologies for the determination of their participation interest in the unit, including but not limited to: relative Round 3 amounts of oil or gas in place under each block; hydrocarbon pore volumes; and estimated ultimate recovery. SENER may use any of Round 3.1 commenced in September 2017 and concluded on March those methodologies to allocate costs and production between the 27, 2018. Thirty-five shallow-water areas in the Gulf of Mexico blocks when it imposes a unitisation order upon the interest owners were offered, and 16 were awarded (representing a total area of of those blocks. 2 11,020 km constituting 2.23 billion BOE of prospective resources). In order to calculate the State’s share in the production, royalties Pemex was the biggest winner of this round, winning one block and taxes, the income and expenditures allocated to a party to the individually and six in consortiums with companies such as CESPA unitisation agreement by reference to its participation interest in the and Shell. Expected investment totalled US$3.8 billion. unit will be deemed to be income arising from and expenditures Rounds 3.2 and 3.2 have been postponed until February 2019, and incurred in the contractual area or entitlement of that party. could be further suspended depending on actions taken by incoming The guidelines recognise the international practice of executing a president López Obrador. pre-unitisation agreement at the time of discovery, which is followed by the execution of a unitisation agreement once a development plan Migrations and Farm-outs has been agreed, as well as the fact that parties may provide for the redetermination of participation formulas once a certain number of Under the new Mexican oil and gas legal framework, Pemex is development wells have been drilled – the execution of all of which allowed to migrate the entitlements it managed to retain after the is subject to previously obtaining SENER’s authorisation. Energy Reform to the new oil and gas contractual regime created A unitisation agreement or order will not imply the transfer, thereby. In this case, SENER must propose the model contract and exchange or modification of interest owners’ participation in their the Ministry of Finance must set the applicable fiscal terms. The respective blocks. first entitlement migrated to the new scheme relates to the Ek-Balam SENER may authorise the incorporation into the unit of areas that field. On May 2, 2017, CNH and Pemex executed the relevant are not yet subject to any E&P contract or entitlement, without production sharing contract. prejudice to the State’s ability to award that area later on to a third Pemex is also allowed to partner with other companies to develop the party. entitlements it migrates into contracts. However, CNH must select When a common reservoir is located under blocks in different the relevant partner through a bidding round – except for Pemex’s exploratory, appraisal or development terms, the Ministry may entitlements already operated by third parties under integrated (risk) authorise the extension of the applicable term in order to align the service contracts (known as “CIEPs”) or financed public works relevant contractors’ operations. contracts (known as “COPFs”) executed prior to August 12, 2014 The Ministry of Energy may consult an internationally renowned (date of entry into force of the Hydrocarbons Law). This partner third-party expert during the unitisation process when interest selection process is known in Mexico as a Pemex farm-out bidding owners do not submit information or fail to reach an agreement. round. A Surveillance Committee, comprised of members designated by In March 2017, the first farm-out bidding round resulted in the the interest owners of the unitised field, must supervise the unit execution of a licence contract by and between CNH, Pemex and operators’ activities. BHP regarding the 1,285 km2 Trion deep-water block, which is contiguous to one of the contractual areas awarded under Round 1.4. The parties to a unitisation agreement may stipulate any dispute resolution mechanism of their choice, including submitting their In October 2017, Cheiron Holdings Limited and DEA won the farm- disputes to a third-party expert. out bidding rounds regarding Pemex’s onshore fields Cárdenas- Mora and Ogarrio, respectively. CNH has delayed future scheduled An interest owner may request the termination of a unit by proving farm-outs until February 2019. that the unit does not produce oil or gas revenues exceeding operating costs or that unit operations are unfeasible. The unitisation of reservoirs traversing the United States-Mexico Unitisation border must be conducted in accordance with the Agreement between the United States and Mexico Concerning Transboundary The legal and regulatory framework deriving from the Energy Hydrocarbon Reservoirs in the Gulf of Mexico. Reform allow SENER to force E&P contractors and entitlement In September 2018, Pemex and the international Block 7 Consortium holders (interest owners) to unitise their fields when a reservoir (Talos Energy, Sierra Oil and Gas, and Premier Oil) signed Mexico’s straddles the boundaries of their contractual area or entitlement, first Pre-Unitization Authorization Agreement (PUA). The PUA with a view to operate efficiently and maximise production. In their relates to the Zama field, an enormous reserve discovered by the E&P contracts, contractors expressly consent to report the discovery Block 7 Consortium, housing between 1.4–2 billion barrels of oil of common reservoirs, to seek a voluntary unitisation agreement in place. Because the field could span into a neighbouring block (subject to the Ministry’s approval) and/or to abide by a compulsory held by Pemex, the parties entered into the PUA, which has been unitisation order by the Ministry. Operations conducted on a unitised

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approved by SENER. The two-year agreement enables information capacity in the gas pipeline network through open season processes sharing between the parties, and paves the way for the eventual organised by CENAGAS. execution of a Unit Agreement and Unit Operating Agreement should a shared reservoir be confirmed. Gasoline and Diesel

Assignment of Interests in E&P Contracts The Mexican gasoline and diesel market is also undergoing a liberalisation process. Since January 1, 2016, retailers may sell The E&P contracts awarded by CNH provide that the sale, gasoline and diesel under their own brands or brands licensed from assignment, transfer or encumbrance of any rights thereunder are private companies rather than Pemex. More than 11 gas station subject to CNH’s prior authorisation. E&P contractors (except for brands are now present in the market, including ExxonMobil and those whose shares are publicly traded) are even required to ensure BP. Since April 1, 2016, any company may obtain an import permit. that they do not suffer a change of control without CNH’s prior As a consequence, 16 companies are already importing gasoline and authorisation. Changes that do not imply a change of control may 23 are importing diesel. Over the course of 2017, maximum retail simply be notified to CNH. gasoline and diesel prices were phased out on a geographical basis. On January 30, 2017, CNH issued guidelines regarding the Since November 30, 2017, all Mexican retailers may sell at market authorisation procedure which E&P contractors and operators prices. must follow prior to effecting a change of control. The procedure In November 2017, SENER published a public policy imposing is meant for CNH to verify that the minimum technical, financial minimum inventory requirements for holders of fuel marketing and operational capabilities, and experience, required from E&P and distribution permits who sell gasoline, diesel and aviation contractors and operators under the relevant bidding procedure are fuel to service stations and final users. The minimum fuel storage not circumvented as a result of the change of control. requirements will start to apply in 2020 and aim at raising minimum inventories from five days of sales to 10–15 days of sales in 2025.

State-appointed Trader Canada On November 16, 2017, CNH commenced a government procurement procedure to hire a trading company to market the The situation in Canada continues to be somewhat in a state of flux State’s share of oil and gas originating from production sharing due to regulatory, political, physical and commercial issues. At contracts. The State’s trader must transfer the sale proceeds to the both the provincial and federal levels, legislatures and regulators are Mexican Oil Fund, after subtracting the trader’s fees and, where imposing increased environmental controls and taxation on energy- applicable, logistics costs. Pemex’s trading arm, PMI Comercio related activities. For example, a new Canadian federal Pipeline Internacional, has acted as the State’s trader thus far. Safety Act came into force on June 19, 2016. The Act increases the regulation of pipelines and the liability of pipeline operators. In Natural Gas addition, First Nations (Indigenous) bands are politically powerful in western Canada and, in many cases, new energy projects must be approved by First Nations bands having traditional rights over the As part of the ongoing liberalisation of the Mexican natural gas land and rights-of-way to be used for these projects. market, Mexico has also continued the gradual implementation of a competitive natural gas transportation and trading market. As if regulatory and political constraints were not enough, Canada’s The Mexican Energy Regulatory Commission (“CRE”) estimates lacking pipeline and transportation infrastructure presents that more than US$12 billion will be invested in natural gas expensive transport costs. In addition, the overall costs of proposed transportation, distribution and storage projects in Mexico in the western Canadian LNG projects are increasing to a point where they next five years. may not be competitive with energy supplies from other markets, leaving open the question of whether any of the approximately 20 In 2015, Mexico increased its volumetric net natural gas pipeline announced West Coast LNG export projects will ever be built. imports by almost 50% (the largest increase worldwide). This is a result of Mexico’s plan to increase gas imports from the south of After nine years of controversy, on March 24, 2017, the Trump Texas to Mexico’s combined-cycle power plants and manufacturing Administration in the United States approved the Keystone XL hubs. Mexico is building 5,000 km of gas pipelines in order for its oil sands pipeline from Alberta to the United States. This action network to reach 21,000 km by 2019. overturned the Obama Administration’s previous rejection of the pipeline on the grounds that the project was not in the national CRE will apply asymmetric regulations to Pemex until the creation interest of the United States and would undermine U.S. global of a multiple-player, efficient and competitive market has been leadership in fighting climate change. However, controversy over completed. During the transition period, CRE will continue the pipeline continues. Commencement of construction of major regulating the terms and conditions of Pemex’s first sales. sections of the pipeline could remain tied up in the courts for In February 2017, CENAGAS, the new independent operator of the several more years. In addition, questions have been raised as to Mexican gas network, conducted its first annual auction of import whether demand for the pipeline’s capacity is sufficient to justify pipeline capacity. BP won an aggregate 200 billion Btu/D capacity its completion. in two pipelines. Meanwhile, on October 5, 2017, TransCanada announced that it Effective July 1, 2017, CRE eliminated the cap on Pemex’s natural would no longer be proceeding with its long-planned Energy East gas first sale prices and launched the Permanent Reserve Capacity project, a major eastward-bound pipeline system. The pipeline had Regime. Natural gas prices are now set by the market. As a result, it faced its own set of hurdles, not the least of which were Ontario is expected that Pemex’s production of natural gas will increase, and and Quebec provincial environmental protections and spill response that the new E&P contractors will start offering their production soon. plans. The Permanent Reserve Capacity Regime will allow users to reserve

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United States Exports

Several important developments have recently occurred on the In December 2015, the 40-year general ban on crude oil exports from United States energy front relating to the environment, local the United States was lifted. By October 2018, the United States regulation of energy resources, energy exports, and the general was exporting an average of 1,847,000 barrels per day of crude impact of the Trump Administration on energy issues. oil. In light of the shale boom, the light, sweet crude derived from shale formations, which is not well suited for the U.S. Gulf Coast Environmental refineries, represents a particularly attractive commodity to export.

On June 2, 2014, under the Obama Administration, the Legislation Environmental Protection Agency (“EPA”) announced a proposed rule that would cut carbon emissions by 30% in the United States by In the summer of 2016, the United States Senate passed an almost 2030. A 2014 U.S. Supreme Court case, EPA v. EME Homer City 800-page bill dealing with many aspects of energy, called the Energy Generation, upheld the EPA’s power to impose interstate pollution Policy Modernization Act. One of the more significant provisions controls. The decision turned on the EPA’s interpretation of the of the bill dealt with improving the procedures for the export of word “significant”, which the agency said could mean more than domestically produced natural gas by way of LNG. The bill fell just one thing. The court agreed. short of passage in a bicameral Congressional conference at the end However, environmental activism under the Obama Administration of 2016. A new bill, the Energy and Natural Resources Act, was is being reversed under the Trump Administration. As of the time of introduced in 2017. It builds on the Energy Policy Modernization writing, since January 2017, when Donald Trump took office, over Act, addressing a wide range of issues. It features 11 titles on the 50 environmental rules have been overturned, are in the process of following topics: efficiency; infrastructure; supply; accountability; being rolled back or are being seriously considered for roll-back. For conservation; federal land management; National Park System example, in October 2017, the EPA proposed a repeal of the Obama management; sportsmen’s issues; water infrastructure; natural Administration’s Power Plan. Proposals such as these have been met hazards; and Indian energy. While enactment of this bill is unlikely, with strong opposition from environmental groups and several State several of its provisions were incorporated into other bills that were enacted throughout 2018. governments and will likely end up in litigation.

Election of Donald Trump Municipal Activism Against Energy Resource Development

In view of the election of Donald Trump as President in November Courts in some States are upholding local authority to limit upstream of 2016, a regulatory environment that is more friendly to energy developments, pursuant to zoning or home rule provisions. the energy industry is evolving, but vocal opposition to many The energy industry has fought back, arguing that these regulations initiatives of the new administration are surfacing. The current limit their capability to do business within the boundaries of a White House administration, with its “America First Energy Plan”, State, infringe private property rights, and create an unreasonable has been aggressively rolling back regulations and set goals of “patchwork” of inconsistent regulation, thereby increasing the costs “energy independence” and “energy dominance”. Changes were of their operations and making the development of energy resources implemented very quickly, causing some in the industry to become unnecessarily inefficient. concerned about uncertainty and the impact on oil prices. As In 2014, the New York Court of Appeals held that the State’s Oil, changes continue to be made, it remains to be seen how they will Gas and Solution Mining Law does not pre-empt local zoning laws impact the industry over time. What is certain is that all of this that effectively ban oil and gas production, affirming municipalities’ change will come with unique challenges. vested authority to regulate land use. Similarly, the Supreme Court of Pennsylvania, through its 2013 and 2016 decisions, invalidated sections of the Commonwealth’s oil and gas law, known as Conclusion Act 13. These decisions eliminated Pennsylvania’s Public Utility Commission’s authority to review and determine compliance The dramatic opening of the Mexican energy industry and the new with local drilling ordinances and mandated that any challenges oil and gas supplies available throughout North America through regarding zoning decisions start in a county court. These decisions shale reserves, discoveries of new conventional oil fields and the thwart one of the fundamental purposes of Act 13, that is, to provide Canadian oil sands, will bring innumerable social and economic consistency to the challenges of local ordinances. benefits to the entire region. Of course, these developments also introduce a dramatic shift in supply/demand models for pricing In other sectors of the energy industry, municipal action is also as well as the need for complicated trade-offs in the areas of gaining ground. In 2014, in Maine, the City Council of South environmental and safety protections and taxation. Overall, Portland approved zoning changes that will prohibit the export and however, the writers remain optimistic that a proper balance will bulk loading of Canadian crude onto marine tank vessels from the be maintained for the good of all constituents. Unfortunately, there city’s waterfront. will be winners and losers as the North American energy drama In November 2014, the City of Denton, Texas enacted a ban on unfolds but, overall, the region’s and the world’s economies should oil and gas drilling by hydraulic fracturing. In reaction, the Texas ultimately benefit as these developments evolve. Governor signed into law a bill that diluted the authority of local governments to ban drilling operations. The law recognises the right Acknowledgment of owners to exploit their mineral resources “fully and effectively”, The authors would like to thank Violet A. Obioha for her invaluable but the power is not absolute. Local governments still have the right assistance in the preparation of this chapter. to regulate activities for the purpose of health and safety.

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John P. Cogan, Jr. Annie G. McBride Stone Pigman Walther Wittmann PLLC Stone Pigman Walther Wittmann PLLC 1001 McKinney, Suite 1600 909 Poydras Street, Suite 3150 Houston, TX 77002 New Orleans, LA 70112-4042 USA USA

Tel: +1 713 651 1881 Tel: +1 504 593 0880 Fax: +1 713 655 6282 Fax: +1 504 596 0880 Email: [email protected] Email: [email protected] URL: www.stonepigman.com URL: www.stonepigman.com

John is a veteran of structuring, negotiating and completing international Annie assists public agencies, private companies, and start-ups business matters, particularly related to energy. Examples of John’s with corporate, business, and real estate matters. She joined Stone work are his involvement in: development of LNG liquefaction projects Pigman in 2016. Annie graduated from Loyola University New Orleans in Canada, Colombia, Indonesia, Nigeria, Qatar, Trinidad, the United College of Law and is a member of the Louisiana Bar. States and Yemen; LNG regasification projects in Canada, Chile, Jamaica, Mexico and the United States; upstream production sharing and other types of oil and gas development contracts in Bolivia, Burma (Myanmar), Colombia, Ecuador, Kazakhstan, Saudi Arabia, the United States and Venezuela; downstream processing plants in Argentina, Colombia, Mexico and the United States; and power projects in Argentina, Brazil, China and the Dominican Republic. John also serves as an arbitrator and expert witness in disputes relating to these types of matters.

Stone Pigman Walther Wittmann PLLC has extensive experience assisting clients in all aspects of energy-related transactions, business formations, project financings, M&A, strategic alliances and the purchase and sale of major energy assets. In addition to developing project structures, we often serve as lead counsel on contracts for joint ventures, joint operations, sales and purchases, processing, services, transportation, development, investment, production sharing, farm-out agreements, drilling, storage, construction, operation and management and technology licensing. We have handled hundreds of domestic and international energy deals that involve the exploration, extraction, processing, transportation and sale of hydrocarbons, renewables and other natural resources. Our clients include small and large entities, major and independent oil companies, drilling companies, oil field service providers, lenders, developers, government agencies and foreign investors.

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Albania Gjergji Gjika

Gjika & Associates Attorneys at Law Ergys Hasani

consumption of natural gas is predicted to increase to 1.6 Bcm in 1 Overview of Natural Gas Sector 2030, of which approximately 70% is expected to be used for the production of electric power. Initially, the natural gas shall be used 1.1 A brief outline of your jurisdiction’s natural gas in the industry sector for the production of electric power, whereas sector, including a general description of: natural after the year 2020, the gas shall be provided to domestic consumers gas reserves; natural gas production including with an expected final consumption of 37% in 2030. the extent to which production is associated or non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) 1.2 To what extent are your jurisdiction’s energy liquefaction and export facilities, and/or receiving and requirements met using natural gas (including LNG)? re-gasification facilities (“LNG facilities”); natural gas pipeline transportation and distribution/transmission Currently, Albania’s energy requirements are not met using natural network; natural gas storage; and commodity sales gas due to the lack of infrastructure. By virtue of the data provided and trading. by the Institute of Statistics (“INSTAT”), the production of natural gas in Albania for the year 2016 was 79 kilotons of oil equivalent The exploration of gas in Albania began in 1955. The exploitation (“ktoe”), while the quantity distributed to the consumer was only of gas in Albania for industrial use (chemical residues industry, oil 51 ktoe. The final and completed data for the year 2016 shall be industry and production of electric power) dates back to 1963, when published within September 2018. the gas field of Bubullima (Area of Kallm) was first exploited, followed by the gas field of Divjaka in 1964 with a total production of However, the consumable produced quantities are used in the 70 million cubic metres (“Mcm”)/year, Frakulli in 1972, Finiq-Krane industry sector, while the energy requirements in Albania are mainly in 1974, Ballaj in 1983, Povelça in 1987 and Delvina in 1989. met by other sources such as crude oil, coal, firewood and electric power. The highest production of gas in Albania was registered in 1982 with a total production of 0.937 billion cubic metres (“Bcm”), while the cumulative production of natural gas is 3.15 Bcm, and the cumulative 1.3 To what extent are your jurisdiction’s natural gas production of accompanying gas is 8.7 Bcm. After the 1990s, the requirements met through domestic natural gas production of natural gas decreased to 12 Mcm/year. production? Currently, the number of wells producing natural gas is approximately Albania’s natural gas requirements are not met through domestic 20, with a minimum production of 200–300 normal cubic metres natural gas production. According to the data provided by INSTAT, (“Nm3”)/day. the production of natural gas in Albania for the year 2016 was 0.27 According to the data provided by the National Agency of Natural ktoe/10,000 habitants, while the quantity distributed to the consumer Resources (“NANR”), the geological reserves of natural gas are was only 0.18 ktoe/10,000 habitants. Currently, the produced 3 18,163,700,000 Nm and lie mainly in the Kuçova and Patos oilfields. quantities of natural gas are used only in the industry sector. By virtue of Law No. 104/2013, dated 25.03.2013 “On the ratification of the agreement between the Republic of Albania, the Republic of 1.4 To what extent is your jurisdiction’s natural gas Greece and the Republic of Italy for the project for the Trans Adriatic production exported (pipeline or LNG)? Pipeline” (“TAP”), and Law No. 116/2013, dated 15.04.2013 “On the ratification of the agreement with the government of the hosting There is no export of natural gas through pipelines due to the lack country between the Republic of Albania, represented by the Council of infrastructure. of Ministers and Trans Adriatic Pipeline Ag, in relation to TAP, as well as the agreement between the Republic of Albania represented by the Council of Ministers and Trans Adriatic Pipeline Ag, in relation 2 Overview of Oil Sector to TAP”, the Republic of Albania will implement the TAP. This project will link three countries, namely Greece, Albania and 2.1 Please provide a brief outline of your jurisdiction’s oil Italy. In January 2010, TAP opened country offices in Greece, sector. Albania and Italy. The implementation of TAP in Albania will develop the natural gas sector in Albania. According to studies, the The oil sector in Albania is regulated by the following:

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■ Law No. 7746/1993 “On hydrocarbons – (exploration and company ‘Albpetrol’ sh.a. and ‘Albgaz’ Sh.a.” (DCM 848/2016); production)” (“Law 7746/1993”). and “Regulation on Procedures and Time Limits for Granting, ■ Law No. 9876/2008 “On the production, transport and trade Modification, Transfer or Licence Distribution in the Natural Gas of bio fuels and other fuels, renewable, for transport, as Sector”, approved by ERA with Decision No. 97, dated 04.07.2017 amended” (“Law 9876/2008”). (“Regulation 97/2017”). ■ Law No. 8450/1999 “On the processing, transport and trading By virtue of Albanian law, all petroleum in its natural state is the of oil, gas and their by-products” (“Law 8450/1999”). exclusive property of the Albanian State, represented by the Ministry ■ Law No. 8561/1999 “On the expropriation and temporary of Infrastructure and Energy (the “MIE”). The MIE is entitled to taking over of private property for public interest” (“Law conclude petroleum agreements with any contractor interested in 8561/1999”). the research and production of oil and gas, granting them the right Albania ■ Law No. 7811/1994 “On the approval of the Decree No. to research and produce as per the terms and conditions of the 782/1994 ‘On the fiscal regime in the hydrocarbons sector petroleum in the relevant contract area. (exploration and production)’” (“Law 7811/1994”). NANR is an institution dependent on the MIE. NANR is entitled to ■ Law No. 9975, dated 28.7.2008 “On National Taxes” (“Law negotiate petroleum agreements, prepare the necessary documentation 9975/2008”). and practices concerning the granting of the permits, licences and authorisations in compliance with the law which enables an applicant 2.2 To what extent are your jurisdiction’s energy to enter into agreements and to perform petroleum operations. requirements met using oil? AlbpetrolSh.A. (“Albpetrol”) is a State-owned company, having as its object the production and trade of petroleum products based on Albania’s energy requirements are not met using oil, but mainly the petroleum agreement concluded with the MIE on 26.07.1993 electric power; however, the production of oil in Albania is at high “On the authorization for the performance of Petroleum Operations”, levels. By virtue of the preliminary data provided by INSTAT, the and having the right to grant to third parties a licence agreement for production of oil in Albania for the year 2016 was 1,056 ktoe, while the areas under its administration. the quantity available for consumption was 1,266 ktoe. The final AlbgazSh.A (“Albgaz”) is a State-owned company, operating as and completed data for the year 2016 shall be published within a combined operator performing the activity of the Transmission September 2018. System Operator (“TSO”) and Distribution System Operator (“DSO”) of natural gas. 2.3 To what extent are your jurisdiction’s oil requirements The ERA is the regulatory authority in the sector of natural gas and met through domestic oil production? electric power, with the exception of the exploration and production/ exploitation of natural gas. According to the preliminary data provided by INSTAT, the production of oil in Albania for the year 2016 was 3.67 ktoe/10,000 habitants, while the quantity available for final consumption was 3.2 How are the State’s mineral rights to develop oil 4.40 ktoe/10,000 habitants. The final and completed data for the and natural gas reserves transferred to investors or companies (“participants”) (e.g. licence, concession, year 2016 shall be published within September 2018. service contract, contractual rights under Production Sharing Agreement?) and what is the legal status of 2.4 To what extent is your jurisdiction’s oil production those rights or interests under domestic law? exported? The State mineral rights to develop oil and natural gas are transferred According to the data provided by NANR, 378,275 tons of crude to an investor by entering into a petroleum agreement with the latter. oil were produced this year, up until June 2018, whilst 30,324 tons The petroleum agreement may be for a term of up to five years for of crude oil were exported. The export of oil for the year 2017 was exploration, and up to 25 years for production and exploitation of 316,130 tons of crude oil. the hydrocarbon reserves. Based on the data provided by the Albanian customs, the principal The petroleum agreement may provide to the investor the right to countries to which Albanian oil is exported are Italy, Spain and Malta. construct and operate pipelines in Albania, the right to own part of the production and the right to sell and export the production. Any interested party wishing to enter into a petroleum agreement 3 Development of Oil and Natural Gas on hydrocarbons should submit an application to NANR and the latter must submit to the MIE the necessary documents. The MIE 3.1 Outline broadly the legal/statutory and organisational decides on the approval or refusal within 10 days and, in case of framework for the exploration and production approval, NANR starts the negotiation on the terms and conditions (“development”) of oil and natural gas reserves of the petroleum agreement with the applicant. including: principal legislation; in whom the State’s The final draft may be sent for review to the Ministry of Finance mineral rights to oil and natural gas are vested; Government authority or authorities responsible for and to the Ministry of Justice. The MIE should sign the petroleum the regulation of oil and natural gas development; and agreement within 10 days of receiving the revised and renegotiated current major initiatives or policies of the Government agreement, and send it to the Council of Ministers for final approval. (if any) in relation to oil and natural gas development. Even in case of a licence agreement to be entered into with Albpetrol for the areas administered by the latter, the negotiation should be The oil and natural gas sector in Albania is regulated by all the laws undertaken with NANR, and the licence agreement must be signed mentioned in question 2.1, as well as: Law No. 102/2015 “On the by the MIE and Albpetrol, and finally the agreement should be natural gas sector” (“Law 102/2015”); DCM 848/2016 “On the approved by the Council of Ministers. establishment of the company ‘Albgaz’ Sh.a. and determination of the public authority representing the state as shareholder of the

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3.3 If different authorisations are issued in respect of 3.7 Are there any currency exchange restrictions, or different stages of development (e.g., exploration restrictions on the transfer of funds derived from appraisal or production arrangements), please specify production out of the jurisdiction? those authorisations and briefly summarise the most important (standard) terms (such as term/duration, There are no currency exchange restrictions or restrictions on the scope of rights, expenditure obligations). transfer of funds derived from production out of the jurisdiction.

Any legal entity wishing to perform exploration activity in relation to oil and natural gas should enter into a petroleum agreement with 3.8 What restrictions (if any) apply to the transfer or the MIE or into a licence agreement with Albpetrol for areas under disposal of oil and natural gas development rights or interests? Albania the operation of the latter. The exploration agreement may be entered into for a period of five to seven years. The oil and natural gas development rights may be transferred Any legal entity wishing to perform production and exploitation or assigned to any third party depending on the provisions of the activity in relation to oil and natural gas should enter into a petroleum agreement with the MIE. petroleum agreement with the MIE or into a licence agreement with Albpetrol for areas under the administration/operation of the The natural gas development rights may be transferred or assigned latter. The production and exploitation agreement may be entered to any third party upon the prior approval of ERA. into for a period of 25 years and renewed for a period of not more The approval from ERA is not required in case of: than five years. ■ The transfer of the assets of the licensee with installed capacity up to 1MW. 3.4 To what extent, if any, does the State have an ■ The transfer of the assets of the licensee operating a direct ownership interest, or seek to participate, in the line in the natural gas sector. development of oil and natural gas reserves (whether ■ The transfer of assets with a total value of less than 150 as a matter of law or policy)? million ALL or assets that are not closely related to the licensed activity. All oil and natural gas in their natural state are the exclusive property of the Albanian State. The latter may delegate the right to explore, 3.9 Are participants obliged to provide any security produce and exploit to any interested third party by entering into a or guarantees in relation to oil and natural gas petroleum agreement or licence agreement. In such agreement, the development? Albanian State is represented by the MIE, while the implementation of such agreement is supervised by NANR. Any operator wishing to operate in the oil and natural gas sector, in order to enter into an exploration or exploitation agreement, should 3.5 How does the State derive value from oil and natural have necessary financial means proving the ability to undertake gas development (e.g. royalty, share of production, such activity. There is no specification on what kind of security taxes)? or guarantee should be provided; however, in practice, a bank guarantee is required. The following taxes are applicable: ■ Profit tax amounting to 50% of the net profit for the relevant 3.10 Can rights to develop oil and natural gas reserves fiscal year, payable according to the relevant petroleum granted to a participant be pledged for security, or agreement. booked for accounting purposes under domestic law? ■ Royalty tax on oil and gas amounting to 10% of the sales, payable not later than the 15th day of the following month. The right to develop oil and natural gas may not be pledged. ■ Bonuses paid for entering in a concession agreement, as stipulated in the respective agreement. 3.11 In addition to those rights/authorisations required ■ Share of the production of oil and gas, as stipulated in the to explore for and produce oil and natural gas, what respective agreement. other principal Government authorisations are In case of a production-sharing agreement, the contractor is required to develop oil and natural gas reserves (e.g. entitled to compensate the State authority in oil or natural gas as environmental, occupational health and safety) and from whom are these authorisations to be obtained? compensation for business costs.

In addition to the authorisation mentioned in question 3.3, the 3.6 Are there any restrictions on the export of following permits are required: production? ■ The Environmental Permit approved by the Minister of Environment and issued by the National Licensing Center. There are no restrictions in relation to the export of oil and natural ■ The Development Permit, Construction Permit and Use gas. Limitations may be imposed by the petroleum agreement to Permit issued by the National Territory Council. supply or contribute to the supply of the internal market in case of ■ The exploration and production of hydrocarbons may be an emergency. performed by experts equipped with a professional permit for such activity. This does not apply to foreign experts who perform such activity for not more than 12 months as of their entry into Albanian territory.

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3.12 Is there any legislation or framework relating to 6 Transportation the abandonment or decommissioning of physical structures used in oil and natural gas development? If so, what are the principal features/requirements of the 6.1 Outline broadly the ownership, organisational and legislation? regulatory framework in relation to transportation pipelines and associated infrastructure (such as natural gas processing and storage facilities). There is no specific law or regulation on the abandonment or decommissioning of physical structures used in oil and natural Recently, the Albanian Parliament approved Law No. 102/2015, gas development. However, the holder of an oil and natural gas which implements Directive 2009/73/EC of the European Parliament

Albania development right should take all necessary measures for the and of the Council of 13.07.2009 concerning common rules for protection of the environment and diminution of the pollution due to the internal market in natural gas, and governs the transport and the performance of petroleum operations. associated infrastructure in relation to natural gas. The construction and use of pipelines for the transmission and 3.13 Is there any legislation or framework relating to distribution of natural gas, LNG and natural gas deposits, direct gas storage? If so, what are the principal features/ lines connecting the Albanian natural gas system with neighbouring requirements of the legislation? systems, as well as any plant, installation or other device incorporated in the natural gas sector, is subject to approval by the Gas storage is regulated by Law No. 102/2015. Gas storage may be Council of Ministers. Such approval is granted for a period of 30 performed by any legal entity duly licensed by ERA. The licence is years, renewable. granted for a period of not more than 30 years and may be renewed. Depending on the efficiency and profitability, ERA may license one Any legal person wishing to operate in the natural gas sector and to or more operators. perform the following activities should obtain a licence issued by ERA for the transmission, distribution, supply and trade of natural gas, as well as operation of natural gas storage facilities and LNG 3.14 Are there any laws or regulations that deal specifically facilities. with the exploration and production of unconventional oil and gas resources? If so, what are their key features? 6.2 What governmental authorisations (including any applicable environmental authorisations) are There are no regulations pertaining to exploration and production of required to construct and operate oil and natural unconventional gas in Albania. gas transportation pipelines and associated infrastructure?

4 Import / Export of Natural Gas (including The following permits and authorisations are required for the LNG) construction and operation of the natural gas transportation pipelines and associated infrastructure: ■ The Environmental Permit approved by the Minister of 4.1 Outline any regulatory requirements, or specific Environment, issued by the National Licensing Council terms, limitations or rules applying in respect of (“NLC”). cross-border sales or deliveries of natural gas ■ The approval of the Council of Ministers on the construction (including LNG). and use of the natural gas transportation pipelines and associated infrastructure. By virtue of Law No. 102/2015, only legal entities duly licensed ■ The Development Permit, Construction Permit and Use by ERA may perform wholesale and retail of natural gas (including Permit issued by the National Territory Council. LNG). Such licence is issued for a period of not more than 10 years and may be renewed. 6.3 In general, how does an entity obtain the necessary The price in relation to wholesale and retail sale of gas is determined land (or other) rights to construct oil and natural gas based on supply and demand. transportation pipelines or associated infrastructure? Do Government authorities have any powers of compulsory acquisition to facilitate land access? 5 Import / Export of Oil An investor, who has entered into a petroleum agreement, or a 5.1 Outline any regulatory requirements, or specific holder of the permit to construct natural gas transportation pipelines, terms, limitations or rules applying in respect is also granted the right of use of the land. The right to use the land of cross-border sales or deliveries of oil and oil is exercised by virtue of an agreement entered into with the landlord, products. being between the State entity, local government or private person owning the immovable property and the investor/holder of the There are no specific requirements, limitations or rules in relation permit, against the payment of a fee. The investor shall compensate to cross-border sales of oil and oil products. Any legal entity duly the landlord for all the damages suffered by the latter due to such licensed may perform the import/export of oil and oil products construction works, instalment of infrastructure, or the limitation to in accordance with the international convention ratified by the use the land. Albanian government. In case the landlord fails to enter into such an agreement with the investor, the latter is entitled to address the competent court for the purpose of determining the easement rights and the annual payment which is due to the landlord.

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Furthermore, Albanian law provides for the expropriation of private property, provided that the oil and natural gas activity in a certain 6.7 Are parties free to agree the terms upon which oil area is of special public interest and is the object of dispute between or natural gas is to be transported or are the terms (including costs/tariffs which may be charged) the investor and the landlord in relation to use of the relevant regulated? property.

The expropriation right is exercised for a public interest that cannot In relation to oil, the parties are free to agree to the terms and be completed or protected by other means, only on the grounds set conditions of transport by entering into an agreement, which should out in Law No. 8561/1999 and against fair compensation. then be filed with NANR. In relation to the transport of natural gas, the terms and conditions,

6.4 How is access to oil and natural gas transportation as well as tariffs, are regulated in accordance with the proposed Albania pipelines and associated infrastructure organised? methodology which is expected to be approved by ERA.

The TSO, in the capacity of the administrator of natural gas transportation infrastructure, should ensure unlimited access to the 7 Gas Transmission / Distribution transmission system to any third party in accordance with the terms and conditions determined in the Network Transmission Code, 7.1 Outline broadly the ownership, organisational and approved by ERA. regulatory framework in relation to the natural gas Access for third parties may be granted, provided that the operator transmission/distribution network. has the necessary financial and professional capacity to exercise the access right. The transmission and distribution of natural gas is regulated by Law The access right to the natural gas transportation pipelines is No. 102/2015 and Regulation 97/2017. regulated by virtue of an agreement entered into with the TSO. The Transmission means the transport of natural gas to the client through terms and conditions of the access agreement as well as the access a network of high-pressure pipelines, which are different from the fees should be in compliance with the methodology approved by pipelines in the exploration-production system and the distribution ERA. pipelines, excluding the service of supply. Natural gas transmission is an activity of public interest and may be performed by a TSO licensed by ERA. A TSO is a legal entity that operates only in the 6.5 To what degree are oil and natural gas transportation pipelines integrated or interconnected, and how is co- transmission of natural gas and has, inter alia, the following powers: operation between different transportation systems to construct, own, operate, maintain and develop a safe, efficient established and regulated? system for natural gas transmission and ensure a competitive market, as well as ensure sufficient capacity to meet reasonable demand for To date, the oil transportation system is not integrated or the transmission of natural gas; to provide a natural gas transmission interconnected with any transportation system of any third country. service; and to grant third-party access to the transmission system in Upon completion of the TAP Project, it is expected that the natural accordance with the Transmission Network Code. gas transportation pipelines in Albania will be integrated and Distribution means the transport of natural gas through a pipeline interconnected with the Greek and Italian natural gas transportation network to the client, excluding the service of supply. The systems. distribution of natural gas may be performed by a DSO. A DSO is a legal entity that operates only in the distribution of natural gas and has, inter alia, the following powers: to construct, own, operate, 6.6 Outline any third-party access regime/rights in maintain and develop a safe, efficient and environmentally-friendly respect of oil and natural gas transportation and associated infrastructure. For example, can the system for natural gas distribution; to provide a stable and efficient regulator or a new customer wishing to transport distribution of natural gas in accordance with licence conditions; and oil or natural gas compel or require the operator/ to grant third-party access to the transmission system in accordance owner of an oil or natural gas transportation pipeline with the Distribution Network Code. or associated infrastructure to grant capacity or expand its facilities in order to accommodate the new customer? If so, how are the costs (including costs 7.2 What governmental authorisations (including any of interconnection, capacity reservation or facility applicable environmental authorisations) are required expansions) allocated? to operate a distribution network?

The TSO may refuse third-party access to the natural gas The governmental authorisations required to operate a distribution transportation pipeline or associated infrastructure due to lack of network are: capacity, in case such access impairs the performance of obligations ■ The Approval of the Council of Ministers on the construction to public service. and use of a distribution network. In such case, TSO should make the necessary improvements to the ■ The Distribution Licence issued by ERA. infrastructure, to the extent it is suitable from a financial point of ■ The Environmental Permit approved by the Minister of the view, or in case the interested third party is willing to pay for such Environment and issued by the NLC. improvements. TSO should make the method of calculation of the ■ The Development Permit, Construction Permit and Use costs public. Permit issued by the National Territory Council in case of the construction infrastructure.

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7.3 How is access to the natural gas distribution network 8.2 What range of natural gas commodities can be organised? traded? For example, can only “bundled” products (i.e., the natural gas commodity and the distribution The DSO provides access to the distribution system, within the limits thereof) be traded? of distribution capabilities and technical regulations, in accordance with the terms and conditions stipulated in the Distribution Network There are no specific provisions on tradable natural gas commodities. Code, approved by ERA. However, by virtue of Law No. 102/2015, natural gas comprises methane, including any associated gas, and all hydrocarbons in The DSO should publish the terms and conditions approved by gaseous state in normal atmospheric conditions, including LNG, ERA, including rules guarantees and access fees. The same terms

Albania biogas or other types of gas transmitted and distributed in the apply to all customers without discrimination. pipeline system. The DSO should grant access to the natural gas distribution network taking into consideration the financial ability of the third party. However, all the criteria for granting access should be non- 9 Liquefied Natural Gas discriminatory, proportional and transparent.

9.1 Outline broadly the ownership, organisational and 7.4 Can the regulator require a distributor to grant regulatory framework in relation to LNG facilities. capacity or expand its system in order to accommodate new customers? The operation of LNG facilities is regulated by Law No. 102/2015. The LNG system may be operated by any legal entity licensed by Law No. 102/2015 does not provide for the right of ERA to ERA and depending on the efficacy, by one or more operators. require a DSO to grant capacity or expand its system in order to The LNG system has, inter alia, the following powers: to operate, accommodate new costumers. However, the Distribution Network maintain and develop safe, reliable and efficient LNG facilities; Code, regulating, inter alia, the terms and conditions for providing to connect the LNG facilities with the transmissions system third-party access, is expected to be approved by ERA. in accordance with the technical rules related to LNG plants; install measurement equipment for inflow and outflows, as well 7.5 What fees are charged for accessing the distribution as gas quality parameters; and to ensure objective, equal and network, and are these fees regulated? comprehensive conditions of access to LNG facilities.

The access fee should be calculated in accordance with the 9.2 What governmental authorisations are required to methodology approved and published by ERA. construct and operate LNG facilities?

7.6 Are there any restrictions or limitations in relation to The following governmental authorisations are required in order to acquiring an interest in a gas utility, or the transfer construct and operate LNG facilities: of assets forming part of the distribution network ■ The Approval of the Council of Ministers on the construction (whether directly or indirectly)? and use of LNG facilities. ■ The LNG facilities operation licence issued by ERA. The licence or assets forming part of the distribution system may be transferred entirely or partially to any third party upon prior ■ The Environmental Permit approved by the Minister of approval of ERA, with the exception of assets having a minimal Environment and issued by the NBC. value or those not related to the licensed activity. In case of transfer ■ The Development Permit, Construction Permit and Use of assets, the transferee should apply to ERA to obtain a new licence. Permit issued by the National Territory Council.

9.3 Is there any regulation of the price or terms of service 8 Natural Gas Trading in the LNG sector?

8.1 Outline broadly the ownership, organisational and The price for accessing LNG facilities is calculated in accordance regulatory framework in relation to natural gas with the methodology approved by ERE with Decision 178/2017 trading. Please include details of current major “On approval of the methodology for calculation of the fees initiatives or policies of the Government or regulator for transmission and distribution network of natural gas”. This (if any) relating to natural gas trading. methodology aims to set out rules for calculation of the fee for access and use of the transmission and distribution system of the The wholesale and retail of natural gas may be performed by a legal natural gas in Albania. entity duly licensed by ERA. A company licensed for the supply The access fee shall be based on the following principles: (i) of natural gas is also entitled to perform the trading of natural gas, the access fee shall reflect the costs; (ii) the access fees shall be provided that separate accounts are kept of each of the activities. calculated in such manner that at the end of the regulatory period, ERA surveys the natural gas market in cooperation with the the difference between the real cost of the network (the realised Competition Authority at least every two years, and the Competition incomes) and those allowed through the fee, is as small as possible; Authority takes measures to ensure effective competition in the (iii) the subventions between different classes of the customers natural gas market and to identify market abuse cases. is prohibited; (iv) the access fee should reflect the actual cost of A regulation on the organisation and functionality of the natural gas the service for each customer and should be allocated as fairly as market is expected to be approved by ERA. possible; (v) the access fees should give the right signals for the

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efficient use of the network; (vi) the allowed expenses in the fee Albanian law does not impose any restriction as to the ownership of should be transparent for all the participants; and (vii) the access fee such companies. should remain stable over time. 11 Competition 9.4 Outline any third-party access regime/rights in respect of LNG facilities. 11.1 Which governmental authority or authorities are The LNG system operator should offer services on a non- responsible for the regulation of competition aspects, discriminatory basis to all network users that comply with the or anti-competitive practices, in the oil and natural gas sector?

market requirements. Albania An LNG system operator may refuse access to a third party to LNG The competent authority responsible for the regulation of facilities or associated infrastructure due to lack of capacity, in case competitive and anti-competitive practices in both oil and gas such access impairs the performance of obligations to public service. sectors is the Competition Authority (“CA”).

10 Downstream Oil 11.2 To what criteria does the regulator have regard in determining whether conduct is anti-competitive?

10.1 Outline broadly the regulatory framework in relation By virtue of Law No. 9121/2003 “On the protection of competition”, to the downstream oil sector. the following are considered anti-competitive conducts that might restrict or distort competition: prohibited agreements; abuse of In addition to the laws indicated in question 2.1, the downstream oil dominant position; and concentrations. sector is regulated, inter alia, by the following: Prohibited agreements, specifically, are agreements that: directly or ■ DCM 755/2014 “On the determination of procedures and requirements with regard to the award of a “Processing indirectly fix purchase or selling prices or any other trading condition; Licence” for processing plants of the by-products of oil”. limit or control production, markets, technical development or investment; share markets or sources of supply; provide dissimilar ■ DCM 19/2015 “On the procedures and requirements with regard to the granting, transfer and renewal of the concession conditions to equivalent transactions with different parties, licence for refineries for crude oil processing activity for the thereby placing them at a competitive disadvantage; and render production of the by-products thereof ”. the conclusion of agreements subject to acceptance by other ■ DCM 970/2015 “On the determination of the procedures and contracting parties of additional obligations that, due to their nature requirements for granting licences for the trading of crude oil or commercial use, are not related to the object of such agreements. and its by-products”. The abuse of dominant position may occur in the following cases: ■ Order of the Ministry of Energy and Industry 389/2014 “On the direct or indirect fixing of unfair selling or purchase prices or the data that should be sent by legal entities exercising their other unfair trading conditions; the restriction of production, markets activity in the sector for processing, transporting and trading or technical development; the provision of dissimilar conditions to crude oil and its by-products”. equivalent transactions with different parties, thereby placing them ■ Order of the Ministry of Energy and Industry 315/2017 “On at a competitive disadvantage; and rendering the conclusion of the procedures for issuing technical certification for the agreements subject to the acceptance by other contracting parties entities carrying out activities in the sector of processing, of additional obligations that, due to their nature or commercial use, transport and trade crude oil and its by-products”. are not related to the object of such agreements. A legal entity may operate an oil refinery for processing crude oil, The concentration may occur in the following cases: the merger of provided that it is established as a joint stock company and after two or more companies; the acquisition of direct or indirect control obtaining a concessionary licence through a decision of the Council by one or more individuals or legal entities that simultaneously of Ministers for a term of 30 years, renewable. control at least one other company; and direct or indirect control Processing plants are entitled to carry out the activity of processing over one or more companies or parts thereof. petroleum by-products, provided they are established as a joint stock company and have obtained the processing licence, issued by 11.3 What power or authority does the regulator have to the Ministry of Energy and Industry, which is issued for a period of preclude or take action in relation to anti-competitive 15 years, renewable. practices?

10.2 Outline broadly the ownership, organisation and In case of doubt for anti-competitive actions, the CA, on its own regulatory framework in relation to oil trading. initiative, is entitled to carry out investigations within the premises of the companies or group of companies, and the residences of the The wholesale of oil may be performed by any legal entity administrators, directors and other employees of the companies. established as a joint stock company, provided it has obtained a The Inspectors of the CA are also entitled to obtain information or trade permit from the Ministry of Energy and Industry for a period seize objects when such seizure is deemed necessary. of 10 years, renewable. Moreover, the CA, according to the information received, may In addition to the above, the wholesale of oil may be performed by perform either a preliminary or in-depth investigation. Depending (i) legal entities producing hydrocarbons, the latter being entitled to on the results of such investigation, the CA applies the respective sell the produced crude oil only to oil refineries for export purposes, measures provided for in the Law “On the Protection of and to companies that have obtained a trade licence for crude oil, Competition”. (ii) oil refineries, which may trade their own production, and (iii) processing plants, which may trade their own production.

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In case of anti-competitive conduct, the CA may impose penalties to up to 10% of the turnover of the previous fiscal year. 13 Dispute Resolution

11.4 Does the regulator (or any other Government 13.1 Provide a brief overview of compulsory dispute authority) have the power to approve/disapprove resolution procedures (statutory or otherwise) mergers or other changes in control over businesses applying to the oil and natural gas sector (if any), in the oil and natural gas sector, or proposed including procedures applying in the context of acquisitions of development assets, transportation or disputes between the applicable Government associated infrastructure or distribution assets? If so, authority/regulator and: participants in relation to oil what criteria and procedures are applied? How long and natural gas development; transportation pipeline and associated infrastructure owners or users in Albania does it typically take to obtain a decision approving or disapproving the transaction? relation to the transportation, processing or storage of natural gas; downstream oil infrastructure owners or users; and distribution network owners or users in Concentrations are considered as such and need to be approved relation to the distribution/transmission of natural gas. by the CA in case during the year prior to the transaction: (a) the combined worldwide turnover of all participating companies Any dispute arising from a petroleum agreement in the oil sector is more than 7 billion ALL (approx. 50 million Euros) and the is settled in accordance with the provisions of the agreement and domestic Albanian turnover of at least one participating company is in practice, petroleum agreements also determine an international more than 200 million ALL (approx. 1.4 million Euros); or (b) the court of arbitration as the competent authority for resolving such combined domestic turnover of all participating companies is more disputes. than 400 million ALL (approx. 2.9 million Euros) and the domestic turnover of at least one of the participating companies is more than With regard to the companies operating in the natural gas sector, the 200 million ALL (approx. 1.4 million Euros). competent authority for the resolution of disputes arising with regard to licensing and the amendment, transfer, revocation or renewal of a The above concentrations should be notified to the CA within 30 licence is the Albanian Energy Regulator. The decision of the latter days of their conclusion, and the latter must approve or refuse it authority may be appealed at the Albanian national court. within two months as of receipt of the notification.

13.2 Is your jurisdiction a signatory to, and has it duly 12 Foreign Investment and International ratified into domestic legislation: the New York Obligations Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and/or the Convention on the Settlement of Investment Disputes between States 12.1 Are there any special requirements or limitations on and Nationals of Other States (“ICSID”)? acquisitions of interests in the natural gas sector (whether development, transportation or associated The New York Convention on the Recognition and Enforcement of infrastructure, distribution or other) by foreign Foreign Arbitral Awards was ratified by the Albanian Parliament on companies? 09.11.2000 and entered into force on 27.06.2001. The Convention on the Settlement of Investment Disputes between There are no restrictions on acquisition of interests by foreign States and Nationals of Other States (“ICSID”) was signed and companies. Therefore, the foreign investors may either establish ratified by the Albanian Parliament on 15.10.1991 and entered into a company or a branch in Albania for the purpose of exercising its force on 14.11.1991. activity. There are no restrictions as to the nationality of shareholders of a company. 13.3 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 12.2 To what extent is regulatory policy in respect of the or State organs (including any immunity)? oil and natural gas sector influenced or affected by international treaties or other multinational The governmental authorities do not benefit from any immunity, arrangements? and to date there have not been any difficulties with regard to the enforcement of judgments against the governmental authorities. Albania has ratified the Energy Community Treaty and has become a part of the Energy Community. In light of the above, and the subsequent obligation of applying the acquis communautaire, the 13.4 Have there been instances in the oil and natural gas sector when foreign corporations have successfully new legislation on natural gas, namely Law No. 102/2015 “On the obtained judgments or awards against Government natural gas sector”, dated 23.09.2015, is completely harmonised authorities or State organs pursuant to litigation with the European legislation in force. before domestic courts? Moreover, in relation to the TAP Project, the Albanian Parliament has ratified the intergovernmental agreement entered into with Italy Recently, there have been court procedures initiated by one of the and Greece. companies operating in the Albanian oil sector; however, due to confidentiality we may not provide further details on the case and the company.

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This development plan and the Master Plan to be approved shall 14 Updates include at least: (i) the identification of the demands for gas and the possible scenarios for gas supplying; (ii) the policies for gas prices, 14.1 Please provide, in no more than 300 words, a fees and legal framework of gas; (iii) promotion of natural gas in summary of any new cases, trends and developments Albania; (iv) developing knowledge in gas area and training of the in Oil and Gas Regulation Law in your jurisdiction. respective employees of the Ministry of Energy and Infrastructure, Transmission Gas Operator and Energy Regulator Entity; and (v) On 14.02.2018 the Council of Ministers approved the Decision developing a plan on the priority projects in the natural gas area No. 87 “On approval of the development plan in the natural gas including a pre-feasibility analysis of the possible projects of gas sector in Albania and identification of the priority projects” (“DCM infrastructure, along with the strategy for attracting the investors. 87/2018”). Albania By virtue of DCM 87/2018 the Master Plan aiming to identify the priority projects in the area of gas, should be approved in September 2018.

Gjergji Gjika Ergys Hasani Gjika & Associates Attorneys at Law Gjika & Associates Attorneys at Law Ambasador 3 Building Ambasador 3 Building “Dervish Hima” Street, 20th floor “Dervish Hima” Street, 20th floor Office No. 159 Office No. 159 Tirana Tirana Albania Albania

Tel: +355 42 400 900 Tel: +355 42 400 900 Email: [email protected] Email: [email protected] URL: www.gjika-associates.com URL: www.gjika-associates.com

Gjergji Gjika is the founder of Gjika & Associates Attorneys at Law. Ergys Hasani joined Gjika & Associates Attorneys at Law as an Associate in January 2016. He graduated from the Faculty of Law He has many years of experience providing legal counsel to domestic University of Tirana and holds a Master’s degree in Civil Law. He has and international multinational companies, with a focus on business been a member of the Albanian National Bar Association since 2017. and commercial law, tax and employment law, administrative and public procurement law, mergers and acquisitions, re-organisations He has important experience in consulting, due diligence and regularly and corporate governance. He is regularly involved in drafting advises clients in relation to corporate and business law, labour law, contracts, legal opinions and due diligence in relation to mining, administrative law, as well as hydrocarbons and the natural gas and hydrocarbons and the natural gas and energy sectors. energy sectors. Gjergji Gjika is recognised as a leading lawyer in the 2014–2019 editions of the IFLR1000. He has been a member of the Albanian National Bar Association since 2006.

Gjika & Associates is a dynamic business-oriented law firm, established in 2013 as a fruitful joining of highly skilled attorneys with extensive experience in the national and international arena. Our attorneys have experience in all segments of the natural resources industry, ranging from renewable resources to power generation to oil and gas. We apply a distinctly commercial approach to guide clients through strategic decisions, policy initiatives, commercial transactions, project financing and development, regulatory compliance, tax matters, credit trading, and litigation. We pride ourselves on our responsiveness and teamwork, as well as on maintaining a thorough grounding in both legal and business dimensions of the energy and utilities industries. Our clients include: independent power producers; alternative energy project developers and producers; investor-owned and publicly owned electric, gas, water, and telecommunications utilities; emerging businesses in the smart energy sector; power marketers; oil and gas producers; natural gas and petroleum product storage and transmission companies; lenders; developers; and contractors. Gjika & Associates has been recognised as a recommended firm in the 2015–2019 editions of the IFLR1000.

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Algeria

LPA-CGR Avocats Rym Loucif

and allowing Algeria to benefit from higher European gas pricing 1 Overview of Natural Gas Sector (Source: Wood Mackenzie Country Report—Algeria, July 2017). Gas reserves: 1.1 A brief outline of your jurisdiction’s natural gas As of January 2018, Algeria had 153.1 Tcf of proved natural gas sector, including a general description of: natural reserves (Source: BP Statistical Review of World Energy, June gas reserves; natural gas production including the extent to which production is associated or 2018), the eleventh-largest natural gas reserves in the world and non-associated natural gas; import and export of the second-largest reserves in Africa, behind Nigeria (Source: Wood natural gas, including liquefied natural gas (LNG) Mackenzie Country Report—Algeria, July 2017). liquefaction and export facilities, and/or receiving and The natural gas field of Hassi R’Mel holds proved reserves of about re-gasification facilities (“LNG facilities”); natural gas 85 Tcf, which represents more than 50% of Algeria’s total proved pipeline transportation and distribution/transmission network; natural gas storage; and commodity sales natural gas reserves. and trading. The remainder of Algeria’s natural gas reserves are located in associated and non-associated fields in the southern and southeastern Overview: regions of the country. Algeria is the leading natural gas producer in Africa and the second- Recent gas developments in Gassi Touil and Rhourde Nouss have largest natural gas supplier to Europe outside of the region (Source: proven to be economic and steadied production. US Energy Information Administration, Country Analysis Brief: Algeria also holds large untapped shale gas resources. Algeria, March 2016). Gas production: The first major hydrocarbon discoveries in Algeria were made in the BP’s 2018 Statistical Review of World Energy states that the 1950s during the colonial period. The largest gas deposits discovery production of natural gas for 2017 amounts to 78.5 million tonnes (Hassi R’mel) was made in 1956. of oil equivalent (“toe”). Algeria has a growing gas sector, with significant assets coming The following table sets out Algeria’s natural gas production over on-stream in the coming years and aims to increase its gas export the past 10 years (Source: BP Statistical Review of World Energy, infrastructure, with new LNG trains starting production. Algeria is a June 2018. Excludes gas flared or recycled. Includes natural gas major gas supplier to Europe with multiple pipelines connecting both produced for gas-to-liquids transformation):

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In March 2018, Total SA reported that natural gas production has Algeria’s Government is attempting to reduce the country’s started from Timimoun field in southwestern Algeria. Algeria’s dependence on natural gas in the power sector by increasing the Sonatrach jointly operates the Timimoun production complex with share of electricity generated by renewable energy. partners. Sonatrach has 51% interest, Total 37.75% and Cepsa In 2011, Algeria adopted a National Programme for the Development 11.25%. Gas from Timimoun will eventually be produced with a of Renewable Energies with the aim of achieving production of total of 37 wells connected to a processing plant tied into the GR5 22,000 MW dedicated to domestic consumption by 2030, of which pipeline to move gas from southwestern Algeria to Hassi R’mel (Oil over 4,000 MW are to be accomplished by 2020. & Gas Journal, March 2018). In June 2018, Sonatrach, Total, Repsol, and the National Agency for the Valorisation of Hydrocarbon Resources (“ALNAFT”), 1.4 To what extent is your jurisdiction’s natural gas signed a 25-year concession contract to extend Tin Fouye Tabankort production exported (pipeline or LNG)? Algeria (“TFT”) gas and condensate field. Total, Sonatrach and Repsol will make drilling and development investments required to develop The global volume of exports reached 53 billion cubic metres in additional reserves estimated at more than 250 million boe (Oil & 2017, against 53.9 billion cubic metres in 2016. In 2017, pipeline Gas Journal, June 2018). exports represented 36.4 billion cubic metres whereas LNG exports Export of natural gas (including LNG): accounted for 16.6 billion cubic metres (Source: BP Statistical Algeria is the largest gas supplier to Southern Europe, with Review of World Energy, June 2018). approximately 70% transported via pipeline and 30% exported as LNG. Italy and Spain are the largest importers of Algeria’s gas. Gas 2 Overview of Oil Sector is mainly transported from a hub at Hassi R’Mel to LNG terminals on the coast and sub-sea export pipelines (Source: Wood Mackenzie Country Report—Algeria, July 2017). 2.1 Please provide a brief outline of your jurisdiction’s oil Midstream and downstream infrastructures: sector. Transcontinental pipelines: Overview: The Transmed pipeline allows the transportation of gas from the Hassi R’Mel field onshore Algeria, across Tunisia and the According to BP’s 2018 Statistical Review of World Energy, Mediterranean to Sicily and onwards to the Italian mainland. Algeria is classified in Africa third after Libya and Nigeria for oil The Pedro Duran Farell (“GPDF”) pipeline started in 1996 and resources. travels 325 miles to Spain via Morocco. Algeria holds the third-largest amount of proved crude oil reserves The newest MEDGAZ pipeline connects Algeria to Spain via the in Africa, all of which are located onshore because there has Mediterranean Sea. been limited offshore exploration. Apparently, two-thirds of the Algerian territory remain largely underexplored or unexplored There are plans for the construction of a second pipeline from (Source: US Energy Information Administration, Country Analysis Algeria to Italy (“GALSI” pipeline) and a pipeline from Nigeria Brief: Algeria, March 2016). to Algeria to transport Nigerian gas to Europe (Trans-Saharan Gas Pipeline (“TSGP”)). In 1956, one of the largest oil deposits was discovered in Algeria, Hassi Messaoud. LNG plants: Algeria’s LNG facilities are situated on three sites (Arzew, Bethioua Algeria has been a Member State of OPEC since 1969. and Skikda) and are supplied with gas from the Algerian National Oil reserves: Grid. Most Algerian LNG volumes are delivered into Europe, As of January 2018, Algeria had 12,200 mmbbl of proved oil although deliveries have also been made into the US and Asia. reserves, most of them being held onshore (Source: BP Statistical Algeria has three operational LNG plants and one decommissioned Review of World Energy, June 2018). plant. The two largest and very similar plants, GL1Z and GL2Z, are The main oil fields in Algeria are located in the Hassi-Messaoud- located at Bethioua; the GL1K plant is located at Skikda. A new 4.5 Dahar province and the Illizi and Berkine basins. Hassi-Messaoud mmtpa modern train was commissioned at Skikda in 2013 and was contains about 71% of Algeria’s combined proved, probable, and meant to replace trains lost through an explosion in 2004 (Ibid.). possible oil reserves, and the Illizi basin, contains about 15% (Source: US Energy Information Administration, Country Analysis 1.2 To what extent are your jurisdiction’s energy Brief: Algeria, March 2016). requirements met using natural gas (including LNG)? Oil production: Algeria ranks third place in Africa, after Nigeria and Angola in The national energy consumption reached 59.6 million toe in respect of oil production. 2017, representing an increase of 2.1% compared to 2016. The structure of national consumption remains dominated by natural BP’s 2018 Statistical Review of World Energy states that Algeria’s gas (37%), followed by electricity (30%) and petroleum products oil production for 2017 amounts to 66.6 million tonnes. The (27%) (Source: National Energy Balance for 2017 published by the following table sets out Algeria’s oil production over the past 10 Algerian Ministry of Energy in 2018). years (million tonnes) (Source: BP Statistical Review of World Energy, June 2018. Includes crude oil, shale oil, oil sands and NGLs (natural gas liquids – the liquid content of natural gas is 1.3 To what extent are your jurisdiction’s natural gas where this is recovered separately). Excludes liquid fuels from requirements met through domestic natural gas other sources such as biomass and derivatives of coal and natural production? gas).

Algeria relies on its own natural gas production for domestic consumption, which is heavily subsidised.

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Crude oil exports: The National Energy Balance for 2017 published by the Algerian Algeria exports mostly light crude oil. According to the US Energy Ministry of Energy in 2018 states that domestic consumption Information Department, about 75% of Algerian crude oil exports represents more than one-third of the country’s total production of are sent to Europe. hydrocarbons. Refined petroleum products: According to the Oil & Gas Journal, Algeria has five oil refineries 2.4 To what extent is your jurisdiction’s oil production exported? with a total nameplate capacity of 522,800 b/d (Source: Oil & Gas Journal, Worldwide Refining Survey 2016). The overall volume of exports reached 108.3 million toe in 2017. Algeria’s largest refinery, Skikda, is the largest refinery in Africa, Crude oil represents 25.2% of exports, while LPG represents 7.6% with a capacity to process 355,300 b/d of crude oil and condensate, and refined products 15.6% (Source: National Energy Balance for accounting for more than half of Algeria’s total refinery capacity. 2017 published by the Algerian Ministry of Energy in 2018). The two other largest Algerian refineries are located in Algiers and Arzew and have the capacity to process 58,100 b/d and 75,000 b/d, respectively. Algeria has two other inland refineries, Hassi 3 Development of Oil and Natural Gas Messaoud and Adrar, which are connected to local oil fields and supply oil products to nearby areas (Source: US Energy Information Administration, Country Analysis Brief: Algeria, March 2016). 3.1 Outline broadly the legal/statutory and organisational framework for the exploration and production In May 2018, Sonatrach acquired a refinery located in Augusta in (“development”) of oil and natural gas reserves Sicily in order to open up new prospects for Algerian crude oil and including: principal legislation; in whom the State’s meet Algeria’s growing fuel needs. mineral rights to oil and natural gas are vested; Oil pipelines and export terminals: Government authority or authorities responsible for the regulation of oil and natural gas development; and Algeria uses multiple coastal terminals (Arzew, Skikda, Algiers, current major initiatives or policies of the Government Annaba, Oran, Bejaia in Algeria and La Skhirra in Tunisia) in (if any) in relation to oil and natural gas development. order to export crude oil, refined products, LPG, and NGPL. The most important pipelines carry crude oil from the Hassi Messaoud Historical overview: field to refineries and export terminals. Algeria does not have any Algeria’s legal and fiscal frameworks for its energy strategy have transcontinental export oil pipelines (Ibid.). undergone three major reforms in the past 30 years. ■ Law 86-14 2.2 To what extent are your jurisdiction’s energy First, Law No. 86-14 of 19 August 1986 regarding exploration and requirements met using oil? production activities as amended (“Law 86-14”), was adopted in a context of dropping oil prices. The National Energy Balance for 2017 published by the Algerian Ministry of Energy in 2018 states that petroleum products represent It introduced the concept of production sharing contracts. In 26.7% of the national energy consumption for 2017. addition, foreign partners received a share of production in return for a technological and financial investment. Law 86-14 aimed primarily to attract foreign investors to share 2.3 To what extent are your jurisdiction’s oil requirements the financial risk with them and benefit from their technological met through domestic oil production? expertise.

Domestic oil requirements are met through the country’s own Thus, the period 1986–1990 marked the opening of the Algerian production. hydrocarbons sector to the partnership.

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Sonatrach, the national oil company, maintained its monopoly over Upcoming reform of the Hydrocarbons Law: hydrocarbons exploration, exploitation and transportation activities. The Minister of Energy announced earlier this year that the Foreign companies had to carry out upstream activities through a Hydrocarbons Law would be amended. A first bill is expected partnership with Sonatrach (having a minimum participation of within the first quarter of 2019. Please refer to question 14.1 below 51%). for further details. ■ Law 05-07

Law No. 05-07 of 28 April 2005 regarding hydrocarbons (“Law 05- 3.2 How are the State’s mineral rights to develop oil 07”) was introduced in order to liberalise the sector. Consequently, and natural gas reserves transferred to investors or it revoked the monopoly of Sonatrach over upstream activities. companies (“participants”) (e.g. licence, concession,

However, Law 05-07 has been amended one year after its adoption service contract, contractual rights under Production Algeria Sharing Agreement?) and what is the legal status of by Order No. 06-10 of 29 July 2006 (“Order 06-10”) which those rights or interests under domestic law? reintroduced a minimum participation of 51% of Sonatrach. Order 06-10 also introduced retroactive taxation with the windfall Pursuant to the Hydrocarbons Law, the exploration and production profit tax applicable to all production sharing contracts entered into activities for conventional hydrocarbons involve the conclusion of force prior to Law 05-07. an exploration and/or exploitation contract between ALNAFT and a ■ Law 13-01 contracting party. Law No. 13-01 of 20 February 2013 (“Law 13-01”) amended Law The contracting party may be either Sonatrach on its own, 05-07. It introduced “unconventional hydrocarbons” (covering in or Sonatrach and one or more foreign investors. Sonatrach’s particular shale oil and gas) which benefit from a more incentivising participating interest in the exploration and/or exploitation contract legal and tax regime. It also established a profit-based taxation as is equal to 51% at least. opposed to revenue-based taxation. The conclusion of the exploration and/or exploitation contract Current legal framework: is necessarily preceded by a tender process. Such tender process Law 05-07 (the “Hydrocarbons Law”) currently governs the oil is opened only to pre-qualified companies (which means those and gas sector in Algeria. companies holding a certificate issued by ALNAFT in consideration of legal, technical and financial criteria with a distinction being made The key players in the Algerian hydrocarbon market are the between the status of operator-investor and non-operating investor). Ministry of Energy, two agencies created by the Hydrocarbons Law and the Algerian state-owned oil and gas company Sonatrach. The rights granted to the contracting party under an exploration and/ or exploitation contract can be summarised as follows: The Hydrocarbons Law introduced a new institutional framework by creating: (i) ALNAFT; and (ii) the Hydrocarbons Regulating ■ Exclusive rights over the exploration and exploitation in Authority (“ARH”). the contractual area subject to certain conditions (such as the performance of a minimum research programme ■ ARH shall implement and enforce the regulations regarding or the approval of the development plan of discoveries by hydrocarbons exploration and production activities in Algeria, ALNAFT). including technical regulations as well as regulations relating to transportation tariffs, third-party access to transportation ■ Ownership rights over the production arising from the infrastructures, health, safety and environmental standards. contractual perimeter at the measurement point. ■ ALNAFT shall promote the hydrocarbons industry and ■ No ownership rights over the land comprised in the manage the Algeria hydrocarbons database. ALNAFT also contractual area. grants prospecting permits, initiates calls for competitive ■ The assignment of rights and obligations under the biddings, evaluates competitive bids, enters into exploration exploration and/or exploitation contract is subject to and exploitation contracts with Sonatrach and foreign specific conditions detailed in question 3.8 below. partners for upstream activities, approves development plans, A joint operating agreement (“JOA”) is also entered into between collects royalties on behalf of the Algerian Treasury, etc. Sonatrach and the foreign investor(s). The purpose of the JOA is The Hydrocarbons Law is based on the following main principles: to define the rights and obligations of Sonatrach and the foreign ■ Foreign companies are required to enter into a contract with investor(s), including the modalities of the exploration and ALNAFT in order to perform exploration and exploitation production costs’ funding. activities in Algeria. ■ There is only one legal instrument: the exploration and/or 3.3 If different authorisations are issued in respect of exploitation contract. different stages of development (e.g., exploration ■ Sonatrach loses its prerogatives as regulator and only appraisal or production arrangements), please specify maintains its status as operator, with certain special rights those authorisations and briefly summarise the most and obligations owing to its status as a national State-owned important (standard) terms (such as term/duration, company. For instance, Sonatrach’s working interests cannot scope of rights, expenditure obligations). be less than 51% of the exploration and/or exploitation contract and Sonatrach has the obligation to ensure the As per the Hydrocarbons Law, ALNAFT is entrusted by the Algerian transportation of the production. State with the exercise of prospecting, exploration and exploitation ■ The mining titles are exclusively granted to ALNAFT. activities, and is the exclusive holder of mining titles. ■ All hydrocarbons production is allocated to the contracting With respect to defined contractual areas, ALNAFT is in turn parties, subject to the payment of applicable taxes and entitled to grant two types of authorisations which are required to royalties. explore and produce oil and natural gas, namely: ■ Title to the hydrocarbons production shall pass to the ■ Prospecting permit whereby the operator is authorised – on contracting parties at the agreed measurement point. a non-exclusive basis – to perform prospecting activities in a defined perimeter.

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■ The exploration and/or exploitation contract entered into (iv) An annual additional income tax payable to the Public between ALNAFT and the contracting party as a result of Treasury: such tax is very similar to the corporate a bidding process opened to pre-qualified companies only income tax; it is based on the consolidated profit of all (please refer to question 3.2 above for further details). Such oil activities carried out in Algeria. Its ordinary tax rate contract (and any amendment thereto) is approved by a amounts to 30%. decree enacted by the Council of Ministers, and the contract (v) Other taxes: land tax, gas flaring tax, water tax,² CO (and any amendment thereto) enters into force only when emission tax, and 1% transfer tax in case of transfers such decree is published in the Official Gazette. of participating interests in the exploration and/or exploitation contracts. 3.4 To what extent, if any, does the State have an (vi) Windfall profit tax: applicable to contracts entered into Algeria ownership interest, or seek to participate, in the before the publication of the Hydrocarbons Law. Such development of oil and natural gas reserves (whether tax is triggered as and when the monthly arithmetical as a matter of law or policy)? average of the Brent price exceeds USD 30 per barrel. The tax is based on the share of production allocated to The Algerian State is the sole owner of the discovered or the foreign partners, and its rate is comprised between 5% and 50% depending on the level of production. undiscovered hydrocarbons located in the soil and subsoil of the national territory. The Hydrocarbons Law clearly states that the Algerian State assumes 3.6 Are there any restrictions on the export of no obligation to finance or guarantee financing of hydrocarbons production? operations and is in no way liable to third parties in the context of the performance of an exploration and/or exploitation contract. The Hydrocarbons Law provides for the following restrictions: It adds that no claims shall be made, directly or indirectly, by the (i) Priority for the supply of the domestic market. contracting party or any other relevant parties, against ALNAFT or Priority is given to meet the needs of the domestic market of the State, as a result of any damage or consequences, of any kind both liquid hydrocarbons and gas. whatsoever, resulting from the hydrocarbons operations. The terms and conditions for supplying the domestic market However, the following state-owned agency and company are key with liquid hydrocarbons are defined in the exploration and/ players in the exploration and production activities: or exploitation contract. The price for the quantities of liquid hydrocarbons collected in this context is the basic price ■ ALNAFT is the exclusive holder of mining titles granted by determined in accordance with the provisions of Articles 90 the Algerian State and monitors upstream activities. and 91 of the Hydrocarbons Law. ■ Sonatrach must hold a minimum participating interest of 51% ALNAFT may also request each gas-producing contractor to in the exploration and/or exploitation contract. contribute to meeting domestic needs. The maximum rate of each contractor’s contribution and the terms and conditions 3.5 How does the State derive value from oil and natural for supplying the national gas market are defined in the gas development (e.g. royalty, share of production, exploration and/or exploitation contract. The price applied taxes)? for the valuation of the quantities of gas withdrawn for this contribution is the average, weighted by the volumes, of the prices of the various sale contracts of Algerian gas for export The Algerian State derives value from oil and natural gas development carried out by the contracting party. through two main means: (ii) Joint-commercialisation of gas. ■ A minimum participating interest of 51% held by state-owned company Sonatrach in all exploration and/or exploitation The exportation of the gas produced under an exploration contracts. As a result, Sonatrach receives at least 51% of and/or exploitation contract is subject to a clause of joint- the hydrocarbons extracted from the relevant contractual commercialisation with Sonatrach contained in the JOA. The perimeters. exportation can also be made by Sonatrach alone, acting on behalf of the contracting party. ■ The taxation regime applicable to upstream activities; it being specified that most of such taxes are paid by the operator (Sonatrach or a joint-venture between Sonatrach and the 3.7 Are there any currency exchange restrictions, or foreign partner(s)): restrictions on the transfer of funds derived from (i) A monthly proportional royalty paid to ALNAFT: such production out of the jurisdiction? tax is based on the value of the quantities of hydrocarbons extracted from the contractual perimeter measured at the The rules applicable to the transfer of funds derived from production measurement point, using the monthly average of the basic depend on whether the foreign partner is considered as a resident or prices. The royalty rate varies between 5.5% and 20%, a non-resident. depending on the area where the contractual perimeter is (i) Non-resident. located (A, B, C or D). During the exploitation period, any non-resident company (ii) An annual surface tax payable to the Public Treasury: this is entitled to keep abroad the proceeds deriving from its tax is based on the surface of the contractual perimeter and hydrocarbons exports acquired under the exploration and/or on a rate per square kilometre which varies according to the exploitation contract. area where the perimeter is located (A, B, C or D) and the phase of the project (exploration/retention/exploitation). Such right is subject to the initial importation in Algeria and transfer to the Bank of Algeria of the convertible currencies (iii) A monthly petroleum income tax payable to the Public required to meet the non-resident company’s development, Treasury: such tax is based on the production value used research, and exploitation expenses, as well as the amounts to calculate the royalties minus authorised deductions necessary for the payment of the royalties and other taxes due (royalties, exploration and development investments, in Algeria. abandonment provisions, training costs, etc.). The rate depends on the project profitability.

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(ii) Resident. Resident companies are required to repatriate and transfer 3.11 In addition to those rights/authorisations required to the Bank of Algeria the proceeds of their hydrocarbon to explore for and produce oil and natural gas, what other principal Government authorisations are exports in accordance with the exchange regulations in force. required to develop oil and natural gas reserves (e.g. However, they are entitled to freely transfer dividends to their environmental, occupational health and safety) and non-resident partners abroad. from whom are these authorisations to be obtained? Any resident entity may also carry out, subject to the approval of the Monetary and Credit Council, any transfer of foreign Under the Hydrocarbons Law, the following other authorisations are currencies necessary to engage in activities abroad falling required to develop oil and natural gas reserves: within the scope of the Hydrocarbons Law.

■ Approval by ARH of an environmental impact study and Algeria an environmental management plan before engaging into 3.8 What restrictions (if any) apply to the transfer or any activity governed by the Hydrocarbons Law; ARH will disposal of oil and natural gas development rights or liaise with the Ministry of Environment in order to obtain its interests? approval on the study. ■ Approval by ARH of a hazard study for certain activities; The assignment of rights and interests under the exploration and/or such study shall be updated every five years at least. exploitation contract is subject to: (i) the prior approval of ALNAFT; 3.12 Is there any legislation or framework relating to (ii) Sonatrach’s pre-emption right; and the abandonment or decommissioning of physical (iii) the payment to the Public Treasury of a non-deductible structures used in oil and natural gas development? If so, what are the principal features/requirements of the transfer duty of 1% of the transaction’s value. legislation? The assignment of rights and interests must be implemented through an amendment to the exploration and/or exploitation contract. Such At the end of the exploration and/or exploitation contract, the amendment must be approved by a decree adopted by the Council ownership of all the physical structures used and allowing the of Ministers. The entry into force of the amendment is subject to the continuation of the activities is transferred for the benefit of the State publication of such decree in the Official Gazette. (without the payment of any price or any costs). Transfers between a company and its direct wholly-owned For any facilities for which the State does not wish the transfer of subsidiaries, are not subject to the above procedure provided that ownership, the contracting party must bear all costs of abandonment the relevant transfer does not involve any commercial transaction and/or restoration of the site. Each calendar year, the contracting (i.e. no payment of price). party shall pay a provision in an escrow account to cover those costs. The site abandonment and restoration programme and the related 3.9 Are participants obliged to provide any security budget must be provided in the development plan. or guarantees in relation to oil and natural gas Control of the abandonment and restoration of sites is carried development? out by ALNAFT in collaboration with ARH and the Ministry of Environment. Firstly, the foreign partner shall provide a bank guarantee issued by a first-ranking bank in Algeria covering the cost of the minimum work programme to be performed by the contracting party during 3.13 Is there any legislation or framework relating to the exploration phase in the context of an exploration and/or gas storage? If so, what are the principal features/ exploitation contract. requirements of the legislation? Secondly, the contracting party shall pay each calendar year a The Hydrocarbons Law deals mainly with the storage of petroleum provision in an escrow account, defined by ALNAFT, in order to products for reserve purposes to ensure the supply of the domestic cover the costs of abandonment and site restoration operations that market. It also deals with free access to transport and storage must be carried out at the end of the production phase. facilities for petroleum products in consideration for the payment of a non-discriminatory tariff. 3.10 Can rights to develop oil and natural gas reserves Concerning gas storage, the Hydrocarbons Law states that before granted to a participant be pledged for security, or undertaking any project for geological storage (including carbon booked for accounting purposes under domestic law? dioxide), a feasibility study and a risk management plan must be approved by ARH. While the Hydrocarbons Law prohibits the constitution of mortgages on deposits and wells, it remains silent as to the possibility of pledging the exploration and/or exploitation contract. 3.14 Are there any laws or regulations that deal specifically with the exploration and production of unconventional Therefore, any pledge over the exploration and/or exploitation oil and gas resources? If so, what are their key contract shall be governed by the provisions of such contract. The features? procedure described in question 3.8 above shall apply in case the enforcement of the pledge results in an assignment of interests in the Law 13-01 provides a specific definition of non-conventional exploration and/or exploitation contract. hydrocarbons. Article 35 of Law 13-01 provides a total research period of 11 years, when the research period for conventional hydrocarbons is limited to seven years. Indeed, the research period is set at a maximum of 11 years from the date of entry into force of the contract with an

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initial phase of three years. This initial phase is referred to as the first research phase. It is followed by a second and third phase of 6 Transportation research, each lasting two years. In addition to these three phases, there is also a so-called pilot phase lasting a maximum of four years, 6.1 Outline broadly the ownership, organisational and which may extend one of the said research phases. The said pilot regulatory framework in relation to transportation phase will be granted to the contractor by ALNAFT. The contractor pipelines and associated infrastructure (such as may, as part of the pilot phase benefit from an early production natural gas processing and storage facilities). authorisation within the limit of the duration of the pilot phase. The exploitation period is extended to 30 years in the case of Hydrocarbons pipeline transport activities fall within the scope of the monopoly granted to Sonatrach (or any of its subsidiaries) on the

Algeria liquid non-conventional hydrocarbons and 40 years in the case of gaseous non-conventional hydrocarbons. This exploitation period basis of a concession delivered by the Ministry of Energy. is extended by an optional extension for a further five years at There is an exception to such monopoly for international pipelines. the request of the contractor. This period may be followed by a The Ministry of Energy may, upon the Council of Ministers’ second optional extension for a further five years at the request of approval, grant a transport concession for international pipelines the contractor and with the approval of ALNAFT. The exploitation that arrive from outside the national territory and that partially or period’s duration of non-conventional hydrocarbons is thus totally cross it, and international pipelines originating in the national significantly longer than that of conventional hydrocarbons, which territory. Sonatrach might be allowed by the Ministry of Energy to have an exploitation period of 25 years, with an additional five-year take a participation in any concession for the hydrocarbons transport period for natural gas fields. through international pipelines. The tax regime applicable to non-conventional hydrocarbons appears Given its monopoly, Sonatrach (or one of its subsidiaries) shall to be more advantageous than that applicable to conventional ensure the transport of all hydrocarbon production from the point of hydrocarbons. entry to the pipeline transport system. Gas pipelines dedicated exclusively to the domestic gas market are 4 Import / Export of Natural Gas (including governed by Law No. 02-01 of 5 February 2002 relating to electricity LNG) and gas distribution (“Law 02-01”). State-owned company Sonelgaz is the owner of the gas transport network supplying the domestic needs, and has a monopoly over the operation of such network 4.1 Outline any regulatory requirements, or specific through a dedicated subsidiary (“GRTG”). terms, limitations or rules applying in respect of cross-border sales or deliveries of natural gas (including LNG). 6.2 What governmental authorisations (including any applicable environmental authorisations) are required to construct and operate oil and natural The Hydrocarbons Law states that the importation and marketing of gas transportation pipelines and associated hydrocarbons and petroleum products on the national territory are infrastructure? free subject to compliance with: ■ the joint marketing with Sonatrach of the quantities of gas Firstly, the transport concession decision referred to in question produced as part of an exploration and/or exploitation contract 6.1 is necessary for any project to construct and operate oil and gas when the gas is to be sold abroad. Sonatrach may market this transportation pipelines. gas on behalf of the entities constituting the contracting party in consideration for the payment of a gas selling fee; and The authorisation for construction is delivered by ARH after consultation with several ministers (including the Minister of ■ the priority given to meet the domestic market’s needs in terms of gas (see question 3.6 above). Defence). Usual construction authorisations (building permit, occupancy title) and in-principle environmental authorisation (delivered on the basis of an impact study and a hazard study) are 5 Import / Export of Oil also required. When the construction is achieved, and on the basis of satisfactory operating and commissioning tests, authorisations issued by ARH 5.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect and environmental competent authorities (classified installations) of cross-border sales or deliveries of oil and oil are issued for the operation of the pipelines and associated products. infrastructure. Concerning the national market, Sonelgaz is the unique holder The Hydrocarbons Law does not provide for import or export of an authorisation delivered by the Ministry of Energy, after the restrictions regarding liquid hydrocarbons except the priority given Electricity and Gas Regulatory Commission (“CREG”)’s opinion, to meet the domestic market’s needs in terms of liquid hydrocarbons to operate the gas transport network intended to supply the domestic (see question 3.6 above). market. When the network is totally or partially financed by the The distribution of petroleum products (defined as any wholesale State budget, Sonelgaz is subject to the payment to the State, of a or retail sale activities of petroleum products) is subject to an network concession fee set in accordance with the law. authorisation delivered by the Ministry of Energy after ARH’s opinion and compliance with specifications set by decree.

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The concessionaire (Sonatrach) shall allow third parties, within the 6.3 In general, how does an entity obtain the necessary limits of the actual capacity and on the basis of the first-committed, land (or other) rights to construct oil and natural gas first-served, free access to the transport infrastructure via transportation pipelines or associated infrastructure? hydrocarbon pipeline, subject to payment of a non-discriminatory Do Government authorities have any powers of compulsory acquisition to facilitate land access? tariff. Any request for access to transport infrastructure via hydrocarbon The regulations do not provide for specific facilitations for the pipeline is addressed to Sonatrach. obtaining of occupation titles. The usual procedure is applicable. The rejection of the demand for access to hydrocarbon pipeline transport infrastructures can only be based on the following grounds:

6.4 How is access to oil and natural gas transportation ■ A proven lack of available capacity. Algeria pipelines and associated infrastructure organised? ■ Imperative reasons in relation to the successful completion of Sonatrach’s missions. Please refer to question 6.6 below. ■ Technical aspects relating to the safety of pipeline transport systems and the quality of their operation.

6.5 To what degree are oil and natural gas transportation Concerning the gas transportation network dedicated to the pipelines integrated or interconnected, and how is co- domestic market, third parties (eligible customers, distributors and operation between different transportation systems sales agents) have a right of access to such transport facilities upon established and regulated? payment of a non-discriminatory tariff to the network operator (Sonelgaz). The request for access is made to Sonelgaz, and it can As holder of the transportation monopoly, Sonatrach operates a only be refused if there is a proven lack of capacity. Executive hydrocarbon pipeline transmission system (crude oil, condensate, Decree No. 07-293 of 26 September 2007 defines the terms and natural gas and LPG) consisting of 22 pipeline transport systems conditions of free access by third parties to the domestic gas with a total length of approximately 20,927 km. The transport transport network (“Decree 07-293”). network also includes shipping lines and loading facilities located at the ports of Arzew, Bethioua, Bejaia and Skikda. 6.7 Are parties free to agree the terms upon which oil The pipelines are distributed between the south and the north or natural gas is to be transported or are the terms network. These two networks are delimited by the liquid (including costs/tariffs which may be charged) hydrocarbons dispatching centre of Haoud El Hamra (“CDHL”) regulated? and gas dispatching centre of Hassi-R’mel (“CNDG”), through which the effluents pass with the exception of certain effluents such Sonatrach shall offer transport services to all users of the transport as those intended for the needs of the domestic market. network on a non-discriminatory basis and equivalent contractual The southern network ensures the transport of effluents from the conditions, as defined in a standard transport contract. deposits to CDHL for crude oil and condensate and to CNDG for Pursuant to Decree 14-77, Sonatrach develops the standard transport natural gas and LPG. contract, which lays down the terms and conditions of the transport The northern network provides transportation of: (i) crude oil from service. Sonatrach publishes the standard transport contract after the CDHL to refineries and export ports; (ii) condensate from the its approval by ARH. To date, two standard contracts have been CDHL and the Hassi R’mel deposit to the Skikda refinery and export published: one for natural gas transport (September 2015) and one ports; (iii) natural gas from the CNDG to the domestic market, gas for liquid hydrocarbons transport (April 2018). pipelines for export and liquefaction complexes; and (iv) LPG from Sonatrach must also publish, after approval by ARH, a “network Hassi-R’mel to the separation complexes (Source: Sonatrach’s code” including the description of the transmission system, the “network code”). technical requirements for connection to the transmission system, Gas pipeline network dedicated to the domestic market is operated and the effluent standards to be transported. by state-owned company Sonelgaz under the supervision of the The remuneration of the transport service is calculated each month CREG. Such gas transport network reached 19,258 km in 2016 on the basis of the current regulatory tariff and the quantities of (Source: CREG’s website). The limits of the gas transport network natural gas or liquid hydrocarbons transported. with the “upstream” networks are located at the insulating joint of The transport tariffs in force for the year 2018 are those defined in the entry point of the gas transport network. the Energy Minister’s order of 10 May 2015, namely:

Nature of the effluent Transport tariff 6.6 Outline any third-party access regime/rights in Crude oil 982 DZD/metric ton respect of oil and natural gas transportation and Natural gas liquids (condensate) 1,174 DZD/metric ton associated infrastructure. For example, can the regulator or a new customer wishing to transport LPG 2,172 DZD/metric ton oil or natural gas compel or require the operator/ 1,382 DZD/thousand standard Natural gas owner of an oil or natural gas transportation pipeline cubic metres or associated infrastructure to grant capacity or expand its facilities in order to accommodate the new Concerning the gas domestic transport network, Decree 07-293 customer? If so, how are the costs (including costs provides for the content of the access contract to be entered into of interconnection, capacity reservation or facility between Sonelgaz and the relevant third party. The transport tariffs expansions) allocated? are set by the CREG.

Executive Decree No. 14-77 of 17 February 2014 (“Decree 14-77”) defines the terms and conditions of the free access by third parties to the transport infrastructure via hydrocarbon pipeline.

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7 Gas Transmission / Distribution 7.4 Can the regulator require a distributor to grant capacity or expand its system in order to accommodate new customers? 7.1 Outline broadly the ownership, organisational and regulatory framework in relation to the natural gas transmission/distribution network. The distributor is required to submit a five-year development plan and undertake a commitment to improve service performance (such as quality and continuity of the energy supply or the rate of service). The natural gas transmission and distribution network is governed However, there are no provisions allowing the regulator to require by Law 02-01 and implementing texts enacted by the Algerian the distributor to expand its system. Government. Algeria The Algerian State, as a guarantor of the public service for gas and electricity, grants concessions to distributors. Distributors 7.5 What fees are charged for accessing the distribution are selected as part of a tender process organised by the CREG. network, and are these fees regulated? Sonelgaz’s distribution subsidiary (SDC) has been granted a concession. Distributors supply users according to a pricing system defined by the CREG in a transparent and non-discriminatory way. Distributors act as grid system operators on the relevant perimeter.

7.6 Are there any restrictions or limitations in relation to 7.2 What governmental authorisations (including any acquiring an interest in a gas utility, or the transfer applicable environmental authorisations) are required of assets forming part of the distribution network to operate a distribution network? (whether directly or indirectly)?

The Algerian State grants concessions to gas distributors. The The share capital of the subsidiaries of Sonelgaz responsible for concession is granted through a decree issued by the Energy the production, transportation and distribution of gas is open to the Minister, following the opinion of the CREG. The allocation of partnership provided that Sonelgaz remains the majority shareholder distribution concessions is made through a call for tenders launched for these subsidiaries. and processed by the CREG. Please also refer to question 12.1 below. Specifications provided by Decree No. 08-114 of 9 April 2008 set the rights and obligations of the distributor, which include the following: 8 Natural Gas Trading ■ the right to distribute, on an exclusive basis, gas in a defined area, and to build the necessary facilities; 8.1 Outline broadly the ownership, organisational and ■ the right to use the assets of the concession; regulatory framework in relation to natural gas ■ the obligation for the distributor to provide the service by trading. Please include details of current major ensuring the development, renewal, maintenance and repair initiatives or policies of the Government or regulator of the facilities; (if any) relating to natural gas trading. ■ the obligations resulting from public service missions; continuity, equal treatment, etc.; and The operator of the domestic transport system for gas (Sonelgaz) ■ the obligation to return to the State, at the end of the cannot engage in gas buying or selling activities. concession, the facilities and equipment in good working The activity of commercial agents for gas is subject to the issuance order. of an authorisation by the CREG taking into account various criteria The building of distribution facilities is submitted to the usual such as technical and financial capacities. permits (environmental authorisations, etc.). The remuneration of the gas marketing activity included in the tariffs is established by the CREG. 7.3 How is access to the natural gas distribution network In the domestic market, natural gas can be marketed in two ways: organised? ■ through the conclusion of contracts between distributors, customers and suppliers of gas and commercial agents, Law 02-01 sets out a principle of free access by third parties to the in accordance with the standard contract published by the natural gas distribution network subject to the payment of a non- CREG; or discriminatory tariff. ■ through gas purchase offers, it being specified that gas The access can be refused only in limited cases: purchase requests are made to the gas transmission system ■ a proven lack of capacity; operator (Sonelgaz). ■ requirements relating to the proper performance of public Please refer to questions 3.6 and 4.1 above regarding the export of service missions; and natural gas. ■ grounds relating to the security and safety of networks and the quality of their operation. 8.2 What range of natural gas commodities can be Decree 07-293 provides for the content of the access contract to traded? For example, can only “bundled” products be entered into between the grid system operator and the relevant (i.e., the natural gas commodity and the distribution thereof) be traded? third party.

The regulations remain silent on this issue.

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9 Liquefied Natural Gas 11 Competition

9.1 Outline broadly the ownership, organisational and 11.1 Which governmental authority or authorities are regulatory framework in relation to LNG facilities. responsible for the regulation of competition aspects, or anti-competitive practices, in the oil and natural The liquefaction activity of the gas is sparsely regulated. Tax gas sector? provisions provide for a series of exemptions for this activity. The Algerian Competition Council is the authority responsible for the regulation of competition aspects and anti-competitive practices 9.2 What governmental authorisations are required to (abuse of dominant positions, cartels, etc.). Algeria construct and operate LNG facilities? The Competition Council has resumed its activities since 29 January 2013. It benefits from various training programmes financed by the Foreign companies must carry out the liquefaction activity through European Commission in order to build its own doctrine. a partnership with Sonatrach (having a minimum stake of 51%). The Competition Council is an autonomous administrative authority, The Hydrocarbons Law states that the necessary authorisations for having the legal personality and financial autonomy, assigned to the building and operating an LNG plant shall be defined in a separate Minister of Trade. regulation. This regulation is not yet published. Concerning the natural gas, the CREG shall cooperate with Therefore, the permits required to date to build a liquefaction plant the Competition Council for the compliance with the rules of are those provided for by the ordinary law (including the building competition provided by the legislation in force. permit and various environmental authorisations).

11.2 To what criteria does the regulator have regard in 9.3 Is there any regulation of the price or terms of service determining whether conduct is anti-competitive? in the LNG sector?

The Algerian Competition Law mainly consists of an Order No. 03- There is no specific pricing regulation in the LNG sector. 03 dated 19 July 2003 as amended by Law No. 08-12 dated 25 June 2008 and Law No. 10-05 dated 15 August 2010 (“Order 03-03”). 9.4 Outline any third-party access regime/rights in In summary, Order 03-03 prohibits three types of behaviours or respect of LNG facilities. agreements: (i) Anti-competitive agreements (horizontal and vertical To date, the regulation intended to define the authorisations required agreements). for building and operating an LNG plant is not yet published. (ii) Unilateral abuses of substantial market power (unilateral abusive behaviour of a firm with substantial market power). 10 Downstream Oil (iii) Mergers that are harmful to competition. The Competition Council will assess whether the relevant agreement or conduct has the object or the effect of preventing, restricting or 10.1 Outline broadly the regulatory framework in relation to the downstream oil sector. distorting competition on a relevant market. For example, Order 03-03 prohibits agreements which tend to obstruct the free fixing of prices or the implementation of discriminatory practices towards The Hydrocarbons Law defines “refining” as operations that separate business partners. oil or condensate in liquid or gaseous products suitable for direct use. The Competition Council will also pay particular attention to the Processing activities are defined as liquefied petroleum gas separation behaviour of undertakings having a dominant position on a relevant operations, gas liquefaction, gas to petroleum processing or any other market. Their conduct shall not be abusive (such as exclusive products, gas-to-liquids (“GTL”), petroleum product processing to all dealing, discrimination and limiting market access). products, petrochemicals and “gazochimie”. These activities are carried out by Sonatrach, alone or in association with any person; it being specified that the participation of Sonatrach 11.3 What power or authority does the regulator have to or its subsidiaries cannot be lower than 51%. preclude or take action in relation to anti-competitive practices? The distribution of petroleum products and their storage are subject to an authorisation delivered by the Ministry of Energy after ARH’s The Competition Council can impose the following sanctions: opinion and compliance with specifications set by decree. ■ the relevant provisions of the anti-competitive agreements are declared null and void; and/or 10.2 Outline broadly the ownership, organisation and ■ fines of up to 12% of the annual turnover excluding taxes regulatory framework in relation to oil trading. realised in Algeria during the last closed financial year, or a fine equal to twice the illicit profit made through the anti- Please refer to question 5.1 above. competitive practices (capped to four times such illicit profit), can be imposed.

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(the “Investment Law”) provides for special requirements which 11.4 Does the regulator (or any other Government apply to any foreign investment, regardless of the sector of activity. authority) have the power to approve/disapprove mergers or other changes in control over businesses In particular, foreign investors must find one or more Algerian in the oil and natural gas sector, or proposed partners in order to set up a joint venture that will carry the acquisitions of development assets, transportation or concerned project. The exercise by foreign investors of activities in associated infrastructure or distribution assets? If so, the sectors of production of goods and services and imports can only what criteria and procedures are applied? How long be conducted through a company in which 51% of the share capital does it typically take to obtain a decision approving or is held by one or several Algerian national resident(s) (49/51 rule). disapproving the transaction? In the oil and gas industry, practice shows that foreign contracting

Algeria parties to an agreement set up an Algerian branch instead of creating The referral to the Competition Council of a transaction is mandatory a commercial company. when the conditions laid down by Order 03-03 are met, i.e.: (i) the transaction is considered as a “concentration” within the meaning of Order 03-03; and 12.2 To what extent is regulatory policy in respect of the (ii) such transaction is likely to undermine competition by oil and natural gas sector influenced or affected reinforcing in particular the dominant position of an by international treaties or other multinational undertaking on a relevant market (which is the case when arrangements? a threshold of 40% of the sales or the purchases made in a relevant market is achieved). The most notable influence not only on the regulatory framework The notification is compulsory where the conditions laid down by but also on the country’s oil and gas policy results from Algeria’s Order 03-03 are met. accession to OPEC since 1969. There is no deadline for notification under the Algerian merger In September 2018, Algeria hosted a meeting of OPEC and non- control legislation; it being specified that the Competition Council’s members including Russia which ended without any decision to clearance must be obtained before the completion of the transaction. further increase oil output despite President Donald Trump’s call for lower prices. In practice, the notification shall be made as soon as the negotiations between the parties are sufficiently advanced to enable them to submit to the Competition Council a file comprising all the 13 Dispute Resolution information requested. The Competition Council shall render its decision on the relevant 13.1 Provide a brief overview of compulsory dispute concentration within three months from the filing of the required resolution procedures (statutory or otherwise) documents. applying to the oil and natural gas sector (if any), Before rendering its decision, the Competition Council shall consult including procedures applying in the context of the Minister of Energy and the CREG (for gas matters). disputes between the applicable Government authority/regulator and: participants in relation to oil For general interest reasons, the Government may, upon the and natural gas development; transportation pipeline report of the Minister of Trade and the Energy Minister, authorise and associated infrastructure owners or users in automatically or at the request of the parties concerned, the relation to the transportation, processing or storage completion of a concentration rejected by the Competition Council. of natural gas; downstream oil infrastructure owners or users; and distribution network owners or users in Failure to notify a referable transaction triggers the payment of a fine relation to the distribution/transmission of natural gas. provided in Order 03-03 only when such concentration is completed without the Competition Council’s approval. As a general principle, the competence of the Algerian jurisdictions The amount of such fine can be up to 7% of the turnover excluding has been affirmed by the Investment Law in the event of disputes taxes realised in Algeria, during the last closed financial year, by arising between foreign investors and the Algerian State, except each party to the concentration or the undertaking resulting from where bilateral or multilateral conventions or an agreement between the concentration. the parties (including an arbitration clause) are in place. In the oil and gas sector, the Hydrocarbons Law recognises the 12 Foreign Investment and International recourse to international arbitration, and makes a distinction Obligations between two types of disputes: ■ Disputes between ALNAFT and the foreign investor: mandatory conciliation procedure according to contractual 12.1 Are there any special requirements or limitations on terms and conditions, and if the dispute cannot be settled, acquisitions of interests in the natural gas sector the parties may resort to international arbitration as per the (whether development, transportation or associated contractual provisions. infrastructure, distribution or other) by foreign ■ Disputes between SONATRACH and the foreign investor: companies? the parties may resort to international arbitration according to the contractual provisions. Law 05-07 provides that exploration and exploitation activities may In both cases, Algerian law shall apply. be carried out by any entity established in Algeria under the form of a branch or organised under any other form which is a tax-liable Algerian law expressly recognises the possibility for the parties to entity. organise their arbitration procedure by reference to a set of rules of arbitration. If a company is created, then it has to comply with the “49/51 rule”. Law No. 16-09 on the promotion of investment dated 3 August 2016 In practice, the parties to exploration and/or exploitation contracts usually choose arbitration established in accordance with the

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International Chamber of Commerce Rules of Arbitration, and more rarely, the United Nations Commission on International Trade Law 13.4 Have there been instances in the oil and natural gas (“UNCITRAL”). sector when foreign corporations have successfully obtained judgments or awards against Government authorities or State organs pursuant to litigation 13.2 Is your jurisdiction a signatory to, and has it duly before domestic courts? ratified into domestic legislation: the New York Convention on the Recognition and Enforcement of While there are many disputes in the oil and natural gas sector that Foreign Arbitral Awards; and/or the Convention on have been ruled by the ICC, we are not aware of any cases before the Settlement of Investment Disputes between States the domestic courts. and Nationals of Other States (“ICSID”)? Algeria

On 7 February 1989, the Algerian State acceded to the 1958 New 14 Updates York Convention on the recognition of arbitral awards. Algeria also ratified the Convention on the Settlement of Investment Disputes which entered into force for Algeria on 22 March 1996. 14.1 Please provide, in no more than 300 words, a summary of any new cases, trends and developments Algeria has entered into bilateral treaties on investment protection in Oil and Gas Regulation Law in your jurisdiction. (“BITs”) with numerous countries such as France, Germany, Switzerland, Italy and the UAE. Investors showed little interest in undertaking new oil and natural Some BITs provide for arbitration established in accordance with gas projects, awarding only four of 31 blocks in the 2014 bid round the ICSID Convention, and other BITs leave it to the parties to (See EIA Report last updated on 11 March 2016). choose other arbitration rules such as the ICC Rules of Arbitration With this regard, the Algerian Government is willing to attract or the arbitration of the UNCITRAL. foreign investors; the underlying idea is to boost partnership and achieve the following objectives: 13.3 Is there any special difficulty (whether as a matter ■ To explore new territories; two-thirds of the Algerian territory of law or practice) in litigating, or seeking to enforce remains largely underexplored or unexplored according to judgments or awards, against Government authorities Sonatrach. The average drilling density is equal to roughly or State organs (including any immunity)? 14 exploration wells per 10,000 square kilometres, with only limited offshore exploration. In terms of enforcement, the arbitral award, whether issued in ■ To enhance production to cope with domestic consumption. the frame of domestic or international arbitration, must be made According to recent statements by the Minister of Energy, enforceable by order of the Presiding Judge of the competent court. local oil consumption increased from nearly 210,000 barrels in 2010 to 420,000 barrels in 2017. Appeal against an order refusing to recognise the enforceability of an award may be made. This is why the Algerian Government intends to amend the fiscal regime applicable to exploration and production activities. Specifically with respect to international arbitration, the Algerian State acceded to the 1958 New York Convention on the recognition Finally, it is interesting to note that two recent trends are emerging of arbitral awards. on the Algerian oil and gas market: (i) the entry of new players such as Carlyle and CVC which International arbitral awards are recognised and declared to be acquired ENGIE’s hydrocarbons assets earlier this year and enforceable in Algeria provided that their existence is proven by Worldview capital fund which took control of Petroceltic who relies upon the award and provided that such recognition is not holding a PSC on the Isarène perimeter; and contrary to “international” public policy rules. (ii) the strengthening of the presence of incumbent operators such In the context of this recognition and enforcement procedure, the as TOTAL, ENI or REPSOL in the country, notably through Presiding Judge of the court will not proceed with a new examination the acquisition of the assets of MAERSK or TALISMAN in of the substantive issues of the case. the context of cross-border transactions.

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Rym Loucif LPA-CGR Avocats 02B, Elchahid Djouab Chemin Doudou Mokhtar, Ben Aknoun Algiers, Algeria / 136 Avenue des Champs Elysées 75008 Paris, France

Tel: +213 552 582 893 / +33 6 1987 1792 Email: [email protected] URL: www.lpalaw.com Algeria Partner. Rym Loucif’s practice encompasses all aspects of corporate law and energy law. She develops the energy and oil and gas practice of the Algiers office. Ms. Loucif has developed particular expertise in the field of energy (oil and gas) and she is involved in both transactional and regulatory aspects of a wide array of energy-related projects (M&A, financing). In February 2018, she published a contribution in the renowned Oil & Gas Journal regarding the upcoming reform of the Algerian Hydrocarbons Law. Prior to joining LPA-CGR Avocats, Rym Loucif practised within Gide Algiers. She spent six years at leading US law firms (Willkie Farr and Gibson Dunn) in Paris where she developed her corporate/M&A experience. Ms. Loucif has been admitted to the Paris Bar, studied at University Paris II and, in 2004, received her Master of Laws in Business and Tax Law. She graduated from King’s College London in EU Competition Law. Chambers Global and The Legal 500 rank her among the leading individuals in Corporate/M&A. IFLR recognises Rym Loucif as a leading individual in the categories “Project (Oil & Gas)” and “Corporate M&A”.

With the opening of its fully-integrated office in Algiers in 2007, LPA-CGR is one of the few international law firms that can rely on a local presence of more than 10 years, combining a strong legal expertise with an in-depth knowledge of the country. Our firm is one of the few on the market that can provide its clients with a service that meets international standards and that provides comfort to clients despite a complex legal environment. LPA-CGR Avocats is the adviser to large international groups, Algerian subsidiaries of international groups, central administrations, state-owned corporations and institutions as well as commercial and industrial undertakings. The firm assists its clients regarding their complex transactions in a wide array of areas including Energy, Foreign Direct Investment, Corporate/M&A, Competition, Banking and Finance, and with any resulting disputes.

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Angola Irina Neves Ferreira

ALC Advogados João Francisco Cunha

1 Overview of Natural Gas Sector 1.4 To what extent is your jurisdiction’s natural gas production exported (pipeline or LNG)?

1.1 A brief outline of your jurisdiction’s natural gas sector, including a general description of: natural According to the 2017 Annual Statistical Bulletin of the Organization gas reserves; natural gas production including of the Petroleum Exporting Countries, Angola’s natural gas exports the extent to which production is associated or have grown steadily in the past few years, and correspond to 1.149 non-associated natural gas; import and export of million cubic metres. Information on exports to each country is not natural gas, including liquefied natural gas (LNG) available. liquefaction and export facilities, and/or receiving and re-gasification facilities (“LNG facilities”); natural gas pipeline transportation and distribution/transmission 2 Overview of Oil Sector network; natural gas storage; and commodity sales and trading. 2.1 Please provide a brief outline of your jurisdiction’s oil Angola has 11 trillion cubic feet (297 billion cubic metres) of sector. natural gas resources (as per the Angola LNG website). Historically, the majority of natural gas was re-injected into oil fields to help Angola holds almost 9.5 billion barrels of proved crude oil reserves, recovery or simply flared off as a by-product of oil operations. As according to the latest estimates from the 2017 Annual Statistical recently as 2011, re-injection and flaring still accounted for 91% Bulletin of the Organization of the Petroleum Exporting Countries. of all the natural gas produced in the country. In the last couple of Angola is the second-largest oil producer in Sub-Saharan Africa, years, natural gas sector regulations focused on the development of behind Nigeria. Exploration and production activities relating to oil the country’s first LNG facility in Soyo. The first exportation of and natural gas in Angola are governed by Law 10/04 of 12 November LNG took place in June 2013. (“Petroleum Law” or “Law 10/04”) and Presidential Decree 5/2018. The right to produce and explore for oil or natural gas is granted 1.2 To what extent are your jurisdiction’s energy by a concession agreement, generally preceded by a public tender requirements met using natural gas (including LNG)? procedure. A concession for exploration and production, after the public tender procedure, is granted by a concession decree, issued by Based on data made available by the United Nations Development the Angolan Government, attributing to the national concessionaire Programme, despite being the second-largest economy in Sub- Sonangol (the exclusive concessionaire for mining rights in Angola) Saharan Africa in terms of GDP, around 37% of Angolans live the right to develop a specific oil concession. below the poverty line. Natural gas, hydroelectricity, nuclear and other renewable energies still occupy a small percentage of Angola’s 2.2 To what extent are your jurisdiction’s energy primary energy consumption. requirements met using oil?

1.3 To what extent are your jurisdiction’s natural gas According to the 2017 Annual Report of Organization of the requirements met through domestic natural gas Petroleum Exporting Countries (OPEC), Angola produced 1.653 production? million barrels per day of crude oil. To the best of our knowledge, there is no official data publicly available to answer this question. The development of the natural gas market is headed by Angola LNG. To the best of our knowledge and based on informal research, 2.3 To what extent are your jurisdiction’s oil requirements there is no official Government information about natural gas met through domestic oil production? imports. It is expected that about 20% to 30% of the country’s energy needs, consumed primarily by the industrial sector, are The Angolan government recently authorised the importation of produced by the Angola LNG Project. derivatives up to the amount of USD 4 billion. Hence, although Angola is a relevant producer, it still imports a substantial portion of the petroleum it consumes, particularly refined products.

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of natural gas. Thus, the provisions provided by the Petroleum 2.4 To what extent is your jurisdiction’s oil production Act are equally enforceable for oil and gas exploration – if the exported? gas exploration is made under the oil field licences. However, the PLD 7/18 sets out the Legal and Tax Framework Applicable to the In 2017, Angola exported about 1.7 million barrels per day of crude Surveying, Exploration, Assessment, Development, Production and oil. According to information made available by Sonangol, China Sale of Natural Gas in Angola. The statute aims to promote the accounted for 48% of the country’s sales (hence it is the biggest exploration of natural gas in the country as well as the development customer). According to Sonangol, which reported that India and of related industries. Taiwan complete the top three biggest customers, India is the second largest client of Angolan oil, with 12% of total exports, followed Angola by Taiwan. The United States of America, once one of the largest 3.2 How are the State’s mineral rights to develop oil and natural gas reserves transferred to investors or customers of petroleum of Angola, now occupies fourth place. The companies (“participants”) (e.g. licence, concession, list of buyers also includes South Africa in fifth place, followed by service contract, contractual rights under Production Spain, Brazil, Panama, Malaysia, Japan, Ireland and Italy. In 2015, Sharing Agreement?) and what is the legal status of Angola exported 1.8 million barrels of oil per day. Nearly all of those rights or interests under domestic law? Angola’s oil production is exported, as Angola’s domestic refining capacity is limited. Under the applicable law, i.e., the Petroleum Law, mineral rights are granted to the National Concessionaire. The National Concessionaire, in order to share its technical knowledge and 3 Development of Oil and Natural Gas financial capability, may associate with Angolan or foreign entities of recognised capacity. Such association may take the following 3.1 Outline broadly the legal/statutory and organisational forms: framework for the exploration and production a) Corporation. (“development”) of oil and natural gas reserves b) Consortium. including: principal legislation; in whom the State’s mineral rights to oil and natural gas are vested; c) Production Sharing Agreements. Government authority or authorities responsible for d) Risk Services Agreements. the regulation of oil and natural gas development; and Although the most common type of association with the National current major initiatives or policies of the Government (if any) in relation to oil and natural gas development. Concessionaire is the execution of Production Sharing Agreements there is at one least one example of a Risk Services agreement entered into with the National Concessionaire. The statutory framework for the exploration and production of oil and natural gas reserves is mainly encompassed in the Petroleum Law. In addition, the other relevant statutes are: 3.3 If different authorisations are issued in respect of 1. Law 13/04 of 24 December (“Taxation of Petroleum different stages of development (e.g., exploration Activities” or “Law 13/04”). appraisal or production arrangements), please specify those authorisations and briefly summarise the most 2. Law 2/2012 of 13 January (“Angolan Oil and Gas Foreign important (standard) terms (such as term/duration, Exchange Law for the Oil Industry” or “Law 2/2012”). scope of rights, expenditure obligations). 3. Presidential Decree 91/18 of 10 April (establishes the framework for abandonment and decommissioning of wells According to the Petroleum Law and Decree 1/09 of 27 January – “PD 91/18”). (“Angolan Petroleum Operations Regulation” or “Decree 1/09”), 4. Law 11/04 of 12 November (“Petroleum Customs Law” or petroleum operations (i.e., prospecting, exploration, appraisal, “Law 11/04”). development and production of crude oil and natural gas) can only 5. Presidential Decree 5/2018 of 18 May (establishes the be exercised under a prospecting licence issued by the Ministry framework for the activities involved in the exploration of Petroleum, or pursuant to an oil concession awarded by the of Development Areas – in Portuguese, “Áreas de Government. As for the prospecting licence, any upstanding domestic Desenvolvimento”). or foreign company with the necessary technical and financial 6. Presidential Legislative Decree 6/18 of 18 May (establishes capacity may apply to the Ministry of Petroleum for the issuance the framework for framework applicable to the development of a three-year prospecting licence (exceptionally extendable at of marginal fields). the request of the licensee) to determine the petroleum potential 7. Presidential Legislative Decree 7/18 of 18 May (Legal and of a given area. The prospecting licence includes geological, Tax Framework Applicable to the Surveying, Exploration, geochemical and geophysical research, and the processing, analysis Assessment, Development, Production and Sale of Natural and interpretation of the acquired data, as well as regional studies Gas in Angola – “PLD 7/18”). and mapping, for the purpose of locating oil and natural gas fields. Under the 2010 Constitution of Angola, the State is the owner of all On the other hand, the development of exploration and production national resources within the Angolan jurisdiction. Consequently, activities can only be performed by private sector companies if all oil fields and gas in: the onshore and offshore areas of Angolan they join up with the National Concessionaire, as described under territory; internal waters; territorial sea; exclusive economic zone; question 3.2 above. These joint activities, undertaken between and on the continental shelf, belong to the public domain of the national or foreign companies of proven competence and technical Angolan State. Consequently, all mining rights are exclusively and financial capacity and the National Concessionaire, are subject assigned to the National Concessionaire. All petroleum deposits in to the prior approval of the Government. Angola are an integral part of the public domain, Sonangol being the The concession covers: exclusive holder of all mineral rights related to such deposits. The Petroleum Act is also applicable to the development and exploration a) An exploration period comprising prospecting, drilling, well- test activities and evaluation.

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b) A period for development and production. However, the through accounts with Angolan banks and in Kwanzas. Foreign concession may cover just the development and production investor companies have the right, under said law and after all tax period and the Government may assign a concession directly obligations are complied with, to transfer abroad their share of the to the National Concessionaire should it wish to carry out amounts resulting from the payments of production agreed with the petroleum operations in a particular area without having to Angolan State. associate with other entities. c) The framework (provided by Presidential Decree 5/18) for prospection inside certain special areas (in which oil is very 3.8 What restrictions (if any) apply to the transfer or likely to be found), in order to promote the discovery of oil disposal of oil and natural gas development rights or within previously agreed concessions. interests? Angola The assignment of a contractual position in the exploration and 3.4 To what extent, if any, does the State have an production concession agreement requires the prior authorisation of ownership interest, or seek to participate, in the development of oil and natural gas reserves (whether the Ministry of Petroleum, provided that the transferee is of proven as a matter of law or policy)? competence, and technical and financial capability, unless the assignment is made between subsidiary companies of the transferor. Since 1978, the Angolan Government has enacted the fundamental In the event such assignment is authorised, Sonangol has a pre- principles regulating the exploration of Angola’s petroleum potential. emption right. If Sonangol does not exercise this right, Angolan As mentioned above, the mineral rights in Angola are owned by the companies that are a party to other concession agreements at the State, the public ownership of all rights and benefits arising from the time of the transfer are entitled to exercise such pre-emption right. oil industry being one of the most important governmental aspects. 3.9 Are participants obliged to provide any security or guarantees in relation to oil and natural gas 3.5 How does the State derive value from oil and natural development? gas development (e.g. royalty, share of production, taxes)? A bank guarantee ensuring fulfilment of the work obligations According to the available data, until October 2017, the State derived undertaken in prospecting licences and oil concessions is required. approximately 455 billion Kwanzas from taxes levied to the oil and In the case of a prospecting licence, the amount of the guarantee gas industry. This data does not include the revenues derived from shall be 50% of the value of the estimated work. As for the points d) and e) of the list below. Pursuant to Act 13/04, all entities, associates of the National Concessionaire, the guarantee shall both national and foreign, which carry out petroleum operations on correspond to the value attributed to the mandatory work schedule national territory are subject to the payment of the following taxes: of the oil concession. The National Concessionaire may also require its associates to present a parent company guarantee. a) Petroleum Production Tax. b) Petroleum Revenue Tax. c) Petroleum Transaction Tax. 3.10 Can rights to develop oil and natural gas reserves granted to a participant be pledged for security, or d) Surface Area Charge. booked for accounting purposes under domestic law? e) Contribution towards the training of Angolan staff. Additionally, Sonangol is the concessionaire of mining rights in Under the Constitution, the State is the owner of all national Angola; therefore, it is a part of all Production Sharing Agreements resources within the Angolan jurisdiction. As such, all oil fields executed in Angola. As a part of all Production Sharing Agreements and gas in the onshore and offshore areas of Angolan territory, in currently in force in Angola, Sonangol is contractually entitled to internal waters, in territorial sea, in the exclusive economic zone and receive part of the profits made under the terms and conditions on the continental shelf belong to the public domain of the Angolan established in each Production Sharing Agreement. State, all being mining rights exclusively assigned to the National Concessionaire. That being said, the Angolan State is the sole and legitimate owner of all mineral rights and no pledge, security or 3.6 Are there any restrictions on the export of other and charges and encumbrances can be provided over such production? rights. According to article 8 of Act 11/04, the “exportation of petroleum produced in each petroleum concession, either in its natural state 3.11 In addition to those rights/authorisations required or after having been processed, is exempt from duties and general to explore for and produce oil and natural gas, what customs service fee”. other principal Government authorisations are required to develop oil and natural gas reserves (e.g. environmental, occupational health and safety) and 3.7 Are there any currency exchange restrictions, or from whom are these authorisations to be obtained? restrictions on the transfer of funds derived from production out of the jurisdiction? According to Law 5/98 of 19 July (“Environmental Law”) and to Decree 39/00 of 10 October (“Environmental Protection from Until 2012, companies operating in the oil and gas sector were Oil Activities Regulation”), all projects to be developed within subject to the foreign exchange rules set out in their respective the scope of the oil and gas sector require the presentation of concession agreements; however, with the enactment of Act 2/2012, a number of different reports and studies. The most important the Government established a general foreign exchange regime report is an Environmental Impact Assessment (“Avaliação de applicable to oil and gas activities pursued under the Petroleum Act. Impacte Ambiental” or “AIA”). Angola has ratified the following As of 1 July 2013, all payments made to such suppliers that are international treaties related to safety and environmental protection foreign exchange residents under the applicable law must be made for oil and gas activities:

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a) International Convention on Civil Liability for Oil Pollution Damage. 5 Import / Export of Oil b) International Convention Relating to Intervention on the High Seas in Cases of Oil Pollution Casualties. 5.1 Outline any regulatory requirements, or specific c) International Convention on Oil Pollution Preparedness, terms, limitations or rules applying in respect Response and Co-operation. of cross-border sales or deliveries of oil and oil products. Oil field operators are subject to strict rules regarding health and safety (HSE) measures to be taken in order to ensure the quality of life of their employees. Activities regarding the import, entry, export and dispatch of petroleum products and crude oil are subject to licensing, as per Angola Law 28/11 (“Oil & Gas Distribution and Commercialisation 3.12 Is there any legislation or framework relating to Law”). Companies in charge of the import/export activities must the abandonment or decommissioning of physical be controlled by Angolan citizens. The import of petroleum structures used in oil and natural gas development? If products into the national market is exclusively implemented by the so, what are the principal features/requirements of the legislation? “Superintendencia Logística do Sistema de Derivados de Petróleo” (also referred to as “SLSDP”). There are currently no specific rules that apply to cross-border sales or deliveries of natural gas. Such PD 91/18 governs the abandonment and decommissioning of oil activities are regulated by contract between the parties. An export and gas facilities (onshore and offshore). The abovementioned permit issued by the Ministry of Commerce is, however, required to statute sets, inter alia, the following obligations to all entities export natural gas. under contract (the downstream sector falls outside the scope of PD 91/18): (a) preparation and submission of a provisional and final abandonment plan (it also provides the requirements necessary 6 Transportation to drafting the said plans); (b) provisioning of the required funds to perform the abandonment and decommissioning of wells; (c) prohibition of injection of NORM (radioactive materials) into the 6.1 Outline broadly the ownership, organisational and ground; and (d) creation of artificial reefs is subject to governmental regulatory framework in relation to transportation approval. The provisional plan must be updated in every three years pipelines and associated infrastructure (such as natural gas processing and storage facilities). and the final plan must be approved (no later than 12 months prior to the abandonment) by the National Concessionaire and Ministry of Petroleum. The abandonment and decommissioning procedures The transportation pipelines and associated infrastructure is are subject to the (detailed) technical specifications contained in the regulated by the State. The transportation activities are subject to annexes of PD 91/18. authorisation from the Ministry of Petroleum. The award of the licence is based on the credibility, experience and competence of the applicant, as well as its financial management and technical 3.13 Is there any legislation or framework relating to capacity for the construction and operation of pipeline facilities in gas storage? If so, what are the principal features/ Angola. Operators of oil and gas pipelines have an exclusive right requirements of the legislation? to explore the infrastructures for the transportation of oil and natural gas. The licence authorises its holder to occupy the necessary The main legal framework with regards to gas storage is provided areas to implement the activities established by the licence. Once by Act 26/12 and in Executive Decree 288/14. Please refer to our the licence is extinct, the assets used in the transportation activity comments in section 6 below. become the property of the State. These assets are the property of the operator during the validity time of the licence. Sonangol 3.14 Are there any laws or regulations that deal specifically is a party to every exploration and production agreement and the with the exploration and production of unconventional Sonangol Group operates as a vertically integrated company that oil and gas resources? If so, what are their key has its main activities focused in all phases of the oil business chain. features? Its activities include transportation of oil and gas which Sonangol may perform independently or in association with other companies, No, there are not. national or foreign. The transportation of oil and gas must be executed by a company or a consortium, at their own risk, under the authorisation of the Ministry of Petroleum. 4 Import / Export of Natural Gas (including LNG) 6.2 What governmental authorisations (including any applicable environmental authorisations) are 4.1 Outline any regulatory requirements, or specific required to construct and operate oil and natural terms, limitations or rules applying in respect of gas transportation pipelines and associated cross-border sales or deliveries of natural gas infrastructure? (including LNG). As per Law 28/11, the construction and operation of pipelines Please refer to question 5.1 below. is subject to licensing by the Ministry of Petroleum. In order to contract the services of transport via pipeline, the National Concessionaire, its associates and all the other companies have to conduct a tender procedure. The licence can only be granted to legal persons who meet, inter alia, the following requirements: (i) technical, logistic and operational capacity; and (ii) economic and financial capacity. In addition, an environmental licence issued

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by the Ministry of Environment is required. The company or the ■ It is technically and economically feasible and consistent consortium interested in obtaining pipeline construction rights must with safety standards. have the necessary authorisations issued by the entities competent to ■ The legitimate interests of the owner or operator are respected. grant land rights (please refer to question 6.1 above). The pipeline ■ The new user does not become the owner of all or part of the construction licence is granted for a five-year period by the Ministry pipeline without the consent of the owner or operator. of Petroleum and may be extended for one year. The licence to ■ The owner or operator is not required to finance part or all of operate pipelines – from the exit flange to the processing facilities, the capacity expansion. the petrochemical units, or to the export terminal – is granted for a The new user shall be entirely responsible for the capacity 25-year period by the Ministry of Petroleum and it may be extended expansion costs, including any equipment required for the one or more times for set periods of time. processing of products of different qualities. If, within six months Angola after the date of commencement of negotiations for expansion of the 6.3 In general, how does an entity obtain the necessary pipelines’ capacity, the parties have not reached an agreement on the land (or other) rights to construct oil and natural gas commercial and operation terms, this issue shall be submitted to the transportation pipelines or associated infrastructure? Ministry of Petroleum for consideration and decision. Do Government authorities have any powers of compulsory acquisition to facilitate land access? 6.7 Are parties free to agree the terms upon which oil The Executive Power may declare of public interest – for purposes or natural gas is to be transported or are the terms of expropriation and civil easement – the areas required for the (including costs/tariffs which may be charged) regulated? construction of pipelines and associated infrastructure. In these cases, holders of land rights must be compensated. The licensee has Under Act 26/12, the licensee has the right to charge tariffs for the the right to occupy, under the legislation in force and with respect transportation of oil and gas or deny the service for lack of payment to existing land rights, the areas necessary for the implementation of such fees. The tariffs applied shall be approved by the Minister of the works included under the licence. Please refer to question of Petroleum, considering the needs for the operator to recover his 6.1 above. Licensed entities may negotiate the land rights with the investment and obtain profits consistent with the risk. respective holders and competent real estate and environmental authorities. Pipelines shall be registered with the competent real estate registry office. 7 Gas Transmission / Distribution

6.4 How is access to oil and natural gas transportation pipelines and associated infrastructure organised? 7.1 Outline broadly the ownership, organisational and regulatory framework in relation to the natural gas transmission/distribution network. Please refer to questions 6.6 and 6.7 below. Two ministries oversee the gas sector: the Ministry of Petroleum, 6.5 To what degree are oil and natural gas transportation which oversees the exploration and production of oil and natural pipelines integrated or interconnected, and how is co- gas, their refining, distribution and marketing, and the import, operation between different transportation systems export and conservation of petroleum, products and liquefied established and regulated? natural gas; and the Ministry of the Environment, which oversees projects’ environmental licensing. Plus, Act 28/11 and Presidential There is no interconnection regarding different transportation Decree 132/13 of 5 September 2013 (“Activities of Oil Products systems. Sector Act”, hereinafter “Decree 132/13”) govern distribution of oil products in general (not only natural gas). With the approval 6.6 Outline any third-party access regime/rights in of Decree 132/13, the SLSDP was created. The legal ownership, respect of oil and natural gas transportation and organisational and regulatory framework for natural gas distribution associated infrastructure. For example, can the networks is governed by the SLSDP. Also, the Oil Derivatives regulator or a new customer wishing to transport Regulating Institute (“ODRI”), created by Decree 132/13, is the oil or natural gas compel or require the operator/ Angolan regulatory authority, with management, administrative and owner of an oil or natural gas transportation pipeline financial independence, responsible for regulating the activities of or associated infrastructure to grant capacity or expand its facilities in order to accommodate the new the oil-derived products sector. customer? If so, how are the costs (including costs of interconnection, capacity reservation or facility 7.2 What governmental authorisations (including any expansions) allocated? applicable environmental authorisations) are required to operate a distribution network? The operator of the oil transportation pipeline must transport the crude oil from a third party, with no discrimination and in acceptable Under Act 28/11, the distribution of oil products shall be made by commercial terms, provided it has the capacity available in its sea, air, inland waterway, road and rail, under the market regime, transport system. The operator cannot impede the expansion of the or through ducts, including networks and extensions of pipelines, pipeline, except if the expansion interferes with the technical and under concession. The pipeline distribution is subject to a licence. operational integrity of the system. However, the entities wishing The licensee operator shall meet the following requirements: to expand the pipeline must contribute to the expenses involved. ■ Technical, economic and financial capacity. The Ministry of Petroleum may exempt the pipeline licensee/ ■ National energy policy. operator from these obligations if it is demonstrated and proved that additional transportation is not possible. The expansion of pipeline ■ Land-planning and environmental policy. capacity may only be effected if:

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7.3 How is access to the natural gas distribution network 8.2 What range of natural gas commodities can be organised? traded? For example, can only “bundled” products (i.e., the natural gas commodity and the distribution The distribution network of oil products (natural gas is no exception) thereof) be traded? is under the competition regime. The principles applicable to accessing large storage facilities are also applicable to accessing the Natural gas commodities are usually traded as bundled products in distribution network. Angola, and there is no specific legislation implementing unbundling procedures for the natural gas industry (in contrast, Presidential Decree 132/13 contains unbundling provisions regarding oil storage

Angola 7.4 Can the regulator require a distributor to grant and transportation activities). capacity or expand its system in order to accommodate new customers? 9 Liquefied Natural Gas Please see question 7.4. Regarding the expansion of capacity, there are provisions in the applicable law. 9.1 Outline broadly the ownership, organisational and regulatory framework in relation to LNG facilities. 7.5 What fees are charged for accessing the distribution network, and are these fees regulated? The existing LNG legislation is closely tied with the Angola LNG Project. Its legal regime also includes legislation referring to The distribution operators must allow third-party access to facilities, petroleum activities. According to the legal regime established for under agreement and following a transparent and objective the Angola LNG Project, the Project shall be executed by Angola negotiation. The tariffs shall be published by the distribution LNG Limited, Sociedade Operacional Angola LNG and Sociedade operators. Operadora dos Gasodutos de Angola. Angola LNG Limited will receive revenue generated by the sale of LNG and NGL. The initial 7.6 Are there any restrictions or limitations in relation to shareholders of Angola LNG Limited are Sonangol, Cabinda Gulf Oil acquiring an interest in a gas utility, or the transfer Company Limited, Total LNG and BP Exploration (Angola) Limited. of assets forming part of the distribution network The promoter companies may create new companies particularly for (whether directly or indirectly)? the purposes of commercialisation or transportation of LNG or NGL. In such case, the new entities are considered as being independent Under the legal system set out in Law 26/12 (Oil and Gas from Angola LNG Limited, Sociedade Operacional Angola LNG and Transportation and Storage Law – “Law 26/12”) the transfer of Sociedade Operadora dos Gasodutos de Angola for all legal and tax licences for the transportation network is subject to the Ministry of purposes. Under the Petroleum Act, Sonangol has exclusive mining Petroleum’s authorisation (the same authorisation is not required if it rights to gas exploration on the subsoil and continental shelf of Angola, is completed between affiliate companies). In respect to distribution and may associate with both national and foreign private companies network, the transfer of assets is also subject to a written request to in the terms described above. The National Concessionaire is barred be lodged with the licensor. from assigning all or part of the mining rights granted and any actions to the contrary are invalid and ineffective. As per the Petroleum Act, the oil fields (“Jazigos Petrolíferos”) exist within the public domain. 8 Natural Gas Trading

9.2 What governmental authorisations are required to 8.1 Outline broadly the ownership, organisational and construct and operate LNG facilities? regulatory framework in relation to natural gas trading. Please include details of current major Under Angolan law, natural gas pipeline transportation and storage initiatives or policies of the Government or regulator (if any) relating to natural gas trading. ancillary to production are treated differently from non-ancillary activities. Ancillary pipeline transportation and storage, with the intention of making natural gas extraction viable, is regulated by Law 28/11 governs downstream operations of crude oil refining the abovementioned rules governing natural gas exploration and and the storage, transportation, distribution and commercialisation production. Non-ancillary transportation and storage, performed of petroleum products undertaken by refinery operators, storage in order for natural gas to be commercialised and consumed, is operators, transportation operators, distribution operators, wholesalers governed by Act 26/12 (“Oil and Gas Transportation and Storage and retailers. Access to such activities is open to all economic Act”). Natural gas transportation and storage activities are subject agents, who may even exercise several of the abovementioned to the authorisation of the Ministry of Petroleum, which has the activities subject to licensing. The trade of oil products may be authority to, inter alia: (i) approve the construction and expansion executed through wholesale and retail traders, as per Law 28/11. of pipelines, supervise the works, and authorise and license the The retail trade of natural gas includes the trade and distribution operations; (ii) keep a database concerning pipeline construction of liquefied petroleum gas (“LPG”), and the trade of LPG bottles. and operation; and (iii) define the rules for the granting of pipeline The storage facilities connected to the trade of LPG are subject construction and operation licences and oil and gas storage, without to licensing under the applicable law. The applicable framework prejudicing other authorisations required. The construction and for the licensing of the facilities connected to the trade of LPG is operation of any oil or gas pipeline and storage facilities are subject Presidential Decree 173/13 of 30 October (“Decree 173/13”). The to a licence issued by the Ministry of Petroleum. facilities connected to the retail trade of LPG bottles are also subject to licensing under the applicable law.

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■ The technical, economic and financial capacity of the 9.3 Is there any regulation of the price or terms of service applicant. in the LNG sector? ■ The compliance between the project and national energy policy. The distribution, associated storage and commercialisation of ■ The land-planning scheme and the goals of environmental natural gas and LNG are an essential public service and entail policy. obligations concerning: a) The safety, continuity and quality of the supply. b) Promoting energy efficiency and rational use of resources, as 11 Competition well as environmental protection. Angola c) Satisfying the requirements of priority consumers in the areas 11.1 Which governmental authority or authorities are of health, the armed forces and social assistance. responsible for the regulation of competition aspects, d) Consumer protection. or anti-competitive practices, in the oil and natural gas sector? Natural gas is sold as a commodity, its price is set by market forces; the buying and selling of the commodity by market players, based on supply and demand, determines the average price of natural gas. Angola recently enacted a general competition law (Law 5/18, of 10 May) but an anti-trust authority has not been created yet. However, this has become a growing concern and more recent legislation, such 9.4 Outline any third-party access regime/rights in as Acts 28/11 and 26/12, reflect the Government’s policy to promote respect of LNG facilities. consumer protection, equal treatment, and equal opportunities among players in competition. As per the Petroleum Law, the Ministry of Petroleum may allow the use of a third party’s facilities, if that use contributes to a more efficient use of the existing resources. However, this can only 11.2 To what criteria does the regulator have regard in determining whether conduct is anti-competitive? be done if it does not result in a decrease of production levels or ineffective functioning. Please refer to question 11.1 above.

10 Downstream Oil 11.3 What power or authority does the regulator have to preclude or take action in relation to anti-competitive practices? 10.1 Outline broadly the regulatory framework in relation to the downstream oil sector. Please refer to question 11.1 above. The activities of refining, distributing and marketing of oil derivative products are regulated by Law 28/11. The processing of 11.4 Does the regulator (or any other Government oil derivatives and purifying of crude oil is subject to the licensing authority) have the power to approve/disapprove of the facilities, taking into consideration: mergers or other changes in control over businesses in the oil and natural gas sector, or proposed ■ The technical, economic and financial capacity of the acquisitions of development assets, transportation or applicant. associated infrastructure or distribution assets? If so, ■ The compliance between the project and national energy what criteria and procedures are applied? How long policy. does it typically take to obtain a decision approving or ■ The land-planning scheme and the goals of environmental disapproving the transaction? policy. The licence should be granted by the Ministry of Petroleum. The In addition to rules and restrictions that may be embodied in distribution of petroleum products may be carried out: individual contracts, under the Petroleum Act, transfer of the contractual position held by private companies who are associates ■ Via sea lane, waterway, by air, by road or via railway. of the National Concessionaire (“Associates”) to a third party ■ Through pipeline. requires the prior authorisation of the Ministry of Petroleum (which The pipeline distribution is subject to licensing, taking into will be granted in the form of an executive decree) and the transfer consideration: to a third party of a stake or shares representing more than 50% ■ The technical, economic and financial capacity of the of the Associates’ share capital, deemed equivalent to a transfer of applicant. contractual position. Such authorisation is not required if the transfer ■ The compliance between the project and national energy is made to an “affiliate” as defined by law, provided the assignor policy. remains joint and severally liable. We also note that in the case of ■ The land-planning scheme and the goals of environmental transfer to a third party of a stake or shares representing more than policy. 50% of the Associates’ share capital, the National Concessionaire is granted a right of first refusal. Although it may vary, the applicable timeframe for execution is usually six months. 10.2 Outline broadly the ownership, organisation and regulatory framework in relation to oil trading.

The marketing of oil products is subject to licensing, as per Act 28/11, and may be performed through wholesale or resale trade. The licensee’s project shall fulfil the following requirements:

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12 Foreign Investment and International 13.2 Is your jurisdiction a signatory to, and has it duly Obligations ratified into domestic legislation: the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and/or the Convention on 12.1 Are there any special requirements or limitations on the Settlement of Investment Disputes between States acquisitions of interests in the natural gas sector and Nationals of Other States (“ICSID”)? (whether development, transportation or associated infrastructure, distribution or other) by foreign Since March 2017, Angola is part to the 1958 New York Convention companies? on the Recognition and Enforcement of Foreign Arbitral Awards,

Angola but is not a party to ICSID. In upstream sector, foreign companies who wish to acquire interests outside the scope of the prospecting licence may only do so in association with the National Concessionaire and will need 13.3 Is there any special difficulty (whether as a matter to provide a bank guarantee to ensure compliance with the work of law or practice) in litigating, or seeking to enforce judgments or awards, against Government authorities obligations undertaken before Sonangol. or State organs (including any immunity)?

12.2 To what extent is regulatory policy in respect of the Due to the recent ratification and entry into force of the New York oil and natural gas sector influenced or affected Convention we have not seen many changes in practice in Angola. by international treaties or other multinational At the moment we cannot provide an estimate of how long the arrangements? recognition or enforcement of a foreign arbitral award will take in Angola under the Convention. Treaties and multinational agreements are directly enforceable only to the extent that they have been passed into law by the National Assembly of Angola, pursuant to the Angolan Constitution. 13.4 Have there been instances in the oil and natural gas sector when foreign corporations have successfully obtained judgments or awards against Government 13 Dispute Resolution authorities or State organs pursuant to litigation before domestic courts?

13.1 Provide a brief overview of compulsory dispute There are some ongoing suits in relation to tax issues (profit oil, resolution procedures (statutory or otherwise) mostly) but there is no publicly available information in relation to applying to the oil and natural gas sector (if any), their outcome. including procedures applying in the context of disputes between the applicable Government authority/regulator and: participants in relation to oil 14 Updates and natural gas development; transportation pipeline and associated infrastructure owners or users in relation to the transportation, processing or storage 14.1 Please provide, in no more than 300 words, a of natural gas; downstream oil infrastructure owners summary of any new cases, trends and developments or users; and distribution network owners or users in Oil and Gas Regulation Law in your jurisdiction. in relation to the distribution/transmission of natural gas. The petroleum sector has been under a deep restructuring process Under the Petroleum Act, any dispute arising in connection with since 2017 which led to new legislation being passed. Said legislation any licence or concession instruments, or between the Ministry includes, inter alia, (a) the regime applicable to abandonment and and the licensee, or Sonangol and associates of Sonangol, will be decommissioning, (b) the new rules applicable to the tendering settled by arbitration, usually in accordance with the arbitration process for the upstream sector, (c) the regime applicable to the rules established in the individual contracts, unless the matter is discovery of marginal areas, or (d) the legal and tax framework expressly excluded from arbitration under the Petroleum Act. The applicable to the exploration of natural gas. Moreover, the Angolan Petroleum Act does not apply to the refining, transportation, storage, Government recently announced the creation of a new regulatory distribution and marketing of petroleum. There is no specific body (the National Petroleum Agency). This new regulatory entity regulation concerning appeals to gas sector regulator decisions. was created with the purpose of optimising the coordination of the Decisions of the Ministry of Petroleum may be challenged, pursuant petroleum sector and eliminating potential conflict of interests. A to the general administrative procedure established by Decree Law setting-up committee was already created. It was also announced 16-A/95. The agency for the oil sector (“Agência para o Sector that parts of Sonangol’s business (assets that do not pertain to Petrolífero”) (see question 14.1) will, among other things, be the company’s core business, i.e., prospection, exploration and responsible for settling disputes in an administrative way. This production of oil and gas) could be privatised. does not contradict what is stated above, but rather constitutes, most likely, a first approach towards solving any eventual dispute. Acknowledgment The authors would like to thank managing associate Sofia Cerqueira Serra for her invaluable assistance in the preparation of this chapter. Tel: +351 213 817 400 / Email: [email protected]

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Irina Neves Ferreira João Francisco Cunha ALC Advogados ALC Advogados Masuika Office Plaza Masuika Office Plaza Edifício MKO A Edifício MKO A Piso 5, Escritório A Piso 5, Escritório A Talatona, Município de Belas, Luanda Talatona, Município de Belas, Luanda Angola Angola

Tel: +244 926 877 476/8/9 Tel: +244 926 877 476/8/9 Email: [email protected] Email: [email protected] URL: www.alcadvogados.com URL: www.alcadvogados.com Angola Irina Neves Ferreira is a lawyer, admitted to the Angolan and João Francisco Cunha practises in the area of corporate law and Portuguese Bars, with considerable international experience, assists both national and international clients in several corporate especially in the Angolan jurisdiction. Irina is a partner with ALC matters (notably M&A, corporate re-organisations and investment Advogados and a Managing Associate with MLGTS. Her practice funds) and also provides regular assistance regarding foreign direct focuses on the petroleum sector and its multiple aspects (regulatory, investment operations in Angola. He is a consultant at ALC Advogados insurance and contractual), including matters relating to licences and and an Associate Lawyer at MLGTS. As a member of MLGTS, João concessions, transfer of participating interests and foreign exchange. is a member of the firm’s Oil and Gas Department. Within this team, Irina has a more general legal practice with involvement in operations João regularly assists clients in the areas of oil & gas. João holds an concerning private investment, insurance law, oil & gas and real estate. LL.M. in Oil & Gas from the University of Aberdeen. She is also highly experienced in corporate compliance attained throughout her experience as counsel for the EMEA region in the international compliance team of a multinational company in the IT area. In the area of corporate and commercial law she has acted as legal advisor in several mergers, acquisitions and disposals of companies, including the acquisition and disposal of companies with head offices in Portugal and Angola, on behalf of domestic and foreign clients in various sectors, such as the oil sector, construction, information technologies and communications. Irina also provides general legal advice to numerous national and foreign companies.

ALC Advogados is the exclusive member of the network MLGTS Legal Circle for Angola, an international network based upon the sharing of values and common principles of action with the purpose of delivering high-quality legal services to clients around the globe, to guarantee support to investors in these jurisdictions and to help them navigate through diverse business and legal environments. It was created by Morais Leitão, Galvão Teles, Soares da Silva & Associados (“MLGTS”) and encompasses a select set of jurisdictions, including Portugal, Angola, Macau (China) and Mozambique. While working in close connection, the member firms combine extensive local knowledge with international experience and support of the whole network. ALC Advogados was founded by a group of lawyers of Angolan nationality with the ambition of becoming a leading law firm in Angola by offering clients a new perspective of the Angolan market and a broad range of expertise. The firm routinely assists foreign investors from various sectors and is also involved in M&A projects and tax impact analysis. It regularly assists clients working in the oil & gas sector and its client portfolio includes IOCs and oil service providers operating in Angola. The firm has attained experience while advising clients on contractual, regulatory tax and insurance matters and, overall, the full range of issues present in the lifecycle, starting with the concession and ending with decommissioning.

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Argentina Ignacio J. Randle

Estudio Randle Stone Pigman Walther Wittmann PLLC John P. Cogan, Jr.

The largest shale gas play in Argentina, Vaca Muerta, is located in 1 Overview of Natural Gas Sector the southwestern province of Neuquen. It has an estimated 308 trillion cubic feet of dry, wet, and associated shale gas resources. 1.1 A brief outline of your jurisdiction’s natural gas Argentina’s natural gas grid is comprised of 28,900 km of pipelines. sector, including a general description of: natural There are five main gas pipelines: Gasoducto Norte; Gasoducto gas reserves; natural gas production including Centro Oeste; Neuba I; Neuba II; and San Martin. the extent to which production is associated or non-associated natural gas; import and export of The gas transportation pipelines systems available in Argentina are natural gas, including liquefied natural gas (LNG) operated by the two concessionaires Transportadora Gas del Norte liquefaction and export facilities, and/or receiving and (that operates the main pipelines Norte and Centro Oeste) and re-gasification facilities (“LNG facilities”); natural gas Transportadora Gas del Sur (that operates the Neuba I, Neuba II and pipeline transportation and distribution/transmission San Martin pipelines). network; natural gas storage; and commodity sales and trading. In April 2012, Argentina nationalised the largest oil company in Argentina, YPF, by expropriating Repsol’s 57% controlling interest. In 2016, Argentina’s natural gas reserves were reported to be in In February 2014, Argentina agreed to pay US$5 billion to the the region of 0.4 trillion cubic metres (12.4 trillion cubic feet). Spanish company as settlement. According to the BP Statistical Review of World Energy, in the same Energy subsidies were quite negligible until 2003 but since then year Argentina produced 38.3 billion cubic metres (bcm) of natural have had a considerable impact in the federal budget. The energy gas and consumed 49.6 bcm. subsidies originally stemmed from the set of measures adopted after Natural gas production accounts for about 38% of the total energy the 2001 economic crisis. The Economic Emergency Law No. production portfolio. 25,561 converted to Pesos in 2002 the prices charged by the public utilities and forbid price adjustments and indexation mechanisms. The largest natural gas producers in the country are Yacimientos The energy subsidies were extended many times, distorting the Petroliferos Fiscales (YPF) and Total, accounting together for more market and hurting the federal budget. than half of the production. Other significant players in the natural gas sector include Pan American Energy (a company jointly owned After taking office in December 2015, the new federal government by BP and Bridas Corporation, which in turn is jointly owned by began the difficult task of dismantling the myriad of subsidies and Argentina’s Bulgheroni group and CNOOC), Petrobras, Pluspetrol, decided on a very high adjustment of tariffs, later overturned by Tecpetrol, and Apache Energy. the federal Supreme Court based on the failure to meet certain procedural formalities. Following such decision, the federal Despite being the largest dry gas producer in South America and government conducted the necessary public hearings as requested having the world’s second-largest shale gas reserves, Argentina is by the Supreme Court and will put in place gradual rate increases a net importer of natural gas. In 2014, Argentina imported 11.8 for household and business electricity and gas, to foster new bcm of natural gas – 5.4 bcm by pipeline and 6.4 bcm of LNG. investments in the industry. Virtually all pipeline gas imports are sourced from Bolivia, and more pipelines from this country are under way. The Argentine government expects to resume exporting gas to Chile as of summer 2018, and to produce in the following four years Most LNG imports originate in Trinidad & Tobago and, to a lesser 140 million cubic metres of gas instead of 105 million. As a result extent, Nigeria. Argentina has two LNG re-gasification terminals, of such production increase and the implementation of a rational namely GNL Escobar, which is located on the Paraná River 48 km use plan, the government is developing foreign markets to sell the outside of Buenos Aires, and the Bahia Blanca GasPort, which surplus. is 640 km south of Buenos Aires. Argentina does not have LNG liquefaction terminals. Even as a net importer, Argentina continues exporting a small 1.2 To what extent are your jurisdiction’s energy requirements met using natural gas (including LNG)? amount of natural gas to its neighbours. Argentina had to resort to the importation of Chilean gas due to Natural gas constitutes nearly 50% of Argentina’s primary energy insufficient shipments from Bolivia. supply. According to the BP Statistical Review of World Energy, in 2016 Argentina’s primary energy consumption by type of fuel was as follows:

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Natural Hydro- The country has 10 refineries with a combined 622,000 bpd refining Oil Coal Nuclear Renewables Total gas electricity capacity, which is not sufficient to meet domestic demand. In 2014, Mill. according to the U.S. Energy Information Administration, Argentina tonnes 31.9 44.6 1.1 1.9 8.7 0.7 88.9 imported 43,494 bpd from the U.S. YPF controls half of Argentina’s oil refining capacity. Shell has the second largest refining capacity in equiv. % 25.88 50.16 1.23 2.13 9.78 0.78 100 the country. The oil transportation network system includes the following pipelines: Puesto Hernández – Luján de Cuyo; Puesto Hernández 1.3 To what extent are your jurisdiction’s natural gas – Talcahuano (Chile); Puesto Hernández – Medanito; Medanito – requirements met through domestic natural gas Allen; Plaza Huincul – Challacó; Challacó – Allen; Plaza Huincul –

production? Allen; Puerto Rosales – La Plata; Palmar Largo – Juarez; Las Heras Argentina – Pico Truncado; Pico Truncado – Caleta Olivia; El Treból – Caleta In 2014, Argentina met nearly 75% of its natural gas requirements Córdova; and Jepenner (Brandwen) – Campana. Most of them are through domestic production. operated by YPF or by companies affiliated with YPF. In order to meet demand, Argentina imported 5.4 bcm by pipeline and 6.4 bcm of LNG. Imports by pipeline usually come from Bolivia 2.2 To what extent are your jurisdiction’s energy and currently also from Chile, whereas LNG imports were sourced requirements met using oil? from Brazil (0.1 bcm), Trinidad & Tobago (3.4 bcm), Norway (0.2 bcm), other European countries (1.1 bcm), Qatar (0.9 bcm), and As indicated in question 1.2 above, in 2016, 35.88% of Argentina’s Nigeria (0.9 bcm). energy requirements were met using oil.

1.4 To what extent is your jurisdiction’s natural gas 2.3 To what extent are your jurisdiction’s oil requirements production exported (pipeline or LNG)? met through domestic oil production?

Argentina exports natural gas to Chile and, to a lesser extent, In 2016, Argentina produced 29.8 million tonnes (629,000 bpd) and Uruguay. According to the U.S. Energy Information Administration, consumed 30.9 million tonnes (662,000 bpd), according to the BP exports in 2013 amounted to 0.1 bcm. Statistical Review of World Energy (June 2017). Under Decree Nº 893/2016, the Ministry of Energy and Mining shall issue an export authorisation in cases of temporary exports 2.4 To what extent is your jurisdiction’s oil production for assistance in emergency situations and those that are necessary exported? to enable the use of the infrastructure of neighbouring countries to facilitate the transport of natural gas to the Argentine domestic In 2014, Argentina exported 237,000 bpd (1.02 million tonnes), market, allowing increased production of local origin. according to the Joint Organisations Data Initiative. In October 2017, Argentina and Chile entered into the first power According to the U.S. Energy Information Administration, 29,000 swap agreement, allowing both countries to input gas or electricity bpd of crude oil and 8,000 bpd of oil products were exported to the in a geographical point and to obtain supplies in another one over U.S. in the same year. their long border. Law No. 25,561 of Public Emergency and Amendment of the Currency System of 2002 and Decree Nº 310/2002, on withholdings 2 Overview of Oil Sector to oil and fuel exports, both ceased to apply on January 6, 2017. The Argentine government also ratified the decision to release the internal price in the liquid fuel market and announced by means of 2.1 Please provide a brief outline of your jurisdiction’s oil sector. Decree Nº 962/2017 of November 24, 2017 that the guidelines for the import of crude oil and by-products set by Decree Nº 192/2017 will cease to apply on December 31, 2017. Oil proved reserves in Argentina amounted in 2016 to 2.4 billion barrels (300 million tonnes), with a reserve-to-production ratio of 10:6, according to the BP Statistical Review of World Energy. 3 Development of Oil and Natural Gas Argentina is one of the very few countries that has achieved production of commercial volumes of tight oil. In 2014, tight oil production increased, and it did so at a faster rate than non-tight oil 3.1 Outline broadly the legal/statutory and organisational framework for the exploration and production production. Tight oil production originates in the Vaca Muerta shale (“development”) of oil and natural gas reserves oil and gas field, where YPF, jointly with Chevron, produces around including: principal legislation; in whom the State’s 20,000 barrels per day (bpd). mineral rights to oil and natural gas are vested; The state-owned oil company YPF has been announcing large Government authority or authorities responsible for investments jointly with the likes of Chevron, Total, Pan American the regulation of oil and natural gas development; and current major initiatives or policies of the Government Energy and Wintershall in excess of US$1,100 million in non- (if any) in relation to oil and natural gas development. conventional gas. The projects will take shape in the next four years, after which it is expected that the conventional production Argentina is a federal republic with 23 provinces and a federal and the one from Vaca Muerta will become similar. This will revert district, the Autonomous City of Buenos Aires, and also the federal the situation of the last decade of divestments in the energy sector capital. that caused Argentina to lose self-sufficiency.

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Each province enacts its own constitution and regulatory framework deposits, they belong to the provinces for up to 12 nautical miles and all powers not delegated to the Federal Government in the offshore, and beyond 12 nautical miles they belong to the federal National Constitution are kept by the provinces. government. Oil and gas activity in Argentina has been heavily controlled and Moreover, the 1994 amendment to the Federal Constitution regulated by the government since the early discoveries in the confirmed that gas and oil fields are owned by the Federal nineteenth century. Most activities were historically performed by Government or the Provinces depending on the jurisdiction where the state-owned companies YPF and Gas del Estado. The private fields are located, as mentioned. sector had a limited role in the business, with a higher market Additional steps were taken towards deregulation of the energy participation in downstream. sector, including: (i) the offering under international calls for bidding From the 1920s up to 1989, the Argentine government dominated of exploitation concessions for certain marginal areas previously Argentina both the upstream and downstream segments of the oil and gas operated by YPF; (ii) the offering of association agreements with industry. YPF for the exploration and exploitation of certain major producing The so-called Hydrocarbons Act Nº 17,319, enacted in 1967, areas held by YPF; (iii) the transformation of existing exploration sets forth the basic legal framework for crude oil and natural gas service contracts with YPF into exploration permits; (iv) the exploration and production, following the above-described trend of transformation of existing production service contracts with YPF intense state activity and control, and granting to the federal state the into exploitation concessions; (v) the elimination of official prices property and mining rights over all existing hydrocarbon reserves in for crude oil and refined products; and (vi) the deregulation of gas the territory of Argentina. wellhead (Boca de Pozo) prices as of January 1, 1994. Although the Hydrocarbons Act Nº 17,319 allows the National In September 1992, the mentioned Law Nº 24,145 provided for the Executive Branch to grant exploration permits and production privatisation of YPF, pursuant to which the federal and provincial concessions to private parties, prior to 1989 such concessions were governments sold the privatised YPF’s shares in public offerings. seldom granted and almost all oil exploration and production in In 1992, the federal congress passed the Natural Gas Act Nº 24,076, Argentina was carried out by or on behalf of the state-owned oil which set forth the basis for deregulating the transportation and company YPF. Notably, however, a substantial volume of oil was distribution of natural gas, the sale of the assets of the state-owned produced by private companies operating under service contracts company Gas del Estado to private companies, the granting of with YPF. Under this system, crude oil, whether extracted by YPF licences to operate such assets, the establishment of a regulatory or by private companies operating under service contracts, was framework for the industry and the creation of a regulatory body to delivered to YPF, and the Secretariat of Energy distributed the same oversee the industry. among the refining companies according to quotas. At the same Under the Natural Gas Act Nº 24,076, the transportation and time, the National Executive Branch set official prices for crude oil distribution systems of Gas del Estado were organised into and refined petroleum products at levels which in many cases were two transportation companies and eight distribution companies lower than the international prices. transferred to private investors. The gas industry was further In August 1989, the federal congress enacted the so-called State regulated by Decrees N° 1189/92, 1738/92, 2255/92, 1186/93, Reform Act Nº 23,696 and the Economic Emergency Act Nº 1186/94 and 1411/94. 23,697 that provided the legislative basis for the deregulation of In 2012, the so-called Hydrocarbons Sovereignty Act Nº the economy and the privatisation of Argentina’s state-owned 26,741 and the regulatory Decree Nº 1277/12 limited the free companies, granting the President broad authority to reorganise disposal regime, including larger state intervention in oil and gas such companies, and also declaring certain state assets and most exploration, production, refining and marketing. Also, importantly, state-owned companies to be subject to privatisation. the Hydrocarbons Sovereignty Act Nº 26,741 expropriated Repsol Following the State Reform Act and the Economic Emergency Act, YPF S.A., the formerly state-owned YPF that had been privatised a series of presidential decrees relating specifically to deregulation in 1992. of energy activities were issued, among them Decrees Nº 1055/89, Later, Decree Nº 929/2013 set incentives for oil and gas declining Nº 1212/89 and Nº 1515/89, which laid the foundations for energy exploration and production. deregulation, eliminated restrictions on imports and exports of crude A new Hydrocarbons Act Nº 27,007 enacted in 2014 aimed at oil, and deregulated the domestic oil industry including the prices creating incentives to encourage long-term foreign oil and gas of oil products. investment, as declining production and increasing imports made it Based on the deregulatory decrees, in the 1990s, service contracts necessary to boost exploration and production, particularly the non- were turned into concessions, with a free disposal regime, and freely conventional one, especially in potentially rich shale oil and gas negotiated prices. areas such as world-class Vaca Muerta. The Hydrocarbons Act Nº In 1992, natural gas transportation, storage, distribution and 27,007 also provides for reduced royalties when the business model commercialisation were regulated by the Natural Gas Act Nº so warrants because of the quality of the oil produced, the geology 24,076, setting an open-access regime. of the field or the location of the deposit. After the economic crisis of 2001, legislation and regulations – The federal regulatory authority is the Secretaría de Energía including the Economic Emergency Act Nº 25,561 – were enacted, (Sectretariat of Energy), within the Ministerio de Energía y Minería limiting the 1990’s regime and imposing further government (Ministry of Energy and Mining). controls on prices and disposal of production. The regulatory authority for the transportation and distribution of Under the Law Nº 24,145 enacted in 1992 and the Law Nº 26,197 natural gas is the Ente Nacional Regulador de Gas (Federal Gas enacted in 2007, that partially amended the Hydrocarbons Act Nº Regulatory Authority) created in 1992 at the federal level and 17,319, the provinces assumed the ownership and administration regulated by Decree Nº 2255/92. At the local level, each province of the hydrocarbon deposits within their boundaries, and thus the may have its own regulatory agency and regulate the local activities power to grant concessions on them. The federal government kept accordingly. The Ministry of Energy and Mining has conducted the power to enact general energy legislation. Regarding offshore a review of the tariffs in order to design a tariff adjustment that

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will foster the investments necessary to expand the network to In turn, exploration permits for non-conventional exploration reach more households, improve service quality and maintain high comprise two sub-periods of up to four years each, plus a potential safety standards. The aim of the Ministry of Energy and Mining extension of five years. by readjusting tariffs is to turn resources into reserves and then into In all cases, offshore exploration permits include an additional one- production, and replace importations. year term. The Ministry of Energy and Mining created, by means of Resolution Any unused time in the exploration period may be added to the Nº 46-E/2017, a programme to encourage investments in natural gas production concession term. production from non-conventional reservoirs in the Neuquén basin, As to exploitation concessions, the general term for onshore which will remain valid until December 31, 2021. The companies conventional exploitation is 25 years, for offshore conventional joining the programme could receive compensations and must exploitation it is 30 years, and for non-conventional exploitation it is provide insurance bonds through policies approved by the National Argentina 35 years. In the case of non-conventional exploitation, the 35-year Superintendence of Insurance. term includes five years to develop a pilot plan. Decree Nº 629/2017, issued to comply with the policies of the The provinces may grant extensions of up to 10 years to producers National Government to improve productivity and competitiveness that comply with the investment as undertaken. of local producers, created a Regime of Importation of Used Goods in the Hydrocarbon Industry to expedite the importation of Natural gas transportation concessions are granted for 35-year used equipment that the local industry does not supply, as well as terms, which may be extended for up to 10 additional years. to incorporate new technologies and management modalities that Provincial government royalties are harmonised at 12%, payable contribute to the development and promotion of the sector. by the exploitation concessionaires to the provinces that granted the concession. The royalty rate may be increased by 3% for each concession extension, subject to a maximum rate of 18%. 3.2 How are the State’s mineral rights to develop oil and natural gas reserves transferred to investors or The mentioned extensions, which must be applied for at least companies (“participants”) (e.g. licence, concession, one year in advance, may be awarded every 10 years to the service contract, contractual rights under Production concessionaires that have met their investment requirements. Sharing Agreement?) and what is the legal status of those rights or interests under domestic law? Since the enactment of the Hydrocarbons Act Nº 27,007, state- owned companies, federal or provincial, may not be awarded reserved areas (not open to other bidders). Over time, oil and gas activities in Argentina have been undertaken under a myriad of legal forms, ranging from full concessions, to All concessions are subject to early termination in case of breach of service contracts, including joint ventures and different kinds of the terms of the concession. agreements. The federal government and the provinces may enter into contracts 3.4 To what extent, if any, does the State have an for the exploration, development and exploitation activities in their ownership interest, or seek to participate, in the respective jurisdictions, with foreign or local, private or public development of oil and natural gas reserves (whether companies. There is a wide range of possibilities for the provinces as a matter of law or policy)? to do so, including granting exploration permits and exploitation concessions. The hydrocarbons industry in Argentina has for the most part been heavily controlled and regulated by the state, with periods in which The Hydrocarbons Act Nº 27,007 enacted in 2014 to encourage oil and gas activities were deregulated and state-owned companies long-term oil and gas investment, included a model bidding process privatised. The main state-owned companies in the industry, YPF to harmonise the bidding conditions, drafted with the participation and Gas del Estado, were included in a privatisation programme of the provinces and the federal government. initiated in 1992. Under the mentioned bidding process, concessions are awarded Previously, in 1989, the mentioned Decrees Nº 1055/89, Nº 1212/89 to the most suitable bidder, taking into consideration levels of and Nº 1515/89 had initiated the path to the oil and gas industry’s investment and the exploration activities offered by the bidder. deregulation, and service and take-or-pay contracts were turned into Once an exploration permit holder finds commercially exploitable free disposal concessions. oil or gas, the investor may request an exploitation concession to In 1992, natural gas transportation, storage, distribution and benefit from the exclusive right to produce hydrocarbons from the commercialisation were opened up to private investment by the concession area. Natural Gas Act Nº 24,076. After 2001 the state became again increasingly active in regulating 3.3 If different authorisations are issued in respect of and participating in the oil and gas industry, with heavier intervention different stages of development (e.g., exploration legislation and regulations at the federal and provincial level. appraisal or production arrangements), please specify those authorisations and briefly summarise the most Among the most important pieces of legislation in the field, in important (standard) terms (such as term/duration, 2012 the Hydrocarbons Sovereignty Act Nº 26,741 set the tone for scope of rights, expenditure obligations). heavier state intervention in oil and gas exploration, production, refining and marketing and called for the expropriation of 51% of The terms of an exploration permit depends on the bidding conditions the shares owned by the Spanish company Repsol in Repsol YPF applicable to each contract and are divided into sub-periods. S.A., the private company that was the continuation of the formerly Exploration permits for conventional exploration comprise two state-owned YPF, privatised in 1992. Immediately thereafter, the sub-periods of up to five years each, plus a potential extension of a government took possession of the expropriated shares and YPF’s further five years. assets. The expropriation just applied to Repsol YPF S.A., and to no other company or oil and gas assets.

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Declining hydrocarbons production and increasing imports to cope with domestic demand led to legislation designed to boost 3.7 Are there any currency exchange restrictions, or exploration and production, particularly in the non-conventional restrictions on the transfer of funds derived from production out of the jurisdiction? fields. The Hydrocarbons Act Nº 27,007 enacted in 2014 isa milestone in this new turn in governmental policy towards private participation in the oil and gas industry in Argentina. After taking office in December 2015, the new federal government repealed the complex foreign exchange controls regime formerly in Based on the Hydrocarbons Act Nº 27,007, the government- force. International markets consider opening to foreign currency issued regulations aimed at encouraging production to correct and the reaching of a settlement with the foreign bondholders, the oil price decline, as well as improve the conditions for badly ending a default lasting for over a decade, as the correct moves to needed exploration. Special attention is given in the regulations of attract new foreign investments. Argentina Argentina’s shale gas reserves, considered to be among the largest in the world. In 2017, YPF reached its highest level of non-conventional gas 3.8 What restrictions (if any) apply to the transfer or disposal of oil and natural gas development rights or production through its operations at the Vaca Muerta oil field interests? located in Neuquén, with a total volume of 11.36 million daily cubic metres. Government policy is that hydrocarbons companies must prioritise domestic demand requirements. 3.5 How does the State derive value from oil and natural gas development (e.g. royalty, share of production, taxes)? 3.9 Are participants obliged to provide any security or guarantees in relation to oil and natural gas development? Provincial government royalties are currently harmonised at 12%, calculated at wellhead, payable on a monthly basis by the Under the Hydrocarbons Act Nº 27,007 on the oil and gas model exploitation concessionaires to the provinces that granted the bidding process, the bidding conditions set, among other conditions, concession. The royalty rate may be increased by 3% for each the kinds and amounts of guarantees to be provided by the concession extension, up to a maximum of 18%. hydrocarbons companies bidding for concessions. The Hydrocarbons Act Nº 27,007 provides for the potential reduction of the applicable royalties when the business conditions make it advisable because of the quality of the oil produced, the 3.10 Can rights to develop oil and natural gas reserves granted to a participant be pledged for security, or geology and productivity of the field or the geographic location of booked for accounting purposes under domestic law? the deposit.

The exploitation concessionaires and the holders of exploration The rights to develop and produce oil and gas from reserves under permits also pay a canon that varies depending on the exploration concessions may be used as collateral and booked for accounting or production area awarded. purposes in compliance with local, generally accepted accounting In addition to the canon and royalties, the federal, provincial and principles. municipal governments levy the taxes applicable at each level in accordance with the federal constitution, the provincial constitution 3.11 In addition to those rights/authorisations required and the applicable laws, e.g. federal income tax, value-added tax, to explore for and produce oil and natural gas, what stamp tax, gross income tax, and the like. other principal Government authorisations are required to develop oil and natural gas reserves (e.g. environmental, occupational health and safety) and 3.6 Are there any restrictions on the export of from whom are these authorisations to be obtained? production?

The following authorisations, among others, are required for an In relation to the export of production, there is no legislation oil and gas company to obtain exploration permits and production specifically prohibiting it, but in practice, exports have not been concessions to develop and produce oil and gas: permitted due to the impossibility of obtaining the necessary administrative clearings. a) Corporate registrations including that of the legal entity before the applicable General Inspection of Corporations. Under Decree Nº 893/2016, the Ministry of Energy and Mining b) Tax registrations including that before the applicable federal, shall issue an export authorisation in cases of temporary exports provincial and municipal tax authorities. for assistance in emergency situations and those that are necessary c) Labour and health and safety registrations, including those to enable the use of the infrastructure of neighbouring countries before the applicable federal, provincial and municipal to facilitate the transport of natural gas to the Argentine domestic labour, social security and health and safety authorities. The market, allowing increased production of local origin. government generated new conditions for the applicable Law Nº 25,561 of Public Emergency and Amendment of the collective labour agreements with different unions in order to Currency System of 2002 and Decree Nº 310/2002, on withholdings permit clauses which are more flexible and to achieve higher to oil and fuel exports, both ceased to apply on January 6, 2017. competitiveness in the activity. The Argentine government also ratified the decision to release the d) Environment-related registrations and compliance and monitoring before the applicable federal, provincial and internal price in the liquid fuel market and announced by means of municipal authorities, including mandatory environmental Decree Nº 962/2017 of November 24, 2017 that the guidelines for impact assessments, approvals and renewals. the import of crude oil and by-products set by Decree Nº 192/2017 e) The current government is implementing decisions to reduce will cease to apply on December 31, 2017. the number and complexity of procedures and approvals.

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Secretariat of Energy. Further regulations are contained in Decrees 3.12 Is there any legislation or framework relating to Nº 885/92, 1738/92, 2255/92, 1186/93 and 2731/93. the abandonment or decommissioning of physical structures used in oil and natural gas development? If As a general rule, the Hydrocarbons Act Nº 17,319 and the Natural so, what are the principal features/requirements of the Gas Act Nº 24,076 provide that approvals for the export of natural legislation? gas will be granted insofar as they do not affect domestic supply. Under the Natural Gas Act Nº 24,076, natural gas imports do not Resolution Nº 5/96 of the Secretariat of Energy regulates the process require prior approval. applicable to the abandonment or decommissioning of oil and In any event, copies of the import and export agreements must be natural gas projects. filed before the Federal Gas Regulatory Authority. The regulations govern two kinds of abandonment of hydrocarbons wells, the temporary one and the definitive one. Argentina The concessionaire must submit to the enforcement authority an 5 Import / Export of Oil abandonment or decommissioning plan in advance for approval. The enforcement authority may in turn request amendments to the 5.1 Outline any regulatory requirements, or specific abandonment or decommissioning plans based on technical grounds. terms, limitations or rules applying in respect The term available to the concessionaire to complete the of cross-border sales or deliveries of oil and oil products. abandonment or decommissioning plan depends on the kind of field being abandoned and other technical, economic and operational aspects involved. In relation to restrictions on the export of production, there is no legislation specifically prohibiting it, but in practice exports have not been permitted due to the impossibility of obtaining the necessary 3.13 Is there any legislation or framework relating to administrative clearings, and the trend is to permit them definitively. gas storage? If so, what are the principal features/ requirements of the legislation? 6 Transportation Under the Secretariat of Energy Resolution Nº 709/2004, all entities that operate storage tanks, or any kind of liquefied petroleum gas storage with a capacity exceeding 1,000 kilograms, must be 6.1 Outline broadly the ownership, organisational and registered before the Registro Nacional de la Industria de Gas regulatory framework in relation to transportation pipelines and associated infrastructure (such as Licuado de Petróleo (Liquefied Petroleum Gas Industry National natural gas processing and storage facilities). Registry). Such entities must comply with all requirements and regulations, among them the periodical security audits certifying The transportation of natural gas is regulated by the Natural Gas the operating conditions of their installations, and obtaining the Act Nº 24,076, which defines natural gas transportation as a public registration certificate. service. Concessions for the transportation and distribution of natural gas 3.14 Are there any laws or regulations that deal specifically are granted by the federal state and the provinces. Concession with the exploration and production of unconventional holders have the obligation to build, maintain and operate pipelines oil and gas resources? If so, what are their key in accordance with the terms of the concession and the applicable features? legislation.

Answer not available at time of print. The federal and provincial governments may only provide transportation services if there are no private entities willing to be awarded a transportation concession in a specific area. 4 Import / Export of Natural Gas (including Under the Hydrocarbons Act Nº 17,319, a production concession LNG) grants the concessionaires the right to obtain a transportation concession to transport their hydrocarbons production. Such concession allows the construction and operation of pipelines, and 4.1 Outline any regulatory requirements, or specific is subject to the obligation to provide open access to third parties terms, limitations or rules applying in respect of cross-border sales or deliveries of natural gas to their transport infrastructure, pursuant to applicable regulations, (including LNG). provided they have capacity available. As to the transportation of liquid hydrocarbons, the Secretariat Intending to curtail the effects of the diminishing natural gas of Energy Resolution Nº 1460/06 sets forth the technical and available to the domestic market, the Ministry of Economy issued safety requirements and standards applicable to oil pipelines, Resolution Nº 534/2006, which regulates the import and export of the concessionaires of which have been granted transportation natural gas. The government also caused the Dirección General concessions beyond the limits of their production concessions. de Aduanas (General Customs Authority) to apply as a basis for Regulations and requirements applicable to fuel storage facilities the valuation of natural gas exports, the highest price set for the may be found under Law Nº 13,660 and Decree Nº 10,877/60. importation contracts of natural gas into Argentina. Moreover, Law Nº 26,095 levies special fees on the users of the The export of natural gas requires the prior approval of the Secretariat transportation facilities to be used to expand the natural gas of Energy. Resolution Nº 299/98 of the Secretariat of Energy transportation pipeline network so as to promote domestic industry regulates natural gas exports, setting forth the limitations applicable supply, other than for works that the concessionaires must undertake and the requirements necessary to obtain the prior approval of the themselves under their contracts.

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Resolution Nº 120-E/2017 approved the technical regulation for the Under the Hydrocarbons Act Nº 17,319, since hydrocarbons transportation of liquid hydrocarbons applicable to oil pipelines, activities are considered of national interest, the surface land owners polyducts and facilities subject to a transportation concession under may not oppose the use of their land if it is necessary, but they must Law Nº 17,319, extending it to all oil pipelines that transport crude be compensated by the concessionaires for damages caused to the oil. Along these lines, Resolution Nº 18-E/2017 calls for bids for the properties affected by the activities. The interested parties may acquisition of pipelines for the project “Expansion of the system of either claim determination of the respective damages amount by the transportation and distribution of natural gas”. Under the mentioned appropriate authority, or determine them by mutual agreement. Resolution, the first bidding process includes the construction of the In order to determine the compensation, land owners may resort Regional Centro II pipeline in the province of Santa Fe, the upgrade to the courts and produce evidence of the alleged damage. Since of the coastal and Tandil-Mar del Plata pipelines in the province of it is not always easy to determine or quantify the damages, the

Argentina Buenos Aires, as well as the Cordillerano Patagónico pipeline in Hydrocarbons Act Nº 17,319 provides a second alternative Chubut and Río Negro. mechanism of compensation to the land owner based on the characteristics of the different areas where the activities are carried 6.2 What governmental authorisations (including out. any applicable environmental authorisations) are required to construct and operate oil and natural gas transportation pipelines and associated 6.4 How is access to oil and natural gas transportation infrastructure? pipelines and associated infrastructure organised?

The following authorisations, among others, are required from Pipelines and other hydrocarbon transportation infrastructure are a company intending to construct and operate oil and natural gas governed under the general open-access principles, whereby third transportation pipelines and associated infrastructure, in addition to parties have access to the infrastructure subject to the applicable being awarded the necessary concession by the federal or provincial regulations. Thus, pipelines subject to the Hydrocarbons Act must authority: permit the transportation of hydrocarbons belonging to third parties, provided they have available capacity. (a) Corporate registrations, including that of the legal entity before the applicable General Inspection of Corporations. Carriers are not allowed to give advantages or preferences to any (b) Tax registrations including that before the applicable federal, third party, unless such preferences or advantages are based on provincial and municipal tax authorities. objective criteria accepted by the enforcement authority. (c) Labour and health and safety registrations including those before the applicable federal, provincial and municipal 6.5 To what degree are oil and natural gas transportation labour, social security and health and safety authorities. The pipelines integrated or interconnected, and how is co- government generated new conditions for the applicable operation between different transportation systems collective labour agreements with different unions in order to established and regulated? permit clauses which are more flexible and to achieve higher competitiveness in the activity. Gas transportation systems are governed by the Natural Gas Act Nº (d) Environmental and related registrations and compliance 24,076, the Hydrocarbons Act Nº 17,319, the Hydrocarbons Act Nº monitoring before the applicable federal, provincial and 27,007, and the regulations issued by the Federal Gas Regulatory municipal authorities, including the mandatory environmental Authority and the Secretariat of Energy at the federal level. impact assessments, approvals and renewals. The Federal Gas Regulatory Authority has broad governing Resolution Nº 1460/2006 sets forth the regulatory framework applicable to the pipeline transportation of oil and approved and control powers that include: (a) issuing regulations on gas the Technical Rules for the Transportation of Liquid sales, transportation and distribution activities; (b) preventing Hydrocarbons in Pipelines. monopolistic or discriminatory behaviour; (c) approving the tariff (e) The current government is implementing decisions to reduce frameworks applicable to gas utilities and adjustments thereto; the number and complexity of procedures and approvals. (d) monitoring all matters related to the technical operation of the gas transportation systems; (e) approving transfers of controlling interests in gas transportation and distribution companies; (f) 6.3 In general, how does an entity obtain the necessary approving the construction, expansion or abandonment of major land (or other) rights to construct oil and natural gas facilities; (g) inspection and testing of facilities; and (h) imposing transportation pipelines or associated infrastructure? Do Government authorities have any powers of warnings and fines in accordance with the Natural Gas Act Nº compulsory acquisition to facilitate land access? 24,076, the applicable regulations and the terms of the particular transportation concession. Pipelines that run through two or more provinces are subject to Decisions by the Federal Gas Regulatory Authority under the federal legislation and jurisdiction. Natural Gas Act Nº 24,076 are subject to judicial review. Disputes Pipelines located exclusively in a province are subject to the among regulated entities or between regulated entities and third jurisdiction of such province, although they must comply with all parties arising from the distribution, storage, transportation or applicable federal regulations. marketing of natural gas must be submitted to the Federal Gas Regulatory Authority, whose decision may be appealed by means Pipeline concessionaires have to secure the necessary land to of administrative proceedings before the federal administration and construct and operate their pipelines, which they may do by means thereafter before the applicable federal courts. of acquiring the land or requesting easements to the competent enforcement authority.

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tariffs to all customers, unless due to the location, type of services 6.6 Outline any third-party access regime/rights in or any other reason, the enforcement authority authorises a different respect of oil and natural gas transportation and tariff. associated infrastructure. For example, can the regulator or a new customer wishing to transport The price of the gas is subject to different regulations and agreements oil or natural gas compel or require the operator/ entered into between the federal government and the natural gas owner of an oil or natural gas transportation pipeline producers. or associated infrastructure to grant capacity or The Commission for Planning and Strategic Coordination of the expand its facilities in order to accommodate the new customer? If so, how are the costs (including costs National Hydrocarbons Plan, created by Decree Nº 1277/2012, of interconnection, capacity reservation or facility may establish the criteria applicable to the commercialisation of expansions) allocated? hydrocarbons to ensure reasonable prices, and may set referential sale prices of hydrocarbons and fuels. In practice, rates are strictly Argentina Gas distribution companies must operate in accordance with the regulated by the government in relation to the macroeconomic terms of the concession granted to operate their networks. needs, although the current federal government is implementing the administrative and regulatory improvements necessary to foster new A licence grants the right to distribute natural gas within a specified investments. geographic area. The concession to distribute gas does not include the exclusive right to sell gas within the same area; under certain circumstances, consumers may purchase gas directly from producers 7 Gas Transmission / Distribution or brokers. The Argentine legal system adheres to the open-access principles whereby licence holders must assure to all users open and non- 7.1 Outline broadly the ownership, organisational and discriminatory access to the gas transportation and distribution regulatory framework in relation to the natural gas transmission/distribution network. network operated by them.

Under their licences, the distribution companies must on a regular See above. basis receive, transport and sell gas through their distribution systems, keep all equipment and facilities in good operating condition, establish adequate measurement and control systems, 7.2 What governmental authorisations (including any improve and preserve the ecosystems in which they operate, and applicable environmental authorisations) are required to operate a distribution network? interrupt the service rendered to large users when necessary in order to maintain an adequate level of supply for residential and other commercial users, as directed by the enforcement authority. The A private entity interested in distributing gas must be awarded a licences granted imply the obligation to keep certain infrastructure distribution concession. Concessions are granted for 35 years and investments. may be extended for 10 years. The Natural Gas Act Nº 24,076, and Decree Nº 2255/92 regulate Provincial authorisations are also required to construct, operate and the tariffs that the distribution companies may charge, and mandate maintain gas distribution networks. that the gas price must be based on the cost of the gas purchased at Concessions are subject to early termination in case of breach of the the point of entry into the transportation system, a transportation terms of the concession. charge, and a distribution commensurate with a reasonable return on investments. 7.3 How is access to the natural gas distribution network The Federal Gas Regulatory Authority has to periodically review organised? and adjust the tariffs in accordance with the policies set forth under the Natural Gas Act Nº 24,076 and the licences and with the aim of Gas distribution companies must allow free access to their systems fostering efficiency. to every third party. Third parties enjoy open access to the transport Since taking office, the current federal government began infrastructure under the applicable regulations. dismantling the complex subsidies regime formerly in place and Distributors may not grant any advantage or preference to any third is implementing an adjustment of tariffs, conducting the public party, unless such preferences or advantages are authorised based hearings and other necessary formalities, to foster new investments. on objective criteria as determined by the Federal Gas Regulatory It is not mandatory for the transportation companies to expand their Authority. existing gas transportation pipelines network at the request of a third party. If a transportation company is not willing to expand its 7.4 Can the regulator require a distributor to grant transportation capacity upon the request of the customers, however, capacity or expand its system in order to the federal and local authorities may grant new concessions, so that accommodate new customers? other plays may enter the market and build the necessary pipelines to satisfy the increasing demand. The terms and conditions of a concession may require distributors to undertake the investments and works necessary to expand their 6.7 Are parties free to agree the terms upon which oil systems to accommodate new customers. or natural gas is to be transported or are the terms (including costs/tariffs which may be charged) 7.5 What fees are charged for accessing the distribution regulated? network, and are these fees regulated?

Transportation tariffs are indicated in the terms of the bidding Tariffs for accessing the distribution network are regulated in conditions of each concession. Transporters must charge the same the terms and conditions of the gas distribution concessions.

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Distributors must charge the same tariffs to all customers, unless due to the location, type of services or any other reason, the Federal 9 Liquefied Natural Gas Gas Regulatory Authority authorises a different tariff scheme. The Commission for Planning and Strategic Coordination of the 9.1 Outline broadly the ownership, organisational and National Hydrocarbons Plan, created by Decree Nº 1277/2012, regulatory framework in relation to LNG facilities. may establish the criteria applicable to the commercialisation of hydrocarbons, to ensure reasonable prices, and may set referential Resolution Nº 338/2012 of the Secretariat of Energy approves sale prices of hydrocarbons and fuels. In practice, rates are strictly the Terms for the Liquefied Natural Gas Operation Terminals regulated by the government in relation to the macroeconomic and sets forth the applicable regulations. To enhance the security needs. of the process, the regulations created a Registry of Independent

Argentina Professionals.

7.6 Are there any restrictions or limitations in relation to acquiring an interest in a gas utility, or the transfer 9.2 What governmental authorisations are required to of assets forming part of the distribution network construct and operate LNG facilities? (whether directly or indirectly)? The Secretariat of Energy and may delegate supervision and control Under the Natural Gas Act Nº 24,076, gas transporters and entities activities on the Federal Gas Regulatory Authority. controlling or controlled by gas transporters may not control gas distribution companies. 9.3 Is there any regulation of the price or terms of service Consumers purchasing natural gas directly from producers may not in the LNG sector? control distribution companies that provide gas distribution services in the area where such consumers operate. The Secretary of Energy determines reference prices (below export Likewise, no producer, gas storehouse owner, natural gas distributor, parity prices) with the goal of guaranteeing regular supply in the customer who purchases natural gas directly from producers, any domestic market and may establish price stabilisation mechanisms group thereof or any company affiliated therewith, may hold a in order to avoid price fluctuation in the domestic market. controlling interest in a transportation company. Also, the Secretariat of Energy, together with the Antitrust Gas distribution is considered a public service, and thus distributors Commission, will perform an analysis of the sector, including the may not sell, encumber, lease, sublease or assign the assets necessary behavioural patterns of its agents, for the purpose of fixing limits to render the distribution service, without the prior authorisation of at certain levels at each stage of vertical integration of the industry. the Federal Gas Regulatory Authority.

9.4 Outline any third-party access regime/rights in 8 Natural Gas Trading respect of LNG facilities.

The fall in gas production combined with a strong economic growth 8.1 Outline broadly the ownership, organisational and resulted in massive investments in LNG re-gasification projects. regulatory framework in relation to natural gas With the government unlikely to threaten economic growth by trading. Please include details of current major loosening price controls further, Argentina is expected to keep initiatives or policies of the Government or regulator (if any) relating to natural gas trading. investing in LNG re-gasification capacity.

The legal framework for gas trading is mainly regulated in the 10 Downstream Oil Natural Gas Act Nº 24,076 and the regulations issued pursuant to it. Decree Nº 180/2004 updated the regulation of the Mercado Electrónico del Gas (electronic wholesale market for natural gas or 10.1 Outline broadly the regulatory framework in relation MEG), in which gas traders and gas producers participate, who must to the downstream oil sector. be registered before the Secretariat of Energy. Law N° 13,660, enacted in 1949, and Decree Nº 10,877/60 enacted in 1960, govern the refining, elaboration, transformation and storage 8.2 What range of natural gas commodities can be traded? For example, can only “bundled” products of solid, liquid or gaseous hydrocarbon products. (i.e., the natural gas commodity and the distribution The mentioned activities are also subject to registration requirements thereof) be traded? set forth by the Secretariat of Energy. The Secretariat of Energy is also the enforcement authority of Law N° 13,660 and Decree In 2004, the federal government introduced certain modifications Nº 10,877/60, and as such may approve applications to build new to the gas market regulations applicable to operations different refineries or modify or upgrade existing ones. from a strict bundle structure, and created a fund for investments Any refinery must comply with federal and provincial environmental in transportation and distribution of gas. The regulation also and safety regulations, which includes a previous report about the classified consumers into different categories, depending on their environmental impact on the area in which the refinery or plant gas expenditures. will be built or upgraded, and a certificate on safety report about the project by a safety auditing firm, previously registered under a special registry before the Secretariat of Energy.

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Also under the Secretariat of Energy, Resolution Nº 450/94 provides that any company who applies for refining or commercial activities 11.3 What power or authority does the regulator have to must be registered under the Registry of Oil Companies of the preclude or take action in relation to anti-competitive practices? Secretariat of Energy. More recently, Decree Nº 1277/2012 regulates the so-called The control and investigation of anti-competitive practices are carried Hydrocarbons Sovereignty Act Nº 26,741 and the Federal Plan for out by the Antitrust Commission, which has broad investigative Hydrocarbons Investments. Under Decree Nº 1277/2012, upstream powers, including the right to: (a) request from private parties the and downstream companies must register before the Federal submission of relevant information, documentation, commercial Registry of Hydrocarbons Investments and submit investment books, and any other document or report that may be useful to the programmes on an annual basis. The investment programmes investigation; (b) convene public hearings; and (c) request from are subject to the approval of the Commission for the Strategic Argentina the competent courts the issuance of search warrants to access the Planning and Coordination of the Federal Plan of Hydrocarbons premises of the parties being investigated. The resolutions of the Investments. The Commission is vested with broad regulatory and Antitrust Commission may be appealed before the competent Court enforcement powers including controlling costs and setting prices. of Appeal. The export of crude oil, natural gas and by-products is subject to prior governmental approval. The Natural Gas Act Nº 24,076 also governs transportation, 11.4 Does the regulator (or any other Government authority) have the power to approve/disapprove storage, marketing and distribution of natural gas and considers mergers or other changes in control over businesses transportation and distribution as public services. in the oil and natural gas sector, or proposed acquisitions of development assets, transportation or associated infrastructure or distribution assets? If so, 10.2 Outline broadly the ownership, organisation and what criteria and procedures are applied? How long regulatory framework in relation to oil trading. does it typically take to obtain a decision approving or disapproving the transaction? The terms and conditions applicable to the sale of hydrocarbons by producers to refineries are freely negotiated between the parties. In relation to the natural gas sector, the Antitrust Commission and In any event, local prices are affected by price controls and export the Federal Gas Regulatory Authority have the power to approve or limitations. reject any proposed amalgamation, change of control or merger in The Commission for Planning and Strategic Coordination of the the gas industry. Each of those entities works at different levels, it National Hydrocarbons Plan, created by Decree Nº 1277/2012, has even being possible that a proposed transaction be approved by one broad powers to determine the criteria for the commercialisation of and rejected by the other. hydrocarbons with the aim of ensuring reasonable prices. Under the Antitrust Act Nº 25,156 and as part of the merger control procedure, the Antitrust Commission has to request the opinion of 11 Competition the Federal Gas Regulatory Authority in gas-related transactions. A previous filing before the Antitrust Commission is mandatory for concentration transactions exceeding certain amount thresholds as 11.1 Which governmental authority or authorities are set forth in the Antitrust Act Nº 25,156. responsible for the regulation of competition aspects, or anti-competitive practices, in the oil and natural gas sector? 12 Foreign Investment and International Obligations Competition aspects are generally governed by the Antitrust Act N° 25,156 and the related regulations. Although the Antitrust Act Nº 25,156 calls for the organisation of an independent Antitrust Court, 12.1 Are there any special requirements or limitations on such court has not yet been created, and enforcement is still in the acquisitions of interests in the natural gas sector hands of the Comisión Nacional de Defensa de la Competencia (whether development, transportation or associated infrastructure, distribution or other) by foreign (Antitrust Commission), which is not an independent court but an companies? administrative agency that depends on the Secretariat of Commerce. In relation to the gas market, there is an additional control as the There are no such specific regulations prohibiting foreign investment Federal Gas Regulatory Authority also has powers to approve or in the natural gas sector. reject potential concentrations in the gas market.

12.2 To what extent is regulatory policy in respect of the 11.2 To what criteria does the regulator have regard in oil and natural gas sector influenced or affected determining whether conduct is anti-competitive? by international treaties or other multinational arrangements? The Antitrust Act Nº 25,156 considers as anti-competitive any activity or conduct related to the production and exchange of goods Under Argentine law, international treaties entered into and approved or services that has the purpose or effect of limiting, restricting or as mandated under the Federal Constitution have precedence distorting competition or market access or abuse of a dominant over local laws and regulations. In other words, local laws and position in a market, to the extent of being harmful to general regulations must be consistent with the principles and obligations economic interests. set forth in foreign treaties entered into by Argentina. In the gas industry, for example, Argentina has signed treaties with Bolivia for the importation of natural gas.

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In October 2017, Argentina and Chile entered into the first power swap agreement, allowing both countries to input gas or electricity 13.4 Have there been instances in the oil and natural gas in a geographical point and to obtain supplies in another one over sector when foreign corporations have successfully obtained judgments or awards against Government their long border. authorities or State organs pursuant to litigation before domestic courts? 13 Dispute Resolution The cases CMS and Sempra both involved litigation regarding breaches in the gas industry. CMS was an investor in the gas 13.1 Provide a brief overview of compulsory dispute transmission company Transportadora de Gas del Norte, and Sempra resolution procedures (statutory or otherwise) was an investor in the distribution companies Sodigas Pampeana

Argentina applying to the oil and natural gas sector (if any), and Sodigas Sur. Both the CMS and Sempra awards upheld the including procedures applying in the context of plaintiffs’ complaints that the government had breached the “fair disputes between the applicable Government authority/regulator and: participants in relation to oil and equitable treatment” clauses under the applicable bilateral and natural gas development; transportation pipeline investment treaties. Thus, CMS and Sempra were awarded several and associated infrastructure owners or users in millions in damages. After the award to CMS was released in 2005, relation to the transportation, processing or storage the government filed two motions against the ICSID panel awards, of natural gas; downstream oil infrastructure owners requesting a declaration that the award was null, and a stay against or users; and distribution network owners or users in the execution of the award until the aforesaid nullification motion relation to the distribution/transmission of natural gas. were decided. After hearing the government commitment to comply with the decision, the ICSID panel granted the motion to stay the Any controversy or dispute between producers, transporters, execution of the award. The case ended with a settlement. distributors, consumers or any third interested party (be they The Sempra case also ended when the shareholders sold their individuals or legal entities), arising from any service rendered stake and the buyer entered into a settlement agreement with the under the Natural Gas Act Nº 24,076, must be initially submitted to government. the Federal Gas Regulatory Authority. The resolutions of the Federal Gas Regulatory Authority are subject to appeal before the Federal Administrative Appellate Court. 14 Updates Administrative fines and penalties imposed by the Federal Gas Regulatory Authority may also be appealed before the Federal 14.1 Please provide, in no more than 300 words, a Administrative Appellate Court. summary of any new cases, trends and developments in Oil and Gas Regulation Law in your jurisdiction. 13.2 Is your jurisdiction a signatory to, and has it duly ratified into domestic legislation: the New York The federal government continued implementing a number of Convention on the Recognition and Enforcement of measures hailed by the international markets as the correct moves Foreign Arbitral Awards; and/or the Convention on to attract additional foreign investment in the oil and gas and other the Settlement of Investment Disputes between States sectors, including opening the access to foreign currency, eliminating and Nationals of Other States (“ICSID”)? limitations to inbound and outbound money movements, reaching settlements with foreign bondholders, and dismantling complex Argentina is a signatory party and has duly ratified as domestic formalities and procedures formerly in place. These developments legislation the New York Convention on the Recognition and have been widely supported by the current administration success Enforcement of Foreign Arbitral Awards and the Convention on the in the October mid-term congressional elections all around the Settlement of Investment Disputes between States and Nationals of country. Moreover, the government is poised to successfully Other States (ICSID). approve in Congress, before the congressional calendar, bold labour, tax and social security legislation that will enhance the conditions 13.3 Is there any special difficulty (whether as a matter for investment in many areas, including oil and gas. of law or practice) in litigating, or seeking to enforce judgments or awards, against Government authorities or State organs (including any immunity)? Acknowledgment The authors would like to thank Marcos Herrmann, senior associate Argentina is a party to several international conventions to facilitate at Estudio Randle, for his invaluable assistance in the preparation foreign investors’ ability to enforce awards against the government. of this chapter. In practice, however, there have been cases in which the government has challenged the enforcement of such adverse awards. Moreover, in the renegotiation of some utility agreements such as those of gas distribution companies, the government requested, as a condition of the renegotiation, the waiver by the utility companies to their rights under the bilateral investment treaties and the ICSID. Argentina has entered into different co-operation and commercial agreements in order to intensify investments in different areas, including the ones with Germany, Israel, Italy, Japan and Spain.

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Ignacio J. Randle John P. Cogan, Jr. Estudio Randle Stone Pigman Walther Wittmann PLLC Carlos Pellegrini 1135, 2° piso 1001 McKinney, Suite 1600 Buenos Aires Houston, TX 77002 Argentina USA

Tel: +54 11 5252 0700 Tel: +1 713 651 1881 Fax: +54 11 5252 0706 Email: [email protected] Email: [email protected] URL: www.stonepigman.com URL: www.randlelegal.com

Ignacio J. Randle is a partner at the law firm Estudio Randle in Buenos John P. Cogan, Jr. is a veteran of structuring, negotiating and completing Argentina Aires, Argentina. Mr. Randle received his law degree from the Catholic international business matters, particularly related to energy. Examples University of Argentina in Buenos Aires in 1986 and holds a Master of John’s work are his involvement in: the development of LNG in Laws from the University of Chicago Law School. He practised liquefaction projects in Canada, Colombia, Indonesia, Nigeria, as a foreign attorney with Baker Botts in Houston, Texas, and in Qatar, Trinidad, the United States and Yemen; LNG regasification Washington, D.C., and with McDermott, Will & Emery in Chicago, projects in Canada, Chile, Jamaica, Mexico and the United States; Illinois. upstream production-sharing and other types of oil and gas development contracts in Bolivia, Burma (Myanmar), Colombia, In 1989 he was awarded the Perez Companc Foundation Scholarship Ecuador, Kazakhstan, Saudi Arabia, the United States and Venezuela; for Law and Economics. downstream processing plants in Argentina, Colombia, Mexico and the Mr. Randle’s practice focuses on international business transactions United States; and power projects in Argentina, Brazil, China and the and M&A, with emphasis on natural resources, energy and Dominican Republic. John also serves as an arbitrator and expert infrastructure projects. He represents domestic and foreign companies witness in disputes relating to these types of matters. doing business in Latin America, as well as Argentine companies pursuing business opportunities abroad. Mr. Randle has published in different countries and lectured in the Law School and the School of Economics in Buenos Aires, as well as in other fora in Argentina and abroad. Mr. Randle is currently Council member of the Legal Practice Division and Council member of the Energy, Environment, Natural Resources and Infrastructure Law section of the International Bar Association, Trustee of the Rocky Mountain Mineral Law Foundation, former President of the University of Chicago Alumni Club of Argentina, Chairman of the Environment, Health & Safety Law Committee of the International Bar Association, Chairman of the Mining Law Committee of the International Bar Association, Officer of the Corporate Social Responsibility Committee of the International Bar Association, Chairman of the American Bar Association’s International Environmental Law Committee, Chairman of the American Bar Association’s International Energy and Resources Committee, and Council Member of the International Law & Practice section of the American Bar Association.

Estudio Randle is committed to outstanding, innovative and hands-on legal services. We are dedicated to assist our clients by implementing creative approaches to sophisticated and common issues alike. Our priority is to address our clients’ needs, providing them with pragmatic and timely solutions. In pursuing such, we strongly believe in excellence and team-work, among us and with our clients’ in-house colleagues. Estudio Randle intends to be a step ahead of the needs of the clients. We care to understand our client’s business in order to anticipate any issues before they may become a problem, and to solve those others that have already become one. We therefore provide personalised attention, avoiding over-delegation. We never take a problem for granted and we never give a problem any timing advantage. Estudio Randle blends experienced and highly qualified partners with young lawyers and paralegals. Our lawyers have practised lawinand graduated from universities in the United States and Europe. Some of them have also held responsibility positions in the judiciary, in administrative agencies and in major multinationals’ legal departments. Likewise, other lawyers also serve in high responsibility offices in professional associations around the world, staying updated on the cutting-edge legal issues evolving in the leading international business centres. Estudio Randle provides comprehensives legal advice to domestic and international clients and governments, primarily in business transactions, natural resources, real estate, infrastructure, corporate, litigation and tax matters. * * * Stone Pigman Walther Wittmann PLLC has extensive experience assisting clients in all aspects of energy-related transactions, business formations, project financings, M&A, strategic alliances and the purchase and sale of major energy assets. In addition to developing project structures, we often serve as lead counsel on contracts for joint ventures, joint operations, sales and purchases, processing, services, transportation, development, investment, production sharing, farm-out agreements, drilling, storage, construction, operation and management and technology licensing. We have handled hundreds of domestic and international energy deals that involve the exploration, extraction, processing, transportation and sale of hydrocarbons, renewables and other natural resources. Our clients include small and large entities, major and independent oil companies, drilling companies, oil field service providers, lenders, developers, government agencies and foreign investors.

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Austria Bernd Rajal

Schoenherr Dagmar Hozová

By a formal decision of 20 December 2017, the NRA (E-Control) 1 Overview of Natural Gas Sector approved the long-term Network Development Plan 2017 (NDP 2017). According to the extension of the capacity by remedying 1.1 A brief outline of your jurisdiction’s natural gas capacity deficiency, the NDP 2017 grants the continuation of already sector, including a general description of: natural approved projects and approved projects with modifications. In gas reserves; natural gas production including addition, the NDP 2017 provides a new project “Auersthal” to set the extent to which production is associated or up a new central inflation system according to the DIN and API non-associated natural gas; import and export of standards. This system should guarantee two separately working natural gas, including liquefied natural gas (LNG) systems for GCA and OMV Exploration & Produktion GmbH, who liquefaction and export facilities, and/or receiving and re-gasification facilities (“LNG facilities”); natural gas presently share one system. Two separately working systems lead to pipeline transportation and distribution/transmission a more efficient and secure use of inflation systems. network; natural gas storage; and commodity sales The Austrian gas market is currently not linked to LNG terminals and trading. outside Austria. The import of LNG nevertheless is an option as some Austrian companies, together with JV partners, plan to In 2016, gross inland consumption (production + imports – exports construct new LNG infrastructure in the Adriatic region and to build, + storage variations) of natural gas in Austria amounted to 7.2 Mtoe. or expand, the necessary transport capacity. In 2011, the initiators Only about 1.0 Mtoe thereof was covered by domestic production of of the Gate terminal (an LNG terminal in Rotterdam) signed offtake natural gas (EU Commission, DG Energy, Energy datasheets: EU – 28 contracts with several major European energy suppliers; among countries, August 2018; https://ec.europa.eu/energy/en/data-analysis/ these was the Austrian supply company EconGas. country). Austria, therefore, is dependent on the import of natural gas, By a formal decision of 19 January 2018, the NRA (E-Control) mainly from Russia, Norway and Germany. By a formal decision of approved the Coordinated Network Development Plan 2017 (CNDP 23 September 2016, the NRA (E-Control) approved the Coordinated 2017) for the period 2018–2027. The CNDP 2017 includes, inter Network Development Plan 2016 (CNDP 2016). The CNDP 2016 alia, the project of the cross-border point Murfeld which connects provided 16 new projects. One of the most important projects in the markets of Austria and Slovenia. The physical flow direction Austria is “BACI”: the Austrian and the Czech Transmission System is from Austria to Slovenia. The project would also ensure a Operators, Gas Connect Austria GmbH (GCA) and NET4GAS reverse flow from Slovenia to Austria. The project is currently in (project sponsors) plan to connect their pipeline systems and create the conceptual phase and the current planning is based on market additional transportation possibilities. The length of the planned indications. The most important benefit of the project would be the pipeline is approximately 61 km (49 km on Austrian and 12 km on diversification of supply sources e.g. LNG from the Adriatic area. Czech territory) and is planned to cross the border near the village of Reintal. The current planned completion of the project is scheduled for The Central European Gas Hub (CEGH), a subsidiary of OMV Gas the end of 2020. The BACI Project has the potential to open the Eastern & Power GmbH, is one of the most important natural gas trading Austrian market to Northern European gas importers through the platforms in Central Europe. Russian natural gas is transferred Czech market. Another important infrastructure project is the “Entry from that point via the Austrian pipeline system to Europe. CEGH Mosonmagyaróvár” project: the cross-border point Mosonmagyaróvár provides hub services such as title transfer services, wheeling connects the markets of Austria and Hungary. The physical flow services or gas auctions (e.g. within the context of gas release direction is currently going from Austria to Hungary. The project programmes). would ensure a reverse flow from Hungary to Austria. The project Transit of natural gas is carried out via the TAG (Trans-Austria is currently in the conceptual phase and current planning is based on Gasleitung) and WAG (West-Austria-Gasleitung) pipeline systems market indications. This project would be a potential connection to (the major transmission lines in Austria), the South East Gas other projects for the establishment of a Southern Corridor. The most Pipeline (SOL), the Hungarian-Austrian Gas Pipeline (HAG), the important benefit of the project would be the diversification of routes March-Baumgarten Pipeline (MAB) and the PENTAWest pipeline. and supply sources. To further develop the Southern Corridor GCA The WAG pipeline system consists of a pipeline with a DIN800 together with the Hungarian transmission system operator (TSO) interior diameter which is enhanced by a second DIN1200 parallel FGSZ Zrt. and the Romanian TSO SNTGN Transgaz SA consider to pipeline for approx. 140 km and its auxiliary equipment (metering jointly conduct an open season (OS) procedure for the booking of new and control stations, slide gate valve station, etc.). WAG runs from or incremental cross-border transmission capacity at the Romanian- Baumgarten an der March on the Austrian-Slovak border, through Hungarian border and the Hungarian-Austrian border. Lower Austria and Upper Austria to Oberkappel on the border to

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Germany. WAG is operated by GCA. The TAG pipeline comprises three parallel pipelines and the auxiliary equipment for each, 2 Overview of Oil Sector including compressor stations and exit/entry points. The nominal diameters (DN) of the pipelines are between 900 mm and 1,200 2.1 Please provide a brief outline of your jurisdiction’s oil mm. TAG runs from Baumgarten an der March on the Austrian- sector. Slovak border, through Lower Austria, Burgenland, Styria and to Arnoldstein in Carinthia on the border between Austria and Italy. The two companies engaged in the exploration and production of oil TAG is owned and operated by Trans Austria Gasleitung GmbH, in Austria are OMV and RAG. The only oil refinery in Austria is which is a joint venture of the Italian TSO Snam and GCA. Both located in Schwechat and is operated by OMV. GCA and Trans Austria Gasleitung GmbH have been certified by

Austria is considered a transit country for crude oil. There are two Austria E-Control as TSOs under the ITO model. Distribution lines are main oil pipelines crossing Austrian territory. Via the Trans-Alpine operated by several regional and municipal Distribution System Pipeline (Transalpine Ölleitung – TAL), oil is transported from Operators (DSOs). the Port of Trieste to Austria. Close to the Italian-Austrian border, EconGas is the dominant supplier on the market for delivery of local the Adriatic Sea-Vienna pipeline (Adria-Wien Pipeline – AWP) re-distributors and on the wholesale supply market. Customers branches off and pumps the imported crude oil intended for the of EconGas are industrial customers with an annual natural gas domestic market from Trieste directly to the refinery in Schwechat. consumption exceeding 500,000 m³ and power plants. Markets The TAL throughput in 2016 was 41.4 Mtoe. Of this, 43 per cent for supply of retail customers (customers with an annual natural went to refineries in Ingolstadt, Vohburg, Neustadt and Burghausen, gas consumption of up to 500,000 m³) are divided into several 34 per cent to the refineries in Karlsruhe and 18 per cent via AWP geographical areas, which are deemed identical to the distribution to the Schwechat refinery. 5 per cent was forwarded to Czech grids. refineries via the Central European Pipeline (MERO). In addition to TAL and AWP, there are two more crude oil pipelines. The GSU 1.2 To what extent are your jurisdiction’s energy ships domestically produced oil to the refinery, while via the AWP- requirements met using natural gas (including LNG)? Lannach pipeline, oil is shipped to the strategic depot in Lannach. The TAL is currently owned by a consortium of eight oil companies. The Austrian energy supply is based on a balanced mix of energy The shareholders of the TAL Group include some of the major sources. In the long run, the importance of fossil energy sources names in the global oil sector: OMV; Shell; Rosneft; ENI; C-Blue has been declining in favour of renewable energy sources. This Limited (Gunvor); BP; Exxon Mobil; Mero; Phillips 66/Jet; Total; trend is also true for gas consumption; however, it is slightly less and MERO ČR. In Austria, the operator of the pipeline is the distinct. While the share of gas (mixed gas and natural gas) in Transalpine Ölleitung in Österreich GmbH. 2016 was 20.9 per cent of the gross inland energy consumption, The AWP is operated by the Adria-Wien Pipeline GmbH which is it slightly increased to 22.4 per cent in 2017 (Federal Ministry of a 100 per cent subsidiary of OMV Refining & Marketing GmbH Sustainability and Tourism, energy in Austria – Data, facts and and Austria’s largest oil stockholding company ELG (Erdöl- numbers 2018). Nevertheless, the share of fossil energy sources Lagergesellschaft GmbH), whose shareholders are OMV (55.6 in Austria’s energy portfolio (imports, domestic production and per cent), BP Europa SE (23.1 per cent), Shell Austria (16.7 per storage) is still very high. cent) and Eni Austria (4.6 per cent). ELG operates about 40 depots throughout the country. 1.3 To what extent are your jurisdiction’s natural gas OMV’s refinery in Schwechat is Austria’s sole refinery, which requirements met through domestic natural gas supplies about 60 per cent of the domestic oil consumption. The production? construction of a pipeline linking MOL’s refinery in Bratislava (Slovakia) with the OMV refinery in Schwechat has been planned Domestic natural gas production is performed by OMV and RAG. for a long time already; however, due to heated debates on the Only about 1 Mtoe of gross domestic consumption may be covered Slovakian track it has been postponed several times. In December by domestic production of natural gas (see question 1.1 above). 2017, the Slovak Ministry of Economy presented a statement about Austrian re-distributors import gas from Russia (ca. 82.2 per cent), the status of the working activities and the further procedure to the and other countries like Germany and Norway (17.8 per cent; Slovakian Government. The main issue of the debate between the Federal Ministry of Economy, Family and Youth, Energy Strategy Slovak Ministry of Economy (in cooperation with BSP Bratislava 2015). In 2016, net imports amounted to 6.2 Mtoe of natural gas. – Schwechat Pipeline GmbH) and the capital city of Bratislava is In 2016, more than 80 per cent of all physical gas imports were re- still the decision about the so-called city corridor going through exported (www.e-control.at, Market Report 2017). Bratislava as the best route. The capital city of Bratislava, as well as the whole Bratislava region and interested civil organisations are 1.4 To what extent is your jurisdiction’s natural gas against the route going underneath the Petrzalka part of the city. In production exported (pipeline or LNG)? addition, a project to link the Druzhba crude pipeline system via Bratislava to Vienna is planned, but is also heavily debated. In 2014, the production output amounted to 1.0 Mtoe, of which the The main distribution terminal is located in the OMV storage facility OMV share of the volume was about 80 per cent, and RAG’s share at Lobau. The oil products are delivered from Lobau by rail, by ship 20 per cent. LNG is not exported from Austria. There is no publicly along the Danube or on the road. available data on the share of gas which is exported from Austria to other countries. 2.2 To what extent are your jurisdiction’s energy requirements met using oil?

Oil and oil products still account for almost 40 per cent of the energy requirements of Austria. Total domestic oil consumption in 2016

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amounted to 12.2 Mtoe. This figure includes the consumption of petroleum products ranging from liquid gas to petrol, kerosene, gas 3.2 How are the State’s mineral rights to develop oil oils, fuel oils, lubricants. Crude oil imports in 2013 amounted to and natural gas reserves transferred to investors or companies (“participants”) (e.g. licence, concession, 7.83 Mtoe and the main suppliers were Kazakhstan and Nigeria. service contract, contractual rights under Production Libya was still the second-biggest importer of crude oil in 2010; Sharing Agreement?) and what is the legal status of however, due to the “Arab Spring”, the imports declined to about those rights or interests under domestic law? one-third of their original volume. Libyan production resumed at the end of 2011 and increased steadily in 2012. Oil and natural gas are considered federal State-owned mineral resources which are in the possession of the Austrian Federal State

Austria 2.3 To what extent are your jurisdiction’s oil requirements (sec. 1 No. 10 MinroG). Therefore, the Austrian Federal State has the met through domestic oil production? right to search, explore and produce oil and natural gas (sec. 68 para. 1 MinroG). The same applies to the search of hydrocarbon-bearing In 2016, the total domestic oil production (including LNG) amounted geological structures which shall be used as storage for oil or natural to 0.8 Mtoe. In total, approximately 9 per cent of the Austrian oil gas. The Federal State is authorised to transfer the exercise of these demand was covered by domestic crude oil production in 2016. rights to individuals or legal entities and also groups of persons based on commercial law, which dispose of necessary technical and financial means for the establishment and operation of such mining 2.4 To what extent is your jurisdiction’s oil production activities (sec. 69 para. 1 MinroG). The transfer of these rights is exported? stipulated by contract governed by civil law. Therein general rights and obligations and also the consideration for the transfer of such Crude oil produced in Austria is directly transported to OMV’s oil rights, e.g. appropriate remuneration or interest payments for the refinery in Schwechat. Therefore, crude oil is not exported directly. used area, are determined. Such contracts will be concluded by However, petroleum products made of refined oil amounting to the Federal Ministry of Sustainability and Tourism in consultation 2.5 Mtoe are exported from Austria. Exact figures on which exact with the Federal Minister of Finance. Civil courts are competent to products are exported to which country are not available. adjust legal differences. The search, exploration of, and storage in non-hydrocarbon-bearing geological structures, which shall be used 3 Development of Oil and Natural Gas as storage for oil or natural gas, is subject to an approval of the competent authority. Such approval has to be granted to individuals, but also to legal persons and groups of persons based on commercial 3.1 Outline broadly the legal/statutory and organisational law. In contrast to the above, the transfer of the exercise of rights is framework for the exploration and production not possible in order to prevent malpractice; however, the transfer (“development”) of oil and natural gas reserves of the approval is possible, but has to be notified to the authority. including: principal legislation; in whom the State’s mineral rights to oil and natural gas are vested; Government authority or authorities responsible for 3.3 If different authorisations are issued in respect of the regulation of oil and natural gas development; and different stages of development (e.g., exploration current major initiatives or policies of the Government appraisal or production arrangements), please specify (if any) in relation to oil and natural gas development. those authorisations and briefly summarise the most important (standard) terms (such as term/duration, According to the Austrian federal system, the exploration and scope of rights, expenditure obligations). production of oil and natural gas is regulated by the federal legislator in the Mineral Resource Act (“Mineralrohstoffgesetz The search, exploration and production of oil and natural gas and – MinroG”, Federal Law Gazette I 1999/184, as amended). This the search for geological structures to be used as storage depend on act is valid for the whole of Austria and does not only regulate work plans. Work plans shall provide, e.g. information concerning the exploration and production of oil and natural gas, but also the purpose, scope, mode and time of work and also safety measures the search and exploration of geological structures which can be and the names of the responsible persons. used as storage facilities. Additionally, the act contains provisions See question 3.2 with regard to the search, exploration of and concerning the underground storage of natural gas without tanks storage in non-hydrocarbon-bearing geological structures to be and the purification of stored natural gas. An Environmental Impact used as storage for oil or natural gas. The mining beneficiary has Assessment (EIA) has to be conducted when the exploration of oil to notify the set-up of a mining establishment or an independent or natural gas exceeds 500,000 m³/d (reduced thresholds of 250,000 section of a mining establishment to the authority. According to m³/d apply to exploration fields located in a special protected area). sec. 119 para. 1 MinroG, an authorisation is required for the setting The EIA approval, issued under the EIA Act, replaces the approval up or construction of mining facilities on the surface, in tunnels, under the MinroG. mine shafts and the drilling of a drill hole and probes of more than On an administrative level, the competent authorities are the 300 m in depth, for the purpose of mining activities which start on Federal Ministry of Sustainability and Tourism and, in case the surface. A mining facility is defined as an artificial independent an EIA is required, the Government of the State concerned local object which is used for the search, production, purification (“Landesregierung”). Applicants can appeal against decisions in operational connection with the search and production of natural of the Federal Ministry of Sustainability and Tourism with the gas, and also the search and exploration of geological structures Constitutional and also the Administrative Court. The EIA decision, used for the underground storage of natural gas without tanks issued by the State Government, can be repealed with the Federal and the operational purification in connection with storage. An Administrative Court (“Bundesverwaltungsgericht”) and thereafter authorisation for a mining facility can only be granted, if: (i) it with the Constitutional and Administrative Court. is constructed (set up) on the property of the applicant, or on the property of another person with the owner’s consent, or on the basis of a legally-binding decision of the authority (sec. 148 et seq.

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MinroG); (ii) according to the best available technology, avoidable transfer of funds derived from production out of the jurisdiction are emissions do not exist; (iii) on the basis of medical or other sciences stipulated by Austrian law. which come into consideration, life or the health of persons is not endangered and no unreasonable disturbance of persons exists; (iv) 3.8 What restrictions (if any) apply to the transfer or it is not expected that the property of the applicant which is not disposal of oil and natural gas development rights or committed to use will be endangered and that there will not be any interests? damage to the environment and water; and (v) the operation of the mining facility does not produce any waste which can be avoided The transfer or disposal of specific oil or natural gas development or is not justifiable according to the best available technology. rights (search, exploration and production of oil and natural gas Produced waste must be disposed of in proper form if it cannot be

and the search for hydrocarbon-bearing geological structures and Austria avoided or recycled economically. Additionally, public interests storage therein) requires the consent of the competent Federal have to be taken into consideration. The authority has the power Minister (see question 3.2). The authorisation to search and explore to impose obligations, terms and conditions and limitations in order non-hydrocarbon-bearing geological structures, which shall be to grant an authorisation. Generally, an operating approval is not used as storage, as well as the storage therein, can be transferred required (sec. 119 para. 8 MinroG). by contract; it has to be notified and verified to the authority. The authority has to authorise the transfer of the storage right if the 3.4 To what extent, if any, does the State have an acquirer disposes of necessary technical and financial means for the ownership interest, or seek to participate, in the storage in such structures. development of oil and natural gas reserves (whether as a matter of law or policy)? 3.9 Are participants obliged to provide any security or guarantees in relation to oil and natural gas Generally, OMV and RAG carry out oil and natural gas development development? activities in Austria. Currently, the Austrian Federal State, namely the Austrian Industry Holding AG (Osterreichische Industrie According to sec. 69 para. 1 MinroG, participants are obliged to dispose Holding AG – OIAG) has a stake of 31.5 per cent in OMV. Different of necessary technical and financial means for the establishment and Austrian states have an indirect holding in the RAG. The states’ operation of mining activities. Therefore, securities or guarantees interests have been reduced in recent years. in relation to oil and natural gas development are stipulated in civil contracts with the applicants. Existing contracts are not disclosed 3.5 How does the State derive value from oil and natural to the public. In case the development activities are linked to the gas development (e.g. royalty, share of production, operation of landfills, securities or guarantees for potential restoration taxes)? of the landfill have to be provided to the competent authority.

As stated above (see question 3.2), the exercise of specific rights 3.10 Can rights to develop oil and natural gas reserves in connection with oil and natural gas development (production) is granted to a participant be pledged for security, or transferred by contract (sec. 69 para. 1 MinroG); this is done against booked for accounting purposes under domestic law? payment of an appropriate consideration. Therefore, the contracting party has to pay: There are no special regulations in connection with the pledge for (i) an area interest for the search for oil or natural gas and the security or the booking for accounting purposes of rights to develop search and exploration of hydrocarbon-bearing geological oil or natural gas under the Austrian law; such regulations may be structures to be used as storage; stipulated in the civil contract with the competent Federal Minister. (ii) a field interest and production interest for the production including the right to acquire oil or natural gas; and (iii) a storage interest for the storage of oil or natural gas in 3.11 In addition to those rights/authorisations required hydrocarbon-bearing geological structures. to explore for and produce oil and natural gas, what other principal Government authorisations are Sec. 69 MinroG regulates the calculation of the production interest. required to develop oil and natural gas reserves (e.g. Under certain conditions (economic reasons), an exemption from environmental, occupational health and safety) and the area, field, production and storage interest is possible andis from whom are these authorisations to be obtained? regulated in a special ordinance based on sec. 69 para. 1 MinroG. Apart from authorisations based on the Austrian Mineral Resource Act (see question 3.3), several other authorisations (of different 3.6 Are there any restrictions on the export of production? authorities) may be required, depending on the specific project. Therefore, authorisations, e.g. according to the Nature Conservation Act or Water Rights Act, may be required. If a specific project Austrian law does not provide special restrictions on the export is subject to an Environmental Impact Assessment (EIA), the of oil or natural gas production. In the event of a crisis, certain competent authority issues a single decision under the EIA Act, measures (including export restrictions) can be taken on the basis covering all necessary licences (“one-stop shop”); see question 3.1. of the Energy Steering Act 2012 (“Energielenkungsgesetz”, Federal Law Gazette 2013/41). 3.12 Is there any legislation or framework relating to the abandonment or decommissioning of physical 3.7 Are there any currency exchange restrictions, or structures used in oil and natural gas development? If restrictions on the transfer of funds derived from so, what are the principal features/requirements of the production out of the jurisdiction? legislation?

No specific currency exchange restrictions or restrictions on the According to sec. 119 para. 14 MinroG, the abandonment of a

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mining facility has to be notified to the authority. This is not virtual trading point as designated by the market area manager has required if the abandonment of a mining facility has been indicated to be independent, especially from the vertically integrated natural to the authority in connection with a closure plan. Such closure plan gas undertaking, in terms of its legal form, organisation and its has to be authorised by the authority. The authority is empowered to decision-making power. prescribe safety measures. 5 Import / Export of Oil 3.13 Is there any legislation or framework relating to gas storage? If so, what are the principal features/ requirements of the legislation? 5.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect Austria The storage of natural gas is carried out by the Crude Oil Search of cross-border sales or deliveries of oil and oil Corporation (“Rohoel Aufsuchungs AG – RAG”) and OMV Gas products. Storage GmbH. Natural gas is stored in hydrocarbon-bearing geological structures; the storage of natural gas in non-hydrocarbon- According to the Oil Stockholding Act (“Erdölbevorratungsgesetz bearing geological structures is possible. According to sec. 97 of the – EBG”), oil importers have to report their import activities to the Austrian Gas Law 2011 (“Gaswirtschaftsgesetz – GWG”), storage Federal Ministry of Sustainability and Tourism. If petroleum from undertakings have to grant access to storage facilities to producers, other EU Member States is brought into the geographical area of natural gas traders and suppliers domiciled in the EU (parties application for commercial purposes or by mail order, a declaration entitled to storage access) under non-discriminatory and transparent as specified in the EBG shall be lodged with the competent customs conditions. The storage undertaking has to stipulate storage office (together with accompanying documents required by the utilisation charges on a non-discriminatory basis. The principles Petroleum Excise Act (“Mineralölsteuergesetz”)). The Ministry is on which the storage charge is calculated have to be published competent to verify the completeness and accuracy of the imported once a year and after every change thereof (sec. 99 para. 1 GWG). quantities of oil and oil products as registered by the importer. As The access to storage can be refused under certain conditions, of 1 April of each year until 31 March of the following year, oil e.g. if access is economically unreasonable, in the event of failure importers have to keep an emergency reserve of 25 per cent of their conditions or a lack of storage capacities. The party seeking access net imports of the previous year in domestic stock. to storage can file an application with the regulatory authority The transport of fuel oils in main or reserve tanks of vehicles is not (E-Control) if access to storage is refused. E-Control has to find considered import or export in accordance with the EBG. whether the prerequisites for refusal of access apply (within one month). If the authority finds out that the right to storage access has been violated, access has to be granted immediately upon service of 6 Transportation the decision. 6.1 Outline broadly the ownership, organisational and 3.14 Are there any laws or regulations that deal specifically regulatory framework in relation to transportation with the exploration and production of unconventional pipelines and associated infrastructure (such as oil and gas resources? If so, what are their key natural gas processing and storage facilities). features? As regards ownership of transportation pipelines and storage In Austria there are no specific regulations regarding the exploration facilities, see questions 1.1 and 3.2. Regulations on the operation of and production of unconventional oil and gas resources. Pursuant transportation pipelines and storage facilities for natural gas can be to Annex 1 No. 28 Environment Impact Act, a full environmental found in the GWG. The transmission and distribution grid is divided impact permission applies for hydraulic fracturing of rock into three market areas (East, Tyrol and Vorarlberg), within which formations at unconventional reservoirs of mineral oil and natural a market area manager, a distribution area manager and a clearing gas (e.g. tight gas, shale gas, etc.). and settlement agent are entrusted with providing system services. The market area manager shall be designated by the transmission network operators. The market area manager shall have, inter 4 Import / Export of Natural Gas (including alia, the following responsibilities: (i) to ensure the establishment LNG) of non-discriminatory access to the virtual trading point; (ii) to manage the balance groups which are active in the market area; (iii) to coordinate system operations and the use of linepack, as well 4.1 Outline any regulatory requirements, or specific as the use of physical balancing energy together with the market terms, limitations or rules applying in respect of cross-border sales or deliveries of natural gas area’s distribution area manager, mainly via the virtual trading (including LNG). point; (iv) to establish a uniform methodology for the calculation and announcement of capacity at the entry/exit points of the market The GWG provides for the setting up of a virtual trading point area’s transmission network; (v) to organise the establishment that can be used, inter alia, for cross-border trading. The virtual and operation of the online platform for offering capacity; (vi) on trading point is a notional point in a market area at which market the basis of a variety of load-flow scenarios and together with the participants can trade natural gas even without having the right to transmission system operators and the distribution area manager, system access for the market area. Access to the virtual trading to draw up a common forecast of the capacity need and utilisation point shall be subject to the operational rules of the market area in the market area’s transmission network over the next 10 years; manager and the transmission system operators, in line with the (vii) to draw up a coordinated network development plan; (viii) to market rules. The virtual trading point is not a physical entry or exit coordinate measures to overcome physical congestions with the point but enables natural gas buyers and sellers to purchase and sell distribution area manager, the system operators and storage system natural gas without the need to book capacity. The operator of the operators in the market area; and (ix) to coordinate the nomination

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procedure for the transmission system, including the exchange of upon application, the temporary utilisation of properties belonging nominations with the operator of the virtual trading point. to third parties, with a view to undertaking preliminary works in Transit of natural gas is no longer outside the market area (control connection with the construction, extension or alteration of a natural area), i.e. the pipe-in-pipe system has been abolished. In line with gas pipeline system. The application shall state the nature and this, transit of natural gas is subject to the same regulations as duration of the intended preliminary work with a work plan attached. transport for domestic supply. Network users have to be a member The applicant is only legally entitled to obtain such a decision if the of a balance group or have to establish their own balance group. A preliminary work begins within one year of the application being balance group representative bears the responsibility for the balance filed. The party authorised to carry out preliminary work has to duly group. He has the obligation to develop schedules and transfer compensate the owners of the properties concerned, any parties who have a right in rem in these properties (except mortgage creditors)

them to the clearing and settlement agent and control area manager. Austria Natural gas storage facilities are operated by RAG and OMV. Natural and any parties who hold mining licences for any restrictions they had gas is stored in hydrocarbon-bearing geological structures. Storage at the time when the permit was granted (see further sec. 144 para. 9 undertakings are obliged to grant access to their storage facilities to GWG). Property owners and any other parties who have a right in parties entitled to storage access (producers, natural gas traders and rem in a property may be deprived of, or restricted in, these property suppliers domiciled in the European Union) at non-discriminatory rights, provided that this is required with a view to construct a and transparent conditions. Storage utilisation charges have to be pipeline (transmission or distribution line) and that it is in the public stipulated on a non-discriminatory and cost-oriented basis. Access interest to do so. A public interest shall be deemed to exist if an can be denied under certain conditions (sec. 97 para. 2 GWG). according provision for such natural gas pipeline facility has been laid down in the long-term plan or the network development plan. In such a case, the regulatory authority (E-Control) shall confirm the 6.2 What governmental authorisations (including existence of a public interest by official decision. Where a natural any applicable environmental authorisations) are gas pipeline facility is not included in the long-term plan or network required to construct and operate oil and natural gas transportation pipelines and associated development plan, a public interest shall be deemed to exist if the infrastructure? construction of such facility is necessary to achieve the objectives of the GWG. For natural gas line facilities with a pressure range up to, In general, the construction, expansion, fundamental changes and and including, 0.6 MPa, private property may only be expropriated the operation of natural gas pipelines are subject to an authorisation if no public land is available in the area concerned or if the natural of the authority (see sec. 148 GWG). The authority examines the gas undertaking cannot, for economic reasons, be reasonably potential impacts on life, health, real rights, technical (safety) and expected to use public land. considers environmental aspects (sec. 135 GWG). The competent For the construction of oil pipelines, the Pipeline Act provides for authority must be notified of any completion or permanent shutdown. the right of the project developer to access foreign land in order Generally, natural gas pipelines can be operated after this notification. to conduct preliminary studies for the preparation of the project Depending on the specific project, several other authorisations (sec. 7 para. 1 Pipeline Act). Furthermore, the authority shall, upon and approvals may be required (e.g. Nature Conservation Act). application by the project developer, pronounce the expropriation of If a specific project is subject to an EIA, the competent authority a property, if the permanent positioning of the pipeline at a certain issues a single decision under the EIA Act, covering all necessary location is required either for technical reasons or for reasons of authorisations (“one-stop-shop”). The operation of a transport disproportional costs for an alternative routing of the pipeline. pipeline is subject to a licence (sec. 119 GWG). In general, the TSO Expropriation may include easement rights or the transfer of the has to comply with one of the unbundling models set out in the Gas property to the project developer. However, the transfer of the Directive (OU, ISO, ITO or ITO+). Gas storage pipes and spherical property shall be a measure of last resort (sec. 27 Pipeline Act). gas storage tanks also require a licence under the GWG; gas storage facilities are subject to the approval requirements of the MinroG. 6.4 How is access to oil and natural gas transportation As regards the construction and operation of oil pipelines and pipelines and associated infrastructure organised? associated infrastructure, the Pipeline Act (“Rohrleitungsgesetz”) applies. According to sec. 3 of the Pipeline Act, as a general rule, The system operator operating the system to which the customer the transportation of goods via a pipeline, as well as the construction wishes to be connected is obliged to grant non-discriminatory access and operation of a pipeline, is subject to a concession issued by the under approved GTC, as well as regulated tariffs (see in detail sec. governor. In case the pipeline crosses more than one State or the 27 et seq. and sec. 58 et seq. GWG). In the event that the application national border, the Federal Minister is the competent authority. for access also concerns a natural gas line upstream of the relevant Furthermore, a permit for the construction and operation of the distribution system, the system operator is obliged to promptly pass pipeline has to be obtained (sec. 17 Pipeline Act). Such permit is on the application to the distribution area manager for further action. granted on the basis of a technical construction plan submitted by For this purpose, the natural gas undertakings concerned shall enter the project developer. In addition to the permit under the Pipeline into contracts under civil law for the benefit of the party entitled to Act, further regulatory permits (e.g. in accordance with the Water system access. The line capacity currently used for the customer Act or Waste Management Act, etc.) may have to be obtained from in the network up to the virtual trading point shall continue to the respective competent authorities. be available to the customer in the event of a supplier switch or supply by several suppliers. In the latter case, the current supplier 6.3 In general, how does an entity obtain the necessary shall make available that part of the capacity currently used for the land (or other) rights to construct oil and natural gas customer that is needed by the second supplier for the partial supply transportation pipelines or associated infrastructure? of the customer. Imbalance charges relating to customers with Do Government authorities have any powers of several suppliers shall be settled in the balance group to which the compulsory acquisition to facilitate land access? customer’s metering point is assigned.

According to sec. 144 para. 1 GWG, the authority shall authorise,

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Unlike in the gas sector, access to oil pipelines is not regulated. such application when drawing up the long-term plan. Capacity Access to the central stockholding entity Erdöllager-Gesellschaft expansion applications shall be approved if certain conditions are met. GmbH (CSE) is regulated under the Oil Stockholding Act. In Costs deriving from capacity expansion are allocated to the users of the accordance with sec. 8 para. 5 of the Oil Stockholding Act, the grids via the regulated transportation tariffs. The regulated tariffs are Federal Minister shall, by order, establish a tariff of maximum based on the allowed costs of the system operators (to be calculated in charges per 1,000 crude oil units for the assumption of stockholding accordance with chapter 5 of the GWG). obligations (currently the tariff amounts to EUR 50.20 excl. value- Unlike in the gas sector, access to oil pipelines is not regulated. added tax). The CSE shall conclude stockholding contracts, in accordance with these charges and general terms and conditions, with any compulsory stockholder offering to assume stockholding 6.7 Are parties free to agree the terms upon which oil Austria or natural gas is to be transported or are the terms obligations as required by the Oil Stockholding Act. (including costs/tariffs which may be charged) regulated? 6.5 To what degree are oil and natural gas transportation pipelines integrated or interconnected, and how is co- GTC for access to the grid have to be approved ex ante by the operation between different transportation systems regulatory authority, which also sets the tariffs for access to the established and regulated? domestic transport system. Tariffs are paid by the end-consumers (“postage stamp tariff ”). The tariffs for transmission system The Austrian natural gas transportation network is disconnected operators shall be calculated by applying a methodology which and consists of three market areas. Transportation of natural is subject to approval by the regulatory authority (E-Control) by gas between different control areas, e.g. from the Eastern part of official decision, and must comply with the requisites of Article Austria to Tyrol, is only possible by using foreign networks (e.g. 13 Regulation (EC) No. 715/2009. Upon request of E-Control, the via Germany). A market area manager is established for each of the methodology shall be adjusted or redesigned. The tariffs resulting market areas. For responsibilities of the market area manager, see from the application of the approved methodology are enacted by question 6.1. The TSOs are obliged to cooperate with other system means of an ordinance of the regulatory authority and are published operators. For instance, they have to exchange information and data on the internet. in order to set up a long-term network development plan. Moreover, Unlike in the gas sector, the terms for the transportation of oil are not system operators are obliged to conclude uniform interconnection regulated. The parties are free to agree on such terms in contractual point agreements with each other for all interconnection points agreements. between their systems. Such interconnection point agreements at interconnection points shall be concluded in consultation with, and following, the specifications of the market area manager and 7 Gas Transmission / Distribution the distribution area manager, as applicable. The same shall apply for interconnection point agreements with system operators in other countries and the operators of storage or production facilities. 7.1 Outline broadly the ownership, organisational and regulatory framework in relation to the natural gas As stated in question 2.1, there are two main pipelines crossing the transmission/distribution network. Austrian territory: the TAL, via which oil is transported from Italy through Austria to Germany and the Czech Republic; as well as The existing Austrian transit pipelines are (at least partly) owned the AWP which branches off the TAL and transports oil from the and operated by GCA, a subsidiary of OMV (51 per cent) and the Austrian-Italian border to the refinery in Schwechat. consortium consisting of Allianz and Snam S.p.A. (49 per cent). The domestic transmission and distribution networks are owned 6.6 Outline any third-party access regime/rights in and operated by GCA and Trans Austria Gasleitung GmbH as TSOs respect of oil and natural gas transportation and and various DSOs (see question 1.1). Domestic transmission and associated infrastructure. For example, can the distribution networks are subject to regulated third-party access (TPA), regulator or a new customer wishing to transport which means that GTC are approved ex ante and tariffs are regulated. oil or natural gas compel or require the operator/ owner of an oil or natural gas transportation pipeline or associated infrastructure to grant capacity or 7.2 What governmental authorisations (including any expand its facilities in order to accommodate the new applicable environmental authorisations) are required customer? If so, how are the costs (including costs to operate a distribution network? of interconnection, capacity reservation or facility expansions) allocated? A licence from the regulatory authority (E-Control) is required to operate a distribution network and has to be granted if certain As stated above, the system operator operating the system to which licence conditions are fulfilled (e.g. third-party liability insurance). the customer wishes to be connected is obliged to grant non- The authority may impose obligations and terms or grant the discriminatory access under approved general terms and conditions authorisation temporarily (sec. 43 GWG). DSOs are required to (GTC) and regulated tariffs. The regulatory authority (E-Control) appoint an individual as technical director in charge of managing and decides upon appeals regarding the denial of access. Access may supervising the operation of the system before the initial operation. be denied by the system operator under certain conditions, e.g. Additionally, the operator may appoint a managing director to carry extraordinary system conditions, insufficient system capacity or out its function (compare sec. 46 GWG). The managing director insufficient interconnection of systems. The refusal has to be notified is accountable to the authority with regard to compliance with the in writing (sec. 33 GWG). Where system access for transports provisions of the GWG. The DSO has to notify the appointment of in the distribution system is refused due to lacking capacities, these two persons to the authority. the party entitled to system access shall have the possibility to file an application for capacity expansion. The distribution area manager shall take due account of the capacity need indicated in

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7.3 How is access to the natural gas distribution network 8 Natural Gas Trading organised?

8.1 Outline broadly the ownership, organisational and The DSO operating the system to which the customer wishes to regulatory framework in relation to natural gas be connected is obliged to grant non-discriminatory access under trading. Please include details of current major the approved GTC and regulated tariffs. DSOs are obliged to initiatives or policies of the Government or regulator enter into private-law contracts with consumers on the connection (if any) relating to natural gas trading. to the natural gas distribution system and system utilisation under approved GTC within their distribution area (compare sec. 27 and According to the GWG, natural gas traders are natural or legal 58 GWG). persons buying or selling natural gas without carrying out the Austria function of transmission or distribution within or outside the system in which such a natural gas trader is established. Natural gas traders 7.4 Can the regulator require a distributor to grant capacity or expand its system in order to buying or selling natural gas for customers in the federal territory accommodate new customers? of Austria have to notify their activities to the regulatory authority (E-Control). The conclusion of natural gas supply contracts with a Access to the distribution system may be denied by the DSO under term of more than one year and involving the purchase of a quantity certain conditions, as provided by law. The regulatory authority of natural gas of more than 250 million normal m³ per year from (E-Control) decides upon appeals regarding the denial of access. the territory of the European Union or from third countries, as well DSOs are obliged to enter into private law contracts with consumers as their duration and the quantity of natural gas they relate to, shall on the connection to the natural gas distribution system and utilisation be notified to the regulatory authority (E-Control). Additionally, under the GTC within their distribution area (general obligation to independent natural gas traders (applicants) have to register as connect). The system user’s facility primarily has to be connected balance group representatives who are to be responsible for and to the system at a technically suitable point, with due regard to the establish a balance group in at least one of the three Austrian economic interests of the system user. The general obligation to control areas (or may join an existing balance group). Therefore, connect shall not apply if the operator of the distribution system contracts with the clearing and settlement centre and the control area cannot with any economic reasonability be expected to make an manager have to be concluded. individual connection, considering the interests of all its customers. An amendment to the GWG in 2013 introduced administrative and Compare also question 6.6 with regard to insufficient system criminal penalties for breaches of EU Regulation No. 1227/2011 capacity or insufficient interconnection. (REMIT), which came into force on 28 December 2011 in Austria. REMIT prohibits insider trading and attempted or actual market manipulation in the wholesale energy markets. According to 7.5 What fees are charged for accessing the distribution sec. 10a GWG, market participants that are obliged to publish network, and are these fees regulated? inside information in accordance with Article 4 of EU Regulation No. 1227/2011 are additionally obliged to inform E-Control According to sec. 72 GWG, the following tariffs for the usage of the simultaneously. The European Market Infrastructure Regulation distribution networks are charged: (EU Regulation No. 648/2012 of the European Parliament and of (i) a system utilisation charge; the Council of 4 July 2012 on OTC derivatives, central counter- (ii) a system admission charge; parties (CCPs) and trade repositories (TRs) – EMIR) entered (iii) a system provision charge; into force on 16 August 2012. If the energy trader exceeds the clearing threshold hereunder, the clearing obligation, the risk (iv) a metering charge; and mitigation techniques and the reporting obligations must be (v) supplementary service charges. fulfilled. Below the clearing threshold only the reporting obligation The regulatory authority (E-Control) shall set the distribution system and certain risk mitigation techniques are applicable. According charges listed above under (i), (iii), (iv) and (v), with the charges to an ordinance on wholesale energy transaction data storage under (i), (iii) and (v) being fixed rates, by ordinance. For the charge (Data Storage Ordinance “Energiegroßhandels-Transaktionsdaten- under (iv), a cap shall be set. The tariffs for the transmission system Aufbewahrungsverordnung”, Federal Law Gazette II 2012/337), charges listed under (i) to (iii) at the entry and exit points concerned energy traders are obliged to keep data of their transactions for shall be determined by applying a methodology to be approved by five years. These data include the identity of the buyer/seller, the E-Control upon a proposal by the transmission system operators, marketplace where the transaction was concluded, trading day and and shall be enacted by ordinance. time of transaction, contract specifications, etc. This obligation applies for over-the-counter trading as well as for exchange trading. 7.6 Are there any restrictions or limitations in relation to The data must, on demand, be provided to E-Control, to the Austrian acquiring an interest in a gas utility, or the transfer Federal Competition Authority, and to the European Commission. of assets forming part of the distribution network (whether directly or indirectly)? 8.2 What range of natural gas commodities can be traded? For example, can only “bundled” products There are no restrictions or limitations in relation to acquiring an (i.e., the natural gas commodity and the distribution interest in a natural gas utility, or the transfer of assets forming part thereof) be traded? of the distribution network. The GWG provides for the establishment of a virtual trading point system. The virtual trading point is a notional point in a market area at which market participants can trade natural gas even without having the right to system access for the market area. The virtual

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trading point is not a physical entry or exit point, but enables natural are no licence or concession requirements for oil trading activities gas buyers and sellers to purchase and sell natural gas without the in Austria. Furthermore, there is no price regulation for oil products. need to book capacity; therefore, trading of unbundled products is Oil trading is carried out on a contractual basis. possible. See also question 4.1. 11 Competition 9 Liquefied Natural Gas

11.1 Which governmental authority or authorities are 9.1 Outline broadly the ownership, organisational and responsible for the regulation of competition aspects, regulatory framework in relation to LNG facilities. or anti-competitive practices, in the oil and natural Austria gas sector? Currently, there are no existing LNG facilities in Austria. Some Austrian companies plan to construct such a terminal in the Adriatic On an administrative level, E-Control is competent for the region as part of a JV (see also question 1.1). regulation of the gas market. The competence of other authorities being responsible for competition aspects remains unaffected. The Federal Minister of Sustainability and Tourism is the highest 9.2 What governmental authorisations are required to authority. The Federal Minister is also responsible for the regulation construct and operate LNG facilities? of the search, exploration and production of oil and natural gas (ordinances, notices). The competence of other authorities being LNG is not regulated under the GWG. responsible for competition aspects, such as the FCA, the Federal Cartel Attorney and the Cartel Court, remain unaffected. 9.3 Is there any regulation of the price or terms of service in the LNG sector? 11.2 To what criteria does the regulator have regard in determining whether conduct is anti-competitive? No, there is not. The regulator must observe the criteria of the Austrian Anti-Trust 9.4 Outline any third-party access regime/rights in Act (“Kartellgesetz”, Federal Law Gazette I 2005/61, as amended), respect of LNG facilities. Arts 101 and 102 TFEU and also that of the Gas Act and Energy Regulatory Authority Act. As there are no LNG facilities in Austria, access to LNG terminals is not regulated. 11.3 What power or authority does the regulator have to preclude or take action in relation to anti-competitive practices? 10 Downstream Oil According to the Energy Regulatory Authority Act (“Energie- 10.1 Outline broadly the regulatory framework in relation Control-Gesetz” E-Control-G, Federal Law Gazette I 2010/110, to the downstream oil sector. as amended), one of the regulator’s key tasks is to exercise market oversight. If the regulator identifies any competition violations, it There is no specific regulatory framework for the downstream oil has the power to instruct the respective market participant by way sector in Austria. of official decision to act in compliance with the legal obligations. In the performance of these duties, the regulator has to seek to However, in 2009 the Austrian Government introduced a legislative achieve agreement between the parties involved (sec. 24 para. 2 measure which restricts the ability of retailers to set pump prices. E-ControlG). In accordance with the legal requirements, fuel station operators have to set their maximum prices in the morning and may not increase their prices over the course of the day. As a result of the 11.4 Does the regulator (or any other Government fast increase in fuel prices, the Federal Minister has launched an authority) have the power to approve/disapprove initiative for regulation of fuel prices before major public holidays. mergers or other changes in control over businesses Accordingly, operators of fuel stations are not allowed to increase in the oil and natural gas sector, or proposed acquisitions of development assets, transportation or or decrease their prices for a certain period of time (usually from associated infrastructure or distribution assets? If so, midday on the day before the holiday until midnight of the Sunday what criteria and procedures are applied? How long following the holiday). does it typically take to obtain a decision approving or As regards the regulatory requirements for emergency reserves, disapproving the transaction? the Oil Stockholding Act stipulates that importers of crude oil, petroleum products, biofuels or feedstocks directly used to produce According to the Austrian Anti-Trust Act, intended mergers biofuels shall hold 25 per cent of their imports as compulsory generally have to be notified to the FCA if the companies involved emergency reserves from 1 April of each year until 31 March the reached, in the last year before the merger, the following turnover: following year. (i) worldwide, more than EUR 300 million; (ii) in Austria, more than EUR 30 million; and 10.2 Outline broadly the ownership, organisation and (iii) worldwide, at least two companies each with more than EUR regulatory framework in relation to oil trading. 5 million. In 2017, the Austrian merger control was amended, introducing Unlike in the gas sector, oil trading is not regulated per se. There a transaction value test that extends the reach of Austrian merger

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control. Effective from 1 November 2017, the amendment introduces additional thresholds, even if the above-listed thresholds are not met. 12.2 To what extent is regulatory policy in respect of the A transaction requires a pre-merger approval in case the following oil and natural gas sector influenced or affected by international treaties or other multinational four cumulative conditions are fulfilled: arrangements? ■ combined turnover of the undertakings exceeding EUR 300 million worldwide; The regulatory policy in respect of the oil and natural gas sector is ■ combined turnover of the undertakings exceeding EUR 15 especially influenced and affected by European law, in particular by million in Austria; the TFEU. ■ the “value of consideration” for the transaction exceeds EUR 200 million; and Austria ■ the target has significant activities in Austria (local nexus). 13 Dispute Resolution The FCA and the Federal Cartel Attorney may, within a period of four weeks from notification, either clear a merger or request the 13.1 Provide a brief overview of compulsory dispute Cartel Court to examine the intended merger. The Cartel Court resolution procedures (statutory or otherwise) has to decide within a period of five months from reception of the applying to the oil and natural gas sector (if any), request. The court has to interdict the merger, if it expects that the including procedures applying in the context of merger will lead to the creation or strengthening of a dominant disputes between the applicable Government position. authority/regulator and: participants in relation to oil and natural gas development; transportation pipeline and associated infrastructure owners or users in relation to the transportation, processing or storage 12 Foreign Investment and International of natural gas; downstream oil infrastructure owners Obligations or users; and distribution network owners or users in relation to the distribution/transmission of natural gas.

12.1 Are there any special requirements or limitations on No compulsory dispute resolution procedures apply between the acquisitions of interests in the natural gas sector (whether development, transportation or associated regulator and corporations in the oil or natural gas sector. infrastructure, distribution or other) by foreign companies? 13.2 Is your jurisdiction a signatory to, and has it duly ratified into domestic legislation: the New York According to the Foreign Trade Act (“Außenwirtschaftsgesetz Convention on the Recognition and Enforcement of – FTA”), acquisitions of (at least) 25 per cent, or of controlling Foreign Arbitral Awards; and/or the Convention on interests in companies in specific industries, including in energy, the Settlement of Investment Disputes between States by foreign investors (i.e. non-EEA and non-Swiss persons) require and Nationals of Other States (“ICSID”)? approval (“FTA approval”) by Austria’s Federal Ministry for Digitisation and Economic Affairs. The FTA approval is a so-called The New York Convention on the Recognition and Enforcement of ex ante approval and applies in case of the acquisition of energy Foreign Arbitral Awards was ratified in 1961, and the Convention on supply and network companies. It requires the foreign investor to the Settlement of Investment Disputes between States and Nationals file for approval prior to entering into a legally binding agreement of Other States was ratified in 1971. regarding such acquisition. Any acquisition entered into without required approval is invalid and, if implemented, can be unwound. 13.3 Is there any special difficulty (whether as a matter FTA approval is only required for direct investments by Foreign of law or practice) in litigating, or seeking to enforce Investors. Therefore, as a general rule, indirect investments by judgments or awards, against Government authorities Foreign Investors via EU/EEA or Swiss entities are not captured by or State organs (including any immunity)? the approval regime, since EU law would not allow such investment restrictions. Accordingly, if the acquiring entity is domiciled within Generally, there is no special difficulty in litigating, or seeking to the EEA/EU or Switzerland, no FTA approval is required even if the enforce judgments or awards, against Government authorities or acquiring entity’s (indirect) shareholder is a Foreign Investor (so State organs. called indirect investment), unless such structure was implemented and used to circumvent the approval requirement. Indirect 13.4 Have there been instances in the oil and natural gas investments might trigger an ex officio review procedure which aims sector when foreign corporations have successfully at suspicious circumvention structures. The review procedure can obtained judgments or awards against Government be initiated by the Ministry in exceptional cases only. It requires (i) authorities or State organs pursuant to litigation a reasonable suspicion that the investment structure was chosen in before domestic courts? order to circumvent the FTA approval requirement, (ii) a reasonable suspicion that the circumvention results in a threat to certain public Generally, there is no difference between Austrian and foreign interests, such as public order and public security, and (iii) the corporations before the law. absence of EU provisions conflicting with the application of the FTA approval requirement.

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The proposed amendment to the Gas Market Model Ordinance 14 Updates includes among others the following changes: ■ The Gas Market Model Ordinance 2018 stipulates specific 14.1 Please provide, in no more than 300 words, a rules for virtual interconnection points. summary of any new cases, trends and developments ■ The regulatory authority must be notified by distribution in Oil and Gas Regulation Law in your jurisdiction. managers in advance of any implicit capacity allocations under Article 2(4) of EU Regulation 2017/459, pursuant to To comply with the applicable EU regulations, E-Control published sec. 15(3) of the 2018 ordinance. draft amendments to the Gas System Charges Ordinance 2018 and ■ Distribution-level entry and exit points at market area borders the Gas Market Model Ordinance. In order to implement these are subject to the balancing rules for distribution-level cross- Austria amendments in the current Austrian gas market, E-Control, in border interconnection points, unless different rules apply. cooperation with the transmission system operators Gas Connect ■ For large consumers, the contracted capacity is raised from Austria GmbH and Trans Austria Gasleitung GmbH, drafted a 10,000 kilowatt hours per hour (kWh/h) to 50,000 kWh/h proposal to establish a virtual interconnection point at Baumgarten. measured per hour per entry, exit or metering point. The proposed amendment to the Gas System Charges Ordinance ■ Balance responsible parties for diversified balance groups 2018 regulates a mandatory minimum premium for created must now notify the regulatory authority in advance of the start of their activities. incremental capacities to assure the cost-effectiveness of upcoming incremental capacity projects. Therefore, the regular rates are The above changes entered into force in May 2018. elevated by the mandatory minimum premium as a basis for the aforementioned annual auction. The mandatory minimum premium Acknowledgment must be recalculated every four years or whenever there has been an incorrect calculation regarding the incremental capacity’s demand The authors would like to thank Nina Zafoschnig, an associate before the annual auction. with Schoenherr since 2017, for her invaluable assistance in the The changes proposed in the Gas System Charges Ordinance 2018 preparation of this chapter. entered into force in April 2018. Tel: +43 1 534 37 50721 / Email: [email protected]

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Bernd Rajal Dagmar Hozová Schoenherr Schoenherr Schottenring 19 Schottenring 19 1010 Wien 1010 Wien Austria Austria

Tel: +43 1 534 37 50203 Tel: +43 1 534 37 50794 Fax: +43 1 534 37 66100 Fax: +43 1 534 37 66100 Email: [email protected] Email: [email protected] URL: www.schoenherr.eu URL: www.schoenherr.eu Austria Bernd Rajal is a partner with Schoenherr in Vienna where he is a Dagmar Hozová has been an associate with Schoenherr Vienna member of the firm’s Regulatory Practice Group. He is also aCo- since 2018. As a member of the Regulatory Practice Group, her main Head of Schoenherr’s Energy Group. Bernd’s practice focuses on practice areas are constitutional law, administrative law and energy energy and environmental law. He advises and represents a wide law. Prior to joining Schoenherr, she worked for more than one year range of energy utilities in relation to power plant permits (e.g. large- in the field of public procurement in a national law firm. During her scale HPPs, wind farms). Bernd is regularly involved in major energy studies, she gained experience as a paralegal in international law infrastructure projects all over Europe (Southstream gas pipeline, offices based in Vienna and Prague. Dagmar holds a degree from the Nabucco gas pipeline, heating pipelines, gas storage, hydro pump University of Vienna (Mag. iur. 2015). storage) and advises clients of all sectors and industries (utilities, financial investors, network operators, traders) on a large spectrum of energy regulatory issues. He regularly provides transactional advice in the field of energy and environmental law. He advised the European Commission on the status of the transposition of the RES Directive in EU Member States. With Schoenherr representing various governmental departments (e.g. the Austrian Ministry of Environment), he is also involved in legislative procedures making proposals for the amendment of environmental and energy law provisions. Bernd is author of various legal articles in the field of energy and environmental law.

Schoenherr is a leading full-service law firm in Central and Eastern Europe. With 13 offices located in Belgrade, Bratislava, Brussels, Budapest, Bucharest, Chisinau, Istanbul, Ljubljana, Prague, Sofia, Vienna, Warsaw and Zagreb, as well as country desks for Albania, Bosnia-Herzegovina, Macedonia and Montenegro, Schoenherr provides its clients with comprehensive coverage of the CEE/SEE region.* More than 300 legal professionals work across borders in both a centralised and de-centralised manner, according to the individual client’s needs and requirements. Quality, flexibility, innovation and practice-oriented solutions for complex assignments in the field of business law are at the core of the Schoenherr philosophy. *Schoenherr is in compliance with the respective local legal standards and conduct rules in all countries; therefore, the local firm name may vary from jurisdiction to jurisdiction. The energy industry is a complex and highly competitive sector. It is obvious that there is a need for professional advisers who understand the business of companies active in this sector, and who have the experience and capacity to handle complex international energy projects. Schoenherr can assist you with a multi-disciplinary group of lawyers drawn from across the firm’s broad international network that specialise in the specifics of the energy sector. The energy group comprises of lawyers from all practice areas with a detailed understanding of the energy sector and of the needs of international energy clients. Sharing our knowledge and co-operating tightly between our practice groups and between our international offices, our energy group can help you to respond to the changes in the industry and to keep pace with market and regulatory developments. Our lawyers are regularly involved in both international and domestic energy matters including transactions, development projects, mergers and acquisitions, privatisations, public private partnerships, regulatory matters, public procurement, strategic advice, competition matters and dispute resolution.

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Brazil José Roberto Faveret Cavalcanti

Faveret Lampert Advogados Carolina Assano Massocato Escobar

and meet the Government’s goal of increasing competition in the 1 Overview of Natural Gas Sector Brazilian gas market. Petrobras sold its equity interest in NTS to an investors group led 1.1 A brief outline of your jurisdiction’s natural gas by Brookfield and is negotiating TAG’s sale to another group led sector, including a general description of: natural by Engie. gas reserves; natural gas production including the extent to which production is associated or Since most of the gas produced comes from offshore fields far non-associated natural gas; import and export of from the coast, Brazil has also been investing in the construction natural gas, including liquefied natural gas (LNG) of underwater pipeline systems to transport gas to processing units liquefaction and export facilities, and/or receiving and built along the coast. re-gasification facilities (“LNG facilities”); natural gas Pre-salt gas has been distributed through two large underwater pipeline pipeline transportation and distribution/transmission network; natural gas storage; and commodity sales systems (“Route 1” and “Route 2”). Route 1 belongs exclusively to and trading. Petrobras, while part of Route 2 belongs to a consortium formed by Petrobras, Shell, Repsol and Galp. Considering the increased Brazil has always been a country with small gas production, production of the pre-salt fields, construction of a third underwater although the discovery of the pre-salt reservoirs has changed this pipeline system was started (“Route 3”) and the economic feasibility scenario radically. of a fourth system is already being studied. Brazilian gas production comes mostly from offshore fields (80%). Brazil has 14 gas processing or treatment units, which total 95.7 In the ranking of the world’s largest proven gas reserves, Brazil million m³/day of nominal capacity. The total volume processed in ranked 37th with 369.4 billion m³ (66.1 billion m³ onshore and 303.3 2017 was 24.4 billion m³ (66.8 million m³/day), corresponding to billion m³ offshore). 69.9% of the total installed capacity. The gas production has maintained growth for the eighth consecutive LNG is imported through three regasification terminals that year, totalling 40.1 billion m³ in 2017. Until October 2018, the operate with FSRUs chartered by Petrobras. Due to decreased accumulated production was 33.9 billion m3. In the decade of 2008– LNG importation, Petrobras deactivated one of the terminals and 2017, production registered an average growth of 7.2% per year and terminated the charter agreement for one of the three FSRUs that accumulated growth of 85.8%. Of the total gas produced in 2017, were operating in Brazil. associated gas represented 77%. 3.4% of the overall production was There are two other LNG regasification terminals being built in burned or lost, and 25.1% was reinjected. Brazil by private companies and that will work in an integrated Regarding consumption, Brazil registered a growth of 1.7%, manner with new thermal power plants also in construction. Golar totalling 38.3 billion m³ (1% of the world total), and ranked 26th in Power is the main investor in one of the projects and BP, Siemens the ranking of biggest gas consumers. and EIG – American investment fund are the main investors in the other project. Gas logistic is carried out by means of a transportation pipelines network with a total length of 11,700 km. The most relevant part Additionally, there is a large distribution network operated by Local of this network is concentrated in the south east of Brazil and Distribution Companies (LDC) (which in Brazil are state-level the remainder is spread throughout the Brazilian coast, with the concession holders). exception of the Bolivia – Brazil Pipeline, which runs through the Midwest until entering the Bolivian territory at a point in the 1.2 To what extent are your jurisdiction’s energy Municipality of Corumbá (Mato Grosso do Sul). There are some requirements met using natural gas (including LNG)? other isolated pipelines. Currently, the Brazilian transportation pipelines network belongs In August 2018, the supply of energy sources in the Brazilian essentially to three companies incorporated by Petrobras (TBG, internal market was 44.2% based on renewable energy sources NTS and TAG) and operates with a lot of idle capacity. The and 55.8% in non-renewable energy sources. Gas corresponded to expansion need is limited to bottlenecks existing at certain points 12.5% of the market, while oil and its by-products corresponded of the network. Practically all this system’s transportation capacity to 35.8%, mineral coal to 5.5%, and uranium to 1.4%. Renewable is hired by Petrobras. However, Petrobras has been signalling sources were based on sugarcane biomass (17.9%), hydraulic its intention of assigning transportation capacity to reduce costs energy (12.1%), firewood and wood charcoal (7.7%) and other sources (7.0%).

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To enable moving of oil, by-products and ethanol, Brazil has 107 1.3 To what extent are your jurisdiction’s natural gas terminals, of which 59 are offshore terminals (with 1,389 tanks) and requirements met through domestic natural gas 48 are onshore terminals (with 533 tanks), totalling 1,922 tanks. The production? nominal storage capacity was approximately 13.2 million m³, of which 37.6% was for oil, 58.8% was for by-products and ethanol, and 3.6% In September 2018, the total demand for gas was equal to 92.5 million was for LNG. m³/day. Brazil has 19,700 km of pipelines for transportation of oil and oil by- Domestic production was 110 million m³/day, but the quantity offered products. to the market was only 52.1 million m³/day. This difference occurs

because a large amount of gas is consumed by the production and Brazil transportation units themselves, lost during such activities and, 2.2 To what extent are your jurisdiction’s energy mostly, reinjected into the reservoirs due to lack of infrastructure or requirements met using oil? market (in 2017, an average of 27.61 million m3/day was reinjected and this number has already increased to 40 million m3/day in By the end of 2017, oil and its by-products corresponded to 36.4% September 2018). of the domestic market offer of energy sources. The demand not met by local production has been met by gas imported from Bolivia and by LNG. In 2017, an average of 24.3 million m3/day 2.3 To what extent are your jurisdiction’s oil requirements of gas and 5.05 million m3/day of LNG was imported from Bolivia. met through domestic oil production? The LNG is acquired by Petrobras in the international spot market and is used to meet demand spikes that occur when there is water shortage Theoretically, Brazilian oil requirements are met through domestic in the reservoirs of the hydroelectric plants, leading to a large increase production but due to refinery constraints (regarding oil technical in power generation by gas-fired thermal power plants. specification and capacity) it must export part of the domestic production and import crude oil with the technical specification required by local refineries, as well as other by-products. 1.4 To what extent is your jurisdiction’s natural gas production exported (pipeline or LNG)? In 2017, Brazil reduced its oil import needs to 54.5 million barrels of oil. Brazil expanded the surplus in the international trade of oil and by-products, as the net oil export in volume surpassed the net As Brazil is a gas importer, there is no real export. However, there import of by-products. Between January and June 2018, this surplus are cases of LNG loads acquired by Petrobras that are no longer reached a positive balance of US$ 3.5 billion. necessary, in which case Petrobras channels such loads to other markets. This operation is treated as an export for legal purposes. In this context, in 2017 Brazil exported 134.5 million m³ of LNG, 2.4 To what extent is your jurisdiction’s oil production destined mainly to Portugal (60% of the total), at an average value exported? of US$ 184.1/thousand m³, obtaining revenues of R$ 24.8 million. With the continuous increase of national production, in a few years Brazil may become one of the world’s largest oil exporters. 2 Overview of Oil Sector In 2017, Brazilian oil exports increased (24.8%), reaching the highest value of the historic series, 363.7 million barrels. The main 2.1 Please provide a brief outline of your jurisdiction’s oil destination of Brazilian exports in 2017 was the Asia-Pacific region, sector. with 197.6 million barrels (54.3% of the total volume). Next came Central and South America, with 67.5 million barrels (18.6% of With an average production of 3.2 million barrels/day of oil and other the total volume). It is worth mentioning the increase in exports liquids, Brazil is the world’s 9th-largest producer, and the 3rd-largest to North America (17.1%), with an annual increase of 80.8%, to in the Americas behind the USA and Canada. Petrobras is by far the 62.2 million barrels. Europe completes the list of regions which largest Brazilian oil producer. import Brazilian oil, with 23.4 million barrels, representing 10% of the total. By country, China is by far the largest importer of Considering the recent discoveries of large offshore pre-salt Brazilian oil, with a volume of 154.3 million barrels (42.4% of the reservoirs, added to the existing 447 production fields and 337 total). Brazilian oil exports corresponded to 27% of the domestic exploration areas, the expectation is that this number should continue production between 2005–2018. to grow significantly, reaching 5.2 million barrels/day by 2026, with approximately R$ 845 billion of potential investment in development. The pre-salt region has the potential to contribute with the largest 3 Development of Oil and Natural Gas non-OPEC production growth in the decade to come. According to IEA, Brazil will be one of the four countries responsible for covering the world’s demand growth by 2020. 3.1 Outline broadly the legal/statutory and organisational framework for the exploration and production Such discoveries also raised Brazil to 15th position in the world’s (“development”) of oil and natural gas reserves ranking of proved oil reserves, with 12.8 billion barrels. including: principal legislation; in whom the State’s Regarding oil consumption, Brazil is in 7th place, with a consumption mineral rights to oil and natural gas are vested; of approximately 3 million barrels/day. Government authority or authorities responsible for the regulation of oil and natural gas development; and Brazil’s installed refining capacity is 2.3 million barrels/day, which current major initiatives or policies of the Government th makes Brazil 8 in the world ranking. The country has 17 refineries (if any) in relation to oil and natural gas development. (13 of which are owned by Petrobras), with capacity to process 2.4 million barrels/day. In 2017, the refinery utilisation rate was 76.2%. The Constitution gave the Federal Government a monopoly Out of all the oil processed, 91.9% was domestic and 8.1% imported. over several activities related to oil and gas. The Constitutional

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Amendment no. 9/95 allowed these activities to also be performed such resources is transferred to the person that holds the extraction by private companies. rights. Thus, with the end of Petrobras’ monopoly over the oil industry, Oil and gas exploration and production activities must also comply Law no. 9.478/97 was approved to govern the new legal framework with environmental laws and regulations created by the national for the oil industry (Oil Law). It also created the National Council environmental agency (IBAMA). for Energy Policy (CNPE), chaired by the Minister of Mines and Energy (MME), with the duty to prepare energy policies and 3.2 How are the State’s mineral rights to develop oil guidelines, and the National Oil Agency (ANP), the entity in charge and natural gas reserves transferred to investors or of regulation, engagement and inspection of the economic activities companies (“participants”) (e.g. licence, concession, Brazil of the oil, gas, and biofuels industry, and responsible for, among service contract, contractual rights under Production other duties, preparation of bidding proceedings for the concession Sharing Agreement?) and what is the legal status of of rights of exploration and production of oil and gas, executing the those rights or interests under domestic law? concession agreements resulting from such activities and inspecting their performance. The right to explore and produce oil and gas is granted under a In 2008, a discussion was initiated to modify the Oil Law regarding concession agreement or production sharing agreement (PSA), as “midstream” gas activities, resulting in the enactment of Law no. applicable, through bid proceedings carried out by ANP, which 11.909/09 (Gas Law), whose regulation was approved by Decree no. are praised by international companies for their organisation 7.382/10. The Gas Law is currently under revision, as part of the and transparency. ANP has recently launched the Open Acreage programme “Gas to Grow” launched by the Federal Government to Process of offering areas, which consists in the continuous offer of diagnose all the problems in the industry and propose solutions to relinquished marginal oil fields and exploration blocks offered in stimulate its development (Bill no. 6.407/13). past bid rounds that were not awarded or which had been returned to the ANP. In 2010, Law no. 12.276/2010 was created, authorising the Federal Government to assign to Petrobras the exploration and production The only exception refers to the area granted to Petrobras pursuant rights over an area containing the equivalent to 5 billion barrels to Law no. 12.276/2010 (OAA), whereby the right to explore and of oil and gas, in exchange of new shares issued by Petrobras, in produce oil and gas was granted directly to Petrobras regardless of accordance with a contract also known as the Onerous Assignment any bid proceeding. Agreement (OAA). It is worth mentioning that there are initiatives in the Congress to enable Petrobras to sell part of its interests 3.3 If different authorisations are issued in respect of under the OAA. Such initiatives are well advanced and should be different stages of development (e.g., exploration resolved in the short term. The legal regime for the exploration and appraisal or production arrangements), please specify production of oil and gas in this area follows the regime created by those authorisations and briefly summarise the most Law no. 12.276/2010 and the terms of the OAA. important (standard) terms (such as term/duration, scope of rights, expenditure obligations). Also in 2010, Law no. 12.351/2010 was enacted and established the production sharing legal regime for the exploration and production Both concession and production sharing regimes contemplate of oil in a given geographically demarcated area under the terms several stages: exploration and discovery appraisal (exploratory of this law, which became known as the pre-salt polygon. The phase); and production development and production (production rest of the territory – around 98% of the total area of the Brazilian phase). The respective agreements set forth the terms and sedimentary basins – is still subject to the concession regime conditions that must be met to progress from one stage to the next. established by the Oil Law. In general, progression from one stage to the next is subject to ANP Originally, Petrobras had to be the operator in any consortia authorisation, which may not be denied without justifiable reason. (unincorporated joint ventures) that acquired areas within the pre- The term of duration of such phases are defined in the respective bid salt polygon, and also had to hold an ownership interest of at least notices. The exploration phase of the Concession Contracts usually 30% in such consortia. Law no. 13.365/2016 made these rules varies from three to eight years, depending on the characteristics of more flexible and, today, Petrobras only has a right of first refusal the area, and the production phase may last 27 years. The contract for acquisition of an interest of at least 30% in such consortia, as provides for extensions of such terms, upon ANP’s approval. operator. According to the relevant law, Petrobras must indicate in advance the areas in relation to which it intends to exercise its right, The PSA, in turn, can have a maximum term of 35 years, comprising so that the companies participating in the bid for acquisition of such all phases. The exploration phase usually lasts seven years, with areas know in advance when they will be subject to Petrobras’ right extensions foreseen in the contract, but without prejudice to the of first refusal. maximum contract term of 35 years. Since in areas subject to the production sharing regime, a part of the In parallel, there are other industry activities that require different production belongs to the Federal Government, Law no. 12.304/2010 authorisations. Refining, the import and export of oil, by-products created government-owned company Pré-Sal Petróleo S.A. (PPSA), and/or gas, trading, etc., will depend on specific authorisations, the with the purpose of representing the Federal Government in the majority of which are granted by ANP. consortia operating under such regime. In summary, in terms of exploration and production of oil and gas, 3.4 To what extent, if any, does the State have an Brazil has three legal regimes: concession; onerous assignment; and ownership interest, or seek to participate, in the development of oil and natural gas reserves (whether production sharing. In any situation, a specific agreement will be as a matter of law or policy)? entered into with ANP (E&P Agreement).

All mineral resources that exist in the Brazilian subsoil are deemed The Federal Government participates in the exploration and to be the property of the Federal Government. However, once they production of oil and gas in two ways. The first is through Petrobras, are produced in accordance with applicable laws, the property of which is a company controlled by the Federal Government. The

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second is through PPSA, which is a company fully owned by the ANP Ordinance 07/1999, which does not involve major difficulties. Federal Government created to represent its interests in the areas Obviously, the export of oil and gas may not be authorised if it under the production sharing regime. jeopardises domestic supply, a situation that is currently very Until the enactment of Law no. 13.365/2016, it was mandatory for remote. Petrobras to have an interest of at least 30% in the areas under the production sharing regime (pre-salt polygon). Today, however, such 3.7 Are there any currency exchange restrictions, or obligation no longer exists and was replaced with Petrobras’ right to restrictions on the transfer of funds derived from acquire an interest of at least 30% in such areas, in accordance with production out of the jurisdiction? the terms of the winning proposal in the bid proceeding carried out by ANP. Brazilian legislation does not impose any currency exchange Brazil There are many areas under the concession regime, and even under restrictions or restrictions on the transfer of funds derived the production sharing regime, where Petrobras does not participate from production to outside the jurisdiction. However, Law no. and, in relation to those areas, it is fair to say that the related 4.131/1962, which regulates foreign investments into the country activities are conducted without any ownership interest on the part and transfer of funds, requires such operations to be previously of the Federal Government. registered with the Brazilian Central Bank.

3.5 How does the State derive value from oil and natural 3.8 What restrictions (if any) apply to the transfer or gas development (e.g. royalty, share of production, disposal of oil and natural gas development rights or taxes)? interests?

The Federal Government benefits first from the amount paid for the The transfer of concession contract rights, total or partially, is acquisition of the rights to explore a given area (signature bonus). permitted. The assignee, however, must comply with technical, legal and financial requirements established by ANP, in accordance After discovery, it benefits from dividends related to its equity with ANP Ordinance 126/2016. Such ordinance is under revision interest in Petrobras and from governmental participations due on by ANP, as per Public Consultation no. 28/2018 (new regulation oil and gas produced (royalties) that are also shared with states and for transfer of interests, change in corporate control, reserve-based municipalities where the producing fields are located, according to lending and any other kind of guarantee governed by Brazilian Law criteria established by law. created over rights emerging from E&P Agreements). Additionally, the Government also has a right to a portion of the The transfer is also subject to prior approval by ANP and CADE production in the contracts that are subject to the production sharing (Brazilian Antitrust Authority). regime. It is worth noting that merger and spin-off transactions, change of In the concession regime, the Government is entitled to royalties operator, and substitution or exemption of performance guarantee ranging from 5 to 10%, depending on the location or technical (parent company guarantee) are also deemed a transfer by ANP. aspects of the area, plus a special participation ranging from 0 to 40%, depending on the productivity of the field, calculated based on Likewise, the foreclosure of any guarantees imposed on the rights the net revenue from production. arising out of concession contracts rights (pledge of emerging rights) shall be subject to ANP’s prior approval. In the production sharing regime, the royalties correspond to 15% of the production. Under the OAA, the royalties correspond to 10% The ANP may also require financial guarantees to approve the of the production. assignment to secure compliance with the Minimum Exploratory Program (MEP), if in the exploratory phase, and to guarantee the The Government’s participation in oil production in areas under the payment of the costs with the abandonment of the field, if in the production sharing regime varies according to the winning proposal production phase. in the bid proceeding carried out by ANP. As of today, the rights granted to Petrobras under the OAA cannot The Government is also entitled to a monthly payment throughout be assigned to third parties, although the Federal Government and the period during which an area is held for exploration and Petrobras are willing to change this regime, as mentioned under production of oil and gas. question 3.1 above. The trading of oil and gas received by the Government in accordance with the PSAs must be carried out in accordance with the policy established by the MME. 3.9 Are participants obliged to provide any security or guarantees in relation to oil and natural gas There is an ongoing discussion regarding the possibility of reducing development? the royalties in mature fields in return for new investments that prolong the operating life of the field. The companies or consortia that explore and produce oil and gas in There are other obligations designed to generate benefits for the Brazil must provide financial guarantees for compliance with the Brazilian society, such as using part of the investment in exploration MEP and for payment of the costs related to abandonment of the and production to hire local suppliers (local content obligation), as production fields. well as investing 0.5 to 1% of production revenue in research and When the concessionaire does not have satisfactory technical and development projects. financial capacity, ANP may require a parent company guarantee issued by the controlling shareholder, whereby it will be jointly 3.6 Are there any restrictions on the export of liable for the obligations arising out of the concession or PSA (also production? known as “performance guarantee”). ANP accepts the following financial guarantees for compliance There are no restrictions on the export of oil and gas, only the with the MEP: letter of credit; insurance bond; or oil and gas pledge obligation of obtaining an authorisation from the ANP pursuant to agreement. For abandonment of fields, ANP also accepts other

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forms of guarantees (escrow accounts using production proceeds), at the ANP’s discretion. 3.13 Is there any legislation or framework relating to gas storage? If so, what are the principal features/ requirements of the legislation? 3.10 Can rights to develop oil and natural gas reserves granted to a participant be pledged for security, or Pursuant to article 39 of the Gas Law, underground storage of gas booked for accounting purposes under domestic law? depends on the granting of a concession contract through a public bid proceeding. The rights related to the concession or PSA (“emerging rights”) can However, Bill no. 6.303/13 proposes to simplify the current regime be pledged for security pursuant to terms therein.

Brazil conditioning such activity only to the issuance of an authorisation ANP issued a guideline according to which the emerging rights by ANP. pledge agreements shall be submitted to ANP and any foreclosure Regardless, with the purpose of facilitating underground storage, of the guarantee shall be preceded by an administrative proceeding ANP Resolution no. 17/2015 allows a production field to be for assignment of rights, in accordance with applicable regulations. converted into a storage area upon simple authorisation by ANP, It is important to note that ANP recently initiated Public Consultation without the need to carry out a public bid to grant a concession no. 28/2018 to revise the regulation applicable to that matter among contract for such purpose. others (for instance, reserve-based lending). In any event, environmental licences are currently required and will remain required in the future. 3.11 In addition to those rights/authorisations required to explore for and produce oil and natural gas, what other principal Government authorisations are 3.14 Are there any laws or regulations that deal specifically required to develop oil and natural gas reserves (e.g. with the exploration and production of unconventional environmental, occupational health and safety) and oil and gas resources? If so, what are their key from whom are these authorisations to be obtained? features?

The IBAMA and the state and municipal environmental agencies Brazil has great potential for unconventional gas. are responsible for the licences and authorisations regarding oil and The Oil Law and the Gas Law did not create a specific treatment for gas projects. The definition of the entity in charge of the licensing unconventional gas. will depend on the dimension and scope of the project, but usually In late 2013, the ANP carried out the first bidding round for blocks large E&P projects are subject to IBAMA’s licensing. with potential for unconventional exploration. In general, the following licences are required: operating licence for ANP Resolution no. 21/14 regulates the use of fracking in seismic acquisition; pre-drilling licence; installation licence; and unconventional reservoirs, but the Public Prosecutor’s Office operating licence. obtained a provisional court ruling to stop this activity in Brazil. Other licences or authorisations may be required for specific Therefore, as of this time, there is no exploration and production of activities, such as authorisations from IBAMA for the decommission oil in unconventional reservoirs, even though Petrobras produces of a production field, authorisations from ANTAQ (National small quantities of fuel oil and LNG using the processing of oil shale Agency for Water Transportation), REPETRO (customs regime for from reserves located in the south of Brazil. the import and export of certain assets dedicated to the upstream activities), Federal Police, for the use of certain chemical products and explosives, etc. 4 Import / Export of Natural Gas (including LNG) 3.12 Is there any legislation or framework relating to the abandonment or decommissioning of physical structures used in oil and natural gas development? If 4.1 Outline any regulatory requirements, or specific so, what are the principal features/requirements of the terms, limitations or rules applying in respect of legislation? cross-border sales or deliveries of natural gas (including LNG).

Because until recently Brazil had not faced the issue of abandonment The import and export of gas depends on authorisation from the and decommissioning of fields, this matter was governed by MME, pursuant to article 36 of the Gas Law. precarious regulation. ANP is responsible for presenting the required documentation in the The concession and PSA, as well as ANP Resolution no. 27/2006, authorisation request procedure, and for inspecting these activities. set forth the main rules that must be complied with in the event of abandonment and decommissioning. The import of gas must comply with the procedure set forth in Ordinance MME no. 232/2012. The reduction of abandonment and decommissioning costs may ease the transfer of mature fields operated by Petrobras to companies The export of idle LNG cargoes (imported cargoes that will no willing to extend their economic life, with many positive effects for longer be consumed in Brazil) must comply with the procedure set the country. forth in Ordinance MME no. 67/2010. More recently, ANP’s concern with payments of such costs has led These standards only govern information and documents that must it to condition the assignment of rights in concession contracts to the be submitted to obtain the necessary authorisation and do not create provision of financial guarantees for payment thereof. any major difficulties or constraints. In addition, there is a “self-import” regime in Brazil under which the importer (or affiliated company to which the imported gas is

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intended) is released from the obligation to purchase gas from the Under the Oil Law, the construction of pipelines for both transfer and LDC (a regime similar to that of the free consumer), although it is transportation activities was subject only to a simple authorisation still required to move the imported gas through the pipeline of the from ANP. LDC. For this regime to be adopted, it is necessary to apply for a The Gas Law changed the regulation for gas pipelines. registration at ANP, in accordance with ANP Resolution no. 51/2011 According to the Gas Law, if a company is interested in building a and, eventually, comply with the provisions of the state legislation transportation pipeline, it must first request the MME to authorise that regulates the distribution of piped gas (although there is a the project. Then, the MME will initiate a procedure to analyse its dispute over the validity of the application of the state legislation suitability for the Brazilian energy planning. If approved, ANP will in this case). conduct a procedure (Public Call) to identify the parties interested In addition, the import or export operations must be registered at in hiring capacity in the new transportation pipeline, in order to Brazil SISCOMEX (Brazilian Integrated Foreign Trade System), which is properly assess its capacity. Finally, once the Public Call for tender a system that allows the Government to fully supervise international is completed, ANP conducts a new procedure to carry out the public trading in Brazil. tender for awarding the concession agreement, which establishes the terms and conditions for the construction and operation of the new 5 Import / Export of Oil pipeline. The concession agreement must be awarded to the bidder proposing the lowest transportation tariff. Since the Gas Law was approved, no new transportation pipeline has been built. 5.1 Outline any regulatory requirements, or specific The Gas Law establishes five classes of gas pipelines: (i) terms, limitations or rules applying in respect transportation pipelines; (ii) production offloading pipelines; (iii) of cross-border sales or deliveries of oil and oil transfer pipelines; (iv) pipelines constructed by consumers (which products. occurs, according to article 46, when the Distribution Company has no interest in constructing a distribution pipeline); and (v) pipelines Oil imports and exports depend on authorisation from ANP, as that are part of LNG terminals (this class is not set forth in the Gas provided in article 60 of the Oil Law. Law, but in article 16 of the regulation thereof). The distribution The authorisation must be requested in accordance with the pipeline (LDC pipeline) is not governed by the Gas Law because it procedure set forth in ANP Ordinance 147/98 in the case of oil is deemed to be governed by state legislation. import and in accordance with the procedure set forth in ANP The case in which each one of those classes of pipelines can be built Ordinance 07/99 in the case of oil export. is defined in much more detail, eliminating the certain flexibility These standards only govern information and documents that must that used to exist in the past. In practice, a pipeline that does not be submitted to obtain the necessary authorisation and do not create fall exactly within the cases defined by the Gas Law cannot be built. any major difficulties or constraints. The Gas Law does not allow an end consumer to build a pipeline to In addition, import or export operations must be registered at connect its facility directly to a gas transportation pipeline or to any SISCOMEX. other source of gas. The end consumer is required to be connected to the distribution pipeline of the LDC. 6 Transportation The Gas Law is currently under revision, as part of the governmental programme “Gas to Grow”, and one of the issues that is expected to be amended is the reinstatement of the authorisation regime for the 6.1 Outline broadly the ownership, organisational and construction of new transportation pipelines. regulatory framework in relation to transportation pipelines and associated infrastructure (such as natural gas processing and storage facilities). 6.2 What governmental authorisations (including any applicable environmental authorisations) are required to construct and operate oil and natural The legal regime to build and operate pipelines to transport oil or gas transportation pipelines and associated gas, in Brazil, especially the latter, is very complex. infrastructure? The states hold the right to explore the so-called “piped gas distribution service” (movement of gas by pipeline to end consumers). In addition to complying with the provisions of question 6.1, it There is disagreement whether the legislative jurisdiction over such is also necessary to obtain an environmental licence to build and activity belongs to the states or to the federal government. However, operate the pipeline. The environmental licence must be issued by currently, in practice, the states legislate on this matter. The the IBAMA in the case of an interstate pipeline. Otherwise, the federal government has legislative jurisdiction over the regulation licence must be issued by the environmental agency of the state in applicable to pipelines in other situations. which the pipeline is being built. The Oil Law created two categories of pipelines (for both oil and The declaration of public interest of the land strip on which the gas): transportation; and transfer. The transportation pipeline pipeline will be built must also be obtained in accordance with is used to move products of persons other than the owner of the question 6.3 below. pipeline. The transfer pipeline is used to move solely products of its owner. There is also a third category, not expressly regulated 6.3 In general, how does an entity obtain the necessary by the Oil Law, which is the production offloading pipeline, that is land (or other) rights to construct oil and natural gas deemed to be part of the facilities of a production field and is subject transportation pipelines or associated infrastructure? to the same rules applicable to the construction and operation of Do Government authorities have any powers of these facilities. compulsory acquisition to facilitate land access? The owner of the transportation pipeline cannot move its own products (unbundling). According to the Oil Law, the areas necessary to build facilities used

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by the oil industry may be declared of public interest for purposes be performed by Petrobras subsidiaries, the need to regulate the of expropriation by an executive order granted by the President. coordinated operation of the gas transportation pipelines is already The procedure to request the declaration of public interest must be being discussed and is one of the matters governed by Bill no. filed at ANP. 6.407/13. Once such declaration is obtained, the company tries to first In any case, by ANP Resolution no. 35/12, the transporter is required purchase the ownership of the area or the right of way through a to allow the connection of its gas pipeline to new gas pipelines built private agreement with the current owner. by third parties. If an agreement is not reached, the company can initiate a legal There is no specific regulation that governs how to treat the costs proceeding to obtain a judicial decision expropriating the area. of interconnection, although disputes between the parties in this Brazil respect may be submitted to ANP, which has the power to determine Regarding gas pipelines, the Gas Law allows the public interest a solution for these disputes pursuant to article 20 of the Oil Law. declaration to be issued by ANP, not requiring an executive order from the President. This matter is regulated by ANP Resolution no. 44/11. 6.6 Outline any third-party access regime/rights in respect of oil and natural gas transportation and associated infrastructure. For example, can the 6.4 How is access to oil and natural gas transportation regulator or a new customer wishing to transport pipelines and associated infrastructure organised? oil or natural gas compel or require the operator/ owner of an oil or natural gas transportation pipeline The Oil Law and the Gas Law provide that any company may have or associated infrastructure to grant capacity or access to transportation pipelines and maritime terminals, with the expand its facilities in order to accommodate the new customer? If so, how are the costs (including costs exception of LNG terminals. of interconnection, capacity reservation or facility The right of third parties to access oil transportation pipelines expansions) allocated? is governed by ANP Resolution no. 35/12, while access to gas transportation pipelines is governed by ANP Resolution no. 11/16. Please see the answer to question 6.4. ANP Resolution no. 35/12 expressly provides for the possibility of a third party requiring the owner of the oil pipeline to carry out its 6.7 Are parties free to agree the terms upon which oil expansion, provided that such third party pays the corresponding or natural gas is to be transported or are the terms costs. There is no such right in ANP Resolution no. 11/16, which (including costs/tariffs which may be charged) governs third-party access to gas transportation pipelines. However, regulated? we understand that, although not expressly set forth, the same right exists in relation to gas transportation pipelines, since it would be Under the Oil Law, the contract to transport oil or natural gas by implicit in right of access provided under the Gas Law. pipelines may be freely agreed by the parties, including the tariff On the other hand, ANP Resolution no. 11/16 governs the Public value. Call (public offer of transportation capacity) which aims to ensure With the entry into force of the Gas Law, the terms and conditions equal treatment for all those interested in procuring transportation of natural gas transportation contracts are now subject to ANP’s capacity. approval, including the tariff value, which must comply with the Another mechanism provided by ANP Resolution no. 11/16 is criteria set forth in ANP Resolution no. 15/14. the procurement of interruptible transportation service using idle The tariffs of natural gas transportation contracts signed before the capacity (capacity hired but not being used), provided that the Gas Law cannot be changed even if the tariffs do not comply with relevant pipeline is no longer subject to the exclusivity period (10 the criteria set forth in ANP Resolution no. 15/14. However, ANP is years after the commencement of commercial operation). defending the interpretation that if there is a change in the original Bill no. 6.407/13 is extending third-party access rights over gas tariff due to any supervening event, the new tariff is subject to its production offloading pipelines, processing or treatment units and approval. In this case, there is a dispute over the extent to which LNG terminals (regasification plants). ANP could reduce the profitability assured to the transporter by the original tariff if ANP considers that this profitability fails to comply The Oil Law grants to ANP the power to solve any dispute related to with the criteria set forth in ANP Resolution no. 15/14. third-party access rights in accordance with the procedure regulated by ANP Ordinance no. 254/01. 7 Gas Transmission / Distribution 6.5 To what degree are oil and natural gas transportation pipelines integrated or interconnected, and how is co- operation between different transportation systems 7.1 Outline broadly the ownership, organisational and established and regulated? regulatory framework in relation to the natural gas transmission/distribution network.

The main gas transportation pipelines in Brazil are already connected, The Constitution granted the states the right to explore piped gas with rare exceptions for isolated systems such as Urucu – Manaus distribution service directly or through the concession of this service Gas Pipeline located in the middle of the Amazon rainforest. to private companies (article 25, § 2º). There is a lot of controversy Since the main gas transportation pipelines were owned by Petrobras about the exact meaning of such activity. subsidiaries (TBG, NTS and TAG) and were operated by them or by The Gas Law partially regulates this service by creating the free another subsidiary of Petrobras (Transpetro), there was never a need consumer, self-producer and self-importer regimes. These are to regulate the coordinated operation of these pipelines. situations in which the consumer has the right to purchase natural However, as Petrobras is selling its stake in these companies and gas from any supplier and not only from the LDC, although the the operation of the gas transportation pipelines may no longer

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consumer remains obligated to procure the LDC to move the LDC. In this case, several conditions, which vary according to the natural gas through the LDC gas pipeline to its facility. legislation of each state, must be met by the consumer. Many states The largest LDCs are located in the States of São Paulo (Comgas) do not even allow for this possibility, despite the provisions of the and Rio de Janeiro (Ceg), and the states in which these companies Gas Law, which has been causing a lot of debate. operate have no ownership interest therein. However, the other LDCs are controlled by the states in which they operate, although 7.4 Can the regulator require a distributor to grant Petrobras also has equity interest in many of them, along with the capacity or expand its system in order to Brazilian subsidiary of the Japanese conglomerate Mitsui. The accommodate new customers? exception is the State of Espírito Santo, in which the concession for piped gas distribution belongs to a subsidiary of Petrobras Please see the answer to question 7.3. Brazil (Petrobras Distribuidora).

The LDCs operate under the public service concession regime. 7.5 What fees are charged for accessing the distribution Many of the concession agreements will end in the short term and network, and are these fees regulated? there is much debate about how to handle the concessions’ renewal. Except as provided in the Gas Law, LDCs are regulated by state In accordance with the respective concession agreements and to the legislation or only by the concession agreement. Not all the states state legislation, the LDC is entitled to receive a minimum revenue have regulatory agencies. to remunerate the investment made and to offset the costs of the The tariffs are determined by many different criteria. In general, purchase of gas and its operation and maintenance. there is a perception that tariffs are very high and there are no rules The profit margin assured to the LDC varies greatly according to the to encourage an efficient operation by the LDCs. Tariffs paid by concession agreement and the legislation of each state. Some states large consumers, such as large industries and thermoelectric plants guarantee a return of up to 20% on the investment made by the LDC. subsidise the tariffs paid by residential consumers. This situation Others apply periodic tariff revision policies based on the weighted increases the cost of gas for large consumers and has been cited as average cost of capital (WACC). one of the main causes for the non-growth of the Brazilian gas market.

It should be noted that the distribution of gas through other modes 7.6 Are there any restrictions or limitations in relation to (CNG) is regulated by ANP. acquiring an interest in a gas utility, or the transfer of assets forming part of the distribution network (whether directly or indirectly)? 7.2 What governmental authorisations (including any applicable environmental authorisations) are required to operate a distribution network? In principle, the interests owned by private companies in the LDCs may be freely traded, subject to the terms and conditions of the The right to explore the piped gas distribution service is granted shareholder agreement of each LDC, except if the state legislation by means of a public service concession agreement by the state in provides otherwise. which the service will be provided. The interests owned by the states in the LDCs can only be sold by As a rule, this agreement must be awarded by means of a public means of public bidding. bidding; however, since in most of the cases the current agreements In any event, such transaction may be subject to CADE approval in were awarded when the LDCs were controlled by the states (many accordance with Law no. 12.529/2011. of which still are), most of the concession agreements were awarded directly (i.e., without public bidding). 8 Natural Gas Trading However, when the concession agreements are renewed, a public bidding may be required if the LDC is no longer controlled by the state, except in cases where the current agreement provides for its 8.1 Outline broadly the ownership, organisational and extension in another manner. regulatory framework in relation to natural gas trading. Please include details of current major In some states, new investments by the LDC depend on authorisation initiatives or policies of the Government or regulator from the local regulatory agency and may also be subject to (if any) relating to natural gas trading. environmental licensing by the local environmental protection agency. Gas exports and imports are regulated by the MME and are subject to its authorisation. 7.3 How is access to the natural gas distribution network According to the interpretation of the Brazilian Constitution organised? defended by the states, only LDCs have the right to sell gas to end consumers through pipelines. But there is a lot of controversy about Since it is a concession of a public service, all end consumers have such interpretation. the right to demand the provision of this service. An exception occurs in cases where the free consumer, the self- Nevertheless, the legislation of some states allow the LDC not to producer or the self-importer regime is applicable. In these cases, provide services to a particular consumer if such provision requires the consumer has the right to purchase gas from any supplier and an investment that is not economically viable, unless the consumer not only from the LDC. As previously mentioned, these regimes agrees to pay part of the amount required to make that investment are set forth in article 46 of the Gas Law but may also be subject to feasible. conditions imposed by state legislation, except the self-producer and A more complex situation occurs in relation to consumers who wish self-importer that are regulated by ANP in accordance with ANP to adopt the free consumer, self-producer, or self-importer regime to Resolution no. 51/11, although the legislation of most of the states have the right to buy gas from any supplier and not only from the also establishes rules applicable to those cases.

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The difference between the free consumer and the self-importer or CELSE (joint venture led by Golar Power); and (ii) GNA I and self-producer regime is that, in the last two cases, the consumer also GNA II Thermal Power Plants with a regasification terminal with a imports or produces the gas it will consume (or at least the gas is capacity of 14 million m³/day at Açu Port, in São João da Barra (RJ) imported or produced by an affiliated company). developed by Gás Natural do Açu – GNA (joint venture between BP, The sale of gas to end consumers through means other than by EIG and Siemens). pipeline is regulated by ANP. The import of LNG by Petrobras has always been used as a way to Gas trading is subject to ANP’s authorisation (except the sale of ensure flexibility in the supply of gas for thermoelectric generation. piped gas to end consumers) and the supply agreement must be Firmer domestic consumption is supplied through local production registered at ANP and comply with certain terms and conditions and imports from Bolivia, while thermoelectric power generation Brazil as set forth in ANP Resolution no. 52/11. The trader is required peaks are met by LNG imports. Therefore, Petrobras purchases to provide certain information to ANP periodically and, as the case LNG cargoes as needed, and does not have a long-term supply may be, may be required to prove the gas reserves that constitute the agreement. ballast (physical guarantee) of the supply agreement (especially in On the other hand, CELSE and GNA entered into long-term LNG the case of supply for thermoelectric generation). supply agreements with Exxon and BP affiliated companies, To procure gas pipeline transportation capacity, the trader must respectively. As both companies have obtained long-term power also obtain an authorisation from ANP and comply with the trading agreements at auctions carried out by ANEEL, they are also provisions of ANP Resolution no. 51/13, which basically establishes required to have a gas supply agreement for the same period. obligations that must be fulfilled to ensure the proper operation of There is a lot of debate over the suitability of Brazil continuing to the transportation systems. import LNG in the long term in view of the large production of In the case of supply of gas for thermoelectric generation, the associated gas in the pre-salt fields. However, the truth is that LNG agreement had to impose a very high fine in the case of supply is still very competitive in relation to pre-salt gas, in particular due failure, which made it very difficult to find suppliers who were to the greater supply flexibility. willing to assume the risk of paying such fine. This requirement The construction and operation of LNG terminals is governed by was recently modified by National Electricity Agency (ANEEL) ANP Resolution no. 52/15. This standard regulates the procedure Normative Resolution no. 827/18, and now it is allowed the for obtaining authorisation for these activities and the requirements imposition of a fine more in line with international market practice. that must be met by the LNG terminal. The possibility of transferring to ANP the power to regulate the free The owner of the LNG terminal must provide a series of information consumer regime (the self-production and self-import regimes are on the operations carried out through the LNG terminal, as already regulated by ANP) is currently under discussion. However, established in ANP Resolution no. 50/11. the states are refusing to accept the transfer of this power and claim ANP Resolution no. 50/11 also regulates the provision of services that, according to the Constitution, they should regulate the free by the owner of the LNG terminal (basically LNG storage and consumer regime. regasification) and establishes the terms and conditions that must be observed by the services agreement, as well as the criteria for 8.2 What range of natural gas commodities can be calculating the remuneration for the service. This standard is traded? For example, can only “bundled” products unclear as the remuneration agreed between the parties is subject (i.e., the natural gas commodity and the distribution to ANP approval. thereof) be traded? The distribution of LNG by trucks is regulated by ANP Ordinance no. 118/00. Under the Gas Law, the sale and trading of gas has been “unbundled” There is a single gas liquefaction plant in Brazil built and operated from pipeline transportation services. At the state level, the sale by White Martins (Union Carbide subsidiary). It is a small-scale and distribution of gas is sold as a bundled service. However, with production plant that uses gas imported from Bolivia through the due observance of free consumer, self-importer and self-producer Bolivia – Brazil Gas Pipeline. The LNG produced in this plant is exceptions provided for in article 46 of the Gas Law. traded by a joint venture between White Martins and Petrobras, called Gás Local. 9 Liquefied Natural Gas 9.2 What governmental authorisations are required to construct and operate LNG facilities? 9.1 Outline broadly the ownership, organisational and regulatory framework in relation to LNG facilities. In addition to obtaining authorisation from ANP as described in Petrobras is currently the only Brazilian LNG importer, with two question 9.1, an environmental licence granted by the IBAMA must FSRUs operating in three terminals: Pecém (CE); Todos os Santos also be obtained. Bay (BA); and Guanabara Bay (RJ). Due to the low demand, Moreover, the terminal must be registered at ANTAQ, according to Petrobras anticipated the expiration of the charter agreement of the ANTAQ Resolution no. 4.325/15. third FSRU. There is a dispute over the need to obtain an authorisation from Although over the last three years, Brazil had an idle installed ANTAQ for the import and chartering of the FSRU, given regasification capacity of more than 30 million m³/day, twonew that although the FSRU is a vessel, it will not be employed in a LNG regasification terminals are being constructed to supply gas navigation activity. to new thermoelectric plants that are being built in an integrated In any case, an authorisation from the Brazilian Navy approving manner with the terminal: (i) Porto do Sergipe I Thermal Power the location where the FSRU will be moored must also be obtained. Plant in Barra dos Coqueiros (SE), with a regasification terminal with a maximum capacity of 14 million m³/day developed by

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9.3 Is there any regulation of the price or terms of service 11 Competition in the LNG sector?

11.1 Which governmental authority or authorities are There is no regulation of the LNG price. However, the terms of responsible for the regulation of competition aspects, service of the LNG terminal must comply with the provisions of or anti-competitive practices, in the oil and natural ANP Ordinance no. 50/11, which define how the remuneration gas sector? applicable to the services provided should be composed. Pursuant to the Brazilian Antitrust Law (Law no. 12.529/2011),

9.4 Outline any third-party access regime/rights in the Administrative Council for Economic Defence (CADE) is the Brazil respect of LNG facilities. governmental authority responsible for the regulation of competition aspects. Nevertheless, ANP is the entity responsible for the analysis Article 58 of the Oil Law expressly excludes LNG terminals from of the technical aspects of anti-competitive practices in the oil and the third-party access right. However, Bill no. 6.407/13 intends to gas sector. create the right of third parties to access LNG terminals. Bill no. 6.407/17 intends to grant ANP the power to determine the termination of gas supply or gas transportation agreements insofar as it is established that these agreements constitute a violation of 10 Downstream Oil the economic order. There are allegations that many agreements entered into by Petrobras in the past have clauses aimed at ensuring the monopoly of the gas market. However, Petrobras claims 10.1 Outline broadly the regulatory framework in relation to the downstream oil sector. that such provisions would be justified by the need to ensure the amortisation of the investments made, and which were exposed to high commercial risk. Pursuant to ANP Ordinance 16/2010, any company organised and existing under the laws of Brazil may be authorised by ANP to construct and operate refineries. 11.2 To what criteria does the regulator have regard in The installed refining capacity in Brazil is 2.3 million barrels/day, determining whether conduct is anti-competitive? which puts Brazil in 8th position in the world ranking. Brazil has 17 refineries (13 of which belong to Petrobras), with capacity to Article 36 of the Brazilian Antitrust Law defines as violations of process 2.4 million barrels/day. In 2017, the refinery utilisation the economic order, the acts which under any circumstances have factor for the year was 76.2%. Of the total oil processed, 91.9% as an objective or may have the following effects, regardless of was of domestic origin and 8.1% was imported. fault, even if not achieved: to limit, restrain or in any way hinder free competition or free initiative; to control the relevant market of Notwithstanding the above figures, the lack of investments in the goods and services; to arbitrarily increase profits; and to exercise a country’s refining expansion could cause Brazil to be, in 2026, dominant position in an abusive manner. among the five largest oil exporters in the world. This is because, without the expansion of the refining capacity in Brazil to meet the This provision establishes a non-exhaustive list of conducts which increase in fuel consumption, the country will have to import a larger may harm the competition. Whether such conduct will really have volume of by-products, which may be undesirable from the point of this effect when adopted is a matter to be analysed on a case-by-case view of the balance of payments, since the prices of by-products in basis. the international market are higher than the price of crude oil. The production of oil by-products was 110.2 million m³ in 2017, 11.3 What power or authority does the regulator have to of which 96.1% was produced in refineries, and the remainder was preclude or take action in relation to anti-competitive divided between petrochemical plants, NGPUs and other producers. practices? The fuel trading regulation is very complex and is undergoing a CADE’s duties are defined by the Brazilian Antitrust Law and revision process. The regulation varies according to each type of supplemented by CADE’s Internal Regulations, approved by fuel (gasoline, diesel, LPG, fuel oil, etc.) and the activities to be Resolution no. 20/2017. The agency carries out three functions: carried out (distribution to service stations, wholesale marketing, (i) preventive: analyses and decides on all acts of economic etc.). How each activity is defined by ANP should be observed for concentration between large companies that might undermine free purposes of its regulation (which sometimes may not make much competition; (ii) repressive: investigates and judges cartels and sense). other anti-competitive conducts; and (iii) educational: instructs the public in general about the different conducts that might hinder 10.2 Outline broadly the ownership, organisation and free competition; encourages and stimulates academic studies and regulatory framework in relation to oil trading. researches on the subject; carries out and supports courses, lectures, seminars and events related to the subject. In practice, almost all crude oil trading is destined for export. Only In this regard, CADE may, among other duties set forth in the law, the trading of oil by-products, which must comply with the ANP propose a cease and desist agreement for violation of the economic regulation mentioned in question 10.1, occurs in the domestic order and adopt preventive measures that lead to the ceasing of the market. conduct that constitutes a violation of the economic order, setting a With regard to oil imports and exports, we refer to the answers to deadline for compliance and the daily fine to be applied in case of section 5 above. non-compliance.

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11.4 Does the regulator (or any other Government 13 Dispute Resolution authority) have the power to approve/disapprove mergers or other changes in control over businesses in the oil and natural gas sector, or proposed 13.1 Provide a brief overview of compulsory dispute acquisitions of development assets, transportation or resolution procedures (statutory or otherwise) associated infrastructure or distribution assets? If so, applying to the oil and natural gas sector (if any), what criteria and procedures are applied? How long including procedures applying in the context of does it typically take to obtain a decision approving or disputes between the applicable Government disapproving the transaction? authority/regulator and: participants in relation to oil and natural gas development; transportation pipeline

Brazil and associated infrastructure owners or users in According to article 88 of the Brazilian Antitrust Law, CADE must relation to the transportation, processing or storage be notified of any concentration act, in any economic sector, in which of natural gas; downstream oil infrastructure owners at least one of the groups involved in the transaction has registered or users; and distribution network owners or users in annual gross sales or total turnover in Brazil, in the year preceding relation to the distribution/transmission of natural gas. the transaction, equal to or greater than R$ 750 million, and at least one other group involved in the transaction has registered annual In line with the Oil Law, the concession and the PSA agreements gross sales or total turnover in Brazil, in the year preceding the for the exploration and production of oil and gas establish that any transaction, equal to or greater than R$ 75 million. disputes and controversies must be resolved by arbitration. In some The control of these concentration acts will occur prior to the cases, expert mediation should be carried out before the arbitration transaction; that is, until CADE’s final decision, the conditions of begins. competition between the companies involved must be maintained. However, ANP understands that the arbitration refers solely to When analysing a concentration act, CADE observes, for example, disputes arising from or related to the Agreement, and it can only the market share of the companies involved in the transaction; be carried out to settle disputes related to disposable interests (a whether there is rivalry on the part of competitors, in addition to very unclear concept under Brazilian law), pursuant to Law no. other aspects related to the sector under analysis. CADE ensures 9.307/1996, such as the following: a) the imposition of contract the preservation of competition, aiming, among other things, at penalties and calculation thereof; b) disputes arising from the the diversity and quality of products and services provided to execution of guarantees; c) the calculation of indemnities arising consumers. In the transactions of the oil and gas sector, ANP will from the termination or transfer of the Agreement; d) the breach of be heard, according to the cooperation agreement mentioned in contract obligations by any party; and e) actions related to contract question 11.1 above. right or obligation. After completing the analysis of the concentration, within 240 days (extendable for another 90 days), CADE may approve 13.2 Is your jurisdiction a signatory to, and has it duly the transaction (with or without restrictions) or simply reject the ratified into domestic legislation: the New York transaction. Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and/or the Convention on the Settlement of Investment Disputes between States 12 Foreign Investment and International and Nationals of Other States (“ICSID”)? Obligations Brazil is a signatory only to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed in 12.1 Are there any special requirements or limitations on 1958, and ratified and incorporated into the domestic legal system acquisitions of interests in the natural gas sector in 2002. (whether development, transportation or associated infrastructure, distribution or other) by foreign companies? 13.3 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 In general, Brazil has no restriction on foreign investment in oil and or State organs (including any immunity)? gas. However, concessions and authorisations are only granted to companies organised and existing under the laws of Brazil. The The main obstacle faced by Brazilian litigation is the delay of the legal, technical and financial requirements required by regulators for proceedings in the Brazilian courts. This is due to the large amount each specific activity must also be observed. of proceedings in these courts. Thus, the arbitration mechanism, although of a higher cost, has been an alternative to those who 12.2 To what extent is regulatory policy in respect of the wish to obtain judgments within a more reasonable time than those oil and natural gas sector influenced or affected rendered by judicial courts. by international treaties or other multinational arrangements? However, the enforcement of the arbitration award has been very slow, especially if issued abroad, since, to this end, it has to be ratified by the Brazilian courts. The international treaties and other multinational arrangements that are ratified by the Brazilian Congress and by the President enter into force and effect in Brazil, with force of law.

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13.4 Have there been instances in the oil and natural gas 14 Updates sector when foreign corporations have successfully obtained judgments or awards against Government authorities or State organs pursuant to litigation 14.1 Please provide, in no more than 300 words, a before domestic courts? summary of any new cases, trends and developments in Oil and Gas Regulation Law in your jurisdiction. Most of the cases in which a foreign corporation files a lawsuit against government authorities in Brazil deals with tax matters. Over the last years, many measures have been implemented to Regulatory matters are usually disputed under administrative or stimulate the development of the Brazilian oil and gas industry. arbitration proceedings initiated before ANP. The end of Petrobras’ obligation to be the sole operator of the pre- Brazil With regard to disputes involving tax matters, there are several salt, and to participate in the consortia to explore such areas, brought decisions in favour of foreign corporations regarding the payment the opportunity to streamline the development of these reservoirs. of a state tax that is charged in the temporary import of equipment ANP’s multiannual plan for the supply of areas (bidding rounds) to be used in the exploration and production of oil and gas. The brings Brazil to the attention of investors, in addition to new local Brazilian Supreme Court has recently ruled that this tax is not due content policy, tax benefits extension, royalties reduction for new in temporary import of goods, and as result, there are an important frontiers and mature basins, etc. number of cases in which the foreign company has obtained a Federal Government programmes have been launched to revitalise judicial decision allowing the temporary import of drilling rigs, and onshore areas and to foster the development of the gas industry. many other types of equipment used by oil companies without the Furthermore, the Petrobras Divestment Plan for the sale of interests payment of the state tax. in production fields and subsidiaries, together with the initiatives in Regulatory matter can be mentioned in regard to two arbitration the Congress to enable Petrobras to sell part of its interests under the proceedings initiated by British Petroleum and Enron related to OAAs, will certainly unfold new opportunities for foreign investors. obtaining access to the Bolivia – Brazil Gas Pipeline. In both cases, ANP has decided in favour of the foreign companies.

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José Roberto Carolina Assano Faveret Cavalcanti Massocato Escobar Faveret Lampert Advogados Faveret Lampert Advogados Av. Rio Branco, 134 – 14th floor Av. Rio Branco, 134 – 14th floor Rio de Janeiro – RJ Rio de Janeiro – RJ Brazil Brazil

Tel: +55 21 3031 8448 Tel: +55 21 3031 8448 Email: [email protected] Email: [email protected] URL: www.ftlt.com.br URL: www.ftlt.com.br Brazil

José graduated from the Rio de Janeiro State University in 1986. He Carolina has extensive experience in upstream transactions and joined Villemor Amaral Advogados in 1986, where, for 25 years, he regulatory advisory, having worked for more than 15 years as an in- was the leader of the infrastructure and projects practices. house lawyer and regulatory advisor for international and national oil companies, namely Repsol, Shell and Dommo Energia (formerly OGX José holds more than 15 years of experience in the areas of energy Petróleo e Gás). and oil & gas, where he has represented Petrobras and many other state gas distributors in several structuring projects, greenfield Within these companies, Carolina has worked in several key development, commercial agreements, funding structures (he has projects and transactions involving M&A transactions (Farmin/Farmout been a pioneer in representing Petrobras in project finance related Agreements, PSA, JOA, AMI, JSBA, etc.), bid rounds (in Brazil to oil fields, floating production unities, natural gas pipelines, power and Colombia), unitisation, E&P contracts (seismic acquisition, plants, petrochemical plants), regulatory advisory and licensing. MSA, charter agreements, etc.), oil trading, regulatory advisory, administrative proceedings and liaison with regulatory entities and As external counsel of Petrobras, he has led several projects and relevant stakeholders. transactions that were landmarks for the foundation of the current format of the gas industry in Brazil. Carolina has acquired great knowledge over the years on the activities inherent to the oil & gas industry, which qualifies her to provide Due to his vast experience in the oil and gas industry as Petrobras valuable regulatory advice and advocacy before the ANP. external legal counsel, he was invited in 2007 to take the position of General Counsel of OGX Petróleo e Gás Participações S.A.

Faveret Lampert is a law firm formed by some of the most experienced lawyers in the Brazilian infrastructure field, advising on corporate issues, disputes, project development and financing of assets in the energy, natural resources, logistics and infrastructure sectors. We are a business law boutique headquartered in Rio de Janeiro (offices in Downtown and Ipanema), currently acting for some of the largest companies in Brazil. We have a proven track record of working in large and complex projects and a solid and dedicated team to oil and gas transactions. Our expertise in the field comprises the entire value chain, from production (upstream), LNG (including regasification and sales) to transportation pipelines, processing facilities, petrochemicals and the marketing and trading of fuels. Our clients benefit from the direct and continuous participation of the senior partners in the work and from the experience that they have gained by being involved in some of the most complex cases, transactions and projects in the last decades in Brazil.

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Canada Kevin Kerr

Blake, Cassels & Graydon LLP Christine Milliken

There are currently 14 LNG terminals proposed for development 1 Overview of Natural Gas Sector in the Province of British Columbia and approximately half of that number proposed in the East Coast Provinces of Canada. (Source: 1.1 A brief outline of your jurisdiction’s natural gas Natural Resources Canada). sector, including a general description of: natural Canada currently has a single LNG importation and regasification gas reserves; natural gas production including facility – the Canaport LNG facility in New Brunswick on Canada’s the extent to which production is associated or Atlantic coast (the “Canaport Facility”) – and no LNG liquefaction non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) and export facilities. liquefaction and export facilities, and/or receiving and Canada has over 949 Bcf of storage capacity, amounting to over re-gasification facilities (“LNG facilities”); natural gas 30% of Canada’s annual natural gas demand (source: National pipeline transportation and distribution/transmission Energy Board and Natural Resources Canada). According to network; natural gas storage; and commodity sales Natural Resources Canada, this capacity has been increasing at a and trading. rate of 5% per year for the past decade. Canada is the world’s fourth-largest natural gas producer, behind Canada’s natural gas markets are unregulated and this has fostered the United States, Russia and Iran (source: Natural Resources the development of a sophisticated wholesale energy trading Canada). As of 2018, Canada has approximately 73 trillion cubic market. The Canadian and United States gas markets are integrated feet of proved natural gas reserves. In 2017, Canada produced and operate as a single North American market. There are three a total of 18.1 billion cubic feet (Bcf) of natural gas per day, of major pricing points for North American natural gas. The Henry which approximately three quarters was produced in the province of Hub in Louisiana is the pricing point for the New York Mercantile Alberta (source: CERI). Exchange (“NYMEX”), while the AECO-C Hub in south-eastern Alberta and the Dawn Hub in Ontario are the primary pricing points Canada is the United States’ number one foreign supplier of in Canada. The retail and commercial natural gas supply in Canada natural gas, with approximately 97% of the United States’ natural is regulated to varying degrees across the country according to the gas imports coming from Canada (source: EIA). From its peak in respective provincial regulatory body. 2007, exports of natural gas from Canada to the United States have declined by approximately 25% to a low in 2014, as production of shale gas in the United States has driven down domestic prices, 1.2 To what extent are your jurisdiction’s energy reducing the demand for natural gas imports from Canada (source: requirements met using natural gas (including LNG)? EIA). However, Canadian natural gas exports to the United States have recovered from 2014 levels and are on the rise. As of 2017, Natural gas accounts for 34% of Canada’s total primary energy exports of natural gas from Canada to the United States are at supply (“TPES”), oil accounts for 35%, followed by hydro (12%), approximately 85% of the peak 2007 level. (Source: National nuclear (10%), coal (6%), and biofuels, wind, solar and geothermal Energy Board). Western Canadian natural gas continues to compete comprising (6%) of TPES (source: IEA, 2016). for market share in Central and Eastern Canada, where closer natural Natural gas supplies approximately 8% of Canada’s total annual gas supplies are increasingly available from the United States. electrical energy production needs. Renewables, which include Canada has an extensive natural gas transportation system linking hydro (60%), wind (4%), biofuels & waste (2%) and solar (1%) the Western Canadian Sedimentary Basin to markets in Eastern account for approximately 67%, followed by nuclear which supplies North America, the Midwest and California. There are 54 natural 16%, coal which supplies 8%, and oil which supplies 1% (source: gas pipelines that cross the Canada-United States border (source: IEA). Government of Canada). Export pipelines originating in Ontario have been adapted to enable bi-directional gas flow to accommodate 1.3 To what extent are your jurisdiction’s natural gas the increase in imports of shale gas to Central Canada from the requirements met through domestic natural gas United States. production? As competition from the United States’ domestic supply has decreased demand for Canadian natural gas exports to the United Despite Canada’s capability to meet its natural gas requirements States, Canadian natural gas companies continue to develop LNG through domestic natural gas production, Central and Eastern facilities in an attempt to access new foreign natural gas markets. Canada have both increased imports of natural gas from the north-

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eastern United States, where an abundance of supply has driven Canada’s total crude oil and equivalent exports (source: Natural down the price of natural gas. In 2017, approximately 870 Bcf Resources Canada). In 2017, Canada was the largest foreign supplier of natural gas was imported to Canada primarily from the United of crude oil to the United States, accounting for 43% of total crude States, but also small amounts through the Canaport Facility oil imports (source: Natural Resources Canada). (source: Natural Resources Canada). 3 Development of Oil and Natural Gas 1.4 To what extent is your jurisdiction’s natural gas production exported (pipeline or LNG)? 3.1 Outline broadly the legal/statutory and organisational framework for the exploration and production Canada Canada is the fourth-largest exporter of natural gas. In 2017, Canadian exports to the U.S. increased and were at the highest level (“development”) of oil and natural gas reserves including: principal legislation; in whom the State’s since 2012 (source: National Energy Board). In 2017, 51% of all mineral rights to oil and natural gas are vested; natural gas produced in Canada was exported to the United States Government authority or authorities responsible for with the vast majority of exports delivered by pipeline (source: the regulation of oil and natural gas development; and Natural Resources Canada). current major initiatives or policies of the Government Canada does not currently have any LNG liquefaction and export (if any) in relation to oil and natural gas development. capacity. However, as of 2018, a total of approximately 215.8 million metric tonnes per annum of liquefaction capacity had been proposed Canada’s Federal and provincial governments share jurisdiction for Western Canada (i.e. Pacific coast) and a further 49.3 million over Canadian energy policy, as well as the legal and regulatory metric tonnes per annum for Eastern Canada (i.e. Atlantic coast). In framework for the exploration of Canadian oil and natural gas 2018, LNG Canada made a positive investment decision to proceed reserves. Accordingly, there is no single energy policy or regulatory with its $40 billion LNG project in northern British Columbia (see body governing the development of oil and natural gas reserves question 14.1 for additional information). in Canada. In addition to regulating the oil and gas industry in Canada, the Federal and provincial governments are also owners of the majority of Canada’s mineral rights, with the provincial 2 Overview of Oil Sector governments being the major holders of mineral rights in Canada. The Federal government’s ownership of mineral rights is much smaller in comparison to the provincial governments’ ownership of 2.1 Please provide a brief outline of your jurisdiction’s oil mineral rights, with most of the Federal governments’ ownership sector. rights being made up of oil and gas rights in Canada’s national parks and Aboriginal lands. Canada is the world’s fourth-largest crude oil producer and ranks third in oil reserves (behind Saudi Arabia and Venezuela), with 167.7 Federally owned oil and gas rights are governed by the Canadian billion barrels of estimated proven oil reserves, and of that number, Petroleum Resources Act and the Canada Oil and Gas Operations 163.4 billion barrels are located in the Alberta oil sands (source: Act. Provincially owned oil and gas rights are governed by each Natural Resources Canada). Canada’s proximity to the United province’s respective legislation governing the exploration and States and its stable political, legal and financial regime has resulted production of oil and natural gas. The National Energy Board in significant international investment in its oil industry. Canada’s (the “NEB”) is the Federal agency that handles the majority of the oil industry includes a diverse composition of companies engaged in responsibilities regarding the regulation of interprovincial pipelines exploration and production, transportation, upgrading and refining. and energy development and trade, while each province has its own regulatory body with responsibility over intraprovincial projects. Canada’s Federal government has recently completed a review of the 2.2 To what extent are your jurisdiction’s energy NEB’s structure, role and mandate to ensure its composition reflects requirements met using oil? regional views and has sufficient expertise in environmental science, community development and Indigenous traditional knowledge. As Approximately 31% of Canada’s energy demand is supplied through a result of such, review draft legislation to, among other things, the consumption of oil (source: US EIA). replace the NEB with a New Canadian Energy Regulator and significantly change the way in which Federal, interprovincial and 2.3 To what extent are your jurisdiction’s oil requirements international energy projects in Canada are reviewed and approved, met through domestic oil production? has been introduced, but has not yet come into force. There are hundreds of privately owned and publicly listed companies Canada’s oil requirements are primarily met through domestic oil that are engaged in the exploration and production of oil and natural production (source: US EIA). In 2017, Canada produced approximately gas in Canada. These companies obtain the right to explore, drill 4.2 million barrels of oil per day, while it consumed 1.8 million barrels and produce oil and natural gas primarily from the provincial of oil per day (source: Natural Resources Canada). Despite Canada’s governments. capability to meet its oil requirements through domestic crude oil Although the majority of Canada’s oil and natural gas is owned by production, in 2017, total crude oil imports averaged approximately the Federal and provincial governments, some oil and gas rights 670,000 barrels per day (source: National Energy Board). are held by private landowners. For example, in the province of Alberta, approximately 14% of Alberta’s oil and gas rights are 2.4 To what extent is your jurisdiction’s oil production privately owned. Companies obtain the right to explore, drill and exported? produce oil and natural gas from private landowners by way of a privately negotiated oil and gas lease. In 2017, Canada exported 3.3 million barrels of crude oil per day to the United States, which accounted for approximately 99% of

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3.2 How are the State’s mineral rights to develop oil 3.6 Are there any restrictions on the export of and natural gas reserves transferred to investors or production? companies (“participants”) (e.g. licence, concession, service contract, contractual rights under Production Pursuant to the National Energy Board Act (Canada) (the “NEB Sharing Agreement?) and what is the legal status of Act”), oil or gas may not be exported without a licence issued by the those rights or interests under domestic law? NEB. Any oil or gas exporter must also otherwise be in compliance with the exportation requirements set out in the NEB Act and The oil and natural gas rights owned by Federal and provincial applicable regulations to export oil and gas production. governments, and private individuals, as discussed above, are

transferred to participants through licences and/or leases to explore Canada for, develop and produce oil and/or natural gas. 3.7 Are there any currency exchange restrictions, or restrictions on the transfer of funds derived from Once a licence or lease is issued, a participant is entitled to production out of the jurisdiction? explore for, develop and produce oil and natural gas in accordance with the terms of the licence or lease. At the end of the term, or There are generally no currency exchange restrictions or restrictions upon termination of the licence or lease, the rights granted to the on the transfer of funds derived from production out of Canada. participant will revert to the owner who issues the licence or lease.

3.8 What restrictions (if any) apply to the transfer or 3.3 If different authorisations are issued in respect of disposal of oil and natural gas development rights or different stages of development (e.g., exploration interests? appraisal or production arrangements), please specify those authorisations and briefly summarise the most important (standard) terms (such as term/duration, A lease issued for the development of oil and natural gas will govern scope of rights, expenditure obligations). the ability of a participant to transfer or dispose of its oil and natural gas development rights. With respect to Federal and provincial Authorisations in respect of different stages of development are leases, the transfer of development rights is generally permitted typically addressed in the lease agreement or the licence issued by and frequently occurs in Canada’s oil and gas industry. Ownership the mineral owner. In some cases, a licence may first be issued to changes are typically approved by and registered with the applicable allow a participant the opportunity to conduct certain exploration provincial registrar. activities in order to confirm the existence of oil and natural gas With respect to leases issued by a private landowner, transfer reserves covered by such licence. Upon proving the existence of or disposition of oil and natural gas development is generally such oil and gas reserves, a lease for the production and development permitted, subject to certain restrictions. A typical restriction would of such reserves is subsequently issued. give the mineral rights owner the rights to withhold its consent to a A typical oil and natural gas lease would include the following transfer where the transferee may not have the financial resources or standard provisions: (a) a granting clause specifying the mineral technical expertise to develop and produce the resources. rights that can be explored for and produced; (b) provisions respecting The Investment Canada Act includes restrictions on the sale of oil the terms of the lease; (c) royalty provisions reserving a royalty and gas rights and interests to foreign investors. See question 12.1 to the lessor of the lease; (d) rights of the lessee to undertake for a discussion of those restrictions. activities to continue the lease; (e) clauses addressing abandonment and reclamation obligations; and (f) liability and indemnification provisions. 3.9 Are participants obliged to provide any security or guarantees in relation to oil and natural gas development? 3.4 To what extent, if any, does the State have an ownership interest, or seek to participate, in the Depending on the jurisdiction, participants who do not have development of oil and natural gas reserves (whether sufficient capital resources may be required to provide a form of as a matter of law or policy)? security in relation to oil and natural gas development, particularly in relation to abandonment and reclamation obligations. For Canadian Federal and provincial governments do not seek to directly example, the Alberta Energy Regulator (the “AER”) requires a participate in the development of oil and natural gas reserves. licensee to maintain a ratio of deemed assets to deemed liabilities Rather, as outlined above, the governments lease their mineral (known as a Liability Management Rating or “LMR”) above 1.0. rights to privately held and publicly listed oil and gas companies to If a licensee’s LMR falls below the 1.0 threshold, the licensee explore for, develop and produce oil and natural gas. is required to provide a security deposit equal to the difference between the licensee’s deemed liabilities and deemed assets. 3.5 How does the State derive value from oil and natural gas development (e.g. royalty, share of production, 3.10 Can rights to develop oil and natural gas reserves taxes)? granted to a participant be pledged for security, or booked for accounting purposes under domestic law? Federal and provincial governments and private landowners derive value from their ownership of mineral rights by issuing leases to oil An oil and gas lease is considered to be a form of intangible and gas producers, which leases include provisions (a) reserving to personal property, and thus can generally be pledged for security. themselves a royalty that is calculated with respect to the volume Oil and natural gas reserves can be booked for accounting purposes. of oil and natural gas produced from the lands, and (b) imposing an General rules for booking reserves are found in the Canadian Oil obligation on the lessee to make a prescribed annual payment when and Gas Evaluation Handbook. no production has been derived from the lands.

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In Alberta, the Mines and Minerals Act provides that the owner 3.11 In addition to those rights/authorisations required of the oil and natural gas rights also owns the storage rights with to explore for and produce oil and natural gas, what respect to the underground formations that form a part of the oil and other principal Government authorisations are natural gas rights. Storage rights under the Mines and Minerals Act required to develop oil and natural gas reserves (e.g. environmental, occupational health and safety) and provide the holder with the right to inject natural gas into a reservoir from whom are these authorisations to be obtained? for the purpose of storage. In order to inject natural gas into a storage reservoir, a licence must first be obtained from the AER to There is a vast amount of legislation and regulations that apply to drill an injection well, which licence is issued pursuant to the Oil the development of oil and natural gas reserves. Perhaps the most and Gas Conservation Act (Alberta). In determining whether to issue a licence for the storage of natural gas, the AER takes into

Canada significant legislation outside of exploratory and production regimes concerns the protection of the environment and the health and safety consideration conservation, equity, environmental, safety, capacity of persons actively engaged in the production of oil and natural gas. and deliverability issues. The Federal and provincial governments share responsibility for the In Ontario, the owner of the oil and natural gas rights also owns protection of the environment and for occupational health and safety the storage rights with respect to underground formations. The standards in Canada. The Canadian Environmental Protection Act Oil, Gas and Salt Resources Act (Ontario) governs the drilling of is the primary Federal legislation governing the protection of the a well for the purpose of storage, and establishes the regulatory environment. Each province has also enacted province-specific framework for the issuance of a licence from the Ontario Energy legislation concerning environmental protection. Environmental Board to drill a well for the purpose of injecting substances into protection legislation in Canada addresses key concerns such as land underground formations. The Ontario Energy Board issues storage contamination, air quality, waste disposal, water contamination, licences pursuant to the Ontario Energy Board Act, and has broad wildlife protection and abandonment and reclamation obligations. authority to designate gas storage areas to ensure the safe operation The Canada Labour Code is the primary Federal legislation and development of gas storage facilities. governing occupational health and safety, while each province has also enacted specific occupational health and safety legislation. 3.14 Are there any laws or regulations that deal specifically In all jurisdictions, employers are required to take every reasonable with the exploration and production of unconventional precaution to protect the health and safety of their workers and oil and gas resources? If so, what are their key persons attending project sites. Occupational health and safety features? legislation imposes health and safety obligations for both employers and employees in order to minimise the risk of workplace accidents. There are no laws or regulations that deal specifically with the In some provinces, this obligation extends to the protection of exploration and production of unconventional oil and gas resources the health and safety of all individuals at or near the employer’s in Canada. Existing Federal and provincial legislation and the rules workplace, whether or not those individuals are employees. and directives issued by provincial regulators applicable to oil and gas resource exploration and production, generally continue to apply to the exploration and production of unconventional oil and 3.12 Is there any legislation or framework relating to gas resources in Canada. the abandonment or decommissioning of physical structures used in oil and natural gas development? If so, what are the principal features/requirements of the legislation? 4 Import / Export of Natural Gas (including LNG) Each of the Federal and provincial governments have enacted legislation to govern the abandonment and reclamation of lands 4.1 Outline any regulatory requirements, or specific subject to oil and natural gas development. The key components terms, limitations or rules applying in respect of of abandonment and reclamation obligations under Federal and cross-border sales or deliveries of natural gas provincial legislation include: (i) the removal of equipment, buildings (including LNG). and other structures; (ii) the decontamination of such buildings, structures, land or water; (iii) stabilisation, contouring, maintenance Natural gas imports and exports are regulated in Canada by the NEB. and conditioning of affected lands; (iv) reconstruction and Section 116 of the NEB Act prohibits the export or import of any oil revegetation of the surface of the land; and (v) any other procedures or natural gas, except in accordance with a licence issued under Part or requirements that may be specified by the legislation in the VI of the NEB Act or as may be authorised under the regulations. The applicable jurisdiction. NEB may issue an order authorising the importation or exportation of gas pursuant to section 15 of the National Energy Board Act Part 3.13 Is there any legislation or framework relating to VI (Oil and Gas) Regulations (Canada) (“Part VI Regulations”). gas storage? If so, what are the principal features/ Both an order and a licence for the exportation or importation of requirements of the legislation? natural gas may be issued for periods of two to 20 years, in quantities of not more than 30,000 m3 per day. For the exportation of natural There are various Federal and provincial statutes and regulations gas for subsequent importation or the importation of natural gas that govern the storage of natural gas in jurisdictions throughout for subsequent exportation, an order may be issued for a period of Canada. The jurisdiction within which a storage facility is located two to 25 years. However, further approval from the provincial is determinative of whether the facility is Federally or provincially regulatory body may be required in order to remove natural gas administered. The majority of gas storage facilities in Canada are from the province. located in the provinces of Alberta and Ontario given the proximity While an order authorises the importation and exportation of natural of these jurisdictions to large upstream production (Alberta) and gas, a licence may impose additional terms and conditions with distribution points (Ontario). respect to, among other things, the duration, quantity, tolerance

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levels, points of exportation or importation, and environmental While the primary authorisations for interprovincial or international requirements. A public hearing must be held by the NEB before a pipelines and associated infrastructure are under Federal jurisdiction licence is granted. and issued by the NEB, specific aspects of the pipeline or infrastructure LNG exportation requires a separate licence from the NEB. To project, such as construction, safety and environmental matters, may date, these have generally been issued for terms of 20–25 years and also be subject to provincial jurisdiction and oversight. At both the include maximum annual quantities (subject to a 15% tolerance over provincial and Federal levels of government, there are numerous any 12-month period) and maximum term quantities. However, in statutes and agencies that oversee the construction, operation, safety 2015 the maximum term for LNG export licences was extended and abandonment of oil and gas pipelines. There are also varying from 25 years to 40 years, and some project proponents already in statutes and regulations governing oil and gas transportation and possession of issued export licences have since applied to have their associated infrastructure involving First Nations lands, offshore Canada licences extended for a 40-year term. areas, and the Canadian Arctic.

6.2 What governmental authorisations (including 5 Import / Export of Oil any applicable environmental authorisations) are required to construct and operate oil and natural gas transportation pipelines and associated 5.1 Outline any regulatory requirements, or specific infrastructure? terms, limitations or rules applying in respect of cross-border sales or deliveries of oil and oil products. The construction and operation of interprovincial or international transportation pipelines are regulated by the NEB under the NEB Oil imports and exports are regulated in Canada by the NEB and are Act. The process for approval depends on a number of factors, governed by similar regulations to those of natural gas, subject to including the scope of the pipeline project. Major pipeline projects the differences highlighted herein. might undergo a written or oral hearing to consider issues of interest to various types of interveners, including landowners, Aboriginal The NEB Act requires a licence for the exportation of oil for any communities, municipalities, provincial governments, and other period exceeding that granted by an order. The licence may impose stakeholders. The issues vary, but can include topics related to terms and conditions similar to those in natural gas licences, as safety, the environment, technical considerations and stakeholder outlined in question 4.1. A public hearing must be held by the NEB consultation outcomes. The NEB coordinates the input of other before a licence is granted. Pursuant to section 24 of Part VI of the Federal and provincial agencies into the approval process and makes NEB Act’s Regulations, the importation of oil is exempt from the its decisions in the public interest. licence and order requirements set out in the NEB Act, Part VI. Following a hearing, the NEB will issue a report to the Federal Pursuant to section 28 of Part VI of the NEB Act’s Regulations, government detailing its recommendation regarding whether a major an order issued under the NEB Act for exportation of heavy crude pipeline project should be approved, and, if so, the conditions the oil may be issued for a period not exceeding two years. To export approval should be subject to, if any. After reviewing the report, oil other than heavy crude the period cannot exceed one year. the Federal government will direct the NEB to approve or deny Such order may impose terms and conditions similar to a licence the project. The NEB will issue successful project proponents a and, in addition, will include a requirement that a contract for the certificate of public convenience and necessity (a “CPCN”) which exportation of oil for a term exceeding one month must relieve the will allow for the construction and operation of the pipeline. A holder of the order of any obligation to export oil under the contract CPCN is subject to whatever terms and conditions the NEB considers should exportations be restricted by the Government of Canada. necessary or desirable in the public interest. An environmental assessment pursuant to the Canadian Environmental Assessment Act, 6 Transportation 2012 (“CEAA 2012”) may also be required in connection with the NEB’s approval of a pipeline project. Separate applications will also need to be made to the NEB to set tolls or terms and conditions of 6.1 Outline broadly the ownership, organisational and access and the export and import of oil and gas through the pipeline. regulatory framework in relation to transportation The authorisations required for the construction of an intraprovincial pipelines and associated infrastructure (such as natural gas processing and storage facilities). transportation pipeline vary depending on the province or territory and the governing provincial authority. Where required, the provincial regulators are responsible for conducting provincial environmental Each of the provincial and Federal governments of Canada has assessments related to energy resources activities. In some cases, the enacted legislation to oversee energy resource development Federal and provincial environmental assessments may be combined throughout the country. The regulatory process that applies depends into a joint environmental assessment or the province may agree to on the nature of the facilities and the applicable regulator. rely on the conclusions reached in a single Federal environmental The regulation of energy infrastructure primarily falls under the process. In addition to approvals for the construction and operation jurisdiction of the provinces, unless the work or undertaking is of the proposed pipeline project, provincial regulations might also interprovincial or international in scope, in which case such work govern, among other things, environmental approvals, surface or undertaking falls under Federal jurisdiction. At the Federal level, rights, compensation, and transportation rights. Federal regulatory transportation pipelines and associated infrastructure are primarily approvals may also be required for provincially regulated pipelines, governed by the NEB. The NEB is also responsible for regulating including in relation to dispositions of Federal Crown lands, First tolls and tariffs of interprovincial or international pipelines. At Nations land access, fisheries, navigable waters and species at risk. the provincial level, transportation pipelines and associated The Federal government is currently undergoing a review process infrastructure that are located wholly within a province, and not of the CEAA 2012, the NEB Act and associated legislation. On otherwise an integral part of a Federally regulated pipeline, are February 8, 2018, the Federal government introduced the Impact governed by the respective provincial or territorial regulator. Assessment Act (“Bill C-69”) in the House of Commons. Bill

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C-69 varies significantly from the CEAA 2012 and, if passed, will must meet the “just and reasonable” and “no unjust discrimination” impose increased assessment and consultation obligations on project standards set by the NEB. A transportation contract must pass the proponents, and was introduced and given a first reading in the “economic feasibility” test, which means the investment will be Senate on June 20, 2018. As of November 5, 2018, Bill C-69 is not recovered over the life of the pipeline through the payment of a yet in force. demand charge. Pipeline companies are entitled to the opportunity to recover their cost of capital and the overall return on capital must meet the “fair return standard” set by the regulator. 6.3 In general, how does an entity obtain the necessary land (or other) rights to construct oil and natural gas transportation pipelines or associated infrastructure? 6.5 To what degree are oil and natural gas transportation Do Government authorities have any powers of

Canada pipelines integrated or interconnected, and how is co- compulsory acquisition to facilitate land access? operation between different transportation systems established and regulated? There are Federal and provincial processes that an entity may be required to follow in order to obtain the necessary land (or other) rights Various gas transportation pipelines are integrated or interconnect at to construct oil and natural gas transportation pipelines or associated differing levels. Numerous Federal pipeline systems are integrated infrastructure, depending on the jurisdiction under which the pipeline with provincial pipeline systems located wholly within a province. project is regulated. Such processes include public consultation and These pipeline systems may be functionally integrated and subject notification requirements which may arise during the application to common management, control and direction. There may be a process for the pipeline or associated infrastructure project. The common ownership, purpose, and physical connection between the process for obtaining access depends on whether the land is freehold pipeline systems. In such cases, a pipeline that is otherwise located (privately held) land, Federal or provincial Crown land. wholly within a province will be subject to Federal regulation. For Federally regulated projects to be constructed on Federal Along with transportation pipelines being interconnected and Crown land, the project proponent will need to obtain a Crown integrated within Canada, there are various interconnections with land disposition or go through the appropriate regulator if there is the pipeline system in the United States of America. The different an occupant on the land who refuses to grant access. On freehold regulators and commissions throughout Canada and internationally, lands, the proponent will need to come to an agreement with the work with each other, as required, to assist in this integration and landowner in order to obtain access. Land acquisition agreements interconnection of pipeline systems. may be entered into before project approval; however, the NEB Act A pipeline that is interprovincial or international (either because it outlines specific content that must be included in these agreements. crosses borders or is functionally integrated with a Federally regulated If the proponent and the landowner cannot reach an agreement, the pipeline) falls under the jurisdiction of the NEB, is regulated in proponent may apply for a right of entry to the lands required for the accordance with Federal pipeline standards and is subject to Federal project. Rights of entry are only available after the project receives application processes and conditions necessary for approval of the approval, and may be granted by the NEB or relevant provincial construction and operation of such pipeline system. If the operator of regulator. The provincial regulator or a specialised Federal tribunal the existing pipeline refuses an interconnection with a new pipeline, will oversee and determine the compensation owed to the landowner the entity desiring the interconnection could apply for an NEB order by the proponent if compensation is not settled by agreement. to force the operator to accept the interconnection, subject to certain considerations such as whether the interconnection would impose an undue burden on the operator of the existing pipeline. Please see 6.4 How is access to oil and natural gas transportation question 6.2 for further details on the required authorisations and pipelines and associated infrastructure organised? application processes for constructing a transportation system.

Oil pipelines are traditionally (but not always) common carrier An example of an integrated pipeline system within Canada is the pipelines. By statute, common carrier oil pipelines are required to pipeline system owned by NOVA Gas Transmission Ltd. This accept and transport all oil tendered. There are allocation provisions system, which is subject to Federal jurisdiction, runs through various in place to manage oversubscription of common carrier oil pipelines. provinces and is functionally integrated, under common ownership, In addition to common carrier pipelines, there are oil pipelines as well as common management, control and direction. underpinned by long-term transportation contracts for all or a portion of the pipeline capacity as well as numerous provincial non-common 6.6 Outline any third-party access regime/rights in carrier pipelines. At the Federal level, the NEB requires contract respect of oil and natural gas transportation and carrier pipelines to offer transportation contracts to all entities on associated infrastructure. For example, can the the same terms and conditions (referred to as “open season”) and regulator or a new customer wishing to transport to retain a portion of the pipeline capacity for uncontracted (“spot”) oil or natural gas compel or require the operator/ owner of an oil or natural gas transportation pipeline shipments to fulfil the pipeline’s common carrier obligations. or associated infrastructure to grant capacity or Natural gas pipelines are traditionally contract carriers. This means expand its facilities in order to accommodate the new that pipeline space is allocated by private transportation contracts customer? If so, how are the costs (including costs for all or a portion of the pipeline’s capacity. While the terms of of interconnection, capacity reservation or facility the transportation contracts are negotiated amongst the contracting expansions) allocated? parties, the NEB is responsible for ensuring “equal tolls for equal service” under the NEB Act for pipelines falling under Federal As noted in question 6.4, third-party access rights may depend on jurisdiction. Provincial regulators are responsible for regulating whether a pipeline has been designated a common carrier pipeline intraprovincial pipeline contracts and tolls under their respective or a contract carrier pipeline. Depending on such designation, there enabling statutes. are particular regulatory processes by which an operator can be required to expand its pipeline system. Transportation contracts have varying terms and while pricing can be negotiated on an individual basis or based on the cost of service, it

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In the case of a contract carrier pipeline, it is unlikely that a shipper or the applicable regulator would be able to force access to the pipeline 7.2 What governmental authorisations (including any and associated infrastructure, although there are mechanisms to applicable environmental authorisations) are required to operate a distribution network? do so in discrete cases. For example, in the Province of Alberta, a shipper could apply to the Alberta Energy Regulator (the “AER”) to have a contract pipeline designated as a common carrier pipeline In general, an LDC requires a licence from the provincial regulator and force access to the pipeline and associated infrastructure. If to construct and operate a distribution network, and the tariffs of the expansion of a natural gas pipeline or storage facility is required, LDC must then be approved by the provincial utilities commission. then the costs will either be borne pro rata by the shippers on the An LDC may be able to obtain exclusive franchise rights to operate pipeline system or imposed more heavily on the shippers of the new in an area, either under the operating licence or via a municipality volumes to be accommodated, as determined by the appropriate franchise agreement. Canada regulatory board having jurisdiction. 7.3 How is access to the natural gas distribution network organised? 6.7 Are parties free to agree the terms upon which oil or natural gas is to be transported or are the terms (including costs/tariffs which may be charged) An LDC must provide distribution services to all end-users on or regulated? near their distribution network in a non-discriminatory fashion and in accordance with the tariffs sanctioned by the provincial utilities If the pipeline falls under Federal jurisdiction, the NEB is responsible commission. for determining the tolls and tariffs which apply to the transportation services provided by such pipeline and will continue to monitor 7.4 Can the regulator require a distributor to grant these tolls and tariffs throughout the operation of the pipeline. The capacity or expand its system in order to pipeline owner/operator must submit an application for approval of accommodate new customers? the tariff and the appropriate regulatory board will determine the tolls and tariffs to be offered to parties wishing to transport oil or Provincial utilities commissions can typically order an LDC to natural gas on that particular pipeline. For smaller pipelines, the provide distribution services to an end-user not currently connected NEB operates on a complaint-based approach where disputes over to the distribution system. An order to connect and provide non- set costs/tariffs are settled between the pipeline operator and the discriminatory access may be granted if such an order does not cause party using the service. Similar regimes exist for intraprovincial undue burden to the current ratepayers connected to the distribution pipelines as determined by the provincial regulator. system, as current ratepayers would be required to pay their pro rata share of costs incurred to facilitate such a connection. 7 Gas Transmission / Distribution 7.5 What fees are charged for accessing the distribution network, and are these fees regulated? 7.1 Outline broadly the ownership, organisational and regulatory framework in relation to the natural gas As general practice, a provincial utilities commission will set the transmission/distribution network. rate as part of the tariff that an LDC may charge for providing distribution services. When setting a rate, the regulator will attempt As discussed in question 6.1, natural gas transmission pipelines to balance the interests of both end-users and the LDC; end-users in Canada are privately owned high-pressure lines that transport must receive safe and reliable service at just and reasonable rates, natural gas, primarily from the gas-producing western provinces but the rates must provide the LDC’s shareholders with a fair return to the rest of the country and parts of the United States. As the on their capital investment. natural gas transmission pipeline network predominantly involves interprovincial pipelines, this sector is regulated by the NEB, which also approves transmission tariffs. 7.6 Are there any restrictions or limitations in relation to acquiring an interest in a gas utility, or the transfer Natural gas is distributed to end-users through a network of of assets forming part of the distribution network low-pressure intraprovincial pipelines that fall under provincial (whether directly or indirectly)? jurisdiction. Provincial governments delegate their authority to oversee distribution pipelines to specialised utilities commissions. In general, no change in control of the voting securities of an LDC In addition, each province will generally have one or more private or the transfer of any assets forming part of a distribution network or government-owned utilities responsible for gas distribution, may occur without regulatory approval from the provincial utilities commonly called “local distribution companies” or “LDCs”. It is commission (or commissions) with jurisdiction over the LDC or the responsibility of each provincial utilities commission to oversee LDC assets at issue. and approve the services, rates and operations of the LDCs. For the most part, LDCs are granted exclusive franchise rights to provide non-discriminatory distribution services in a particular area or 8 Natural Gas Trading municipality. Most provinces have partially deregulated the retail natural gas 8.1 Outline broadly the ownership, organisational and market and have allowed both natural gas marketers and LDCs to regulatory framework in relation to natural gas sell gas to consumers, thereby “debundling” the sale and transport trading. Please include details of current major of natural gas. A consumer may choose to have an LDC supply initiatives or policies of the Government or regulator natural gas at a regulated rate or contract with a gas marketer to (if any) relating to natural gas trading. purchase natural gas at a contracted rate. Since 1985, wholesale natural gas prices in both Canada and the

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United States have been deregulated in whole or in part, which leave such matters to be determined at the discretion of the project has evolved over time into a sophisticated continental-wide proponents. Nonetheless, the development of an LNG project is wholesale energy market. The Canadian and American natural gas subject to numerous other regulatory requirements which will likely transmission network is connected by a vast and complex network necessitate interaction with both Federal and provincial authorities. of pipelines spanning across the countries’ borders with multiple Depending on the circumstances, consultation and/or negotiations trading hubs. Contracts are traded in large quantities and prices are with local stakeholders may also be required, such as First Nations publicly available based on market forces in both countries. This communities. system allows for seamless trading throughout the North American market. 9.2 What governmental authorisations are required to Transaction prices are determined in the open market at or by Canada construct and operate LNG facilities? reference to established wholesale market delivery/receipt points, which are discussed in further detail in question 1.1. Various government approvals, licences and permits are required Natural gas can be traded on both a short-term and long-term to construct and operate an LNG facility in Canada. Chief among basis, either physically or through the use of derivatives. Natural these are environmental assessments and approvals prescribed by gas derivatives trading is regulated on a provincial level through legislation. An important feature of both provincial and Federal province-specific securities or commodities legislation, and such environmental regimes is that where an environmental assessment legislation may impose certain registration and filing requirements. is required, a clearly defined hierarchy of legislative authority is Several provinces require natural gas marketers who sell natural prescribed. Specifically, most (if not all) project-related permits gas to residential and small commercial consumers to be licensed. issued by various Federal and provincial authorities cannot be Furthermore, trading entities that are affiliates with a regulated granted until a ministerial decision on the environmental assessment utility, such as a transmission company, must follow certain rules to of a project has been granted. That said, permit application activities, prevent preferential treatment. Finally, when trading and exporting including regulatory consultation, can (in some cases) occur parallel natural gas across provincial or Federal borders, traders may require to an environmental assessment. approval from either the NEB, outlined in question 4.1, or the Federal legislative regimes of general application relevant to applicable provincial regulator. the development and operation of an LNG facility include, but There are several initiatives under way that may affect natural are not limited to, the Fisheries Act (Canada), the Navigation gas trading. First, there is currently a proposal to create a Federal Protection Act (Canada), the Species at Risk Act (Canada), CEAA securities regulator in Canada, which would regulate commodities 2012, and the Technical Review Process of Marine Terminal and derivative trading uniformly across the country. The G-20 has Systems and Transhipment Sites process (commonly referred also been advocating its member countries to uniformly regulate to as “TERMPOL”). Provincial legislative regimes of general derivatives. Second, the Canadian Securities Administrators application relevant to the development and operation of an (“CSA”) has proposed certain Business Conduct Rules in National LNG facility in British Columbia include, but are not limited to, Instrument 93-101, with the purpose of promoting responsible the Oil and Gas Activities Act (British Columbia), the Heritage business conduct in “over the counter” derivatives markets. Conservation Act (British Columbia), the Water Users’ Community Act (British Columbia), and the Wildlife Act (British Columbia). Provincial legislative regimes specific to the LNG industry in British 8.2 What range of natural gas commodities can be Columbia include the Liquefied Natural Gas Facility Regulation traded? For example, can only “bundled” products (British Columbia). (i.e., the natural gas commodity and the distribution thereof) be traded? The Constitution Act, 1982 (Canada) establishes a number of protections regarding the traditional rights of aboriginal or “First Natural gas can be traded either on a short-term basis, via spot market Nations” peoples. In the context of an LNG project, the most relevant trades, or using long-term bilateral contracts. In addition to physical of these is the duty of the Federal and provincial governments to gas trades, derivatives can be used to complete natural gas trades, consult with First Nations groups regarding a proposed project that most commonly as futures contracts or hedges, which can either be could impact their rights and, where appropriate, accommodate physically settled or financially settled. These derivatives can also their traditional rights and mitigate any infringement of such rights. be traded as: (i) off-exchange or “over the counter” derivatives; or Although this “duty to consult” technically burdens the government, (ii) on-exchange derivatives through trading platforms such as the in practice it is typically the proponents of a project that assume NGX or NYMEX. the management and cost of the consultation process, and this commonly occurs in close connection with the environmental Due to deregulation, which is further discussed in question 7.1, the approval processes. sale and trading of natural gas is no longer bundled with transmission and distribution services. Traders are able to separately purchase gas from one entity (be it a producer or another trader), and contract 9.3 Is there any regulation of the price or terms of service with another entity (for example, a transmission company), to in the LNG sector? secure transportation rights. There is no direct regulation of the price or terms of services in the Canadian LNG sector. 9 Liquefied Natural Gas

9.4 Outline any third-party access regime/rights in 9.1 Outline broadly the ownership, organisational and respect of LNG facilities. regulatory framework in relation to LNG facilities. There are no third-party access rights in respect of LNG facilities Federal and provincial governments do not impose ownership or imposed by regulation in Canada. organisational requirements on Canadian LNG projects, but rather

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the MSA, which provides a framework for cooperative enforcement 10 Downstream Oil activities and information sharing. Other Federal and provincial regulatory bodies in the oil and natural gas sector whose mandates 10.1 Outline broadly the regulatory framework in relation may potentially overlap with the Bureau include the AER, the to the downstream oil sector. Alberta Utilities Commission and the NEB. For example, conduct by an infrastructure owner in the oil and natural gas industry that Since 1985, the Canadian petroleum market has been free from may attract an investigation under the Competition Act may also lead legislation that regulates, subsidises, or taxes oil. However, to filing of a common carrier application with the AER. pursuant to the provisions of the Constitution Act, 1867 (Canada), the provinces have the authority to directly regulate retail fuel 11.2 To what criteria does the regulator have regard in Canada prices. For example, Prince Edward Island, Newfoundland and determining whether conduct is anti-competitive? Labrador, Nova Scotia, New Brunswick and Quebec have enacted provincial legislation regulating retail fuel prices, which generally The criteria for determining whether conduct is anti-competitive includes provisions designating maximum and minimum retail depends on the type of offence being alleged. The Competition prices and margins. Act covers a variety of behaviours that may restrict certain activities, including agreements among competitors, mergers, price 10.2 Outline broadly the ownership, organisation and maintenance, vertical restrictions and abuse of dominance. For regulatory framework in relation to oil trading. example, section 45 of the Competition Act targets agreements whose purpose is to restrict competition and prohibit certain Physical trading of oil is carried out by oil producers and oil trading agreements among competitors per se. Section 90.1 targets merchants who buy, store, transport and sell oil. Crude oil futures and agreements that have the effect of restricting competition, even in options are traded through standardised contracts on commodities the absence of an intention to do so. exchanges, primarily NYMEX and the International Petroleum Exchange in London. The current benchmark for tracking over-the- 11.3 What power or authority does the regulator have to counter trades of heavy crude in Canada is Western Canadian Select, preclude or take action in relation to anti-competitive priced for delivery at Hardisty, Alberta. practices? Federal and provincial governments do not have uniform legislation with respect to the treatment of derivatives (such as crude oil futures The Bureau has the authority to initiate and conduct investigations or options). Derivatives are regulated through securities regulatory into possible anti-competitive conduct. In the course of an authorities in all of the provinces as part of a newly implemented investigation and with court authorisation, the Bureau’s investigators cooperative regulatory scheme. may conduct interviews and oral examinations, search for and seize evidence, demand the production of documents and engage in wiretapping. 11 Competition

11.4 Does the regulator (or any other Government 11.1 Which governmental authority or authorities are authority) have the power to approve/disapprove responsible for the regulation of competition aspects, mergers or other changes in control over businesses or anti-competitive practices, in the oil and natural in the oil and natural gas sector, or proposed gas sector? acquisitions of development assets, transportation or associated infrastructure or distribution assets? If so, what criteria and procedures are applied? How long The Competition Act (Canada) (“Competition Act”) provides does it typically take to obtain a decision approving or for the general regulation of trade and commerce in respect of disapproving the transaction? anti-competitive practices in Canada. The Competition Act is administered and enforced by the Competition Bureau (the The Tribunal has authority to make a variety of orders in relation “Bureau”), an independent law enforcement agency headed to a merger. “Merger” is defined broadly in the Competition Act by the Federally appointed Commissioner of Competition (the as follows: “Commissioner”). The Competition Act may be divided into two “…the acquisition or establishment, direct or indirect, by one principal areas: criminal offences; and civilly reviewable conduct. or more persons, whether by purchase or lease of shares or The Bureau is responsible for investigating possible violations of assets, by amalgamation or by combination or otherwise, of the Competition Act. Where appropriate, the Commissioner may control over or significant interest in the whole or a part of a refer a matter under investigation to a separate body for a final business of a competitor, supplier, customer or other person.” determination. Criminal matters are referred to the Director of Public Prosecutions, who may initiate criminal proceedings before The two main elements of this definition are “control” and “significant the courts. Civil matters are brought before the Competition interest”. While neither term is defined in the Competition Act, the Tribunal (the “Tribunal”), a specialised body comprised of Merger Enforcement Guidelines published by the Bureau suggest Federally appointed justices and lay members. that a significant interest will be acquired when a party gains the ability to materially influence the economic behaviour of the target While the Competition Act is administered Federally, certain business. provincial regulatory bodies in the energy sector have mandates that overlap with those of the Bureau. As an example, the Market Although all transactions are subject to the Competition Act, Surveillance Administrator of Alberta (the “MSA”) is responsible for only those that meet prescribed thresholds regarding party size, monitoring and investigating the anti-competitive conduct of market transaction size and shares/economic interest acquired are subject participants in Alberta’s electricity and retail natural gas markets. to notification requirements. If these thresholds are met, the parties In 2014, the Bureau signed a memorandum of understanding with to the transaction are required to notify the Commissioner and provide certain information in respect of the transaction. Unless

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the Commissioner requests supplementary information, the parties value of the assets of the business (where assets are being acquired) may close the transaction 30 days after providing notification. The or of the entity that owns the business (where an entity is being parties may also request an advance ruling certificate (an “ARC”). acquired) exceeds CAD $1 billion. As of 2019, the threshold is The Commissioner will issue an ARC where he is satisfied that there to be adjusted annually based on growth in nominal GDP. This are not sufficient grounds upon which to challenge the merger before threshold applies to acquisitions by: (i) WTO investors that are the Tribunal. If the Commissioner does not believe that sufficient not state-owned enterprises; and (ii) non-WTO investors that are grounds exist to challenge the transaction, but is not willing to issue not state-owned enterprises where the Canadian business being an ARC, he may issue a “no-action letter”. While a no-action letter is acquired is, immediately prior to the acquisition, “controlled by a highly indicative of the Commissioner’s intentions, and a substantial WTO investor”. number of transactions close on this basis, the Commissioner retains Higher thresholds apply to acquisitions being made by: (i) trade Canada the right to challenge the transaction for one year following closing. agreement investors that are not state-owned enterprises; or (ii) If a transaction is challenged, the Tribunal will determine whether non-trade agreement investors that are not state-owned enterprises the merger prevents or lessens, or is likely to prevent or lessen, where the Canadian business that is the subject of the investment competition substantially in a market. The Competition Act provides is, immediately prior to the implementation of the investment, a non-exhaustive list of factors for the Tribunal to consider in this “controlled by a trade agreement investor”. The review threshold analysis, such as the likelihood that the transaction would result in the for these acquisitions is CAD $1.5 billion. As of 2019, the threshold removal of an effective competitor and the extent to which foreign is to be adjusted annually based on growth in nominal GDP. products/competitors are likely to provide effective competition. A Trade agreement investors include entities and individuals whose transaction that is found to prevent or lessen competition substantially country of ultimate control is party to one of the following trade may still be allowed to proceed based on the efficiencies defence agreements: Canada-European Union Comprehensive Economic and prescribed by the Competition Act – the Tribunal will not make Trade Agreement Implementation Act; North American Free Trade an order if it finds that the merger has or is likely to bring about Agreement; Canada-Chile Free Trade Agreement Implementation gains in efficiency that will be greater than, and will offset, the anti- Act; Canada-Peru Free Trade Agreement Implementation Act; competitive effects resulting from the transaction. Canada-Columbia Free Trade Agreement Implementation Act; In the event that a completed transaction fails the above noted test Canada-Panama Economic Growth and Prosperity Act; Canada- and also cannot rely on the efficiencies defence, the Tribunal may Honduras Economic Growth and Prosperity Act; or Canada-Korea order the dissolution of the transaction, the disposition of assets or Economic Growth and Prosperity Act. shares, and/or other appropriate action. In the case of a proposed Where the acquisition is being made by: (i) WTO investors that are transaction, the Tribunal may order the parties not to proceed with state-owned enterprises; or (ii) non-WTO investors that are state- the entire transaction or any part thereof, and/or other appropriate owned enterprises, where the Canadian business being acquired action. The Supreme Court of Canada has confirmed that a remedy is, immediately prior to the implementation of the investment, need not restore competition to the way it was before the transaction, “controlled by a WTO investor”, the review threshold for 2018 is but simply to a state that would avoid substantial lessening of CAD $389 million, which is a CAD $10 million increase from 2017. competition contrary to the Competition Act. Lower thresholds apply to acquisitions by an investor who is not Certain mergers in the oil and natural gas sector that trigger a a “WTO investor”, which involve the acquisition of control of a Competition Act filing may also require clearance under the Canada Canadian business which is not “controlled by a WTO investor” Transportation Act (the “CTA”). Section 53.1 of the CTA states immediately prior to the implementation of the investment. These that parties required to notify a proposed acquisition under the thresholds are CAD $5 million in asset value for direct investments, Competition Act must also give notice of the same to the Minister of and for indirect investment, either CAD $5 million or CAD $50 Transport if the acquisition “involves a transportation undertaking”. million in asset value depending on the proportion of Canadian assets. The Minister of Transport then has 42 days to review the transaction Where a proposed acquisition triggers an ICA review, the foreign and determine whether it raises issues with respect to the public investor cannot complete the transaction without ministerial interest as it relates to national transportation. While “transportation approval. In deciding whether to approve an acquisition, the Minister undertaking” is not defined, where a party to a notifiable transaction will consider whether the investment is likely to be of “net benefit” under the Competition Act is involved in a business that transports to Canada. In making this determination, the Minister will take into products (including energy products such as oil, natural gas and account any undertakings provided by the foreign investor to the electricity) across Canadian provincial borders, approvals of the Canadian government in connection with the proposed acquisition. Minister of Transport may be required. In practice, undertakings are required for almost any review under the ICA. In addition, the ICA also allows the Minister to review a 12 Foreign Investment and International transaction to determine whether it could be injurious to national security, and to accept undertakings related to any such concerns. With Obligations respect to Canada’s oil sands industry in particular, the acquisition by CNOOC of Nexen in early 2013 led to a shift in government policy, 12.1 Are there any special requirements or limitations on such that an acquisition of control of a Canadian oil sands business acquisitions of interests in the natural gas sector by a foreign state-owned enterprise would be considered a “net (whether development, transportation or associated benefit to Canada on an exceptional basis only”. In October 2015, infrastructure, distribution or other) by foreign Canada elected a new Liberal government, which is widely seen as companies? being more open to investment from foreign state-owned enterprises, including investments in Canadian oil sands businesses. Acquisitions of oil and gas interests in Canada by foreign companies will be subject to the general application of the Investment Canada Act (“ICA”). For certain investors, the ICA provides that governmental review will be triggered where a foreign investor is directly acquiring control of a Canadian business where the book

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implementing both the New York Convention on the Recognition 12.2 To what extent is regulatory policy in respect of the and Enforcement of Foreign Arbitral Awards and the UNCITRAL oil and natural gas sector influenced or affected Model Law on International Commercial Arbitration. Canada’s by international treaties or other multinational Federal government and each province other than Ontario have arrangements? implemented both the New York Convention and the UNCITRAL Model Law. Ontario has only adopted the UNCITRAL Model Law. The main international treaties of general application to investment in Canada’s oil and gas industry are Canada’s various bilateral and Canada ratified the ICSID Convention on the Settlement of multilateral free trade agreements (“FTAs”) and bilateral foreign Investment Disputes between States and Nationals of Other States investment protection and promotion agreements (“FIPAs”) in 2013. Also, when ratifying the ICSID Convention, Canada designated British Columbia, Alberta and Ontario as constituent (more commonly referred to internationally as “BITs” or “bilateral Canada investment treaties”). Canada currently has 14 FTAs in force, a subdivisions capable of consenting to ISCID arbitration in their number of which include investment protection chapters similar own right, with the result that foreign investors are able to enter in scope and substance to Canada’s FIPAs. FTAs recently ratified into ICSID arbitration clauses directly with these provincial by Canada include the Canada-European Union Comprehensive governments. Economic and Trade Agreement (“CETA”) and the Canada-Ukraine FTA. On January 23, 2018, negotiations for the Comprehensive and 13.3 Is there any special difficulty (whether as a matter Progressive Agreement for Trans-Pacific Partnership (“CPTPP”) of law or practice) in litigating, or seeking to enforce were completed, and an agreement was reached between the parties. judgments or awards, against Government authorities The CPTPP is an FTA with the remaining members of what was or State organs (including any immunity)? the Trans-Pacific Partnership, an FTA which was signed in February 2016 but never came into force. Both the CPTPP and CETA include As natural gas and oil production and transmission facilities in investment protection chapters. Canada currently has 37 FIPAs in Canada are not typically owned by the Federal or provincial force and six FIPAs concluded but awaiting ratification. governments, this question has limited application in Canada. Furthermore, all Canadian provinces and the Federal government have passed legislation which leaves the government liable in tort. 13 Dispute Resolution However, the Federal and provincial statutes often carry several specific notice requirements in which notice of the claim must be given to the government within a certain number of days after which 13.1 Provide a brief overview of compulsory dispute resolution procedures (statutory or otherwise) the claim arose. applying to the oil and natural gas sector (if any), The liability exposure of municipal governments must be examined including procedures applying in the context of separately in light of applicable provincial statutes which may limit disputes between the applicable Government the liability of municipal corporations or hold plaintiffs to unique authority/regulator and: participants in relation to oil and strict limitation and notice periods. and natural gas development; transportation pipeline and associated infrastructure owners or users in relation to the transportation, processing or storage 13.4 Have there been instances in the oil and natural gas of natural gas; downstream oil infrastructure owners sector when foreign corporations have successfully or users; and distribution network owners or users in obtained judgments or awards against Government relation to the distribution/transmission of natural gas. authorities or State organs pursuant to litigation before domestic courts? Generally speaking, Canada does not impose any compulsory dispute resolution procedures (statutory or otherwise) on its oil and Foreign corporations have successfully obtained judgments against gas sector, with the notable exception of disputes related to tariffs the Government of Canada in multiple occasions under NAFTA, on regulated oil and gas pipelines, which must be heard by specially with awards reaching up to CAD $130 million. While there has mandated administrative bodies. Other specialised governmental yet to be a successful judgment awarded in favour of an oil and dispute resolution forums include the Alberta Surface Rights Board, gas entity, Lone Pine Resources Inc. is currently suing Canada for which is charged, for example, with overseeing access disputes USD $118.9 million under Article 11 of NAFTA over Quebec’s among oil and gas operators and local landowners in Alberta. moratorium on natural gas fracking. The hearing took place in Participants in Canada’s oil and gas industry will typically expressly October 2017 but as of the date of publication, the decision has not attorn to the courts of the province with the closest connection to been released. the parties or the subject transaction, services or operation, or agree Additionally, both Murphy Oil Corporation and Mobil Investments to binding arbitration, including under various available provincial Inc. successfully sued the Federal government in connection with arbitration acts and arbitral rules/institutions. Generally speaking, interests in two offshore petroleum developments and the legality there are also no bars to private enterprises bringing a claim against of the Guidelines for Research and Development Expenditures governmental regulators in local courts where such a claim is promulgated by the Canada-Newfoundland Offshore Petroleum warranted (see also questions 13.3 and 13.4 below). Board. The Arbitral Tribunal in that case found that the guidelines at issue breached Article 11 of NAFTA. Canada’s application to set 13.2 Is your jurisdiction a signatory to, and has it duly aside the tribunal award of approximately CAD $17.3 million was ratified into domestic legislation: the New York dismissed by the Ontario Superior Court of Justice. Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and/or the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID”)?

Foreign arbitral awards are enforceable in Canada under legislation

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Morgan Canada Ltd closed the sale of the Trans Mountain Pipeline 14 Updates to the Federal government for CAD $4.5 billion. When and if the project, which has been under way since 2016, will continue is 14.1 Please provide, in no more than 300 words, a unclear. summary of any new cases, trends and developments On October 1, 2018 the joint venture participants in the LNG Canada in Oil and Gas Regulation Law in your jurisdiction. project announced that they had made a positive final investment decision with respect to the project, moving the project immediately In August 2018, the Federal Court of Appeal (“FCA”) released into the construction phase. The facility, located near Kitimat, British its decision quashing the Governor in Council’s order approving Columbia, will be serviced by the new Coastal GasLink pipeline, the Trans Mountain Pipeline expansion project. The project owned by TransCanada Pipelines Ltd (TransCanada). Coastal Canada would more than double the current system capacity between GasLink has been approved by the British Columbia Oil and Gas Alberta and Burnaby, British Columbia. The FCA found that the Commission, and on October 2, 2018, TransCanada announced its Federal government had not satisfied its duty to consult with First plan to proceed to construction. However, on October 24, the NEB Nations, and that the NEB had erred by excluding project-related announced its intention to review the regulatory jurisdiction for the tanker traffic from its review. The exclusion allowed the NEB to project. TransCanada has stated it will proceed with construction conclude that the project was not likely to cause significant adverse in the meantime. environmental effects, despite acknowledging that the Southern resident killer whale would be negatively impacted. The FCA decision had political effects nationwide. Federal support for the Acknowledgment Trans Mountain expansion project had been tendered in exchange The authors gratefully acknowledge the assistance and contributions for Alberta’s support of the Federal climate change initiative, back of their colleagues Jack Whelan, Callin Sereda, Melia Stewart and in 2016. Upon release of the FCA decision, Alberta announced its Morgan Crilly in the preparation of the 2018 update to this chapter. intention to reject the Federal climate plan. The next day, Kinder

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Kevin Kerr Christine Milliken Blake, Cassels & Graydon LLP Blake, Cassels & Graydon LLP 855-2nd Street S.W. 855-2nd Street S.W. Suite 3500, Bankers Hall East Tower Suite 3500, Bankers Hall East Tower Calgary, Alberta, T2P 4J8 Calgary, Alberta, T2P 4J8 Canada Canada

Tel: +1 403 260 9746 Tel: +1 403 260 9625 Fax: +1 403 260 9700 Fax: +1 403 260 9700 Email: [email protected] Email: [email protected] URL: www.blakes.com URL: www.blakes.com Canada Kevin’s practice primarily focuses on corporate/commercial matters Christine’s practice primarily focuses on mergers, acquisitions and pertaining to the energy sector, including conventional oil and gas, oil divestitures within the oil and gas and renewable energy industries. sands, royalties, renewable energy and retail. Kevin regularly advises She has been involved in a broad range of transactions for private clients on mergers, acquisitions and divestitures of energy companies and public entities, including domestic and cross-border M&A and assets, structuring of joint venture arrangements, cross-border transactions, share and asset purchase and sale transactions, joint transactions and negotiating agreements with respect to upstream, ventures, pipeline and midstream facility development and commercial midstream and downstream energy projects, energy services and arrangements and corporate reorganisations. private equity investments. Christine has significant experience advising clients with general corporate and commercial matters, all aspects of conventional and unconventional oil and gas matters, including liquefied natural gas, pipeline and other midstream project matters, including storage and crude by rail terminals, share and asset purchase and sale transactions and due diligence matters.

As one of Canada’s top business law firms, Blake, Cassels & Graydon LLP (“Blakes”) provides exceptional legal services to leading businesses in Canada and around the world. With offices in Calgary, Toronto, Vancouver, Montréal, Ottawa, New York, London, Bahrain and Beijing, our integrated network of nineoffices worldwide provides clients with access to the Firm’s full spectrum of capabilities in virtually every area of business law. Whether an issue is local or multijurisdictional, practice-area specific or interdisciplinary, Blakes handles transactions of all sizes and levels of complexity. Blakes has one of the leading energy law practices in Canada. With over 100 energy law practitioners throughout our offices, Blakes has developed unique expertise in mergers and acquisitions, transactions, joint ventures, project development, competition and environmental matters, regulatory applications and hearings, ownership and operational issues, carrying out due diligence, and negotiating and preparing projects and other industry development agreements for clients all over the world. We represent clients in all aspects of the domestic and global oil and gas market. Blakes offers extensive experience, service and advice with respect to not only conventional energy assets, but also structured transactions involving the acquisition and development of oil sands, heavy oil and unconventional assets.

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Croatia Bernd Rajal

Schoenherr Petra Šantić

in its capacity as the major wholesale natural gas supplier, and also 1 Overview of Natural Gas Sector an importer of natural gas, continued to dominate the gas supply market with a market share of nearly 68 per cent until 31 March 1.1 A brief outline of your jurisdiction’s natural gas 2014. In 2015, INA’s market share dropped down to 22.7 per cent, sector, including a general description of: natural gas and two new important players in their field of gas supply are HEP reserves; natural gas production including the extent Group companies with a market share of 43.2 per cent and PRVO to which production is associated or non-associated PLINARSKO DRUŠTVO d.o.o. (PPD) with a market share of 22.7 natural gas; import and export of natural gas, including per cent. liquefied natural gas (LNG) liquefaction and export facilities, and/or receiving and re-gasification facilities On 1 April 2014, the State-owned electricity company Hrvatska (“LNG facilities”); natural gas pipeline transportation elektroprivreda d.d. (HEP) was appointed the new supplier on the and distribution/transmission network; natural gas wholesale market in Croatia, taking over the similar role of ‘supplier storage; and commodity sales and trading. of public suppliers’ from a procurement entity PRIRODNI PLIN. In the transitional period, HEP (through its affiliated company HEP- In 2016, gross inland consumption (production + imports – Opskrba plinom d.o.o.) remains the key wholesale gas supplier exports + storage variations) of natural gas in Croatia amounted to other Croatian suppliers with PSOs for the needs of household to 2.17 Mtoe, whereas about 1.37 Mtoe thereof was covered by customers until 31 March 2019. During this period, the price at domestic production of natural gas [https://ec.europa.eu/energy/, which HEP then sells gas to other PSO suppliers has remained Statistical Pocketbook 2018, page 196]. At the moment, Croatia regulated. In addition, HEP has been awarded 60 per cent priority is not completely dependent on the import of natural gas because booking storage capacity with the UGS Okoli. about 48.2 per cent of natural gas supplied in 2016 was covered The new Croatian Gas Market Act (ZTP) [Zakon o tržištu plina, by domestic production from fields in the Pannonian basin and Official Gazette no. 18/18] came into force on3 March 2018. from offshore fields in the North Adriatic. The remaining demand Despite efforts to open up the Croatian gas market, in 2015 and was covered by imports of natural gas [Annual Energy Report 2017 the European Commission initiated two distinct infringement for 2016 of the Croatian Ministry of Environment and Energy, proceedings against Croatia for non-compliance with the above Energy in Croatia 2016, page 130, available at www.mzoip.hr/doc/ Directive. Therefore, it was necessary to make changes to the energija_u_hrvatskoj_2016.pdf]. In 2017, the entry of gas into the regulatory framework for the Croatian gas market in the segment transmission system reached 32.348 kWh, out of which 11.193 kWh for households, specifically regulating the rights and obligations (34.6 per cent) originated from domestic production, 17.956 kWh of gas market participants, the duties and powers of the national (55.5 per cent) from imports and 3.199 kWh (9.9 per cent) from the regulatory authority, the mode of booking gas storage capacity, underground gas storage facility PSP Okoli (UGS Okoli) [Annual the price-setting mechanism for gas supply as a public service, the Report 2017 of the Croatian Energy Regulatory Agency, page designation of a supplier under public service obligation (PSOs) and 128, available at www.hera.hr]. Due to the continuous decrease of a supplier of last resort (SoLR), and the setting of transparent in domestic production, Croatia’s dependence on gas imports is conditions for public tenders to be launched on the gas market (see expected to grow significantly in the future. question 14.1 below). In the Croatian gas and oil industry, the key market player is INA- Gas transmission, distribution and storage of natural gas are INDUSTRIJA NAFTE d.d. (INA), a vertically integrated company regulated energy activities performed as a public service. The ZTP 49.08 per cent owned by MOL Hungarian Oil and Gas Plc., 44.84 provides for a new unbundling regime with the following three per cent owned by the Republic of Croatia and 6.08 per cent owned models: (i) the ownership unbundling model; (ii) the independent by institutional and private investors [www.ina.hr]. As regards the system operator (ISO); and (iii) the independent transmission ongoing INA-MOL dispute, please see question 13.2 below. At the operator (ITO). However, the legal unbundling process of the moment, INA is the only producer of natural gas in Croatia. activities related to gas transmission and gas storage has already Although the Croatian gas market has legally been liberalised since been carried out. 1 August 2008, the first signs ofde facto opening of the market have Domestic transmission lines are owned and operated by the 100 occurred in the gas season 2012/2013 following the removal of a per cent State-owned company PLINACRO d.o.o., which was price cap for gas supply to eligible customers (but only in relation separated from INA in 2002. In 2007, PLINACRO was designated to non-household customers), and new wholesale suppliers entering as the transmission system operator (TSO) for a period of 30 years. the market. INA (through its affiliated company PRIRODNI PLIN) In line with the ZTP, PLINACRO still remains to be certified as

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an ownership unbundled TSO. The gas production fields of the was legally unbundled from INA and bought by the State-owned Pannonia and North Adriatic, the UGS Okoli, 35 distribution PLINACRO in 2009. The gas storage operator PSP continues to systems and 20 final customers are connected to the transmission expand the UGS Okoli to increase gas storage capacity, as well as system [Annual Report 2017 of the Croatian Energy Regulatory to decrease negative environmental impact. Moreover, the main Agency, page 113, available at www.hera.hr]. The Croatian gas investment over the mid-term concerns the planned construction of transmission system is 2,693 km long and has been continuously a small underground gas storage facility in Grubišno Polje. expanded in recent years [www.plinacro.hr]. Under the previous Currently, no LNG facility exists in Croatia. Perhaps one of the PLINACRO’s Plan for the Development, Construction and most important projects in the gas sector concerns the planned Modernization of the Gas Transmission system of the Republic of construction of the floating LNG terminal on the Island of Krk in the Croatia in the period 2002–2011, the regional gas pipeline network

North Adriatic with a capacity of 2 billion m³/year (LNG Terminal). Croatia Lika – Dalmacija from Bosiljevo to Split was completed in May This would open a cross European North-South corridor and improve 2013. Although PLINACRO’s expanded gas pipeline network now the natural gas supply security of the region. The planned LNG re- covers around 95 per cent of the Croatian territory, the distribution gasification facility has been given PCI status. On 29 October 2014, system and gas consumption do not follow the development of the the project has been included in the indicative list of key energy transmission system. In December 2017, a new PLINACRO’s Ten- infrastructure eligible for financial support under the Connecting Year Development Plan of the Croatian Gas Transmission System Europe Facility (CEF) Energy 2014 programme. Under the Decision in the period 2018–2027 [Ten-Year Plan, Desetogodišnji plan dated 16 July 2015 of the Croatian Government, the LNG Terminal razvoja plinskog transportnog sustava Republike Hrvatske 2018.- project has been also designated as a project of strategic importance 2027., available at www.plinacro.hr/UserDocsImages/dokumenti/ to the Croatian State (PSI). In June 2016, the Croatian Government Desetogodi%C5%A1nji%20plan%20razvoja%20PTS%202018- adopted a decision to speed up the preparation and implementation 2027.pdf] was approved by HERA. The current gas supply of the first phase of the LNG project that involves construction of the forecasts indicate the need for further transmission capacity and floating storage and regasification unit (FSRU). At the same time, significant investment in the construction of new parts of the gas LNG Hrvatska d.o.o. (LNG Croatia) [www.lng.hr] (with HEP and transmission system with regard to its integration into new strategic PLINACRO each holding 50 per cent of the equity shares thereof) supply projects. Therefore, the two most important projects under was given the status of the project developer. From March 2017, the Ten-Year Plan are the planned construction of the LNG terminal preparation of project and permitting documentation and activities on the Island of Krk in the North Adriatic and the Ionian-Adriatic related to procurement of FSRU are under way for the construction Pipeline (IAP). The IAP project intends to connect the Croatian and of the floating LNG terminal [www.lng.hr/en/news-details/ Albanian pipeline system with the Trans Adriatic Pipeline (TAP) floating-lng-terminal-implementation-kick-off-68]. The Financing [TAP is part of the EU-designated Southern Gas Corridor with a Agreement for the construction of the first phase of the LNG project length of 800 km, running from Greece to Italy, via Albania and the under the CEF was signed at the Energy Council of 18 December Adriatic Sea.] The total gas pipeline length from Croatia (Ploče) 2017 [https://ec.europa.eu/inea/en/connecting-europe-facility/ to Albania (Fieri) is 540 km and has an annual pipeline capacity cef-energy/projects-by-country/croatia/6.5.1-0018-hr-w-m-16]. of 5 billion m³/year. This is a strategically important project, the According to the most recent publicly available information, the implementation of which will enable the creation of a new energy procurement of Engineering, Procurement and Construction (EPC) corridor for the region of South-East Europe, with the aim of of a jetty with the auxiliary facilities and connecting high-pressure establishing a new supply of natural gas from new sources – the gas pipeline for the import LNG terminal is still pending [www. Caspian and Middle Eastern regions. The IAP project has been lng.hr/en]. On 9 November 2018, LNG Croatia announced that included in the list of EU Projects of Common Interest (PCI). it had selected Golar Power Limited as preferred bidder in the Currently, two cross-border interconnections in Croatia exist, procurement procedure for delivery of the FSRU with the provision those being (i) interconnection Dravaszerdahely–Donji Miholjac of FSRU operation and maintenance services. Golar Power Limited (Hungary–Croatia), and (ii) interconnection UMS Rogatec (Slovenia– offered a new conversion of the existing LNG carrier to an FSRU Croatia). Please note that gas can only be imported from Slovenia vessel with a value of EUR 159.6 million. The Open Season phase and Hungary to Croatia. In this context, the Ten-Year Plan also for customers who could book the capacity of the LNG terminal on a addresses the problem of the security of supply, N-1 criterion long-term period are currently pending, and the deadline for closing and bidirectional flow at the interconnections. Therefore, and to the second round of the Open Season procedure has been postponed avoid possible physical congestion in the gas pipeline network, the until 20 December 2018 [http://www.lng.hr/en/open-season]. The centrepiece of the Ten-Year Plan is projects for the construction of final investment decision is to be taken depending on the outcome compressor stations and new interconnection in the direction of of this process. According to current plans, the LNG Terminal is Lučko–Zabok–Rogatec (Slovenia) [PLINACRO’s Ten-Year Plan, planned to be operational in 2021. pages 53–56]. In addition, the Ten-Year Plan anticipates projects As regards projects allowing gas to flow from the Croatian LNG for connecting the Croatian gas transmission system to the gas terminal to neighbouring countries, the phased development of the transmission systems of other neighbouring countries (e.g. Bosnia LNG terminal and gas pipeline Zlobin–Bosiljevo–Sisak–Kozarac– and Herzegovina, Serbia and Montenegro). A number of new Slobodnica has been included in the updated EU PCI list as of planned projects have been included in the EU PCI and Projects of 18 November 2015 [https://ec.europa.eu/energy/sites/ener/files/ Energy Community Interest list (PECI). documents/5_2%20PCI%20annex.pdf]. In 2017, there were 35 active gas distribution operators in Croatia, Croatia has introduced the entry-exit model and a virtual trading among which the two most important are GRADSKA PLINARA point (VTP) as of 1 January 2014. ZAGREB d.o.o. and HEP-PLIN d.o.o. The total length of the gas distribution network in Croatia at the end of 2017 was 19,091 km. 1.2 To what extent are your jurisdiction’s energy The only underground natural gas storage facility in Croatia is the requirements met using natural gas (including LNG)? UGS Okoli located near the city of Sisak with a total gas storage capacity of 553 million m³. The gas storage operator is PODZEMNO Croatia’s primary energy supply is dominated by liquid fuels [Annual SKLADIŠTE PLINA d.o.o. (PSP) [www.psp.hr]. This company

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Energy Report for 2016 of the Croatian Ministry of Environment lubricants are produced [available at www.ina.hr; Annual Energy and Energy, Energy in Croatia 2016, page 44]: Report for 2016 of the Croatian Ministry of Environment and ■ Liquid fuels – 32.3 per cent. Energy, Energy in Croatia 2016, page 103]. In the last few years, ■ Coal and coke – 7.9 per cent. INA carried out the project of the refinery modernisation in Rijeka and Sisak in order to comply with EU requirements and standards. ■ Natural gas – 22.5 per cent. Transportation of oil through oil pipelines in Croatia is performed by ■ Electricity – 4.9 per cent. Jadranski naftovod d.d. (JANAF) [Ownership structure of JANAF: ■ Hydro Power – 16.2 per cent. 37.26 per cent owned by the State Office for State-owned Property ■ Heat – 0.2 per cent. Management/Croatian Pension Fund; 26.28 per cent owned by ■ Fuel wood – 12.9 per cent.

Croatia the Croatian Restructuring and Sale Centre; 14.97 per cent by ■ Renewables – 3.1 per cent. Ministry of State Assets; 11.80 per cent owned by INA; 5.36 per The above data shows that the share of natural gas in the cent owned by HEP; and 4.33 per cent owned by institutional and consumption of Croatia’s primary energy (22.5 per cent) is private investors.] The JANAF oil pipeline was completed in 1979 exceptionally significant. Croatia is still covering a larger part of its as an international crude oil transportation system with a designed needs by domestic production (40–45 per cent), primarily because capacity of 34 million tonnes/year and an installed capacity of 20 the consumption of gas has significantly decreased over the last few million tonnes/year. The crude oil quantities transported through the years. However, future supply forecasts, and the expected moderate JANAF oil pipeline in 2017 amounted to 7.7 million tonnes. The increase of consumption, indicate that imports of larger gas volumes JANAF oil pipeline system has a longitude of around 631.5 km with will be required [PLINACRO’s Ten-Year Plan, page 6]. the following sections: Omišalj – Sisak, Sisak–Virje (with a section to Lendava in Slovenia) – Gola (Croatian-Hungarian border); and Sisak–Slavonski Brod (with a section to Bosanski Brod in Bosnia 1.3 To what extent are your jurisdiction’s natural gas and Herzegovina) – Sotin (Croatian-Serbian border). Crude oil is requirements met through domestic natural gas imported by tankers through the sea terminal in Omišalj on the Island production? of Krk in the North Adriatic. However, the oil pipeline system can also be used to import oil by land. The biggest crude oil handling Domestic natural gas production is performed by INA. INA reported terminal located in Omišalj has a storage capacity of 1 million m3 their reserves at the end of 2016 at 98 million boe of natural gas. for oil and 60,000 m3 for oil products. Other crude oil handling About 48.2 per cent of total domestic demand in 2016 was covered terminals are located in Sisak and Virje, with a storage capacity of by domestic production from 17 onshore fields in the Pannonian 500,000 m3 in Sisak and 40,000 m3 in Virje. The submarine oil basin and three offshore exploitation areas in the North Adriatic (see pipeline Omišalj – Urinj has a longitude of 7.2 km, with a submarine question 1.1 above) [Annual Energy Report for 2016 of the Croatian section of around 6 km, and connects the Omišalj Terminal with Ministry of Environment and Energy, Energy in Croatia 2016, page the INA’s Oil Refinery in Rijeka. Oil derivatives terminal JANAF- 130]. In 2016, the total domestic production of natural gas was Žitnjak is located in Zagreb with a storage capacity of 142,000 3 1,647.2 million m . m3. The total storage capacity of the JANAF system amounts to 1.54 million m3 for oil and 202,000 m3 for oil products [available 1.4 To what extent is your jurisdiction’s natural gas at www.janaf.hr; Annual Energy Report for 2016 of the Croatian production exported (pipeline or LNG)? Ministry of Environment and Energy, Energy in Croatia 2016, pages 104]. According to HERA’s licence registry, a total of 21 companies Data of the Energy Balances of Natural Gas for 2016 shows that the are licensed as oil and oil products storage operators. Croatia has total export of natural gas in 2016 was 389.4 million m3 [Annual three ports which can receive oil and oil products: Omišalj; Zadar; Energy Report for 2016 of the Croatian Ministry of Environment and Ploče. and Energy, Energy in Croatia 2016, page 137]. LNG is not The JANAF-Adria pipelines project has been given PCI status exported from Croatia. and included in the updated EU PCI list as of 18 November 2015. The project involves the reconstruction, upgrade, maintenance and increase in capacity of the existing JANAF and Adria pipelines 2 Overview of Oil Sector linking the Croatian Omišalj seaport, through Hungary, to the Southern Druzhba pipeline in Slovakia. 2.1 Please provide a brief outline of your jurisdiction’s oil The first LPG terminal in Croatia which is located some 35km sector. from Zagreb (Sv. Križ Začretje) was completed in 2009. The LPG terminal with 13 storage tanks (each 5,700 m³) is owned and The exploration, production and refining of crude oil, and most operated by the company CRODUX PLIN d.o.o. of the trade in oil derivatives and LPG is carried out by INA Currently, the construction of two new LPG and oil derivatives Group companies. Crude oil is produced in 34 oil fields, and gas handling terminals with the total storage capacity of 273,000 m3 in condensates in nine gas condensation fields [Annual Energy Report the port area of Luka Ploče in the South Adriatic is under way. The for 2016 of the Croatian Ministry of Environment and Energy, terminal is being developed as the Adriatic Tank Terminal (ATT). In Energy in Croatia 2016, page 103]. December 2014, the company PPD (now part of Energia Naturalis INA operates two oil refineries and one lubricant products plant. (ENNA) group) has signed a sub-concession contract to construct Processing of oil and production of oil products is carried out in the and operate the LPG and oil derivatives terminals. PPD has also Oil Refinery Rijeka located in Rijeka (Urinj), next to the Adriatic signed a memorandum of understanding for development of these Sea, with a total of 4.5 million tonnes of annual crude oil processing two terminals with the company VTTI, a provider of energy storage capacity or 90,000 bbl/day, and in the Oil Refinery Sisak, close to the worldwide (co-owned by Vitol, one of the largest energy traders in domestic oil fields and in the centre of Croatian market, with a total the world, and MISC, a leading international shipping and maritime of 2.2 million tonnes annual crude oil processing capacity or 44,000 conglomerate). In September 2016, the first stage of ATT has been bbl/day. In addition, INA operates the Lube Refinery Zagreb, where completed with the construction of 50,000 m3 of capacity terminal

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for white petroleum products. Reportedly, the second stage of construction will ensure a capacity of more than 200,000 m3 for 3 Development of Oil and Natural Gas petroleum, as well as 60,000 m3 for the storage of LPG [www.enna. hr/en/the-port-of-ploce-t3]. This would open a new supply route for 3.1 Outline broadly the legal/statutory and organisational the LPG by sea. framework for the exploration and production The Croatian Mandatory Oil Stocks Agency (Hrvatska agencija (“development”) of oil and natural gas reserves including: principal legislation; in whom the State’s za obvezne zalihe nafte i naftnih derivata; HANDA), which has mineral rights to oil and natural gas are vested; been merged with the Croatian Hydrocarbon Agency (Agencija za Government authority or authorities responsible for ugljikovodike; AZU) in September 2017, is the entity responsible the regulation of oil and natural gas development; and

for the maintenance of the mandatory stocks of crude oil and current major initiatives or policies of the Government Croatia oil products of the Republic of Croatia; it is also responsible for (if any) in relation to oil and natural gas development. establishing the mandatory stocks in the quantity of the 90-day average daily consumption in the previous calendar year by 31 July Exploration and production of oil and natural gas reserves in Croatia of the current year. is primarily regulated by the new Hydrocarbons Exploration and The total number of fuel stations was some 843 in 2016, out of Production Act (ZIEU) [Zakon o istraživanju i eksploataciji, which some 387 petrol stations were owned by INA [Annual Official Gazette no. 52/18], which was put into effect on 14 June Energy Report for 2016 of the Croatian Ministry of Environment 2018. Besides, various bylaws are governing specific areas of the and Energy, Energy in Croatia 2016, page 105]. According to hydrocarbons sector. HERA’s licence registry, there is currently a total of 47 oil products The ZIEU provides a legal framework for the exploration wholesalers in Croatia (e.g. INA, PETROL d.o.o., CRODUX and production of the hydrocarbons (oil, natural gas and gas DERIVATI DVA d.o.o., etc.), only one LPG wholesaler and retailer condensates), geothermal energy, storage of natural gas and (INA), 12 LPG wholesalers and one company licensed for the road geological storage of carbon dioxide. The ZIEU also contains transport of crude oil, oil products and biofuels. special provisions concerning the licensing and concession regimes applicable to exploration and production of hydrocarbons. 2.2 To what extent are your jurisdiction’s energy Following the transposition of the EU Offshore Safety Directive requirements met using oil? (Directive 2013/30/EU) into national law, the new Croatian Act on Safety of Offshore Exploration and Production of Hydrocarbons Consumption of liquid fuels represents the main energy source in (ZSOIEU) [Zakon o sigurnosti pri odobalnom istraživanju i Croatia. It is expected that in the long run, fossil fuel production eksploataciji ugljikovodika, Official Gazette no. 78/15] entered will gradually decrease in favour of renewable energy sources. into force on 25 July 2015, and became fully applicable as of 19 Nevertheless, it is expected that the share of liquid fuels in energy July 2018. The new offshore legal regime establishes a minimum consumption in Croatia will continue to be very high in the set of rules for preventing major accidents in offshore oil and upcoming period (also see question 1.2 above). gas operations and limiting the consequences of such accidents. Following the adoption of the ZSOIEU, further implementing regulations and guidelines were made available on the website of 2.3 To what extent are your jurisdiction’s oil requirements the Coordination body/the Croatian Hydrocarbon Agency during met through domestic oil production? 2017 and 2018 respectively (please see further below).

The production of domestic oil products is carried out by INA. Only The Strategic Environmental Impact Assessment (SEA) must be about 19 per cent of domestic requirements for crude oil may be conducted when exploration and exploitation of hydrocarbons covered by domestic production of oil and condensates. The total are intended. Projects related to the production of oil and gas are production of crude oil in 2017 amounted to 667,000 tonnes of oil subject to an Environmental Impact Assessment (EIA) and may also [Annual Report 2017 of the Croatian Energy Regulatory Agency, be subject to the Ecological Network Impact Assessment (ENIA). page 154]. Croatia, thus, is dependent on the import of oil. INA The EIA approval, issued under the EIA Regulation [Uredba o reported their proven reserves at the end of 2017 as 76 million bbl procjeni utjecaja zahvata na okoliš, Official Gazette nos. 61/14 and of oil. Crude oil production in 2017 amounted to 14.5 million boe/ 3/17], has to be obtained prior to the issuance of the location permit. day and condensate production to 1.8 million boe/day [www.ina.hr]. On an administrative level, the competent authorities are, inter alia, the Ministry of Environment and Energy (Ministarstvo zaštite okoliša i energetike; MZOE) as the State administration authority 2.4 To what extent is your jurisdiction’s oil production governing the issuance of the Licences for the Exploration and exported? Production of Hydrocarbons, the conclusion of the Agreements on the Exploration and Production of Hydrocarbons, the issuance Croatia does not export crude oil; it exports oil products. In 2017, of the Licences for the Production of Hydrocarbons, the building about 81 per cent of the imported crude oil, 17 per cent of the and use permits for petroleum facilities, etc., the Ministry of State- domestic crude oil and 2 per cent of the domestic condensates were owned Property (Ministarstvo državne imovine; MDI) as the State used as raw material for oil products production [Annual Report administration authority managing State-owned land, MZOE as 2017 of the Croatian Energy Regulatory Agency, page 155]. The the State administration authority governing the EIA and ENIA total production of oil products in 2017 amounted to 3.6 million process and the Ministry of Construction and Physical Planning tonnes of oil products. Nevertheless, the significant share of the oil (Ministarstvo graditeljstva i prostornog uređenja; MGPU) as the products in the Croatian market originates from imports. State administration authority governing the issuance of the location permits for the petroleum facilities.

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In accordance with the ZIEU and the Act on Establishment of the Hydrocarbon Agency [Zakon o osnivanju Agencije za ugljkovodike, 3.2 How are the State’s mineral rights to develop oil Official Gazette nos. 14/14 and 73/17], the Croatian Hydrocarbon and natural gas reserves transferred to investors or companies (“participants”) (e.g. licence, concession, Agency (Agencija za ugljikovodike; AZU) has been established service contract, contractual rights under Production in February 2014. The AZU provides operational support to Sharing Agreement?) and what is the legal status of competent administration authorities in the domain of exploration those rights or interests under domestic law? and production of hydrocarbons and permanent geological storage and it is responsible for, inter alia, the launching of a public tender Oil and natural gas are mineral resources of special interest to process for the award of a licence for the exploration and production the State which are in the possession of the Republic of Croatia. of hydrocarbons, supervision of the licensed activities as well as

Croatia The ZIEU allows investors to apply for rights to explore and cooperation with investors, etc. extract oil and natural gas reserves. However, only companies The ZSOIEU provides for the establishment of a special competent having their seat or a branch-office in Croatia or in another state authority, so-called Coordination for the Safety of Offshore and which are registered with the competent authority to perform Exploration and Production of Hydrocarbons (Koordinacija za hydrocarbons exploration and production, and which also comply sigurnost pri odobalnom istraživanju i eksploataciji ugljikovodika; with further statutory requirements set out in Art. 17 of the ZIEU the Coordination body). The Coordination body shall be comprised (e.g. absence of criminal convictions, payment of all public duties, of the representatives of the different State authorities, such royalties, charges for the usage of forest land or agricultural land, as, inter alia, MZOE, AZU, the Croatian Register of Shipping absence of unlawful exploration and production activities, absence (Hrvatski registar brodova; CRS), the Ministry of Maritime Affairs, of any remediation liabilities related to the previous exploration Transport and Infrastructure (Ministarstvo pomorstva, prometa and production activities, etc.), may be awarded a Licence for the i infrastrukture; MMPI), the National Protection and Rescue Exploration and Production of Hydrocarbons and the Agreement on Directorate (Državna uprava za zaštitu i spašavanje; DUZS) and the Exploration and Production of Hydrocarbons within one single the Agency for Explosive Atmosphere Hazardous Areas (Agencija tendering procedure. The Licences and the PSA may be awarded za prostore ugrožene eksplozivnom atmosferom; Ex-Agency). In either after a single tendering procedure or for the outstanding areas accordance with the Regulation on Coordination for the Safety of of the previous tendering procedure and in relinquished areas (Art. Offshore Exploration and Production of Hydrocarbons [Uredba o 14 of the ZIEU). Koordinaciji za sigurnost pri odobalnom istraživanju i eksploataciju In addition, Art. 6 of the ZSOIEU lists the requirements to be ugljikovodika, Official Gazette no. 74/17], the Coordination body considered when assessing the participants’ technical and financial was established in September 2017 [www.azu.hr/hr-hr/Koordinacija]. capability, including insurance and liability for potential economic Currently, there are 60 production (also called exploitation) damages. The ZSOIEU explicitly stipulates that the participant may concessions of hydrocarbons (57 onshore and three offshore) in be granted a licence only if it complies with all requirements set out Croatia. With the aim of substantially expanding exploration in the ZSOIEU and relevant provisions of the EU law. and production activities in the upcoming period, the Croatian In accordance with the ZIEU, the State administration authorities Government launched, on 2 April 2014, the first international competent for conducting the above-mentioned tendering procedure offshore licensing round for the exploration of 29 blocks in the is the MZOE and the AZU in consultation with other competent Adriatic Sea, covering approximately 36,823 km². Pursuant to authorities in case that exploration and production activities are to Decisions of the Croatian Government as of 2 January 2015, a be carried out in specific areas (e.g. State-owned land, maritime consortium of US-based Marathon Oil and Austria’s OMV have domain, areas under special water regimes, etc.). been awarded seven offshore oil and gas exploration licences, the company INA obtained two licences, and a consortium of Italy’s ENI and UK-based MEDOILGAS was granted one licence. However, 3.3 If different authorisations are issued in respect of following the withdrawal of the Marathon Oil/OMV consortium different stages of development (e.g., exploration appraisal or production arrangements), please specify from the licensing round in July 2015, the Croatian Government those authorisations and briefly summarise the most revoked their respective licences. The offshore Production Sharing important (standard) terms (such as term/duration, Agreement (PSA) with the remaining participants has not been scope of rights, expenditure obligations). signed yet. Subsequently, the first international onshore licensing round for the As stated above (see question 3.2 above), the award of the Licence exploration of six blocks across the Drava, Sava and East Slavonia for the Exploration and Production of Hydrocarbons and the PSA is regions, covering approximately 15,000 km², was opened on 18 July carried out within one single tendering procedure or in a separate 2014 and closed on 18 February 2015. Pursuant to Decisions of the administrative procedure for the outstanding areas which were Croatian Government as of 3 June 2015, three companies have been subject to the previous tendering procedure and in relinquished awarded six onshore oil and gas exploration licences. Four licences areas. The public tendering procedure is launched on the basis of were awarded to VERMILION ZAGREB EXPLORATION, a local the decision of the Croatian Government. Prior to launching the unit of Canada-based energy group Vermilion. One licence was formal tender procedure, AZU may organise a presentation in order granted to INA, and one to Nigeria-based OANDO PLC. The PSA to inform potential investors on hydrocarbons of their potential for five onshore exploration blocks awarded to Vermillion, i.e. INA, existence in certain Croatian regions. was signed in June 2016. The public tender must be published in the Croatian Official Gazette Following the adoption of the new ZIEU, the Croatian Government and in the EU Official Journal at least 90 days prior to the expiry of launched, on 31 October 2018, the second international onshore the set deadline for submission of bids. Tender specifications must licensing round for seven exploration blocks across the Drava, Sava be made available on the official website of the MZOE and AZU at and Northwest Croatia regions, which is opened until 30 June 2019 www.azu.hr. (further information available at www.azu.hr). On the basis of a Licence for the Exploration and Production of Hydrocarbons, the investor obtains the right to explore hydrocarbons

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and to the direct award of the Production Licence of Hydrocarbons appropriate proportions to the selected tenderer and the National in case the investor has concluded a PSA and provided that the Oil Company. The selected tenderer and the National Oil Company investor duly fulfils all obligations from the concluded agreement. shall conclude a joint venture agreement (JVA) in the period of three The Licence may be granted for a maximum of 30 years and covers months from the issuance of the licence, and prior to concluding the exploration period of up to five years and the production period. the agreement. Accordingly, the draft of the JVA shall constitute an The exploration period may be extended a maximum of twice for integral part of the tender specifications. Furthermore, the Croatian a period of six months in justified cases. The production period Government has exclusive ownership of the documentation and data may be extended by the Government on the request of the investor, in connection with the oil and natural gas development projects. provided that it has been requested at least 12 months prior to the The template PSA stipulates that the Croatian State remains the sole

licence expiry. owner of all petroleum produced, except as regards the contractor’s Croatia In accordance with the ZIEU, the following agreements may be entitlement to its share of production in accordance with the concluded between the Government and the investor: an exploration provisions of the PSA. However, there is no State participation in the and PSA; or an agreement on the production of hydrocarbons. The PSA. In addition, the template PSA provides for the establishment draft agreement has to be part of the tender documentation. The of an advisory committee, as comprised of the representatives of mandatory terms of the agreement are set out in detail in Art. 29 the AZU and the investor, for the purpose of providing orderly of the ZIEU. In this respect, the new ZIEU includes a template of advice and coordination of all matters pertaining to the petroleum the PSA with royalty and applicable taxes (the template PSA). The operations carried out under the PSA. ZIEU provides for the possibility to negotiate the above-mentioned agreement, but the comments and proposed amendments must be 3.5 How does the State derive value from oil and natural submitted by the investor until the set deadline for submission gas development (e.g. royalty, share of production, of bids. Following the negotiation phase, the agreement must be taxes)? concluded between the Government and the investor within six months of the issuance of the licence. The investor is required to pay fees and taxes (i.e. royalties) pursuant In general, the investor pays all costs and bears the risk during to the ZIEU, the Regulation on Fees for Exploration and Production the exploration phase of a project. The conditions and methods of Hydrocarbons (UNIEU) [Uredba o naknadama za istraživanje i of reimbursement of expenditures linked to the exploration and eksploataciju ugljikovodika, Official Gazette nos. 37/14 and 72/14] production activities shall be regulated in the agreement. If oil and and the provisions of the PSA. Participants in the first offshore and gas is discovered, the investor is entitled to recover its exploration onshore licensing round were required to pay an application fee in costs. However, if there will be no production, the investor bears all the amount of EUR 5,000, as well as to provide a bank guarantee for the costs without the right to cost-reimbursement. the bid bond in the amount of EUR 500,000. The petroleum operations may be carried out only within the Methods for setting the amounts and the ratio of allocation of exploration area (istražni prostor) and/or within the exploitation the royalty and other fees for the exploration and production of field (eksplotacijsko polje). hydrocarbons are set out in detail under Art. 51 of the ZIEU and the UNIEU respectively. The fees are established for (i) exploration The Croatian Government has the power to revoke the Exploration and production of hydrocarbons, (ii) the storage of hydrocarbons and Production Licence in case of non-compliance with the terms in geological structures, and (iii) permanent disposal of gas in and conditions of the licence and statutory requirements. Grounds geological structures. for the revocation of the Exploration Licence are set out in detail in Art. 26 of the ZIEU. The fees for exploration and production of hydrocarbons consist of: For the construction and operation of petroleum facilities and ■ total fees, which include: (i) a fee for the exploration area; installations, the building and use permit are required (Sec. IV Arts. (ii) a fee for the area of the established production field; (iii) a signature bonus for the agreement signed between the 140–184 of the ZIEU). investor and the Croatian Government; (iv) a fee (royalty) The energy activities of gas production and natural gas production for the produced quantities of hydrocarbons; (v) additional are also governed by the Gas Market Act (ZTP) and subject to fees for the realised production (production bonus) of licensing by HERA. Therefore, if the production (i.e. extraction) hydrocarbons; and (vi) administrative fees; and operations also include the delivery and sale of natural gas on the ■ share of the produced quantities of hydrocarbons, which Croatian market, a licence for the performance of energy activity of shall be expressed in percentage of the produced quantities of natural gas production (dozvola za obavljanje energetske djelatnosti hydrocarbons belonging to the Republic of Croatia. proizvodnje prirodnog plina) is also required. The licence for As regards the share of production, please see questions 3.3 and natural gas production may be issued for a minimum period of one 3.4 above. In accordance with the ZIEU and the template PSA, the year and a maximum period of 30 years. The general obligations Croatian Government enjoys the pre-emption right to purchase the and rights of a gas producer and a natural gas producer are set out in extracted hydrocarbons based on the market conditions depending Arts. 13–14 of the ZTP. on the method of production.

3.4 To what extent, if any, does the State have an 3.6 Are there any restrictions on the export of ownership interest, or seek to participate, in the production? development of oil and natural gas reserves (whether as a matter of law or policy)? As regards technical restrictions of the Croatian gas transmission system, please see question 1.1 above. In the event of a crisis, certain Generally, the new ZIEU provides that the tender specifications extraordinary measures (including import and export restrictions) may also impose the obligation of the National Oil Company to can be taken on the basis of the Croatian Energy Act (ZE) [Zakon participate with the selected tenderer in the project in a percentage o energiji, Official Gazette nos. 120/12, 14/14, 95/15, 102/15 and between 10 and 30 per cent. In this case, the Licence for the 68/18] and other energy laws. Exploration and Production of Hydrocarbons shall be issued in

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phase and the setting up of a decommissioning fund and a bank 3.7 Are there any currency exchange restrictions, or escrow account for the deposit coverage in the set amount, etc. restrictions on the transfer of funds derived from production out of the jurisdiction? 3.10 Can rights to develop oil and natural gas reserves No specific currency exchange restrictions or restriction on the granted to a participant be pledged for security, or booked for accounting purposes under domestic law? transfer of funds derived from production out of the jurisdiction can be determined in Croatian law. The template PSA stipulates that all transactions, payments and valuations made in currencies other than In accordance with the Concessions Act (ZK) [Zakon o koncesijama, the currency of the Republic of Croatia shall be recorded in Croatian Official Gazette no. 69/17], a pledge may be established over the

Croatia currency, the Kuna (HRK), at the exchange rate in effect at the time rights from the concession contract, with prior approval of the the transaction or valuation is made. The rate of exchange shall be concession grantor, only in favour of financial institutions to secure established by reference to the middle rate published by the Croatian the claims of these institutions on the basis of the loan contract. National Bank (Hrvatska Nacionalna Banka; CNB). Claims of financial institutions may relate solely to financial instruments acquired for the purposes of the concession contract execution, and shall not include any other claims that financial 3.8 What restrictions (if any) apply to the transfer or institutions have towards the concession holder on any other disposal of oil and natural gas development rights or grounds. interests? Special regulations in connection with the pledge for security or the booking for accounting purposes of rights to develop oil and In accordance with the ZIEU, the rights from the licence and natural gas are stipulated in the draft PSA for both the first offshore agreement may be transferred to a third party; however, the and onshore licensing round. In accordance with the draft PSA, the respective transfer is subject to prior approval of the Croatian pledge for security of rights to develop oil and natural gas is subject Government. The Croatian Government cannot refuse the approval to prior approval of MZOE. The approval shall not be unreasonably without justified reasons. It will be assumed that there is a justified withheld. The respective accounting and auditing procedure is reason for refusal of prior approval in case the investor fails to notify specified in detail in the draft PSA. the MZOE of the intended transfer without delay. The MZOE must decide on the investor’s application for prior approval within 30 days of receipt of the application. In addition, the Croatian Government 3.11 In addition to those rights/authorisations required has the pre-emption right to acquire a minimum of 10 per cent of to explore for and produce oil and natural gas, what the shares from the respective licence and agreement, either via a other principal Government authorisations are national SPV or via a legal entity proposed by the Government and required to develop oil and natural gas reserves (e.g. environmental, occupational health and safety) and which fulfils all statutory requirements for the award of the licence from whom are these authorisations to be obtained? and agreement. The transfer of rights from the licence and agreement which is Apart from authorisations based on the ZIEU and the ZTP (see carried out contrary to the rules set out in the ZIEU is null and void. question 3.3 above), several other authorisations (of different As regards the offshore operations, Art. 6 of the ZSOIEU explicitly authorities) may be required, depending on the specific project. stipulates that the licensee may assign its rights and duties from Therefore, authorisations, e.g. according to the Croatian law on a licence to another mining operator only if it complies with all State property management, nature and environmental protection, requirements set out in the ZSOIEU and relevant provisions of the physical planning and building, forest, agricultural land or water EU law. regime and maritime domain, etc., may be required (see question As regards the assignment and change of control clauses in the 3.1 above). PSA, both the ZIEU and the template PSA imposes an obligation Further, the execution of the petroleum operations and the for the Government’s prior approval. A failure to comply with such construction of petroleum facilities are subject to petroleum plans obligation is specified as a ground for termination of the agreement. (naftno-rudarski projekti) (Art. 131 et seq. ZIEU). In addition, pursuant to the ZIEU, the licensee has to prepare and keep a set of obligatory documents for exploration and production works 3.9 Are participants obliged to provide any security or guarantees in relation to oil and natural gas (e.g. a preliminary plan, development and production plan, development? supplementary development and production plan, well drilling project and simplified plan, study on hydrocarbon reserves, records In accordance with the ZIEU, the investor is obliged to provide the on the reserves, etc.). The ZIEU also imposes special obligations of appropriate security or bank guarantee in relation to the exploration reporting to the competent authorities on the licensee. and/or production field restoration costs. Additionally, the investor In order to conduct simultaneous offshore hydrocarbons exploration is obliged to have a whole set of liability insurance policies set out and production activities, a special approval from the MZOE must be in Art. 121 of the ZIEU which cover specific risks linked to oil obtained in accordance with requirements set forth in the Ordinance and natural gas development and operation for the duration of the on fundamental technical requirements, safety and security in the licence and agreement. exploration and production of hydrocarbons from the Croatian In addition, participants in the first offshore and onshore licensing seabed [Pravilnik o bitnim tehničkim zahtjevima, sigurnosti i zaštiti round were required to provide the bank guarantee for the bid bond. pri istraživanju i ekploataciji ugjljikovodika iz podmorja Republike Under the template of the PSA, the following types of financial Hrvatske, Official Gazette no. 52/10]. security are required for oil and gas operations: (i) bank guarantee/ In addition, the ZSOIEU requires that offshore hydrocarbons performance bond for the works programme and parent company operations are conducted only by operators appointed by the licensee guarantee; (ii) insurance for bodily injury, property damage and and approved by the Coordination body. The ZSOIEU provides for other losses; (iii) decommissioning security during the exploration a list of mandatory documents to be adopted by the licensee and/

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or operators (as an operating company appointed under the PSA between the Croatian Government and the licensee) and/or owners 3.13 Is there any legislation or framework relating to (as an entity responsible for a non-production installation) and gas storage? If so, what are the principal features/ requirements of the legislation? submitted for prior approval to the Coordination body. These are, inter alia, the corporate major accident prevention policy, the safety and environmental management system applicable to the installation, The ZIEU and the new Ordinance on permanent disposal of gas in a report on major hazards, the internal emergency response plan, a geological structures [Pravilnik i trajnom zbrinjavanju plinova u design notification (in the case of a planned production installation), geološkim strukturama, Official Gazette no. 106/13], which came a notification of a well operation, a description of the scheme of into force on 31 September 2013, provide a legal framework for gas independent verification, etc. In addition, the report on major storage in geological structures. hazards is subject to review every three years (Art. 15 (9) and Art. Art. 73 et seq. ZIEU provides a legal framework for storage of Croatia 16 (8) of the ZSOIEU). In the event of ‘material changes’ affecting natural gas. A Licence for natural gas storage is required to store the original report on major hazards (as defined in Art. 4 (2) of the natural gas and subject to a tendering process. The petroleum ZSOIEU), the operator or the owner will be required to prepare operations with regard to exploring geological structures suitable an amended report and to submit such amended report for prior for underground gas storage may be carried out exclusively on the approval to the Coordination body. Guidelines for the preparation basis of an Exploration Licence. The petroleum operations with and delivery of the above-mentioned documents are being made regard to storing natural gas may be carried out exclusively on the available at www.azu.hr/hr-hr/Koordinacija/Dokumenti. basis of a Licence for natural gas storage. The award of the licence It should be noted that the competent authorities (e.g. the for natural gas storage and the conclusion of a natural gas storage Coordination body or the petroleum inspectorate within MZOE) contract are carried out within one single tendering procedure. have been given wide enforcement powers in relation to the The storage of natural gas is carried out by the PSP (see question 1.1 preparation and carrying out of offshore operations, including the above) pursuant to the ZTP and Storage Code [Pravila korištenja power to prohibit the operation or commencement of operations sustava skladišta plina, Official Gazette no. 50/18], which came and to revoke the licences for exploration and production of into force on 9 June 2018. According to Art. 79 of the ZTP, access hydrocarbons (Arts. 21–23 and 35–38 of the ZSOIEU). to the gas storage system is subject to the regulated third-party As of 1 June 2016, operators and owners are required to provide access regime. The access to storage can be refused under certain detailed information and reports to both the Coordination body and conditions: (i) lack of capacity; (ii) where access to the system would the National Headquarter for Search and Rescue at Sea (MRCC) in prevent a system operator from performing the PSO; or (iii) where accordance with a common data reporting format as set out in the access to the system would cause serious financial and economic Commission Implementing Regulation (EU) No 1112/2014. difficulties to gas undertakings with regard to take-or-pay contracts concluded prior to a request for approval of access, which is subject to prior approval from the regulatory authority (HERA) (Art. 81 (2) 3.12 Is there any legislation or framework relating to of the ZTP). The refusal has to be notified in writing. The party the abandonment or decommissioning of physical seeking access to storage can file an appeal with HERA, if access structures used in oil and natural gas development? If to storage is refused. HERA has to find whether the prerequisites so, what are the principal features/requirements of the legislation? for refusal of access apply (within 60 days). Against the decision of HERA, no appeal is allowed, but the injured party may bring a claim before the competent Administrative Court. According to the ZIEU, the movable and immovable property used in oil and natural gas development which can be separated without Gas storage is a regulated energy activity performed as a public causing damage is the ownership of the investor who purchased service. Exceptionally, Art. 7 of the ZTP provides that the energy such property. In case the investor already received recovery costs activity of gas storage may be performed as a market activity, for such property, the Croatian State acquires the ownership over provided that the gas storage operator obtains a prior approval from the respective property. In case of the licence revocation and/ HERA. According to Art. 7 of the ZTP, the criteria for issuing or termination of the agreement or the licence and/or agreement the approval of HERA is determined taking into account the level expiration, the immovable property or other fixed installation on the of competition in relation to energy activity of gas storage in the exploration and/or production field becomes the ownership of the Republic of Croatia and the region as well as the issues of security Croatian State. of gas supply in the Republic of Croatia. HERA is required prior to issuing the respective approval to obtain prior opinion of the MZOE In addition, the investor is required to undertake all safety measures and the Croatian Competition Agency (Agencija za zaštitu tržišnog in order to prevent danger to people, property and the environment in natjecanja; AZTN). So far, no such criteria for determining the the occupied areas, and also to notify, among others, the Petroleum access to gas storage system have been issued. Inspectorate and other competent State authorities thereof (Art. 109 of the ZIEU). If the Petroleum Inspectorate and other competent The gas storage tariff regime is based on HERA’s Methodology State authorities ascertain that the safety measures, environmental for Determining Tariffs for Gas Storage [Metodologija utvrđivanja protection measures and restoration of the exploration and/or iznosa tarifnih stavki za skladištenje plina, Official Gazette no. production field are sufficient, the investor can obtain a certificate in 48/18], which came into force on 15 June 2018. On the basis of relation thereto, and thereafter a decision on the decommissioning the methodology, in December 2016, HERA adopted the Decision of the production field and removal from the Registry of production on gas storage tariff rates for the second regulation period 2017– fields. The competent authorities are empowered to prescribe safety 2021 [Odluka o iznosu tarifnih stavki za skladištenje plina, Official measures. Gazette no. 122/16] for PSP, which entered into force on 1 January 2017.

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derivata, Official Gazette nos. 19/14 and 73/17], which came into force 3.14 Are there any laws or regulations that deal specifically on 20 February 2014. Generally, producers, importers and traders of with the exploration and production of unconventional oil and oil products have an obligation to report certain transactions to oil and gas resources? If so, what are their key the MINGO according to the new Ordinance on Data Delivery by the features? Energy Undertakings to the Ministry [Pravilnik o podacima koje su energetski subjekti dužni dostavljati Ministarstvu, Official Gazette There are no special laws or regulations in connection with the nos. 132/14 and 16/15], which came into force on 20 November exploration and production of unconventional oil and gas resources. 2014. In addition, certain reporting/registration obligations to the CNB may also be required, depending on the specific transaction. As regards the wholesale of oil products, see question 10.2 below.

Croatia 4 Import / Export of Natural Gas (including LNG) 6 Transportation 4.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect of 6.1 Outline broadly the ownership, organisational and cross-border sales or deliveries of natural gas regulatory framework in relation to transportation (including LNG). pipelines and associated infrastructure (such as natural gas processing and storage facilities). As regards the Croatian gas market-opening process, please see question 1.1 above. According to the template PSA, the investor As regards ownership of transportation pipelines and storage shall be required, on the request of AZU, to sell a set volume of its facilities, please see questions 1.1 and 2.1 above. Gas transportation share of oil and/or gas to the Republic of Croatia if the Croatian and storage of natural gas are regulated energy activities performed Government’s production share is insufficient to meet domestic as a public service. Provisions on the operation of gas transportation supply requirements. In case of war or imminent expectation of war pipelines and storage facilities can be found in the ZE, ZTP and the or grave national emergency, the Government may also request all or Transportation Network Rules, the General Conditions of Natural part of the oil and gas produced from the agreement area and require Gas Supply [Opći uvjeti opskrbe plinom, Official Gazette no. 50/18] the investor to increase such production to the extent required. and other gas-related regulations. PLINACRO, as the TSO, owns and Cross-border sales and deliveries of natural gas are transacted operates the network of main transmission lines and regional gas pursuant to bilateral agreements between the parties and the pipelines by which domestic and imported natural gas are transmitted availability of cross-border capacity. Also, the Rules on the Gas to exit measuring-reduction stations where the gas is delivered to Market Organisation [Pravila o organizaciji tržišta plina, Official gas distribution systems and to final (industrial) customers directly Gazette no. 50/18], which came into force on 9 June 2018, and the connected to the transmission system. The operation of a gas new Transportation Network Rules [Mrežna pravila transportnog transmission network is divided in five regions (eastern, central, sustava, Official Gazette no. 50/18], which came into force on northern, western and southern Croatia). The TSO has to comply 9 June 2018, are applicable. In the event of a crisis, certain with the duties imposed by the ZTP (Art. 27 et seq. of the ZTP incl. extraordinary measures (including import and export restrictions) informational duties towards gas market participants, publishing can be taken on the basis of the ZE, the Decision on Plan of terms and conditions governing the use of the network, elaborating Interventions on Measures of Protection of Security of Gas Supply the 10-year network development plan, operating, maintaining and of the Republic of Croatia [Odluka o donošenju Plana intervencije developing the transmission facilities, transmitting gas on the basis o mjerama zaštite sigurnosti opskrbe plinom Republike Hrvatske, of signed contracts, etc.). PLINACRO, as the TSO, is responsible for Official Gazette no. 78/14] and the Regulation on Criteria for the the allocation and reservation of the transportation system capacities. Acquisition of the Protected Customer Status in the Event of Gas Network users (e.g. gas supplier and gas trader) are entitled to use Supply Crisis [Uredba o kriterijima za stjecanje statusa zaštićenog the gas transportation system within a reserved capacity on the basis kupca u uvjetima kriznih stanja u opskrbi plinom, Official Gazette of a gas transportation contract concluded with PLINACRO as the no. 65/15], which have been adopted in accordance with Regulation TSO. The system operator is obliged to publish the general terms (EU) No 994/2010 on Security of Gas Supply. In addition, certain and conditions of the transportation system and the standard form reporting/registration obligations to the CNB may also be required, of gas transportation contract. A tariff charging regime applies to depending on the specific transaction. the transportation system both at the transmission and distribution level. Croatia has adopted the entry-exit transportation tariff system. In line with ZTP, the unbundling process of the activities related to 5 Import / Export of Oil the gas transmission and gas storage was carried out. As regards operation of storage facilities, see question 3.13 above. 5.1 Outline any regulatory requirements, or specific According to the ZTP, the natural gas producer is required, inter alia, terms, limitations or rules applying in respect to: ensure a secure, reliable and efficient operation of the upstream of cross-border sales or deliveries of oil and oil pipeline network; and ensure fair, equal and transparent conditions products. for access to the upstream pipeline network, including access to plants providing additional technical services, except those parts As regards the obligation of the oil producer to supply the domestic of the upstream pipeline network used for the production of gas market under the template PSA, please see question 4.1 above. Cross- at the gas field site, etc. According to Art. 79 of the ZTP, access border sales and deliveries of oil and oil products are transacted to the upstream pipeline network is subject to the negotiated third- pursuant to bilateral agreements between the parties. In the event of party access regime. The negotiated third-party access is based on a crisis, certain extraordinary measures (including import and export negotiated commercial conditions. The gas producer may refuse restrictions) can be taken on the basis of the ZE and the Act on Oil access to the upstream pipeline network under certain conditions set and Oil Derivatives Market (ZTNND) [Zakon o tržištu nafte i naftnih out in Art. 81 (1) of the ZTP.

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According to the ZTNND, energy undertakings performing the Determination of Compensation [Zakon o izvlaštenju i određivanju activity of pipeline transport of oil (JANAF) and oil products naknade, Official Gazette nos. 74/14 and 69/17], which came into transport by product-pipeline are required to grant access to their force on 26 June 2014. transport facilities to parties entitled to transport facilities access at non-discriminatory and transparent conditions pursuant to 6.4 How is access to oil and natural gas transportation the negotiated third-party access. As of 20 February 2014, the pipelines and associated infrastructure organised? negotiated third-party access is based on negotiated commercial conditions. Provisions on the operation of the oil pipeline system The operator of the system to which the customer wishes to be of JANAF can be found in the Technical Conditions of Access to connected is obliged to grant non-discriminatory access at regulated Transportation Capacities of JANAF [Tehnički uvjeti za pristup

tariffs in line with the Transportation Network Rules (see questions Croatia transportnim kapacitetima JANAF-a, Gazette “Glasilo VRED-a” 6.1 and 6.6). The contract on connection to the transportation system no. 3-4/03]. Access can be denied under certain conditions (Art. is concluded between PLINACRO, as the TSO, and the distribution 5 of the ZTNND). There are currently a total of 21 companies system operator, storage system operator, gas producer or final licensed for oil and oil product storage in Croatia. (industrial) customer directly connected to the system in line with the General Conditions of Natural Gas Supply. The system operator 6.2 What governmental authorisations (including is obliged to publish the standard form of contract in connection to any applicable environmental authorisations) are the transportation system. required to construct and operate oil and natural As regards access to the oil transportation system, please also see gas transportation pipelines and associated infrastructure? questions 6.1 and 6.6.

According to the Croatian building law, both a location permit 6.5 To what degree are oil and natural gas transportation and building permit issued by the MGPU are required for, inter pipelines integrated or interconnected, and how is co- alia, (i) international and main oil and natural gas transportation operation between different transportation systems pipelines including the terminal and associated infrastructure, (ii) established and regulated? underground gas storage, (iii) oil and liquid oil products storage facilities with a capacity of 50,000 tonnes or more, (iv) LPG storage As regards the Croatian oil and gas transportation network, see facility with a capacity of 10,000 tonnes or more, and (v) buildings questions 1.1, 3.1 and 6.1. The TSO is obliged to cooperate with other and other projects within strategic investment projects of the system operators in the gas sector. The Transportation Network Rules Republic of Croatia defined under a special law (e.g. LNG terminal sets out specific provisions in relation to development, construction on the Island of Krk in the North Adriatic). An EIA must be carried and maintenance of the transportation system. Interconnection out before a location permit can be issued. The use permit will be of the gas transportation system and transportation system of the issued on the basis of a technical examination, provided that the neighbouring country, including technical aspects in relation to constructed building satisfies all conditions under the building and planning, construction and operation of the interconnected pipelines, other energy-related laws. is carried out on the basis of a bilateral agreement concluded with the transportation system operator of the neighbouring country (Sec. Depending on the specific project, several other authorisations and III and V of the Transportation Network Rules). approvals (of different authorities) may be required (e.g. according to the Croatian law on State property management, nature and environmental protection, physical planning and building, water 6.6 Outline any third-party access regime/rights in regime and maritime domain, etc.). The operation of oil and natural respect of oil and natural gas transportation and gas transportation pipelines and associated infrastructure is subject associated infrastructure. For example, can the to licensing. regulator or a new customer wishing to transport oil or natural gas compel or require the operator/ owner of an oil or natural gas transportation pipeline 6.3 In general, how does an entity obtain the necessary or associated infrastructure to grant capacity or land (or other) rights to construct oil and natural gas expand its facilities in order to accommodate the new transportation pipelines or associated infrastructure? customer? If so, how are the costs (including costs Do Government authorities have any powers of of interconnection, capacity reservation or facility compulsory acquisition to facilitate land access? expansions) allocated?

According to Art. 40 of the ZE, energy entities are entitled to As stated above (see question 6.4 above), non-discriminatory use properties belonging to third parties for the construction and access to the gas transportation system according to the principle maintenance of grids and systems for the transmission and/or of regulated third-party access is provided for in line with the transport and distribution of energy, in compliance with special Transportation Network Rules. The access can be refused under regulations. Private land may be expropriated provided that this certain conditions: (i) lack of capacity; (ii) where access to the is required with a view to construct a pipeline and that it is in the system would prevent the system operator from performing the State’s interest to do so. According to Art. 4 of the ZE, construction, PSO; and (iii) where access to the system would cause serious maintenance and the use of energy objects as well as the performance financial and economic difficulties to gas undertakings with regard of energy activities are considered to be in the State’s interest. to take-or-pay contracts concluded prior to a request for approval Generally, construction of new transportation infrastructure has of access, which is subject to prior approval from the regulatory to be provided for in the network development plan of the system authority (HERA). The system operator which refused access to the operators (Art. 8 of the ZE), but also in the development plans of system on the basis of a lack of capacity or a lack of interconnection the local and regional self-government units. Detailed provisions shall make the necessary changes and expansion of the system in on the administrative procedure applicable to property expropriation order to enable access within a reasonable period of time, as far as can be found in the new Croatian Act on the Expropriation and it is economically feasible to do so or when a potential customer

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is willing to pay for them (Art. 81 of the ZTP). In case of refused tariff system is based on the entry-exit model. The tariff rates for the access to the distribution or transmission system by a final decision, natural gas transmission are determined for specific entry and exit construction of a direct gas pipeline may be allowed, which is points for particular years of the regulation period. The duration subject to prior approval from HERA (Art. 82 of the ZTP). Major of the regulation period is five years. The actual tariff rate is set new gas infrastructures (i.e. interconnectors, gas storage system and by the TSO, with the prior approval of HERA. In the event that LNG facilities) may, upon request, be exempt from the application HERA refuses to give approval, it shall independently set the tariff of third-party access right under certain conditions laid down in Art. rates. On the basis of the methodology, in December 2017 HERA 84 of the ZTP. adopted the Decision on gas transportation tariff rates for the second In August 2017, HERA adopted the criteria for issuance the approval regulation period 2018–2021 [Odluka o iznosu tarifnih stavki za transport plina, Official Gazette no. 127/17] for PLINACRO as the

Croatia for construction and operation of a direct gas pipeline, which entered into force on 10 August 2017 [Kriteriji za izdavanje suglasnosti za TSO, which entered into force on 1 January 2018. izgradnju i pogon izravnog plinovoda, Official Gazette no. 78/17]. As of 20 February 2014, oil transportation by oil pipeline is no In May 2018, HERA adopted the new Methodology for Determining longer regulated energy activity and the negotiated third-party Fees for the Connection to the Gas Distribution or Transmission access is not based on the tariff system for oil transportation. The System and for Increasing the Connection Capacity [Metodologija price for oil transportation by pipeline is based upon negotiated utvrđivanja naknade za priključenje na plinski distribucijski ili commercial conditions. The price of oil and oil products storage is transportni sustav i za povećanje priključnog kapaciteta, Official not regulated; it is based upon existing market conditions. Gazette no. 48/18], which entered into force on 15 June 2018. On the basis of the methodology, in December 2016 HERA adopted 7 Gas Transmission / Distribution the Decision on the respective fee amounts for the regulation period 2017–2021 [Odluka o naknadi za priključenje na plinski distribucijski ili transportni sustav i za povećanje priključnog 7.1 Outline broadly the ownership, organisational and kapaciteta za regulacijsko razdoblje 2017–2021 godina, Official regulatory framework in relation to the natural gas Gazette no. 122/16], which entered into force on 1 January 2017. transmission/distribution network. As stated above (see question 6.1), access to the upstream pipeline network is subject to the negotiated third-party access regime. The Gas transmission and distribution are regulated energy activities gas producer may refuse access to the upstream pipeline network performed as a public service. PLINACRO, as the only TSO, is under certain conditions set out in Art. 81 (1) of the ZTP. legally unbundled (also see question 1.1 above). According to HERA’s licence registry, a total of 35 companies are currently Non-discriminatory access to the oil transportation system, licensed as DSOs. Thirteen DSOs are legally unbundled from retail according to the principle of negotiated third-party access, is and 22 DSOs are exempt from unbundling due to having less than provided for in line with the ZTNND and the Technical Conditions 100,000 customers. Transmission and distribution networks are of Access to Transportation Capacities of JANAF (also see question subject to regulated third-party access (see questions 6.6 and 7.3). 6.1 above). Access can be denied under certain conditions, e.g. lack of capacity, technical or safety limitations (Art. 5 of the ZTNND). The refusal of access has to be notified in writing. The party seeking 7.2 What governmental authorisations (including any applicable environmental authorisations) are required access to the system can file an appeal with HERA, if access to the to operate a distribution network? system is refused. HERA has to find whether the prerequisites for refusal of access apply (within 60 days). Against the decision of Apart from the licence issued by the regulatory authority (HERA), HERA, no appeal is allowed, but the injured party may bring a claim a concession for gas distribution or a concession for the building of before the competent Administrative Court. a distribution system is required to operate a distribution network. Prior to the granting of a concession, a tendering process has to be 6.7 Are parties free to agree the terms upon which oil conducted in accordance with the requirements set out in the ZTP or natural gas is to be transported or are the terms and the ZK. (including costs/tariffs which may be charged) regulated? A concession may be granted for a minimum period of 20 years and a maximum period of 50 years (instead of the current maximum time limit of 30 years). In addition, the existing concession Under Croatian law, gas transportation is regulated energy activity contracts may be prolonged with prior approval from HERA and in performed as a public service. The General Conditions of Gas accordance with the requirements set out in the law. The authority Supply stipulate certain specific data that the gas transportation has the power to revoke the concession in case of non-compliance contracts concluded between gas suppliers or gas traders with the with the terms and conditions of the concession requirements (Art. TSO for a definite period of time, need to comprise as follows: (i) data 44 of the ZTP). According to the Regulation on the amount and regarding the contracting parties; (ii) conditions of gas transmission; method of payment of fees for the concession for gas distribution (iii) provisions on quality of gas supply; (iv) conditions of gas and concession for the building of distribution systems [Uredba o delivery limitation; (v) provisions on the reading and communication visini i načinu plaćanja naknade za koncesiju za distribuciju plina i of metering data; (vi) provisions on the billing and payment of the koncesiju za izgradnju distribucijskog sustava, Official Gazette no. fee for the use of the transmission system; (vii) time and location 31/14], a compensation fee for the concession for gas distribution of gas delivery; and (viii) other provisions. The gas transmission and concession for building of distribution systems is determined in tariff regime is based on HERA’s Methodology for determining the amount of 0.5 to 1.5 per cent of the total turnover realised by gas tariff rates for gas transportation [Metodologija utvrđivanja iznosa distribution activities in the previous year in the area for which the tarifnih stavki za transport plina, Official Gazette nos. 48/18 and concession is granted. 58/18], which regulates the mode, method and conditions of the calculation of the network tariffs. The regulation model is based on Depending on the specific project, several other authorisations and the regulation incentive method (i.e. the revenue cap method). The approvals (of different authorities) may be required (e.g. according

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to the Croatian law on State property management, nature and environmental protection, physical planning and building, water 8 Natural Gas Trading regime and maritime domain, etc.). 8.1 Outline broadly the ownership, organisational and regulatory framework in relation to natural gas 7.3 How is access to the natural gas distribution network trading. Please include details of current major organised? initiatives or policies of the Government or regulator (if any) relating to natural gas trading. Non-discriminatory access to the distribution network, according to the principle of regulated third-party access, is provided for in line Croatia has implemented the entry-exit model as of 1 January with the ZTP and the Distribution Network Rules [Mrežna pravila 2014. There is currently no commodity exchange or gas hub in Croatia plinskog distribucijskog sustava, Official Gazette no. 50/18], which Croatia. Wholesale gas trading is exclusively based on bilateral came into force on 9 June 2018. The Distribution Network Rules contracts. In order to pursue gas trade activity in Croatia, a licence govern, inter alia, the connection to the distribution system, services for trading, issued by HERA, is required. In case the intended of the DSO, the rights and duties of the DSO, system users and final activities of wholesale trading of gas also include the sale of gas to customers, contractual relationships and general terms and conditions end-customers, a licence for supply, issued by HERA, is required. of the distribution system, etc. The network user shall conclude a gas distribution contract with the DSO. The gas distribution contract The ZTP has established the responsibility of the gas market governs the provision of gas distribution service, including the participants pursuant to the balancing group model for the purposes ancillary services and the financial obligations in accordance with the of the smooth execution and calculation of purchase and sale Distribution Network Rules. Such contract shall also include a list transactions on the gas market, ensuring the compliance of gas of all final customers connected to the distribution system to which volumes delivered into and taken from the transmission network, the gas supplier supplies the gas elaborated by the balancing groups. and separation of the financial transactions from the physical gas The DSO is obliged to publish the standard form of a gas distribution delivery. contract. Each gas market participant, except for the Croatian energy market operator (Hrvatski operator tržišta energije; HROTE) as the gas market operator, is required to be a member of the balancing 7.4 Can the regulator require a distributor to grant group. A balancing group is a virtual association of one or more capacity or expand its system in order to accommodate new customers? gas market participants, organised on a commercial basis, primarily for the purpose of optimising the costs of balancing, for which the balancing party is responsible. The balancing group is organised Access to the distribution system may be denied by the DSO under and managed by the responsible balancing party, and comprised of certain conditions provided by the law. The regulatory authority the direct members (i.e. gas supplier and gas trader) and indirect (HERA) can be appealed to if the right of access is damaged (see members (i.e. final customer). The HROTE keeps the register of the question 6.6 above). Compare also question 6.6 to insufficient system responsible balancing parties and publishes it on its website (www. capacity or insufficient interconnection. hrote.hr). The VTP has also been introduced in the gas market in Croatia as of 7.5 What fees are charged for accessing the distribution 1 January 2014. Rules on the VTP are laid down under the Rules network, and are these fees regulated? on the Gas Market Organisation and Transportation Network Rules.

The gas distribution tariff regime is based on HERA’s Methodology for The VTP under Croatian legislation is defined as a point of gas determining tariff rates for gas distribution [Metodogija utvrđivanja trading after its entry into the transmission network and prior to iznosa tarifnih stavki za distribuciju plina, Official Gazette no. 48/18], its exit from the transmission network – including the gas storage which set out the mode, method and conditions of the calculation of system. To trade on the VTP it is not required to book entry-exit the network tariffs. The regulation model is based on the regulation capacity or storage system capacity. incentive method (i.e. the revenue cap method). The tariff system in Please note that only a responsible balancing party (voditelj bilančne the distribution system is based on the post stamp principle. The actual skupine) who is a transmission system user is entitled to trade on the tariff rate is set by the DSO, with the prior approval of HERA. In the VTP. This means that, in fact, only market parties in possession of event that HERA refuses to give approval, it shall independently set a supply or trade licence and who have signed a transport contract the tariff rates. On the basis of the methodology, in December 2017 with the TSO can gain access to the VTP. HERA adopted the Decision on gas distribution tariff rates for the The HROTE publishes on its official website the form which allows second regulation period 2018–2021 [Odluka o iznosu tarifnih stavki for the placement of a bid for the purchase or sale of gas on the VTP. za distribuciju plina Official Gazette no. 127/17] for the 35 DSOs, Trading at the VTP is done independently between the responsible which entered into force on 1 January 2018. balancing parties; neither the TSO nor the HROTE act as a clearing house, hence every party bears the counterparty risks of the other. 7.6 Are there any restrictions or limitations in relation to The parties can use bespoke agreements or the standard agreements acquiring an interest in a gas utility, or the transfer published on the HROTE’s website. of assets forming part of the distribution network Regulation (EU) No 1227/2011 of the European Parliament and of (whether directly or indirectly)? the Council of 25 October 2011 on wholesale energy market integrity and transparency (REMIT) applies directly to parties engaging in gas There are no restrictions or limitations in relation to acquiring an trading in Croatia. Since Art. 9 of the REMIT imposes an obligation interest in a natural gas utility, or the transfer of assets forming part on wholesale energy market participants entering into transactions of the distribution network. that are required to be reported to the Agency for Cooperation of Energy Regulators (ACER) to register with the competent national regulatory authority, the registration of market participants is made

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available by HERA via the Centralised European Register of Energy In May 2018, HERA adopted the Methodology for Determining Market Participants (CEREMP) as of 25 February 2015. Tariffs for LNG Reception and Dispatch [Metodologija utvrđivanja iznosa tarifnih stavki za prihvat i otpremu ukapljenog prirodnog plina, Official Gazette no. 48/18] which entered into force on 8.2 What range of natural gas commodities can be traded? For example, can only “bundled” products 15 June 2018. The regulation model is based on the regulation (i.e., the natural gas commodity and the distribution incentive method (i.e. the revenue cap method). On the basis of thereof) be traded? the methodology, in June 2018 HERA adopted the Decision on indicative tariff rates for the LNG reception and dispatch for the Natural gas can be traded as an unbundled commodity, separate regulation period 2021–2040 [Odluka o indikativnim iznosima from the service of distribution/transportation. tarifnih stavki za prihvat i otpremu ukapljenog prirodnog plina, Croatia Official Gazette no. 56/18] for LNG Croatia, which entered into force on 15 June 2018. 9 Liquefied Natural Gas

9.4 Outline any third-party access regime/rights in 9.1 Outline broadly the ownership, organisational and respect of LNG facilities. regulatory framework in relation to LNG facilities. A non-discriminatory third-party access regime also applies to LNG Currently, no LNG facilities exist in Croatia. As regards the planned terminals. The access to a LNG facility can be refused under certain construction of the LNG terminal on Island of Krk in the North conditions (set out in question 3.13 above). Adriatic, please see question 1.1 above. In order to create a legal framework for the development of the LNG terminal, in June 2018, a new Act on LNG Terminal [Zakon o terminal za ukapljeni prirodni 10 Downstream Oil plin, Official Gazette no. 57/18] has been adopted, which entered into force on 5 July 2018. 10.1 Outline broadly the regulatory framework in relation to the downstream oil sector. 9.2 What governmental authorisations are required to construct and operate LNG facilities? The oil industry falls under the competence of MZOE. The national regulatory authority is HERA. The entity responsible for According to the Croatian building law, a location permit and maintenance of the compulsory stocks of crude oil and oil products building permit issued by the MGPU are required for, inter alia, in Croatia is AZU (formerly HANDA). Beside the ZE, the main an LNG terminal (see question 6.2 above). An EIA must be carried legal act is the ZTNND (see question 2.1 above). out before a location permit can be issued. The use permit will be issued on the basis of a technical examination, provided that the 10.2 Outline broadly the ownership, organisation and constructed building satisfies all conditions under the building and regulatory framework in relation to oil trading. other energy-related laws. Depending on the specific project, several other authorisations and As stated above (see question 2.1 above), most of the trade in approvals (of different authorities) may be required (e.g. according oil products and LPG is carried out by INA Group companies. to the Croatian law on State property management, nature and Other important market players in the oil industry are PETROL environmental protection, physical planning and building, water HRVATSKA d.o.o., CRODUX DERIVATI DVA d.o.o., LUKOIL regime and maritime domain, etc.). The operation of an LNG Croatia d.o.o. and TIFON d.o.o. facility is subject to licensing. A licence for the performance of energy activities (dozvola za obavljanje energetske djelatnosti) issued by HERA is needed to 9.3 Is there any regulation of the price or terms of service carry out the wholesale of oil products and wholesale of LPG. As in the LNG sector? regards the wholesale and retail trade with third countries of certain oil products and biofuels, beside the licence for performance of the Pursuant to Art. 7 of the ZTP, an LNG facility operation is regulated respective energy activities, it is necessary to obtain approval from energy activity which is carried out as a public service in the gas MINGO in line with the Regulation on Conditions for Wholesale sector. Currently, there are no special regulations of the price or and Retail Trade with Third Countries of Particular Goods [Uredba terms of service in the LNG sector. o uvjetima za obavljanje trgovine na veliko i trgovine s trećim zemljama za određenu robu, Official Gazette nos. 47/14 and 62/15]. Pursuant to Art. 93 of the ZTP, the Rules for Use of LNG Terminals According to this Regulation, legal and natural persons engaged in (Pravila korištenja terminala za UPP) shall set out specific wholesale and trade of fuels (not including oil products and biofuels provisions in relation to the development, manner of management from the EU Member States, EEA Member States or Turkey) must and the usage of the LNG terminal including contractual relations have adequate warehouses specially furnished and equipped for and general terms and conditions for using the LNG terminal. In the storage of fuel. As regards certain reporting obligations to the the process of adopting the Rules for Use of LNG Terminals, the MINGO, see question 5.1 above. LNG terminal operator shall ensure adequate participation of all interested parties, and conduct public consultations lasting no less The price of oil and oil products is not regulated; it is based upon than 15 days. The Rules for Use of LNG Terminals are to be adopted existing market conditions. Exceptionally, Art. 9 of the ZTNND by the LNG terminal operator, with prior approval of HERA. The provides that the Croatian Government may, for the protection of respective rules must also be published on the websites of HERA consumers, market regulation or other justifiable reasons, determine and the LNG terminal operator. Rules for Use of LNG Terminals the maximum retail prices for certain oil products for a continuous still remain to be adopted. period for a maximum of 90 days.

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(i) the combined worldwide turnover of all undertakings 11 Competition concerned is at least HRK 1 billion (approximately EUR 134.4 million) in the financial year preceding the concentration, where at least one of the undertakings concerned has its seat 11.1 Which governmental authority or authorities are and/or subsidiary in the Republic of Croatia; and responsible for the regulation of competition aspects, or anti-competitive practices, in the oil and natural (ii) the aggregate national turnover of each of at least two of gas sector? the undertakings concerned is at least HRK 100 million (approximately EUR 13.44 million) in the same period. On an administrative level, HERA is competent for the regulation The AZTN may, within a period of 30 days from notification, either and supervision of energy activities in the oil and natural gas clear a merger or decide to open an in-depth review. The in-depth market. The competence of other authorities being responsible for review proceeding may take three months with the possibility of Croatia anti-competitive practices, such as the AZTN, remains unaffected. an extension by another three months where it is necessary to seek additional expert advice, carry out an additional analysis or where sensitive industries or markets are concerned. Pursuant to the 11.2 To what criteria does the regulator have regard in ZZTN, the AZTN may approve unconditionally or conditionally, or determining whether conduct is anti-competitive? prohibit a merger. The regulator has to observe the criteria of the Croatian Competition Act (ZZTN) [Zakon o zaštiti tržišnog natjecanja, Official Gazette 12 Foreign Investment and International nos. 79/09 and 80/13] and also that of the Act on the Regulation Obligations of Energy Activities (ZRED) [Zakon o regulaciji energetskih djelatnosti, Official Gazette nos. 120/12 and 68/18] and other energy-related legislation both at the EU and national level. 12.1 Are there any special requirements or limitations on acquisitions of interests in the natural gas sector (whether development, transportation or associated 11.3 What power or authority does the regulator have to infrastructure, distribution or other) by foreign preclude or take action in relation to anti-competitive companies? practices? As stated above (see section 11 above), special requirements or The AZTN can initiate an investigation upon receipt of a complaint limitations on acquisitions of interests in the oil and natural gas or upon its own initiative. It can request information necessary sector may arise from the Croatian and the EU competition law for conducting the investigation from any entity operating on the irrespective of the nationality of the purchaser. As an exception, Art. market or from State authorities (e.g. HERA is required to provide 25 of the ZTP provides that a special certification process must be technical support to AZTN in the form of expert advice and market conducted where a transmission system owner or TSO is controlled analysis). by a person from a third/non-EU country. In this context, HERA Upon completion of proceedings, AZTN may issue a decision is required to make an assessment, in consultation with the MZOE prohibiting further performance of an anti-competitive agreement and the European Commission, about whether foreign ownership or or practice or a decision prohibiting the abuse of dominant position control of the transmission system would pose a risk to security of in the market. AZTN is further empowered to impose fines (of supply of the Republic of Croatia and the European Union. up to 10 per cent of total annual turnover of the party involved As regards the licence for performance of the respective energy in the anti-competitive practice) or remedial measures. In certain activities, the Croatian law imposes certain residence requirements circumstances, AZTN can terminate the proceedings by imposing on the licensees (e.g. please see questions 3.2 and 3.3). on the parties to the proceedings commitments proposed during the proceedings, provided they are sufficient for the protection of competition and the harmful situation would be eliminated by their 12.2 To what extent is regulatory policy in respect of the fulfilment. oil and natural gas sector influenced or affected by international treaties or other multinational arrangements? 11.4 Does the regulator (or any other Government authority) have the power to approve/disapprove The regulatory policy in respect of the oil and natural gas sector mergers or other changes in control over businesses is especially influenced and affected by the requirements of the in the oil and natural gas sector, or proposed European Union Third Energy Package legislation. acquisitions of development assets, transportation or associated infrastructure or distribution assets? If so, Croatia is a member of the Energy Charter Conference. On 1 July what criteria and procedures are applied? How long 2013, Croatia became the 28th member of the EU. does it typically take to obtain a decision approving or disapproving the transaction?

The Croatian merger control regime catches the merger of independent undertakings, the acquisition of control and the creation of a full-function joint venture. According to Art. 17 of the ZZTN, the filing obligation to the AZTN arises if the following conditions are cumulatively met:

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13 Dispute Resolution 13.3 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 13.1 Provide a brief overview of compulsory dispute or State organs (including any immunity)? resolution procedures (statutory or otherwise) applying to the oil and natural gas sector (if any), including procedures applying in the context of Generally, there is no special difficulty in litigating, or seeking to disputes between the applicable Government enforce judgments or awards, against Government authorities or authority/regulator and: participants in relation to oil State organs. Nevertheless, due to the long timeframes involved and natural gas development; transportation pipeline in obtaining judgments in court, companies often try to resolve

Croatia and associated infrastructure owners or users in disputes without seeking a judicial remedy. relation to the transportation, processing or storage of natural gas; downstream oil infrastructure owners or users; and distribution network owners or users in 13.4 Have there been instances in the oil and natural gas relation to the distribution/transmission of natural gas. sector when foreign corporations have successfully obtained judgments or awards against Government As regards dispute resolution procedures applying between the authorities or State organs pursuant to litigation before domestic courts? regulator and participants in the oil and natural gas sector, see questions 3.1, 3.13, 6.6 and 7.4 above. We are not aware of any such dispute resolution cases. In terms of disputes arising from the PSA between the Croatian Government and the investor, Art. 29 of the ZIEU and the template PSA provide that all disputes arising out of or relating to the PSA 14 Updates shall be finally settled by arbitration in accordance with the Rules of Arbitration of the International Chamber of Commerce (ICC) with a seat of arbitration in Zagreb, Republic of Croatia and the applicable 14.1 Please provide, in no more than 300 words, a law is the Croatian law. Namely, pursuant to Art. 97 of the ZK, summary of any new cases, trends and developments in Oil and Gas Regulation Law in your jurisdiction. the dispute arising from concession contracts shall be resolved by arbitration in Croatia (so-called domestic arbitration) irrespective of the fact that a concession holder is a foreign legal entity. If the The new Gas Market Act (ZTP) came into force on 3 March 2018, parties have not arranged to settle disputes by arbitration, dispute with the primary aim of regulating the rights and obligations of falls within the scope of the exclusive jurisdiction of the Croatian participants in the Croatian gas market pursuant to the Third Gas Administrative Court according to the seat of the concession grantor. Directive (2009/73/EC). The following overview provides a summary of the key amendments to the Gas Market Act: 13.2 Is your jurisdiction a signatory to, and has it duly ratified into domestic legislation: the New York ■ The system of appointing a wholesale gas supplier to Convention on the Recognition and Enforcement of other Croatian suppliers with PSOs has been kept Foreign Arbitral Awards; and/or the Convention on until 1 April 2021. However, prior to appointing a (new) the Settlement of Investment Disputes between States supplier in the wholesale gas market, a public tender has to and Nationals of Other States (“ICSID”)? be conducted by the Croatian Energy Regulatory Agency (HERA) by 3 June 2018. Following the tendering procedure, on 27 June 2018, HERA appointed HEP (through its affiliated The New York Convention on the Recognition and Enforcement of company HEP-Opskrba plinom d.o.o.) as a preferred supplier Foreign Arbitral Awards was ratified in 1981, and the Convention on in the wholesale gas market for an additional period of one the Settlement of Investment Disputes between States and Nationals year (i.e. as of 1 August 2018 until 31 March 2019), which of Other States was ratified in 1998. remains obliged by law to supply gas under regulated Under the Shareholders’ Agreement 2009, MOL gained operational conditions to other suppliers with PSOs for the needs of control of INA. Although the shareholders’ agreement committed household customers. At the beginning of 2019, HERA will the Croatian Government to take over the gas trading business of launch a new tendering procedure in order to appoint a new INA (i.e. the import business of PRIRODNI PLIN) by December wholesale gas supplier for the period from 1 April 2019 until 31 March 2021. Suppliers with PSOs are free to choose 2010, this issue remains unsolved during the ongoing negotiations whether to buy gas from the appointed wholesale market between the Government and MOL. Consequently, two arbitration supplier or on the market at the market price. procedures in connection with the INA-MOL dispute were initiated. ■ The price regulation of gas supply as a public service is At the end of November 2013, MOL initiated the arbitration no longer in the hands of the Croatian Government, but procedure under ICSID rules against the Croatian Government of the regulatory authority (HERA). Until now, the gas under the Energy Charter Treaty. In January 2014, the Croatian price at which the wholesale market supplier sells gas to other Government initiated arbitration under UNCITRAL rules in Geneva suppliers with PSOs for the needs of household customers to annul the 2009 Amendments to the Shareholders’ Agreement was set by the Government. Now, however, HERA must and the Gas Master Agreement (and its First Amendment). In determine and publish a reference price for gas. In other June 2014, the former Croatian Prime Minister was sentenced to words, a price cap mechanism for household customers is to imprisonment for taking a bribe from MOL in 2008 in exchange for be set up by HERA by the date the tender for the appointment securing MOL’s dominant position in INA. However, in July 2015, of a wholesale market supplier is launched at the latest. the Croatian Constitutional Court annulled the verdict and ordered a ■ On 5 March 2018, HERA adopted the Decision on tariff retrial. In December 2016, UNCITRAL dismissed Croatia’s claims rates for gas supply as a public service for the period from based on bribery, corporate governance and MOL’s alleged breaches 1 April 2018 to 31 July 2018. Until 1 August 2018, the respective reference price remains the same as in the previous of the 2003 Shareholders Agreement. ICSID ruling on MOL’s claim gas year (i.e. the price has been set at 0.1809 HRK/kWh). is still expected. For the period thereafter, HERA adopted the Methodology

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for Determining Tariff Rates for Public Service Gas Supply Although key market players are calling for the full liberalisation and Last-Resort Supply [Metodologija utvrđivanja iznosa of the Croatian gas market, the deregulation of gas prices for tarifnih stavki za javnu uslugu opskrbe plinom i zajamčenu household customers has been postponed yet again in order to opskrbu, Official Gazette no. 34/18], which entered into force protect final (household) customers from the excessive market gas on 19 April 2018. The new tariff methodology regulates the price. Nevertheless, as a result of increasing liberalisation in recent method for calculating the final gas price for two distinct years, competition among gas suppliers active in the Croatian market periods, i.e. (i) an interim period from 1 August 2018 to 31 March 2021 (transitional rules), and (ii) a period after (out of a total of 54 licensed gas suppliers, some 45 are active) has 31 March 2021 (regular rules). The main aim of the new increased. Final (household) customers have also started exercising methodology is convergence of the final gas prices for their right to switch suppliers. households with market prices.

In order to further boost investments in exploration and production Croatia ■ Once again, a system of regulated retail prices for of hydrocarbons in Croatia, the Croatian Government launched, household customers remains in place. HERA is required on 31 October 2018, the second onshore licensing round for seven to investigate the functioning of the Croatian gas market at exploration blocks across the Drava, Sava and Northwest Croatia least every three years. Based on the new law, HERA must regions, which is open until 30 June 2019 (further information carry out this investigation by 3 March 2019. In light of the available at www.azu.hr). The prerequisite for this new tender was results of the investigation, HERA can adopt necessary and created by the adoption of a new Croatian Hydrocarbon Exploration appropriate measures to promote effective competition and to ensure the optimal functioning of the gas market. One of and Production Act (ZIEU), which entered into force on 14 June these measures is the adoption of a Gas Price Deregulation 2018. Plan, where HERA shall ensure adequate participation of all After the parliamentary election in October 2016, the new Croatian interested parties, and conduct public consultations lasting Government formed a new ministry for energy and environmental no less than 15 days. HERA shall adopt the Gas Price protection. This was done by combining the previous ministries for Deregulation Plan with the prior approval of the MZOE. energy and mining policy and nature and environmental protection, The plan must also be published on the website of HERA. in order to create the MZOE. This should enable a “one-stop- It follows from the above that the new law provides for the possibility of the deregulation of gas prices at the retail level, shop” for energy and environmental protection policies and, in though no specific deadline is foreseen. Further, it seems particular, the permitting process, as it covers the energy sector and that HERA’s decision for complete deregulation still depends environmental protection within a single governmental ministry. In upon Government approval. line with the Climate Change Policy and Croatia’s Low-emission ■ Suppliers with PSOs for the needs of household customers Development Strategy for the period until 2030, with a view to 2050 shall be appointed for a three-year term on the basis of a (Strategija niskougljičnog razvoja Republike Hrvatske za razdoblje public tender. For the period after 1 April 2021, HERA is do 2030. godine s pogledom do 2050. godine; LEDS), which obliged to conduct a public tender and appoint gas suppliers was developed at the end of 2015, preparation of a new Energy with PSOs by 31 December 2020 at the latest. However, Development Strategy is under way. existing gas suppliers are no longer required by law to act as a supplier with PSOs, meaning that a supplier with PSOs must notify HERA about its decision to cease supplying gas to households under regulated conditions. In that case, HERA shall appoint a new supplier with PSOs following a public tender procedure. ■ Suppliers with PSOs are required to directly or indirectly book (through the appointed wholesale market supplier) gas storage capacities necessary for their supply of gas to households. Up until now, existing suppliers with PSOs could not directly book storage capacity. Namely, as of 1 April 2017 the existing wholesale market supplier (HEP) has been awarded 60 per cent priority for booking storage capacity with the UGS Okoli. Unlike now, however, it will be possible for suppliers with PSOs to directly book storage capacities in accordance with the Regulation on Criteria for the Acquisition of Protected Customer Status in the Event of a Gas Supply Crisis until the end of the gas day 31 March 2021.

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Bernd Rajal Petra Šantić Schoenherr Schoenherr Schottenring 19 Prilaz Gjure Deželića 19 1010 Wien HR-10 000 Zagreb Austria Croatia

Tel: +43 1 534 37 50203 Tel: +38 5 1481 3244 Fax: +43 1 534 37 66100 Fax: +38 5 1481 3073 Email: [email protected] Email: [email protected] URL: www.schoenherr.eu URL: www.schoenherr.eu Croatia Bernd Rajal is a partner with Schoenherr in Vienna where he is a Petra Šantić is an independent Croatian attorney at law cooperating member of the firm’s Regulatory Practice Group. He is also a Co-Head with Schoenherr in Zagreb, where she is a member of the firm’s of Schoenherr’s Energy Group. Bernd’s practice focuses on Energy Regulatory Practice Group. Coming from the Ministry of Foreign and Environmental Law. He advises and represents a wide range of Affairs and European Integration, where she worked on the expert energy utilities in relation to power plant permits (e.g. large-scale HPPs, team for Coordination and Monitoring of Adaptation to the EU System wind farms). Bernd is regularly involved in major energy infrastructure as well as in the negotiation team (2005 until 2008), she focuses on projects all over Europe (Southstream gas pipeline, Nabucco gas Regulatory Law with a primary focus on Public Procurement, Energy pipeline, heating pipelines, gas storage, hydro pump storages) and and Environmental Law. She has broad experience in advising advises clients of all sectors and industries (utilities, financial investors, national and international private clients in all stages of procurement network operators, traders) on a large spectrum of energy regulatory procedures. Petra is also involved in RES projects and due diligence issues. He regularly provides transactional advice in the field of energy proceedings related to transactions in the energy (oil, gas and and environmental law. He advised the European Commission on the electricity) and environmental sectors. Her most recent assignments status of transposition of the RES Directive in the EU Member States. include advising the European Commission on all regulatory aspects With Schoenherr representing various governmental departments (e.g. of LNG production, transport and sale in Croatia and an international the Austrian Ministry of Environment), he is also involved in legislative oil and gas giant in relation to the first international offshore licensing procedures making proposals for the amendment of environmental and round for exploration and production of hydrocarbons in Croatia. energy law provisions. Bernd is author of various legal articles in the She holds a valid certificate in the field of public procurement and is field of energy and environmental law. enrolled in the register of the Ministry of Economics. Petra frequently publishes articles in the field of energy and public procurement law.

Schoenherr is a leading full-service law firm in Central and Eastern Europe. With 14 offices located in Belgrade, Bratislava, Brussels, Bucharest, Budapest, Chisinau, Istanbul, Ljubljana, Podgorica, Prague, Sofia, Vienna, Warsaw and Zagreb, as well as country desks for Albania, Bosnia- Herzegovina, Macedonia and Ukraine, Schoenherr provides its clients with comprehensive coverage of the CEE/SEE region.* More than 300 legal professionals work across borders in both a centralised and de-centralised manner, according to the individual client’s needs and requirements. Quality, flexibility, innovation and practice-oriented solutions for complex assignments in the field of business law are at the core of the Schoenherr philosophy. *Schoenherr is in compliance with the respective local legal standards and conduct rules in all countries; therefore, the local firm name may vary from jurisdiction to jurisdiction. The energy industry is a complex and highly competitive sector. It is obvious that there is a need for professional advisers who understand the business of companies active in this sector, and who have the experience and capacity to handle complex international energy projects. Schoenherr can assist you with a multi-disciplinary group of lawyers drawn from across the firm’s broad international network that specialise in the specifics of the energy sector. The energy group comprises of lawyers from all practice areas with a detailed understanding of the energy sector and of the needs of international energy clients. Sharing our knowledge and co-operating tightly between our practice groups and between our international offices, our energy group can help you to respond to the changes in the industry and to keep pace with market and regulatory developments. Our lawyers are regularly involved in both international and domestic energy matters including transactions, development projects, mergers and acquisitions, privatisations, public-private partnerships, regulatory matters, public procurement, strategic advice, competition matters and dispute resolution.

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Egypt Maha Ibrahim

Youssry Saleh & Partners Ahmed Salah

the Northern Alexandria and West Delta field for natural gas. 1 Overview of Natural Gas Sector Production of phase two is projected to another project, which is the Atoll Gas field that is lying in the Northern Damietta Concession 1.1 A brief outline of your jurisdiction’s natural gas offshore Egypt in the East Nile Delta and being developed by BP. sector, including a general description of: natural Besides, there is a new development project in progress, which is gas reserves; natural gas production including the Al Amal field by Amal Petroleum Co. and also the Muzhil field the extent to which production is associated or by Petro-Zenima Co. non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) liquefaction and export facilities, and/or receiving and 1.2 To what extent are your jurisdiction’s energy re-gasification facilities (“LNG facilities”); natural gas requirements met using natural gas (including LNG)? pipeline transportation and distribution/transmission network; natural gas storage; and commodity sales Egypt’s energy sector depends mainly on fossil-fuels (oil and natural and trading. gas), especially natural gas (in which Egypt held hydrocarbon reserves of 62.8 TCF of natural gas at the end of 2017) due to the expansion of Egypt is a significant oil producer and refiner. Its strategic location gas field discoveries in Western Sahara and the maritime areas, as well is valuable for global energy markets, and it has many valuable as the relative stagnation of oil production. oil and gas resources in the Gulf of Suez, Western Desert, Eastern Desert and Sinai Peninsula. Egypt is the fourth largest producer in As for electric power, Egypt depends mainly on renewable energy the African continent. It serves as a major transit route for oil and sources, especially wind and solar energy in which a large number of gas shipped from the Persian Gulf to Europe and the United States investment projects have been launched through tenders and auctions. through the Suez-Mediterranean (SUMED) pipeline and the Suez Canal. Egypt is one of the first 10 countries to own the highest 1.3 To what extent are your jurisdiction’s natural gas reserves of natural gas in the deep water reserves (approximately requirements met through domestic natural gas 18.52 trillion cubic feet (TCF)) and is able to extract with economic production? value. Regarding the liquefaction and export facilities Egypt has two LNG plants that include three LNG trains, with a combined Egypt is self-sufficient in its natural gas needs. The Egyptian Oil capacity of approximately 610 billion cubic feet (BCF) per year or Minister, Mr. Tarek Al-Mulla, declared in September 2018, that 12.7 million tons per year. Egypt has suspended the import of LNG from abroad after receiving The petroleum sector in Egypt is composed of state-owned entities. its last shipments. Egypt’s natural gas production was about 5.2 Certain laws and regulations govern oil and gas transportation via BCF per day, while the consumption rate was about 6.1 BCF per day a pipeline; all the transportation and supply operations of natural in 2017, between the consumption of electricity and the industrial, gas to all resident areas are managed by the Egyptian Natural Gas household and commercial sectors. Egypt imports about 1.2 BCF Holding Company (EGAS), and the BOD of EGAS determines daily, through monthly shipments. By discovering the giant field the companies, which can handle these activities and is fully Zohr in the waters of the Mediterranean Sea in August 2015, and responsible for supervising on all activities related to transportation through the Italian company Eni, the first phase of developing the and pipelines. The trade of oil and gas is not legal except after the project began before the end of 2017 at a rate of 350 MCF per day, prior permission of the Egyptian General Petroleum Corporation and the production from the Zohr field is predicted to reach 2.7 BCF (EGPC), and the sale of oil and gas shall be implemented by EGPC, per day in 2019. EGAS or the contractor. Regarding the developed projects, the largest project was the Zohr field which was discovered by the 1.4 To what extent is your jurisdiction’s natural gas Italian company, Eni. The production of Zohr was expected to start production exported (pipeline or LNG)? by the end of 2017 with a total production capacity at 350 million cubic feet (MCF) per day, which will be increased by the end of Egypt is one of the members of the Gas Exporting Countries Forum, 2018 to 1.2 BCF. The project is being executed by Petro Shorouk and was always one of the gas exporting countries until the export and Eni’s leoc production BV. The plan also includes developing interruption caused by the January Revolution.

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Currently, Egypt is resuming the export of natural gas starting with Jordan in order to implement the agreement concluded in 2004. 3 Development of Oil and Natural Gas In addition to that, Egypt began, after discovering the Zohr field, the exportation of LNG after the announcement of the suspension 3.1 Outline broadly the legal/statutory and organisational of importation of LNG. framework for the exploration and production (“development”) of oil and natural gas reserves including: principal legislation; in whom the State’s 2 Overview of Oil Sector mineral rights to oil and natural gas are vested; Government authority or authorities responsible for the regulation of oil and natural gas development; and Egypt 2.1 Please provide a brief outline of your jurisdiction’s oil current major initiatives or policies of the Government sector. (if any) in relation to oil and natural gas development.

Egypt is a significant oil producer and refiner and considered the The oil and gas sector in Egypt is regulated by a number of laws and largest in Africa whilst not being a member of the Organization of regulations, the most important of which are the following: the Petroleum Exporting Countries (OPEC). Its strategic location is ■ Gas Market Activities Law No. 196 of 2017 and its Executive valuable for the global energy market as it serves as a major transit Regulations issued by the Prime Ministerial Decree No. 239 route for oil shipped from the Persian Gulf to Europe and the United of 2018; States through the SUMED pipeline and the Suez Canal. ■ Law No. 66 of 1953 amended by Law No. 86 of 1956 concerning mining and quarrying; ■ Law No. 217 of 1980 concerning natural gas; 2.2 To what extent are your jurisdiction’s energy requirements met using oil? ■ Law No. 20 of 1976 regarding the Egyptian General Petroleum Corporation; The past few months have witnessed an increase in Egyptian oil ■ Law No. 45 of 1986 regarding the organisation of the Egyptian General Authority for Geological and Mining production. The production has increased from 630,000 barrels per Projects, currently Egyptian Mineral Resources Authority; day last year, to 657,000 barrels per day, with an increase rate of and 4.3%. However, Egypt has not achieved self-sufficiency for its oil ■ Law No. 236 of 2001 regarding the Egyptian Natural Gas needs yet. Holding Company. In addition to the Ministerial Decrees regarding projects and 2.3 To what extent are your jurisdiction’s oil requirements petroleum products, pricing laws are indicated in the following met through domestic oil production? website links: ■ www.petroleum.gov.eg/ar/Laws/PublicLaws/Pages/default. Egypt imports 30% of its monthly fuel needs in order to bridge aspx. the gap between domestic production and consumption. The ■ www.petroleum.gov.eg/ar/Laws/PricingLaws/Pages/default. import bill is approximately USD 800 million/month for petroleum aspx. products, including gasoline, fuel and diesel. According to the latest consumption reports issued by the General Petroleum Authority: The Governmental Authorities include: ■ fuel consumption is approximately 81.6 million tons per 1. Ministry of Petroleum. year; 2. Egyptian General Petroleum Corporation. ■ domestic fuel production is approximately 56.4 million tons 3. Regulation Department of Natural Gas Market. per year; and 4. Gas Market Regulatory Authority. ■ the volume of Egypt’s import of fuel is approximately 25.2 5. Egyptian Natural Gas Holding Company. million tons per year. 6. Ganoub El-Wadi Petroleum Holding Company. 7. Egyptian Mineral Resources Authority. 2.4 To what extent is your jurisdiction’s oil production By the issuance of the new Gas Market Activities Law No. 196 of exported? 2017 and its Executive Regulations issued by the Prime Ministerial Decree No. 239 of 2018, the gas market started to become more Egypt’s oil exports increased, during the first two months of this liberalised. According to the BP Statistical Review of World Energy year (January and February 2018), to USD 407 million, compared report 2017, Egypt has proven reserves which have not shown any to USD 385 million in oil exports during the same period last year, increase over the preceding year with a maintained figure of 3.5 January and February 2017. billion barrels. According to official data issued by the Central Agency for Public Mobilization and Statistics, the volume of export of crude oil is USD 343 million. 3.2 How are the State’s mineral rights to develop oil and natural gas reserves transferred to investors or The value of non-petroleum exports is USD 64 million during the companies (“participants”) (e.g. licence, concession, above-mentioned period of the current year, compared to USD 21 service contract, contractual rights under Production million in the same period last year. Sharing Agreement?) and what is the legal status of those rights or interests under domestic law?

According to Articles 13 & 14 of the Gas Market Activities Law No. 196 of 2017, and Chapter 2 of Law No. 66 of 1953 amended by Law No. 86 of 1956 concerning mining and quarrying, the projects related to oil and gas prospecting and extracting shall be through

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concession agreements, which are awarded to the contractors by bidding process, the concessions, cannot be concluded except after 3.6 Are there any restrictions on the export of a written consent from the Government (licence). production? According to Article 13 of the Gas Market Activities Law No. Yes, as before contracting with the foreign partners, the Egyptian 196 of 2017, the Egyptian Government receives royalties from Government negotiates to set a maximum limit on the gas rate to be contractors, whether in cash or in-kind equivalent, of a maximum suitable for the domestic market and protect Egypt from the price of 10% depending on the licensed activity and the amount of gas fluctuation of the global market and calculate the average ofgas produced. According to Article 48 of the Gas Market Activities Law production. Also, the Egyptian Government studies the targeted No. 196 of 2017, the Egyptian Government determines the royalties global market and determines the maximum and minimum gas price and fees of each licence case by case on the condition that these Egypt which shall be issued by virtue of Ministerial Decree. royalties and fees are announced and published. For example, EGAS has adopted a policy whereby no more than one-third of the gas reserves are to be exported at any time. 3.3 If different authorisations are issued in respect of different stages of development (e.g., exploration appraisal or production arrangements), please specify 3.7 Are there any currency exchange restrictions, or those authorisations and briefly summarise the most restrictions on the transfer of funds derived from important (standard) terms (such as term/duration, production out of the jurisdiction? scope of rights, expenditure obligations). Yes, according to Law No. 88/2003 individuals can buy foreign There are no official authorisations. However, there is a detailed currency and transfer it abroad. Any individual or business can map on all concession areas operating in Egypt on the website of the engage in a foreign currency transaction, but must use banks Ministry of Petroleum, which is freely accessible. In addition, all or foreign exchange bureaus that are licensed to trade in foreign concession agreements for oil and gas exploration, development and currencies. The bank and foreign exchange bureaus all submit exploitation are issued by laws and published in the official gazette. statements of all their transactions to the CBE, which ultimately In some cases, the Government provides a licence for prospecting controls all foreign exchange transactions. By the year 2016, the before commencing the public auction process. CBE liberalised the exchange rate and erased many capital controls importers of non-essential goods are still limited by the USD 50,000 monthly limit for deposit and a USD 30,000 daily limit for 3.4 To what extent, if any, does the State have an withdrawal. The bank will not provide dollars to importer; they ownership interest, or seek to participate, in the development of oil and natural gas reserves (whether must come up with their own dollars. The bank limits the essential as a matter of law or policy)? goods by a USD 250,000 maximum monthly deposit.

The Mining and Quarries Law No. 66/1953 stipulates the terms and 3.8 What restrictions (if any) apply to the transfer or conditions that regulate and organise all procedures and approvals disposal of oil and natural gas development rights or required for the exploration and exploitation of oil and gas. The interests? Government is heavily involved in its participation in the sharing of production in the operating company in order to: have a supervisory Restrictions are regulated on a case-by-case basis. However, any role; and make sure that expenses and costs are shared properly, concession agreement requires the prior consent of the Government, taxes are accounted for, and the works are largely carried out in represented by the Minister of Petroleum and the agreement of conjunction with national energy policies set by the Government. EGPC.

3.5 How does the State derive value from oil and natural 3.9 Are participants obliged to provide any security gas development (e.g. royalty, share of production, or guarantees in relation to oil and natural gas taxes)? development?

The amount of taxes payable by contractor on the profits released According to Article 23 of Decree No. 239 of 2018, the Executive from the exploration and exploitation activities of all concession Regulation of the Gas Market Activities Law, the authority shall agreements are subject to a 40.55% tax rate which is stipulated in determine the initial and final insurance and all the expenses and Income Tax Law No. 91 of 2005 (Article 49), and the contractor guarantees in the application of the licence on a case-by-case basis. shall comply with the requirements and must prepare the tax returns for the tax authority within the required due date. The EGPC pays 3.10 Can rights to develop oil and natural gas reserves the tax on behalf of the contractor out of the EGPC’s share of granted to a participant be pledged for security, or petroleum saved under the terms of the concession agreement. booked for accounting purposes under domestic law? According to Article 13 of the Gas Market Activities Law No. 196 of 2017, the Egyptian Government receives royalties from the According to Articles 19 and 20 of the Gas Market Activities contractor, whether in cash or in-kind equivalent, of a maximum Law No. 196 of 2017, the authority shall have the right to cancel of 10% depending on the licensed activity and the amount of gas the provided licence in case of any amendments on the shares produced. According to Article 48 of the Gas Market Activities Law ownership of the licensee legal entity without prior approval from No. 196 of 2017, the Egyptian Government determines the royalties the authority or in case of committing any violation to the licence and fees of each licence case by case provided that these royalties terms and conditions. and fees are announced and published.

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Egypt, in addition to the right of the competent authorities in the 3.11 In addition to those rights/authorisations required State to obtain additional revenue, in cash or in-kind equivalent, in to explore for and produce oil and natural gas, what accordance with applicable laws and regulations. other principal Government authorisations are required to develop oil and natural gas reserves (e.g. environmental, occupational health and safety) and 5 Import / Export of Oil from whom are these authorisations to be obtained?

Contractors who are engaged in exploration must comply with the 5.1 Outline any regulatory requirements, or specific general rules and safety regulations concerning industrial facilities terms, limitations or rules applying in respect

Egypt including: Environment Law No. 4/1994 and related Executive of cross-border sales or deliveries of oil and oil Regulations; supplementary decrees issued by the Minister of products. Petroleum; Law No. 453/1954 concerning industrial facilities and other projects; Presidential Decree No. 991/1987 concerning safety There are no an explicit provisions regarding special requirements requirements regarding the construction of industrial facilities; and limitations of the cross-border sales of oil. specific requirements imposed by the relevant authority providing licences; health and gas requirements for gas stations and petroleum 6 Transportation depots issued by Ministerial Decrees; and the general requirements for the constructions of depots, gas and pump stations of Decree No. 132/2010. 6.1 Outline broadly the ownership, organisational and regulatory framework in relation to transportation pipelines and associated infrastructure (such as 3.12 Is there any legislation or framework relating to natural gas processing and storage facilities). the abandonment or decommissioning of physical structures used in oil and natural gas development? If so, what are the principal features/requirements of the The second chapter of the Gas Market Activities Law No. 196 of legislation? 2017 specified the parties involved in the Egyptian gas market and regulated all the procedures and conditions required to carry out the No, there is no legislation covering the decommissioning of the gas market activities. activities. However, the law regulates the cases of cancelling or These parties include the operator of the gas transport system. decommissioning the licence of performing such activities as Article 24, of the above-mentioned law, stipulates that the licence of stipulated in question 3.10. the operator of the gas transport system may be provided to one or more legal entities in accordance with the licensing requirements. 3.13 Is there any legislation or framework relating to Article 25, of the above-mentioned law, stipulates that the owner gas storage? If so, what are the principal features/ and the operator of the gas transport system may permit the other requirements of the legislation? to use the system as per the rules and conditions determined by the competent authority. Article 43 of the Environment Law discusses the gas storage that is carried out by the oil and gas companies’ exploration and exploitation, and regulates all storage requirements as determined 6.2 What governmental authorisations (including by EGPC. any applicable environmental authorisations) are required to construct and operate oil and natural gas transportation pipelines and associated 3.14 Are there any laws or regulations that deal specifically infrastructure? with the exploration and production of unconventional oil and gas resources? If so, what are their key Regarding the oil transportation pipeline, the competent authority features? is the EGPC as stipulated in Law No. 4 of 1988 concerning oil pipelines. Until now, there has been no legal frame that regulates Regarding the natural gas transportation pipeline, the competent unconventional oil and gas resources. However, the Minister of authority is the Gas Market Regulatory Authority established by Petroleum revealed in one of his interviews that there is an intention virtue of Law No. 196 of 2017 and the EGAS which handles all to regulate the exploration of unconventional oil and gas in the operations regarding the transportation and supply of natural gas to coming years to attract further investments to Egypt. all residential areas, industries and power stations. In all cases, a licence shall be issued by the competent authority and 4 Import / Export of Natural Gas (including such licence will include all the rules and regulations that govern LNG) the project.

4.1 Outline any regulatory requirements, or specific 6.3 In general, how does an entity obtain the necessary terms, limitations or rules applying in respect of land (or other) rights to construct oil and natural gas cross-border sales or deliveries of natural gas transportation pipelines or associated infrastructure? (including LNG). Do Government authorities have any powers of compulsory acquisition to facilitate land access?

According to Article 49 of the Gas Market Activities Law No. 196 According to Article 2 of the Decree No. 292 of 1988 (the Executive of 2017, the same mechanism used for calculating the tariff of the Regulation of Law No. 4 of 1988 concerning oil pipelines), in order usage of networks and facilities shall be applied to the cross-border to construct oil and gas transportation pipelines, a Ministerial Decree gas which is unused within the borders of the Arab Republic of

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with approval shall be issued from the Minister of Petroleum, and such decree shall be published in the official gazette. 7.2 What governmental authorisations (including any applicable environmental authorisations) are required to operate a distribution network? 6.4 How is access to oil and natural gas transportation pipelines and associated infrastructure organised? According to Article 2 of the Gas Market Activities Law No. 196 of 2017, the competent authority is the Gas Regulatory Authority. Third parties (other than the EGPC or EGAS) do not have access to pipeline networks constructed for the transportation of oil and gas. 7.3 How is access to the natural gas distribution network For example, Article 5 of Decree No. 292 of 1988 stipulates that

organised? Egypt the authority that owns the oil pipelines shall prepare a map of the itinerary of these lines. Such maps shall be notified to the competent As mentioned in question 7.1, the owner and the operator of the gas ministries before the implementation of any of the projects. distribution system, within the technical capacity of the system, may These activities can be achieved through bilateral or multilateral permit the other to use the system in return for the tariff determined agreements between the relevant parties. by the competent authority. The owner/operator of the gas distribution system shall be 6.5 To what degree are oil and natural gas transportation responsible, by virtue of the licence granted to him, for providing pipelines integrated or interconnected, and how is co- the necessary information to the participants in the gas activities operation between different transportation systems market as stipulated in Article 29. established and regulated?

This information is not available. 7.4 Can the regulator require a distributor to grant capacity or expand its system in order to accommodate new customers? 6.6 Outline any third-party access regime/rights in respect of oil and natural gas transportation and One of the responsibilities regulated by the licence, as stipulated in associated infrastructure. For example, can the the above-mentioned Article 29, is to develop the gas distribution regulator or a new customer wishing to transport system in a safe and efficient manner and to integrate it with other oil or natural gas compel or require the operator/ owner of an oil or natural gas transportation pipeline systems. or associated infrastructure to grant capacity or expand its facilities in order to accommodate the new 7.5 What fees are charged for accessing the distribution customer? If so, how are the costs (including costs network, and are these fees regulated? of interconnection, capacity reservation or facility expansions) allocated? All the fees and tariffs are determined by the competent authority, The provisions of the applicable laws and regulations do not the Gas Regulatory Authority. stipulate this matter explicitly. However, this can be agreed upon between the parties in each individual case. 7.6 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 6.7 Are parties free to agree the terms upon which oil (whether directly or indirectly)? or natural gas is to be transported or are the terms (including costs/tariffs which may be charged) regulated? The applicable laws and regulations do not provide explicitly on specific restrictions or limitations. However, the licence provided EGPC and EGAS are responsible for determining the transportation to the operator shall include all the terms and conditions including of the oil and gas sector and whether it is regulated by law or by the the restrictions. terms and requirements determined by the project’s licence. 8 Natural Gas Trading 7 Gas Transmission / Distribution 8.1 Outline broadly the ownership, organisational and regulatory framework in relation to natural gas 7.1 Outline broadly the ownership, organisational and trading. Please include details of current major regulatory framework in relation to the natural gas initiatives or policies of the Government or regulator transmission/distribution network. (if any) relating to natural gas trading.

The second chapter of the Gas Market Activities Law No. 196 of Natural gas trading is allowed by permission issued from the 2017 specifies the parties involved in the Egyptian gas market and Ministry of Petroleum as the competent authority. regulates all the procedures and conditions required to carry out the gas market activities. The companies, authorised by the Ministry, such as Egypt Gas, Town Gas, etc. sell the gas to the customers according to the fees/ These parties include the operator of the gas distribution system. tariff determined by a Ministerial Decree. Article 28, of the above-mentioned law, stipulates that the owner Regarding the initiatives of the Government, the Minister of and the operator of the gas distribution system, within the technical Petroleum, Mr. Tarek El Mulla, declares that the value of delivering capacity of the system, may permit the other to use the system in natural gas to the residential units will be divided into monthly return for the tariff determined by the competent authority.

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instalments over a period of six years without interest. Such oil pipelines that link the major areas of production, distribution, instalments will be collected on the consumption bill. export and import. The Petroleum Pipelines Company, which is a In addition to that, Egypt has recently passed the new Gas Market subsidiary of the EGPC, owns and operates the major downstream Activities Law aiming at the gradual liberalisation of the gas crude oil and petroleum product pipelines in Egypt. In addition, the market to allow any third party, including the private sector, to Arab Petroleum Pipelines Company owns and operates the SUMED have an access to the gas market under transparent codes and in pipeline, which is another important pipeline in Egypt. consideration of fair tariffs. 10.2 Outline broadly the ownership, organisation and regulatory framework in relation to oil trading. 8.2 What range of natural gas commodities can be Egypt traded? For example, can only “bundled” products (i.e., the natural gas commodity and the distribution Downstream oil is regulated by the Ministry of Petroleum, as the thereof) be traded? general competent authority, and according to its interior regulations. For example, in order to establish a petrol station, a licence The applicable laws and regulations do not specifically mention shall be obtained from the Ministry of Petroleum after fulfilling the commodities of the natural gas. However, this is subject to the the requirements and submitting the necessary documents Ministry of Petroleum as the general competent authority, and may (www.petroleum.gov.eg/ar/PublicServices/Documents/ be regulated by virtue of a decree issued by the Minister. NewConditionsPetrolStations.pdf).

9 Liquefied Natural Gas 11 Competition

9.1 Outline broadly the ownership, organisational and 11.1 Which governmental authority or authorities are regulatory framework in relation to LNG facilities. responsible for the regulation of competition aspects, or anti-competitive practices, in the oil and natural At the time of writing there is no legislation that regulates LNG in gas sector? Egypt as a separate field. However, the Gas Market Activities Law No. 196 of 2017 included Law No. 196 of 2017 concerning the Gas Market Activities stipulates the definition of LNG, the activities related to it, and the facilitations in Article 21: “The Gas Market Activities shall be governed by free used for liquefying the gas, exporting it, and all procedures relating competition where Eligible Consumers shall be entitled to choose to its restoration. their own supplier and where Gas Market Participants shall be treated without discrimination in order to avoid any monopolistic practices. The provisions of executive regulations specify the 9.2 What governmental authorisations are required to measures that achieve this goal.” construct and operate LNG facilities?

The Egyptian LNG which is a joint venture comprising of both local 11.2 To what criteria does the regulator have regard in shareholders, such as the EGPC, EGAS and foreign shareholders, determining whether conduct is anti-competitive? such as Shell Group plc, PETRONAS and Engie (Gaz de Suez), as well as the Spanish Egyptian Gas Company (SEGAS) Liquefied The criteria determined by Law No. 196 of 2017 concerning the Natural Gas Complex in Damietta, Northern Egypt. Gas Market Activities and its Executive Regulation Decree No. 239 of 2018. As stipulated in Article 57 of the Executive Regulation, It should be taken into consideration that all the above-mentioned the Gas Regulatory Authority shall supervise the activities of entities are subject to the Ministry of Petroleum. the gas market to ensure that the market parties comply with the requirements and transparency principles of the competitive market. 9.3 Is there any regulation of the price or terms of service in the LNG sector? 11.3 What power or authority does the regulator have to preclude or take action in relation to anti-competitive All the fees and tariffs are determined by the competent authority, practices? the Gas Regulatory Authority. According to Article 58 of the Executive Regulation of the Gas 9.4 Outline any third-party access regime/rights in Market Activities Law, the Gas Regulatory Authority shall have the respect of LNG facilities. right, in the event of a complaint from any of the participants in the gas market, to examine and study the complaint through committees There is no legislation that specifically regulates LNG. However, formed by the executive manager of the authority. The authority practically, LNG is subject to the same regulations that govern may determine hearings for the parties in order to listen to their natural gas. opinions and to review the documents. The committee shall work to resolve the complaint and make a recommendation to the related parties. 10 Downstream Oil In case the recommendation is accepted, it shall be submitted to the Board of Directors for approval. In case of rejection, a detailed 10.1 Outline broadly the regulatory framework in relation report shall be submitted to the Board of Directors to consider the to the downstream oil sector. closure of the dispute.

Regarding downstream oil, Egypt has developed a wide network of

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In all cases, the litigation will be subject to the civil and commercial 11.4 Does the regulator (or any other Government procedures law and arbitration will be governed by the law agreed authority) have the power to approve/disapprove upon. mergers or other changes in control over businesses in the oil and natural gas sector, or proposed acquisitions of development assets, transportation or 13.2 Is your jurisdiction a signatory to, and has it duly associated infrastructure or distribution assets? If so, ratified into domestic legislation: the New York what criteria and procedures are applied? How long Convention on the Recognition and Enforcement of does it typically take to obtain a decision approving or Foreign Arbitral Awards; and/or the Convention on disapproving the transaction? the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID”)? Egypt This matter is not explicitly regulated by the laws and regulations applicable in the natural gas and oil field. Egypt is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and a signatory in the Convention on the Settlement of Investment Disputes between 12 Foreign Investment and International States and Nationals of Other States. Egypt is also a signatory Obligations state to the Arab Convention for the Enforcement of Judgments and Arbitral Awards signed in 1952.

12.1 Are there any special requirements or limitations on acquisitions of interests in the natural gas sector 13.3 Is there any special difficulty (whether as a matter (whether development, transportation or associated of law or practice) in litigating, or seeking to enforce infrastructure, distribution or other) by foreign judgments or awards, against Government authorities companies? or State organs (including any immunity)?

Practically, there are no limitations on the acquisition of natural gas- No. However, there is no special process for enforcement of foreign related interests by foreign companies. judgments and arbitral awards relating to oil and gas disputes, which must then be subjected to the otherwise regular or traditional forms 12.2 To what extent is regulatory policy in respect of the of enforcement. oil and natural gas sector influenced or affected by international treaties or other multinational 13.4 Have there been instances in the oil and natural gas arrangements? sector when foreign corporations have successfully obtained judgments or awards against Government The international treaties ratified by the Egyptian Government are authorities or State organs pursuant to litigation considered part of the Egyptian legislation. In addition to that, the before domestic courts? Ministry of Petroleum has international relations with regional and international organisations such as: African Petroleum Producers’ This is not applicable. Association; Organization of Arab Petroleum Exporting Countries; Gas Exporting Countries Forum; Organization of Petroleum Exporting Countries; and World Petroleum Council. 14 Updates

13 Dispute Resolution 14.1 Please provide, in no more than 300 words, a summary of any new cases, trends and developments in Oil and Gas Regulation Law in your jurisdiction. 13.1 Provide a brief overview of compulsory dispute resolution procedures (statutory or otherwise) Egypt plans to start a new era of natural gas and LNG trading. applying to the oil and natural gas sector (if any), This has been affirmed after the significant field discovery of the including procedures applying in the context of Zohr gas field, which led to the self-sufficiency of local demands, disputes between the applicable Government in addition to expecting to export the surplus by the year 2019. authority/regulator and: participants in relation to oil Egypt shares the Arab Gas Pipeline with Jordan and Syria, which and natural gas development; transportation pipeline and associated infrastructure owners or users in connects Egypt to Arab countries and has the possibility to extend relation to the transportation, processing or storage to Turkey; this will help Egypt to export natural gas to different of natural gas; downstream oil infrastructure owners markets. Since the 1990s, the Egyptian Government has issued laws or users; and distribution network owners or users in and regulations that attract investors and which facilitate investing relation to the distribution/transmission of natural gas. in Egypt. This continued with the issuance of the New Gas Market Law No. 196 of 2017, which also helped in attracting more investors The disputes arising between the Government and the parties during/ to Egypt. Besides this, the Government’s efforts include developing regarding the implementation of the project, are settled before the the infrastructure, issuing tender, exploration and production. Egyptian courts or through arbitration as agreed upon in the terms and conditions mentioned, whether in the bid requirements or in the licence.

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Maha Ibrahim Ahmed Salah Youssry Saleh Law Firm Youssry Saleh Law Firm 24, St. Al Tayaran, 7th Floor 24, St. Al Tayaran, 7th Floor Nasr City Nasr City Cairo Cairo Egypt Egypt

Tel: +20 2226 22002 Tel: +20 2226 22002 Email: [email protected] Email: [email protected] URL: www.youssrysaleh.com URL: www.youssrysaleh.com Egypt

Ms. Maha Ibrahim is an attorney accepted to plead before the Court of Mr. Ahmed Salah is an experienced oil and gas attorney who consults First Instance. She specialises in drafting contracts specially related his clients on oil and gas regulations in Egypt, EGPC and EGAS to the oil and gas sector such as drilling, seismic, mud logging services procedures, requirements and tenders, and general Egyptian legal and insurance coverage services. framework governing affairs in the sector, in order to maximise gains of the client whilst minimising risks. During his service with Youssry Saleh Law Firm Mr. Salah has: represented companies in joint ventures and bidding preparation; participated in drafting, reviewing and concluding offshore and onshore operating agreements, leases, drilling rig contracts and exploration agreements and due diligence.

Youssry Saleh Law Firm, established in 1985, is a full-service law firm in Egypt which has gained a strong reputation for supporting businesses in a wide range of industries as well as helping individual clients. Youssry Saleh Law Firm, founded and led by Mr. Youssry Saleh, an experienced Supreme Court attorney-at-law, offers a well-structured, cross- disciplinary team of experienced attorneys who create synergy and provide our clients with the needed depth of knowledge, breadth of experience and responsive service, so critical for the resolution of issues and meeting key business objectives. Youssry Saleh Law Firm in Egypt is experienced in drafting and negotiating oil and gas deals and rendition of prior and post legal consultation on disputes arising in relation thereto, whether in respect of execution or accommodation of the changes in governmental laws, rules and regulations concerning the industry itself or industries related thereto.

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France Thierry Lauriol

Jeantet Martin Tavaut

Gas is transported in France by two operators, GRT Gaz (a subsidiary 1 Overview of Natural Gas Sector of Engie Energie Services) and, for the south west of France, TIGF (Total Infrastructures Gaz France). 1.1 A brief outline of your jurisdiction’s natural gas The increase in French natural gas imports in 2017 is mainly driven sector, including a general description of: natural by purchases from Nigeria (+116%) and Qatar (+156%) under long- gas reserves; natural gas production including term contracts. With a 3% increase in exports to France, Norway the extent to which production is associated or remains its main supplier (42% of total gross inflows), followed by non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) Russia (19%), the Netherlands (10%), Algeria (8%), Nigeria (6%) liquefaction and export facilities, and/or receiving and and Qatar (4%). Purchases of natural gas on the markets of north- re-gasification facilities (“LNG facilities”); natural gas western Europe, for which the place of production of the gas is not pipeline transportation and distribution/transmission precisely known, represent 10% of gross inputs. network; natural gas storage; and commodity sales At 121.6 TWh, net natural gas imports increased by 7.5% in the and trading. second quarter of 2018 compared to their level in the previous year. With 188 GWh, national natural gas production increased by 1.1.1 The Portion of Natural Gas in the French Energy Balance: 28.2% year-on-year in the second quarter, driven by the 166 GWh of Energy production in France increased to 131.9 Mtoe (tonnes of oil biomethane injected into the transmission and distribution networks. equivalent) in 2017. In the second quarter of 2018, primary energy 1.1.5 Storage of Natural Gas in France: production increased by 3.8% year-on-year. Natural gas accounts for about 16.5% of France’s energy balance, which is why it is so Today, France uses two types of gas storage: storage in water layers important. In the second quarter of 2018, the energy independence and storage in salt caves. Law No. 2017-1839, dated 30 December rate rose from 2.6% year-on-year to 52%. 2017, putting an end to hydrocarbon exploration and exploitation and laying down various provisions relating to energy and the 1.1.2 National Production of Natural Gas: environment, was published on 31 December 2017. Article 12 In France, the national production of natural gas represents less provides that the revenues of storage managers are regulated. Storage than 2% of total consumption. Domestic natural gas production capacities are sold only in the event of serious and exceptional risks. increased by 28.2% year-on-year in the second quarter of 2018. In 2018, the stock rebuilding phase began in April. The level of 1.1.3 Potential National Reserve of Natural Gas: stocks increased significantly during the second quarter of the same In France, there is a strong potential for biomethane production, year, by 57.7% more than a year earlier. However, the level of which is based in particular on the recovery of agricultural waste. useful stocks had nevertheless reached an exceptionally low level In 2017, the injection of biomethane into the networks increased at the end of the previous quarter. The level at the end of June 2018 by 89% and in 2018, 67 production sites regularly injected their was thus 6.9% lower than the previous year’s level. biomethane into the network. In addition, in 2018, biomethane 1.1.6 Methane Terminals in France: injections into natural gas networks increased by 70% in one year, There are currently four LNG terminals in France: confirming the development of the sector. ■ The “Fos-Tonkin” terminal in Fos-sur-Mer (5.5 Gm3/year 1.1.4 Importations/Exportations of Natural Gas in France: regasification capacity) near Marseille, and the “Montoir- 3 In 2017, LNG imports accounted for 24.4% of French natural gas de-Bretagne” terminal near Saint-Nazaire (13 Gm /year regasification capacity), which are managed by Elengy, a imports. In addition, in the same year, natural gas imports into subsidiary of Engie Energie Services. France amounted to 595 TWh while natural gas exports amounted to 112 TWh. ■ The “Fos-Cavaou” terminal located in Fos-sur-Mer (regasification capacity of 8.253 Bm /year) managed by Due to its geographical position, France is a gas transit centre Fosmax LNG, a subsidiary of Elengy and Total Gaz between northern and southern Europe, particularly to the Iberian Electricité Holding France (TGEHF). Peninsula and Italy via Switzerland. Gas arrives in France through ■ The “Loon-Plage” terminal near Dunkirk, commissioned at five main entry points (Taisnières, Dunkerque, Obergailbach, Fos- the end of 2016 and managed by Dunkirk LNG (in which sur-Mer and Montoir-de-Bretagne). Gas entering in transit or EDF, Fluxys and Total are shareholders). “exported” from France mainly passes through three points (via This infrastructure, with the exception of the Loon-Plage terminal, Oltingue at the Franco-Swiss border and via Larrau and Biriatou are accessible to third parties. In addition, the LNG terminals in Spain).

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managed by Elengy are regulated by the Energy Regulation (Mt) in the third quarter of 2018, a sharp decrease of 3.7% compared Commission (ERC). The world leader in LNG, ENGIE, through to the same period in 2017. its subsidiary Elengy, is the leading seller of terminalling services 2.1.2 National Production and Potential National Reserves of in Europe. In addition, in response to the strong demand for clean Oil: energy, Elengy and its subsidiary Fosmax LNG, owner of the Fos In 2018, France’s oil production represented 1% of its consumption, Cavaou LNG terminal, have just announced the construction of which in turn represented more than 77 Mtoe. In the context of an LNG loading station at the Fos Cavaou terminal, which will France’s energy and climate objectives, hydrocarbon consumption significantly increase their capacity thanks to the two spans of Fos is expected to fall. France, with its new legislation, wishes to phase Cavaou. An additional 40 tankers will be able to load LNG every out hydrocarbon exploration and exploitation on its territory. For day from 2019, compared to the 16 currently at the Fos Tonkin LNG France example, Law No. 2017-1839, dated 30 December 2017 is a bill terminal alone. The Fos terminals will thus become the LNG hub aiming to end the research and exploitation of conventional and in the south of France. non-conventional hydrocarbons. 1.1.7 Distribution: 2.1.3 Importations/Exportations of Oil in France: Natural gas distribution, provided by GrDF (Gaz Réseau To cover its oil consumption, France is 99% dependent on imports. Distribution France, a subsidiary of Engie Energie Services), and 22 local distribution companies, is an activity managed by public These imports amount to nearly 2 million barrels per day. France bodies under concession contracts or service regulations. The imports almost all of its petroleum products by sea. In 2017, crude distribution networks for natural gas represent a total length of oil purchases increased by 3.5% to 58.5 Mtoe and the oil bill, which 194,600 km, which places France in second place in Europe (the accounts for nearly three-quarters of the total energy bill, increased longest distribution network being in Germany). This gives 80% by 25%. Net crude oil imports thus rose from €16.4 billion to €21.1 of the French population access to gas. 9,515 municipalities (and billion in 2017, under the combined effect of increases in import almost all towns with more than 10,000 inhabitants) throughout prices and volumes France are supplied with natural gas. 2.1.4 Distribution and Transportation: 1.1.8 Marketing and Sales of Natural Gas: Over the first 10 months of 2018, French road fuel consumption fell The sale of gas is open to competition. The gas market is fully by 1.2% compared with the first 10 months of 2017, while diesel open to competition, including to private individuals. This means sales fell by 4.2% and premium fuel sales declined at a slower pace that residential users can freely choose their gas supplier. There are (-0.9%). currently 13 suppliers who offer natural gas throughout France, and Transport is ensured by three major crude oil pipelines connecting the regulated gas sales tariffs were found to be contrary to European import deposits and refineries and several finished products pipelines competition law by the Conseil d’Etat in a decision handed down on supplying distribution deposits. 19 July 2017 by competitors of Engie, the main incumbent supplier. The crude oil pipelines are the following: the first one, starting from the seaport of Marseille, the South European pipeline (“PSE” 1.2 To what extent are your jurisdiction’s energy in French), supplies the refinery of Feyzin, Cressier (Switzerland); requirements met using natural gas (including LNG)? and the second one, the Antifer-Le Havre pipeline, transports crude oil from the port of Antifer to the deposit of the CIM (Compagnie See the answer to question 1.1. Industrielle Maritime) in Le Havre which supplies refineries of Lower Seine.

1.3 To what extent are your jurisdiction’s natural gas 2.1.5 Storage of Oil in France: requirements met through domestic natural gas In 2018, France has a total storage capacity for petroleum products production? of around 46 million m3 (the overall storage capacity has remained stable in recent years, at 45.8 million m3 in 2002). Storage facilities See the answer to question 1.1. are unevenly distributed across the country. The proximity of refining facilities import sites and infrastructure for the massive transport of petroleum products affects this distribution. The 1.4 To what extent is your jurisdiction’s natural gas production exported (pipeline or LNG)? Normandy and PACA regions alone account for 48% of national storage capacity. See the answer to question 1.1. 2.1.6 Marketing, Sales of Oil: Total consumption of petroleum products amounted to 20.4 Mt in the second quarter of 2018, up 0.4% compared to the second quarter of 2 Overview of Oil Sector 2017. As a Member State of the European Union, France is required to provide the European Commission with data on average weekly 2.1 Please provide a brief outline of your jurisdiction’s oil national retail prices of petroleum products in accordance with sector. the framework for the implementation of Commission Decisions 1999/280/EC, dated 22 April 1999 and 1999/566/EC, dated 26 July 2.1.1 The Portion of Oil in the French Energy Balance: 1999; fuels distributed in France comply with European Directive 2009/30/EC, which determines the characteristics of petrol and Oil is a major source of energy in France: it represents nearly 45.7% diesel. In addition, the fuels marketed in France are those authorised of the French energy balance in 2018. National production averages by the Decree dated 19 January 2016. 815,000 tonnes per year, covering barely 1% of consumption. With the objective of reducing hydrocarbon consumption by 30% by In 2017, total road fuel sales (excluding LPG) amounted to 50.69 3 3 2030, France remains dependent on hydrocarbons. The total actual Mm , up 0.4% (+0.2 Mm ) compared to 2016. Gasoline sales 3 3 consumption of petroleum products amounted to 20.8 million tonnes increased by 4% (+0.39 Mm ) to reach 10.13 Mm . They represent 20% of total road fuel sales.

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Act No. 2003-8, dated 3 January 2003 on gas and electricity markets 2.2 To what extent are your jurisdiction’s energy and public energy service, Act No. 2004-803, dated 9 August requirements met using oil? 2004 on public electricity and gas service and electricity and gas companies and their implementing regulations, and Act No. 2006- See the answer to question 2.1. 1537, dated 7 December 2006 on the energy sector were repealed in May 2011 and are now consolidated in the Energy Code. 2.3 To what extent are your jurisdiction’s oil requirements With regard to the previous legislation applicable to the oil regime, met through domestic oil production? Act No. 92-1443, dated 31 December 1992 on the reform of the oil regime was also repealed in May 2011 by Decree No. 2011-504.

See the answer to question 2.1. Act No. 2011-835, dated 13 July 2011 prohibits the exploration France and exploitation of oil and gas by hydraulic fracturing and repeals 2.4 To what extent is your jurisdiction’s oil production exclusive licences for projects using this technique. exported? The latest texts adopted in the natural gas sector in France are Decree No. 2016-973, dated 18 July 2016 on the provision to public See the answer to question 2.1. entities of data on the transmission, distribution and production of electricity, natural gas and biomethane, petroleum products and heat and cooling, as well as Decree No. 2016-495, dated 21 April 2016 3 Development of Oil and Natural Gas on the content of the annual concession report transmitted to the authorities issuing the permits. 3.1 Outline broadly the legal/statutory and organisational 3.1.2 The Holders of the Rights to Explore and to Produce Oil framework for the exploration and production and Natural Gas: (“development”) of oil and natural gas reserves Before the adoption of the new law preventing the granting of new including: principal legislation; in whom the State’s mineral rights to oil and natural gas are vested; hydrocarbon exploration licences, the exploration and production of Government authority or authorities responsible for natural gas and oil was governed by the provisions of the First Book the regulation of oil and natural gas development; and of the Mining Code, as provided by articles L.411-1 and L.621-1 of current major initiatives or policies of the Government the Energy Code. In order to have the right to explore or produce (if any) in relation to oil and natural gas development. oil and natural gas in France, it was necessary to comply with the provisions of the New Mining Code. 3.1.1 Applicable Legislation: 3.1.3 Authorities: France has adopted a new law to prevent the granting of new The Department of Energy and Climate (in French “DGEC”) is exploration permits. The blockage of hydrocarbon exploration jointly held by the Ministry of the Ecological and Inclusive and the in the French metropolitan territory and its overseas departments Ministry of the Economy and Finance. Its function is to develop and was presented in the Climate Plan in July 2017 and was adopted by to implement policy on energy, energy commodities, and to fight the National Assembly and the Senate in autumn 2017. This Law, against global warming and air pollution. No. 2017-1839, which puts an end to hydrocarbon research and exploitation and contains various provisions relating to energy and The Bureau Exploration-Production des Hydrocarbures (in French the environment, was promulgated on 30 December 2017. Since “BEPH”), together with other services, is responsible for managing new laws do not apply retroactively, the concessions granted remain the “hydrocarbons” mineral domain in France, which involves until their expiry. In any case, according to the spirit of the text, any the attribution of exploration and production for oil and gas, and renewals should not exceed the 2040 deadline. the monitoring of related activities. It also makes available to the public all data concerning oil and gas exploration and production in The law provides that no new hydrocarbon exploration licences will France, such as mineral rights, geophysical data, well-drilling data be granted, which will stop the search for new oil or gas deposits. and production data (www.beph.net/). Also, no new concessions will be granted for hydrocarbons. As a result, applications for exploration permits that have already been The Bureau de Recherches Géologiques et Minières (in French submitted may be refused. Existing operating leases will not be “BRGM ”), as part of its function as the French Geological Survey, renewed beyond 2040, so production is expected to expire by then. is the public reference institution in the Earth Sciences domain, As far as non-conventional hydrocarbons (shale gas) are concerned, for the management of surface and subsurface resources and risks. their exploration and extraction by hydraulic fracturing is prohibited. BRGM, for the account of the DGEC and delegated by BEPH, has The only exception is that mine gas will continue to be captured for been assigned the task of managing oil and gas seismic data and, safety and environmental reasons because it is very dangerous: it is since 2008, all well-drilling data and, progressively, the data held explosive and contributes significantly to global warming. These by the oil and gas companies operating in France (www.brgm.fr). provisions apply to both land and maritime projects and overseas The General Council of Economy, Industry, Energy and Technology projects, in the same way as projects in metropolitan France. Thus, (in French “CGE”), whose competence was expanded to financial 48 mining title applications have been rejected since 1 January 2018. matters in March 2012, was created by Decree No. 2009-64, dated The main texts applicable to the exploration and production of 16 January 2009, merging the General Council of Industry, Energy oil and natural gas in France are the old Mining Code, the New and Technologies and the General Council of Mines. It is presided Mining Code (legislative part of the New Mining Code codified by over by the Minister of the Economy but is also at the disposal of Ordinance No. 2011-91 of 20 January 2011) and the Energy Code the Ministry of Ecology, Sustainable Development and Energy. (legislative part codified by Ordinance No. 2011-504, dated 9 May The “CGE” is composed of about 50 members, including general 2011 and by Decree No. 2015-1823, dated 30 December 2015). A mine engineers and telecommunications engineers, as well as reform of the New Mining Code is under way. several other top civil servants. It is composed of four sections: “Technology and Society”; “Innovation, Competitiveness and

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Modernisation”; “Regulation and Resources”; and “Security and The multiannual programming on energy (“programmation Risks”. The Council is assisted by the general inspectorate of the pluriannuelle de l’énergie”) was approved by Decree No. 2016- ministry department, which supports the general engineers and 1442, dated 27 October 2016. The multiannual energy programming carries out missions at the request of the Council (www.economie. covers two successive five-year periods. By way of exception, this gouv.fr/cge/actualites). programming covers two successive periods of three and five years The Bureau de Normalization du Gaz (“BNG”): established in respectively, 2016–2018 and 2019–2023. 1970, was authorised by the Ministry of Economy Finances and 3.1.5.2 Investment decisions and initiatives of the Government: Industry in February 2011. The investment decisions in the gas sector belong to the operators, According to this decision, the BNG is in charge of: even though public authorities have several ways to support the France ■ standardisation, especially in the field of gas treatment, development of new infrastructure that is essential for the security of transportation, distribution and in the use of gas fuels; and national supply, such as tariff incentives, or temporary derogations to the access of third parties to the infrastructure. ■ standardisation applicable to gas infrastructure, gas appliances and components, accessories, gas quality and The investment decisions in the oil sector also belong to the related services and activities (www.afgaz.fr/normalisation- operators. It should be noted that no indicative plan for investment bng and P. Sablière, Energy Law, Dalloz Action 2014–105; in this sector has been set out. pp.1367–1368). In addition, in order to reduce France’s energy dependence and to, as 3.1.4 Regulatory Authority: much as possible, reduce oil and gas importations, public authorities have granted hydrocarbons research permits. Since 2000, the French energy sector has also had a regulator to ensure the proper functioning of the internal electricity and gas markets (created by the Law dated 10 February 2000). The 3.2 How are the State’s mineral rights to develop oil regulatory body is the Energy Regulatory Commission (“ERC”). and natural gas reserves transferred to investors or More generally, the law entrusts the ERC with the task of monitoring companies (“participants”) (e.g. licence, concession, service contract, contractual rights under Production the proper functioning of the electricity and gas markets, as well as Sharing Agreement?) and what is the legal status of trade at the gas and electricity borders. those rights or interests under domestic law? It should be noted that Decree No. 2012-385, dated 21 March 2012 provided for the establishment of a national commission on The exclusive research permits and concessions are subject to a guidance, monitoring and evaluation techniques for the exploration specific regime provided for in the New Mining Code. Such regime and exploitation of liquid and gaseous hydrocarbons. is the same for the development of oil and natural gas reserves, since, It should also be noted that the National Energy Ombudsman is an as previously mentioned, articles L.411-1 and L.621-1 of the Energy independent administrative authority responsible for recommending Code provide that their exploration and production is governed by solutions to disputes with suppliers or distributors of electricity the provisions of the First Book of the New Mining Code. or natural gas and informing consumers of their rights. It is As mentioned in question 3.1, point 3.1.1, no new exploration an independent public authority established by Act No. 2006- permits and concessions for hydrocarbons will be granted in France. 1537, dated 7 December 2006 on the energy sector. Its status is It is therefore no longer possible to apply for an exploration permit governed by Act No. 2017-55, dated 20 January 2017 on the general and existing ones will neither be renewed nor be transformed in status of independent administrative authorities and independent concessions. public authorities. The National Energy Ombudsman is a public 3.2.1 The Concession: ombudsman within the meaning of article L.611-1 of the Consumer Code. The energy mediator carries out its mission of mediation of Article L.132-6 of the New Mining Code provides that only consumer disputes under the conditions provided for in the articles the holder of an exclusive research permit in force may obtain a of the Consumer Code and in accordance with the procedures concession, within the perimeter of the research permit and for the defined by articles R.122-1 et seq. of the Energy Code, and for substances mentioned by the permit. In addition, the holder of the disputes involving natural persons, by articles L.612-1 et seq. and exclusive research permit has the right, if the request is made before R.612-1 et seq. of the Consumer Code. the expiry of the permit, to grant concessions over the deposits that have been discovered and may be exploited within the perimeter of The energy mediator is a body responsible for handling consumer this permit during the period of the validity of the aforesaid permit. complaints, recommending solutions to disputes relating to the performance of electricity or natural gas supply contracts, and In accordance with article L.132-8 of the New Mining Code: “The participating in informing consumers of their rights. institution of a concession, even for the benefit of the owner of the land in question, creates a real property right distinct from the 3.1.5 Initiatives or Policies of the Government: ownership of the surface area. This right may not be subject to a 3.1.5.1 Long-term indicative plan for investments in the gas mortgage.” sector: The duration of mining concessions is fixed in the concession The drawing-up of this plan is provided for by article 18 of the Law document. In accordance with article L.132-11 of the New Mining dated 3 January 2003, referred to above. This is in fact a report, Code, the first period of validity cannot exceed 50 years. presented to the National Assembly, which describes the foreseeable It should be noted that operating concessions will not be renewed evolution of the demand for natural gas over the next 10 years, beyond 2040. the adequacy of gas infrastructure (underground storage, methane terminals, transport canalisations, inter-connection works), as well 3.2.2 Mining Permits: as the contribution of long-term contracts for the supply of the Mention should be made of another mining title, the “Mining French market. Permit”, and the regime which applies to it. However, this regime The 2009–2020 Plan is the second report. The first one was (former articles 50 to 63 of the Mining Code) only applies to permits transmitted to the National Assembly in 2006. that are in effect as of the date of the entry into force of Law No. 94-588, dated 15 July 1994, and to the requests for mining permits

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which have been submitted before this date. It does not therefore traditional methods, from wells that were brought on line before 1 apply in terms of future requests. January 1980; other quantities extracted constitute new productions. 3.2.3 Specific Provisions: The taxation of electricity, gas and oil products in France is governed Mention should also be made that Book VI of the New Mining by European law, in particular the European Directives 2003/96/EC, Code sets out a regime and specific provisions for French overseas dated 27 October 2003 and 2008/118/EC, dated 16 December 2008. territories. Directive 2003/96/EC regulates the excise regime, the tax minimum levels and, under certain conditions, exemptions or differentiated tax rates applicable. In France, there are mainly four types of 3.3 If different authorisations are issued in respect of excise regimes on energy: the contribution to the public service of different stages of development (e.g., exploration

energy (CSPE); the tax on final electricity consumption (TCFE); France appraisal or production arrangements), please specify those authorisations and briefly summarise the most the domestic tax on natural gas consumption (TICGN); and the important (standard) terms (such as term/duration, domestic tax on energy products consumption (TICPE). scope of rights, expenditure obligations). For 2018, the main measures are: ■ The accelerated increase in the carbon trajectory in ICT See the answer to question 3.2. tariffs (TICPE, TICGN and TICC) for the next five years: it is set at €44.6 for 2018, €55 for 2019, €65.4 for 2020, €75.8

for 2021 and €86.2 for 2022 (+14.1 €/tCO2 in 2018 and +10.4 3.4 To what extent, if any, does the State have an €/tCO in subsequent years). ownership interest, or seek to participate, in the 2 development of oil and natural gas reserves (whether ■ The further convergence of ICTPE diesel and petrol tariffs, by as a matter of law or policy)? increasing the applicable diesel tariff by €2.6c/l on 1 January 2018 and possibly afterwards. The additional revenues In accordance with the New Mining Code and with its articles generated by this measure will make it possible to reduce the L.136-1 to L.136-4, the mines or deposits belonging to the State local taxation of modest taxpayers, and in particular pensioners, may be operated directly or by State-run entities or by any other and to strengthen the premium for the conversion of old vehicles method. The State may also allocate new mining titles on these by extending its base to all diesel vehicles over 10 years old, mines or deposits. with the aim of improving air quality. A finance law for 2018, The mines which are not operated and which belong to the State dated 30 December 2017, and the amending finance law for may be replaced, by order of both the Minister of Finance and 2017, dated 30 December 2017, have made some changes in the Minister responsible for mines, where the deposit is open for the taxation of petroleum products research. Furthermore, the sale of electricity, natural gas and oil products is The administrative bodies, which are responsible for the management subject to Value Added Tax (VAT). of mines that are operated by the State, are subject to the same rights and obligations as private holders of concessions. 3.6 Are there any restrictions on the export of 3.4.1 Participation of the State in Gaz de France, now Engie production? Energie Services: Compliance with obligations of public services and notably the “Gaz de France” (hereafter referred to as “GDF”) was created in security of supply in France is mandatory. 1946 following the adoption of a Law dated 8 April 1946 on the nationalisation of electricity and gas. GDF was a public utility The Energy Code sets out safeguarding measures applicable to company and owned by the State. In July 2008, GDF merged with all energy sources (oil and natural gas included). Article L.143-1 Suez to create the group GDF Suez, which later became Engie. provides that in case of an energy shortage or a threat to the external trade balance, the government may, for a set period of time, submit In 2018, the State’s share capital structure was 24%; however, the to control and allocate, entirely or partially, energy resources and French government, through the current Pacte bill (Action Plan for energy resources of all kinds, as well as oil products. the Growth and Transformation of Enterprises), will allow the State to reduce its participation and pave the way for privatisation from Article L.143-2 further specifies that interests of national defence 2019 onwards. may also lead to such safeguarding measures. This requirement is set out by articles L.1111-1, L.1111-2, L.1141-1, L.1141-2, L.1141-3, The State will continue to hold a specific share in ENGIE’s capital. L.2141-2 and L.2141-3 of the Code of Defense. It will give it the right to oppose decisions by the group and its subsidiaries under French law on the sale of strategic infrastructure, including natural gas transmission infrastructure located on national 3.7 Are there any currency exchange restrictions, or territory, including GRT Gaz. restrictions on the transfer of funds derived from production out of the jurisdiction?

3.5 How does the State derive value from oil and natural This is not applicable in France. gas development (e.g. royalty, share of production, taxes)? 3.8 What restrictions (if any) apply to the transfer or In accordance with article L.132-16 of the New Mining Code, the disposal of oil and natural gas development rights or holders of the concessions for liquid or gas hydrocarbon mines are interests? bound to pay, on an annual basis, a royalty payment to the State at a progressive rate and calculated on the production. Mining titles in France are provided on an intuitu personae basis The rates for the royalty payment for oil and gas developments and are only transferable with the approval of the State. However, differentiate between former and new productions. Former the new French law on hydrocarbons will prevent the granting of productions refer to quantities extracted, in accordance with exploration permits in the coming years.

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administrative authorisation, which is granted following a public 3.9 Are participants obliged to provide any security inquiry and consultation with the local authorities that are concerned or guarantees in relation to oil and natural gas by the works. development? The regime of this authorisation is now determined by Decree No. 2006-649, dated 2 June 2006. See the answer to question 3.2.

3.12 Is there any legislation or framework relating to 3.10 Can rights to develop oil and natural gas reserves the abandonment or decommissioning of physical granted to a participant be pledged for security, or structures used in oil and natural gas development? If booked for accounting purposes under domestic law?

France so, what are the principal features/requirements of the legislation? Article L.132-8 of the New Mining Code provides that a concession may not be mortgaged. The termination of a hydrocarbon licence is governed by articles However, it is also provided that mines are immovable property, as L.163-1 to L.163-9 of the New Mining Code. well as buildings for the operation of the mines, machines, wells, According to article L.163-2, the termination is subject to a galleries and other works carried out on site. The machines and tools statement to the competent authority (the “Statement”). which are used for the mining are fixtures. Shares or interests in a The concession holder has to notify the measures planned in order company or business for the operations of mines are movable property. to protect the safety, the security and the environment, and more Raw materials that are mined, supplies and other movable objects are generally to stop or prevent all the harmful aspects caused by his movable property (article L.131-4 of the New Mining Code). activities (article L.163-3 of the New Mining Code). In the absence of any express prohibition provided for by the text, it Pursuant to article L.163-4 of the New Mining Code, if there are should be possible for these elements to be the subject of guarantees/ no reasonable measures to avoid the harmful aspects, the licence sureties. holder has the obligation to research whether there is any significant risk that could threaten the security of assets and people after 3.11 In addition to those rights/authorisations required the termination and, when necessary, identify the appropriate to explore for and produce oil and natural gas, what surveillance and control measures which have to be put in place. other principal Government authorisations are required to develop oil and natural gas reserves (e.g. Also, the licence holder has to assess the effects of the mining works environmental, occupational health and safety) and on the presence, the accumulation, the volume, the discharge, the from whom are these authorisations to be obtained? run-off and the quality of every kind of water and value the effects of the termination on the situation thus created on the downstream In accordance with article L.161-1 of the New Mining Code, users, and indicate the measures that have to be taken if necessary “the research works or operation of a mine must comply with the (article L.163-5 of the Mining Code). constraints and the obligations relating to conservation of safety Articles 43 to 47 of Decree No. 2006-649, dated 2 June 2006, and public health, to the solidity of public and private buildings, specify the content of the Statement. to the conservation of ways of communication, the mine and other The Statement has to be sent to the competent Prefect by registered mines, to the essential characteristics of the surrounding area, land mail with acknowledgment of receipt and shall be submitted no or at sea, and more generally to the protection of natural areas later than six months before the definitive suspension of the mining and landscapes, of the fauna and the flora, of biological balances works. and natural resources in particular of interests mentioned in articles L.211-1, L.331-1, L.332-1 and L.341-1 of the Environment Depending on the nature of the works, the following documents are Code, to the interests of archaeology, in particular those listed in to be enclosed with the Statement: the provisions of the articles L.621-30 and L.621-7 of the Estate ■ The geographical plans of the works subject to the termination Code, as well as to the agricultural interests of the sites and the at the relevant territorial scales and the corresponding surface. places affected by the works and by the installations relating to the ■ If persistence of the risk is observed, the plans, sections and operation. Besides that, they have to make sure the mine is well all other documents related to the nature of the deposit and used and conserved”. the works carried out. 3.11.1 The Control and Monitoring of the Administration: ■ A brief accompanied by the plans, exposing the actions taken to date and the next steps planned to minimise the effects of In accordance with the provisions of articles L.171-1 and L.171-2 of the termination. the New Mining Code, the administration is invested with the task ■ A report on the effects of the mining works and their of controlling and monitoring mining activities. termination on all kinds of water. The Prefect (“Préfet”) is responsible for policing the mines. He ■ A study determining whether there would still be significant is under the authority of the Minister responsible for mines and is risk after the final decision of the Police des Mines, and in assisted by the regional director for Environment, Land Settlement such a case, the prevention and control measures required to and Accommodation. mitigate the risks. In the exercise of its authority, the Prefect possesses a right of ■ A summary of (i) the plants in which operations have been injunction and a right of prohibition. ceased before the submission of the termination to the procedure, and of (ii) the work and plants having already More specifically, the works that are undertaken by the prospector or been submitted to a termination procedure. the operator may be submitted to authorisation. The Statement duly completed is also addressed, at the request 3.11.2 The Regulations Governing the Operation of Mines: of the Prefect, to the competent services and city mayors. These Article L.162-4 of the New Mining Code provides that the services and the local councils of the interested communities have commencement of the operation of mines are subject to two and three months respectively to submit comments. In relation

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to the above observations, the Prefect acknowledges the Statement ■ Decree No. 2015-1823, dated 30 December 2015, relating to by decree or informs the concession holder of the other measures the codification of the regulatory section of the Energy Code. to be taken. The concession holder has one month to submit any ■ Order dated 28 July 2014 modifying the Order, dated 2 January further written comments. The Prefect, after having taken notes of 2008, relating to storage containing more than 50 tonnes of his comments, if any, can prescribe all or part of the abovementioned flammable liquefied gas under the authorisation regime in measures. accordance with category No. 1412 of the nomenclature of the classified facilities, except for refrigerated or cryogenic In absence of any prescription, within six months, the concession storage. holder proceeds to the termination under the terms set out in the ■ Decree No. 2014-328, dated 12 March 2014, modifying Statement. Decree No. 2006-1034, dated 21 August 2006, relating to The concession holder provides the Prefect with two copies of a access to underground natural gas storage. France report stating the measures taken. After making a record of those ■ Order dated 11 March 2014 amending the Order, dated 7 measures and confirming their compliance with the additional February 2007, on profiles and unit storage rights. requirements, if any, the Prefect acknowledges the implementation ■ Decree No. 2014-118, dated 11 February 2014, modifying of the measures by decree. The decree certifies that the concession Decree No. 2006-649, dated 2 June 2006, relating to mining holder has abided by his obligations to restore the site and constitutes works, underground storage works and to mining and a sort of delivery of a discharge certificate (“quitus”). This formality underground storage monitoring authorities and the mining puts an end to the application of the Police des Mines. police and underground storages and the annex to article In addition, Decree dated 8 September 2004 provides additional R.122-2 of the Environment Code. details on the documentation to be attached to the Statement, the ■ Decree No. 2011-1411, dated 31 October 2011, relating to techniques used, the effects on all kind of water and the measures the geological storage of gas in order to fight against global generally planned to stop or to prevent all the harmful aspects. warming. Moreover, the ministerial circular No. 4C/2008/05/10257, dated ■ Order No. 2011-504, dated 9 May 2011, relating to the codification of the legislative section of the Energy Code. 27 May 2008, provides detailed prescriptions with regard to the termination of hydrocarbons research works: “the file concerning ■ Order No. 2011-91, dated 20 January 2011, relating to the the commencement of works has to precise what has to be done at codification of the legislative section of the New Mining Code. the termination of the works when a borehole is drilled ‘dry’”, to achieve “a final capping program”. ■ Law No. 2010-788, dated 12 July 2010, relating to the national commitment for the environment (“Grenelle 2”). Finally, pursuant to article R.414-19 of the Environmental Code, ■ Decree No. 2010-129, dated 10 February 2010, modifying if the works have been carried out on a “Natura 2000” site, the Decree No. 2006-1034, dated 21 August 2006, relating to termination has to be subject to an impact assessment. access to underground natural gas storage; ■ Order dated 10 February 2010 modifying the Order, dated 7 3.13 Is there any legislation or framework relating to February 2007, relating to profiles and unit rights to storage. gas storage? If so, what are the principal features/ ■ Law No. 2009-967, dated 3 August 2009, relating to the requirements of the legislation? Grenelle Environment (“Grenelle 1”). ■ Order dated 8 February 2008 modifying the Order, dated 7 In France, provisions concerning gas storage facilities are found in a February 2007, relating to profiles and unit rights to storage. number of important texts. The principal provisions relating to gas ■ Order dated 2 January 2008 relating to storage containing storage are as follows: more than 50 tonnes of flammable liquefied gas under the ■ Decree No. 2018-276, dated 18 April 2018, amended various authorisation regime in accordance with category No. 1412 provisions of the regulatory part of the Energy Code relating of the nomenclature of the classified facilities, except for to the natural gas sector. refrigerated or cryogenic storage. ■ Decree No. 2018-221, dated 30 March 2018, on the constitution ■ Order dated 7 February 2007 relating to profiles and unit of additional natural gas stocks mentioned in article L.421-6 rights to storage. of the Energy Code. ■ Decree No. 2007-910, dated 15 May 2007, modifying Decree No. 2006-648, dated 2 June 2006, relating to mining ■ Order No. 2018-074, dated 27 March 2018, fixing the level rights and underground storage rights and Decree No. 2006- of the storage tariff term in the tariff for the use of GRTgaz’s 649, dated 2 June 2006, relating to mining, the work of and TIGF’s natural gas transmission networks as from 1 April underground storage and the regulations governing mining 2018. and underground storage. ■ Order No. 2018-068, dated 22 March 2018, on the tariff for ■ Decree No. 2006-1034, dated 21 August 2006 on access to the use of Storengy, TIGF and Geomethane underground underground natural gas storage facilities. natural gas storage facilities as from 2018. ■ Decree No. 2006-648, dated 2 June 2006, relating to mining ■ Law No. 2017-1839, dated 30 December 2017, putting an end titles and underground storage titles. to hydrocarbon research and exploitation and laying down ■ Decree No. 2006-649, dated 2 June 2006, relating to mining various provisions relating to energy and the environment. works, underground storage works and to mining and ■ Decree No. 2016-1304, dated 4 October 2016, relating to underground storage monitoring authorities. mining works on land and at sea. ■ Law No. 2006-1537, dated 7 December 2006, relating to the energy sector; abrogated in May 2011 and codified by the ■ Decree No. 2016-1303, dated 4 October 2016, on research Energy Code. by drilling and exploitation by shaft of mining substances, ■ Decree No. 2005-877, dated 29 July 2005, relating to which applies to underground storage of natural gas, liquid, derogations regarding access to certain gas infrastructures; liquefied or gaseous hydrocarbons or chemical products. partly abrogated and codified by the regulatory section of the Energy Code.

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■ Law No. 2005-781, dated 13 July 2005, fixing the orientations Among the specific obligations of the concessionaire of the storage of the energetic policy, partly abrogated and codified by the facility, we note the obligation to comply with the obligations Energy Code. inherent to the public mission of service with which it may be ■ Law No. 2004-80Z3, dated 9 August 2004, relating to invested and which are specified in the act of concession according public services of electricity and gas and to electrical and to the characteristics of the operation in question; they will be the gas companies, partly abrogated and codified by the Energy object of a decree issued in the Council of State (“Conseil d’Etat”). Code. As regards the supervision of research and exploitation works, this ■ Decree No. 2004-555, dated 15 June 2004, relating to technical is assured by the administrative authority in the conditions provided prescriptions applicable to pipelines and connection of gas for in articles L.171-2, L.172-1 and L.175-1 of the New Mining transportation, distribution and storage facilities, abrogated France and codified in the regulatory section of the Energy Code. Code. Accordingly, all the constraints of the mining police have resulted from the Code and Decrees taken for the application of the ■ Order dated 17 January 2003 relating to the prevention of Code apply to storage facilities and, in particular, the Decree dated major accidents in underground gas storage facilities, liquid and liquefied hydrocarbons. 2 June 2006, relating to a mining title and underground storage titles (which repealed Decree No. 95-427, dated 19 April 1995, on the ■ Law No. 2003-8, dated 3 January 2003, relating to the policing of mines settling the conditions for the opening and closure electricity and gas markets and to the public service of energy, abrogated in May 2011 and codified by the Energy of the works). Code. Chapters III and IV, Title IV of Book I of the New Mining Code ■ Law No. 2000-108, dated 10 February 2000, relating to the apply to storage facilities; such sections refer to the withdrawal of modernisation and development of the public service of research and exploitation titles, as well as the transfers and leasing electricity, partly abrogated and codified in the legislative of concessions. section of the Energy Code by Order No. 2011-504, dated 9 May 2011. 3.14 Are there any laws or regulations that deal specifically ■ French Mining Code (modified notably by the abovementioned with the exploration and production of unconventional 2003 Law), where there is a section on “underground storage” oil and gas resources? If so, what are their key (Section V bis). features? ■ French Energy Code. The above is a non-exhaustive list, but it indicates the most relevant In France, exploration and production of unconventional oil and gas texts applicable to gas storage. Other provisions that apply may be is banned. The principal provisions in relation to unconventional oil found in the Environment Code, the Tax Code, the Town Planning and gas resources are as follows: Code and in other more specific texts. ■ Law No. 2017-1839, dated 30 December 2017, putting an end The aims of the provisions are the research, the creation, the to hydrocarbon research and exploitation and laying down trials, the development and exploitation of the natural or artificial various provisions relating to energy and the environment. subterranean cavities, henceforth considered as mining deposits. ■ Law No. 2011-835, dated 13 July 2011, prohibiting the As regards research, article L.221-1 refers back purely and simply exploration and exploitation of liquid or gaseous hydrocarbon to the provisions of Chapters I and II, Title II, Book I of the code mines by hydraulic fracturing. fixing its regime. Article L.252-1 of the New Mining Code specifies Non-conventional hydrocarbons can be found mainly in the Paris that if the subterranean formations searched for are already covered basin and in the south east basin covering nearly half of the French by mining titles, the research is carried out with the consent of the territory. Thus, special techniques are needed to extract non- holders of these titles. conventional hydrocarbons from the subsoil. The most commonly The withdrawal of research titles, object of articles L.173-5 and L.173- used method is called hydraulic fracking. The same process is used 6 of the New Mining Code, cannot, as far as storage is concerned, be to extract shale oil. pronounced on the basis of continued inactivity of the research; whilst Shale gas is a form of unconventional gas, i.e. a natural gas resource an insufficient activity can also justify it for other titles. trapped in shallow, low-permeability clayey rocks or coal deposits. The exploitation of the storage facilities can only be undertaken by a According to the International Energy Agency, the French subsoil 3 concession (article L.231-1). In this regard, the rules of the granting contains 3.9 billion m of shale gas. of the title are those provided for the other sites, the reference being The Law dated 13 July 2011 prohibited the implementation of the made to Section 1 of Chapter II, Title III of Book I of the New Mining hydraulic fracturing technique on national territory. Code. The real estate character of the storage and the commercial The 2017 law put an end to the exploration and exploitation of nature of the act of exploitation are reaffirmed (article L.131-3). conventional and non-conventional hydrocarbons. The duration of the concession and extensions are those fixed for all mining concessions (New Mining Code, articles L.132-11, L.132- 13, L.142-7 and L.144-4). 4 Import / Export of Natural Gas (including As regards the rights and duties of the operator, the principles LNG) are practically the same as those for the other sites. However, a special protection is planned to ensure the safety of the underground 4.1 Outline any regulatory requirements, or specific reservoirs and their exploitation. The carrying out of any works terms, limitations or rules applying in respect of likely to compromise it may be forbidden within a perimeter of cross-border sales or deliveries of natural gas protection, as defined by the Decree granting the concession (New (including LNG). Mining Code, article L.264-1). Also, public utility rights of way are established around the works necessary for the exploitation; they are It has to be noted that since the Law dated 3 January 2003, the necessarily transcribed in acts for the transfer of real property (New monopolies of importation and exportation of gas have been Mining Code, article L.264-1 (2), (3)). removed (article 62 of the aforesaid law).

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However, in cases of threat for the supply security of the country in natural gas, the Minister of Energy can order strictly necessary 5 Import / Export of Oil protective measures, in particular regarding the granting or suspension of the authorisations of supply or transport and the 5.1 Outline any regulatory requirements, or specific concessions of underground storage of natural gas (article L.143-6 terms, limitations or rules applying in respect of the Energy Code). of cross-border sales or deliveries of oil and oil products. 4.1.1 Transparency and Regulation: Historically constructed under the authority of public bodies (the State As previously mentioned in the answer to question 3.6, the Energy and local authorities), the works of transportation and distribution of Code sets out safeguarding measures applicable to all energy natural gas, as well as the liquefied natural gas installations, constitute France sources (oil and natural gas included) in case of an energy shortage the key for the opening up to competition of the gas market. Indeed, or a threat to the external trade balance. competition may only be effected on the markets if the operators and the consumers are able to access these networks, works and The said Code sets out specific measures for oil, with article L.143-7 installations in conditions that are fair and non-discriminatory. providing that the government may regulate or suspend the exportation of crude oil or oil products in the following cases: In this context, the ERC is the guarantor of access to the networks 1. in the event of a war; and installations of natural gas and contributes to the construction of an electricity and gas European market. It monitors the proper 2. in the event of serious international tension constituting a functioning and the development of the networks and infrastructures threat of war; for natural gas and the installations for liquefied natural gas, and 3. in order to carry out obligations it has accepted for the it thus assures a monitoring of the organised markets for natural purpose of maintaining peace and international security; and gas, as well as exchanges at the frontiers for natural gas. Thus, 4. for the implementation of measures taken by the European decisions regarding tariffs are taken jointly by the ministers of the Union. economy and energy upon the proposal of the ERC, and notably The government also imposes an obligation of strategic stocks of oil upon the request of the operators, for the tariffs, for the use of the products listed in article L.642-3 of the Energy Code on licensed oil transportation and distribution networks of gas and the installations operators, in order to meet the needs of final consumers in periods of liquefied natural gas (articles L.445-1 to L.445-3, L.445-5, of crisis. L.446-2 to L.446-4, L.452-1 and L.452-5 of the Energy Code). The ERC therefore proposes to the government tariffs for the use of the networks for the transportation of natural gas, the distribution of 6 Transportation natural gas and methane terminals, and it ensures that the tariffs for the use of infrastructure are applied in a transparent and non- 6.1 Outline broadly the ownership, organisational and discriminatory manner for all users, including with regard to the regulatory framework in relation to transportation traditional suppliers. pipelines and associated infrastructure (such as 4.1.2 Public Service Obligations: natural gas processing and storage facilities). Article L.121-32 of the Energy Code puts in place a certain number of public service obligations which are imposed on: A new legal regime of authorisation for the transportation of natural gas was implemented in France in 2003, replacing the former ■ the operators of the transportation and distribution networks system of concessions. of natural gas and on the operators of the installations of liquefied natural gas, including installations which supply There are today two managers of the transportation networks for auxiliary services; natural gas in France: “GRT Gaz” (Engie Energie Services group); ■ the suppliers mentioned in articles L.443-1 et seq. of the and “Total Infrastructures Gaz France” (“TIGF”). The management Energy Code, on the local distribution companies mentioned of a gas transportation network must be carried out by a legal entity, in article L.111-54 of the same code and on chartered which is separate to the entities that ensure the production or the distributors mentioned in III of article L.2224-31 of the supply of gas. General Local Authorities Code; and As mentioned under question 4.1, point 4.1.1 above, and as far as ■ on the holders of concessions for underground storage of tariffs are concerned, decisions are taken jointly by the ministers natural gas regulated by the New Mining Code. respectively in charge of the economy and energy, upon proposals These obligations concern, in particular: of the ERC, and notably at the request of the operators, for the tariffs ■ the security of persons and upstream installations for the for the use of gas transportation and distribution networks and for linking-up to ultimate customers; the use of natural liquefied gas installations. ■ the continuity in the supply of gas; The sixth natural gas transmission tariff (ATRT6) was applied to ■ the security of supply; GRT Gas and TIGF until 31 March 2018. ■ the quality and the price of products and services provided; The transmission network is linked to two marketplaces (the PEG ■ the protection of the environment, in particular, the application Nord and the Trading Region South, or TRS). Since 1 November of measures aimed at saving energy; 2018, the two marketplaces have been merged to create a single ■ energy efficiency; marketplace. ■ the balanced development of the territory; The tariff structure is divided into different tariff terms, spread ■ the gas supply of last resort to non-domestic clients that over the transmission networks between the main network on ensure missions of general interest; and the one hand and the regional network on the other. These terms ■ the maintenance, in accordance with article L.115-3 of the are paid at 100% by capacity. The main network consists of the Code of Social Action and Families, of a supply for people network elements that connect interconnection points with adjacent who find themselves in a precarious situation. transmission networks, LNG terminals and storage facilities, as

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well as exits to the regional network. Law No. 2017-1839, dated event of a threat to the safety of personnel, to the environment or, 30 December 2017 putting an end to hydrocarbon research and more generally, in the event of non-compliance with the conditions exploitation, known as the Hydrocarbons Law, provides that the imposed by the article L.433-16 of the Energy Code, the State, income of storage operators is regulated as from 1 January 2018. In through its representative, has the right to issue an injunction against force since 1 January 2018, the ATS1 tariff will apply for a period of the operator or the entity responsible for the building works, or, in approximately two years corresponding to the calendar years 2018 the event of urgency, a power to suspend operations. and 2019 and will be updated annually to clear the balance of the CRCP (Accrued Income and Expense Adjustment Account). 6.4 How is access to oil and natural gas transportation pipelines and associated infrastructure organised?

France 6.2 What governmental authorisations (including any applicable environmental authorisations) are Access of third parties to the gas transportation networks is required to construct and operate oil and natural guaranteed by article L.111-97 of the Energy Code that provides gas transportation pipelines and associated that the persons entitled to access works for the transportation of infrastructure? natural gas, namely and principally, are clients, suppliers and their representatives. In accordance with article L.441-3 of the Energy Articles L.431-1 and L.632-1 of the Energy Code provide that the Code, any transporter of natural gas, any distributor of natural gas construction of hydrocarbon and natural gas transportation pipelines and any operator of liquefied natural gas installations may negotiate are subject to a procedure of authorisation. As implemented by Order freely with the supplier(s) its choice of contract for the supply No. 2010-418, dated 27 April 2010, Chapter V of Title V of Book V of natural gas and electricity necessary for the operation of its (section 2) of the Environment Code (articles L.555-7 to L.555-16) installations, provided they have an authorisation. specifies the authorisation procedure. It should be noted that the regulatory part of the Environment Code sets out provisions relating to the amendment and the temporary or definitive suspension of the 6.5 To what degree are oil and natural gas transportation authorisation (R.555-24 to R.555-29). pipelines integrated or interconnected, and how is co- operation between different transportation systems The operation of natural gas transportation pipelines is subject to a established and regulated? procedure of authorisation, together with specifications, as provided for by the Energy Code (articles L.431-3, L.431-6, L.432-11, L.432- The transportation of natural gas is effected by gas pipelines. Gas 12, L.441-3 and L.453-4 of the Energy Code). According to the type may also be transported by gas tankers as regards liquefied natural of project in question, this may be an authorisation given by way gas (“LNG”). of ministerial order (Minister of Energy), by order of a Prefect, or As mentioned above, there are two managers of the networks for pursuant to a simplified procedure of authorisation given by a Prefect. the transportation of natural gas in France: GRT Gaz manages the The abovementioned Decree No. 2012-615, dated 2 May gas network in the north of the country; and TIGF manages the 2012, equally sets out the details applicable to the construction, network in the south west of the country. The transportation of oil commissioning, operation and control of canalisations (R.555-37 to is effected by oil pipelines, but is also transported by ship. The new R.555-47 of the Environment Code). article L.631-1 of the Energy Code (modified by Law No. 2015-992, In addition, there are authorisations to be obtained as far as the dated 17 August 2015) provides that every person who realises, in environment is concerned in application of articles L.511-1 et seq. metropolitan France, an operation which results in the chargeability of the Environment Code on installations that are classified for the of the internal taxes of consumption on a petroleum product listed protection of the environment. in article L.642-3 or operates in the supply of a petroleum product appearing on this list to aircraft has to prove a maritime transport capacity under the French flag proportional to the quantities released 6.3 In general, how does an entity obtain the necessary land (or other) rights to construct oil and natural gas for consumption during the last calendar year. transportation pipelines or associated infrastructure? Do Government authorities have any powers of 6.6 Outline any third-party access regime/rights in compulsory acquisition to facilitate land access? respect of oil and natural gas transportation and associated infrastructure. For example, can the As indicated in questions 6.1 and 6.2, the construction of the regulator or a new customer wishing to transport pipelines for the transportation of hydrocarbons and natural gas is oil or natural gas compel or require the operator/ subject to authorisation. owner of an oil or natural gas transportation pipeline or associated infrastructure to grant capacity or The criteria for the granting of authorisations are fixed in an expand its facilities in order to accommodate the new objective, transparent and non-discriminatory manner. Apart from customer? If so, how are the costs (including costs the conditions relating to the technical and financial capacities of the of interconnection, capacity reservation or facility applicant, as well as to safety and the protection of the environment, expansions) allocated? the criteria also concern the compatibility of the projects with the principles and the missions of a public service. Access of third parties to the gas transportation networks is The owners of land which is crossed by a gas transportation or guaranteed by articles L.111-97 et. seq. of the Energy Code. distribution pipeline must refrain from any action which would However, it may be limited or indeed, prevented, if the infrastructure harm the construction, the proper usage and the maintenance of lacks adequate available capacity. Any refusal to conclude a the pipeline, in accordance with the conditions fixed by the texts contract of access to a method of transportation or distribution of which have been produced in the application of articles L.433-11 natural gas, or an installation of liquefied natural gas, including the and L.433-7 of the Energy Code. Such conditions are fixed by installations providing ancillary services, must set out the reasons Chapter V of Title V of Book V (section 4) of the Environment Code for the refusal, which is notified to the applicant and to the ERC as regards hydrocarbon pipelines (including oil pipelines). In the (new articles L.111-102 and L.111-103 of the Energy Code).

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The development of a competitive gas market therefore necessitates (Strasbourg) which each ensure the supply of 1.5% of the that all the market players can have access, in conditions that are market. The other 20 LDCs share less than 1% of the market. both transparent and non-discriminatory, to detailed information ■ Antargaz and SICAE de la Somme et du Cambraisis are the regarding capacity. Thus, the ERC has asked operators, through first new entrants in the natural gas distribution sector in its decision of 28 May 2003, to publish on their internet site, France. Their previous activities were, respectively, propane information relating to their different capacities. This information is and butane gas distribution and electricity distribution. Their published with respect to all entry and exit capacities and in relation activities in the natural gas sector began when the networks to links between balancing zones. of the municipality of Schweighouse-Thann (Antargaz), The ERC has also asked operators to produce a general note Herbécourt and Vrély (SICAE de la Somme et du Cambraisis)

describing the method of calculation for the maximum capacities became operational in April 2010. France that may be sold and to provide details of this method of calculation, Article L.432-8 of the Energy Code specifies the missions of the as well as the calculations leading to the published results. manager of the distribution network. Finally, the ERC has asked operators to publish their forecast Article R.432-8 of the Energy Code gives the possibility to the programme, for the following six-month period, with a reduction licensor authorities to make a financial contribution to the managers in capacity due to maintenance works, with an update at least on a of public distribution networks, to render profitable the operations monthly basis. which increase the density of existing networks and the creation of new public distribution networks. 6.7 Are parties free to agree the terms upon which oil For towns which are not supplied with gas and which are not linked or natural gas is to be transported or are the terms up to the natural gas network, and which are generally located far (including costs/tariffs which may be charged) from transportation networks of natural gas because they are cut off regulated? from their surroundings, the development of the public distribution network of propane gas may constitute a veritable alternative. See the answer to question 6.4, paragraph 2. Article L.432-6 of the Energy Code confirms the possibility given in In accordance with article L.445-2 of the Energy Code, the decisions 1988 to local bodies and to their public institutions of co-operation regarding the tariffs for the use of the transportation networks are to have new businesses for the distribution of propane by the public taken jointly by the Ministers responsible for the economy and for network, after a period of public consultation, subject to obtaining energy, on the basis of the Energy Regulatory Commission. the approval of the Minister of Energy. A duly accredited company See also the answer to question 6.1 concerning tariffs. can distribute natural gas or any other combustible gas.

7.2 What governmental authorisations (including any 7 Gas Transmission / Distribution applicable environmental authorisations) are required to operate a distribution network? 7.1 Outline broadly the ownership, organisational and regulatory framework in relation to the natural gas Article L.121-45 of the Energy Code specifies, notably, that the transmission/distribution network. public service of the distribution of natural gas is organised by the State and the local authorities or by their public institutions of co- In accordance with article L.111-57 of the Energy Code, the operation. management of a network for the distribution of natural gas which The gas “distributors” carry out their activities in accordance with supplies more than 100,000 clients on the mainland is assured conditions fixed by their authorisation of supply, as well as by the by entities that are separate from those that carry out activities of specifications in the concessions or the service regulations of local production or the supply of natural gas. public bodies referred to in article L.2224-31 of the General Local The provisions of the Energy Code are close to the former Law Authorities Code. dated 7 December 2006, which has therefore (and as compared Article L.2224-31 of the abovementioned Code recalls that the local to the Law dated 9 August 2004) reinforced the idea of the legal authorities or, if necessary, their public institutions of co-operation, separation of activities providing, not for a service or a separate negotiate and conclude concession contracts and monitor the due management but distinct legal entities, in order to assure the fulfilment of the public service mission fixed, as regards the granting management activities of the distribution networks and the authorities, by the specifications of these concessions. production activities or the supply of natural gas. Gas distribution The granting authorities assure, in particular, the control of the networks are structures consisting mainly of medium- or low- public distribution networks for gas. pressure pipelines. The public natural gas distribution networks represent a total length of 195,000 km, making them the second In accordance with the provisions of articles L.322-6 and L.432-5 of largest in Europe after the German networks. Natural gas the Energy Code, the authorities and institutions referred to above transmission and distribution activities in France are generally may also be responsible for the works for the development of public referred to as natural monopolies. Indeed, very few players share networks for the distribution of electricity and gas. these markets and entering them is almost impossible. The local authorities, their institutions of co-operation between About 11 million consumers are connected to the gas distribution such local authorities, or their syndicates which do not possess a network. These customers are supplied by 25 distribution system public distribution network for natural gas, or in relation to which operators (DSO) which are of unequal sizes: the works are not in the process of being carried out, may grant the public distribution of gas to any company duly accredited for ■ GrDF supplies over 96% of the market. these purposes by the Minister responsible for energy, in accordance ■ Twenty-two DSOs, also called local distribution companies with the conditions specified in article L.432-6 of the Energy Code. (LDC), such as Régaz (Bordeaux) and Réseau GDS

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(These local authorities and institutions may create a public body a share proportional to the daily capacity subscribed and a share accepted by the Minister responsible for energy, use an existing proportional to the distance between the delivery point and the public body of this kind, or participate in an existing company, which nearest transmission network. The tariff for access to a network is privately and publicly owned (“société d’économie mixte”).) infrastructure shall be calculated in such a way as to enable the operator operating it to cover its costs.

7.3 How is access to the natural gas distribution network organised? 7.6 Are there any restrictions or limitations in relation to acquiring an interest in a gas utility, or the transfer See the answer to question 7.2. of assets forming part of the distribution network (whether directly or indirectly)? France The right of access to the networks for the distribution of natural gas used to be determined, until recently, by article 3 of the Law dated See the answer to question 7.2. 3 January 2003. The Order dated 9 May 2011 repealed this article and put an end to this condition of eligible clients. Any refusal to conclude a contract for access to a distribution 8 Natural Gas Trading network for natural gas, including the installations which provide ancillary services, must provide reasons and be addressed to the applicant and to the ERC. 8.1 Outline broadly the ownership, organisational and regulatory framework in relation to natural gas trading. Please include details of current major 7.4 Can the regulator require a distributor to grant initiatives or policies of the Government or regulator capacity or expand its system in order to (if any) relating to natural gas trading. accommodate new customers? The activity of the sale of gas to end consumers, which concerns In the context of the general monitoring and proper functioning of the interface between the distributors and end consumers, is open the natural gas market, the ERC examines refusals regarding access to competition. It consists either in the retail sale of gas which is and the contracts or agreements for access to the transportation purchased wholesale, namely within the context of a long-term works and distribution of natural gas, the installations for the storage supply contract, of between 15 and 20 years, or in the context of a of natural gas and the installations of liquefied natural gas. short-term agreement. The gas market in France is increasingly open to competition, 7.5 What fees are charged for accessing the distribution particularly for non-domestic consumers. There was a proliferation network, and are these fees regulated? of market offers for more than 56% of sites at the end of 2017. The market share of alternative suppliers reached 26% in terms of In accordance with article L.452-1 of the Energy Code, and as for the consumption volume in the residential customer segment and 41% tariffs for the use of the transportation networks, the decisions relating in the non-residential market. Market offers drive prices down with to the tariffs for the distribution of natural gas are taken jointly by the discounts of up to 10% off the offer price compared to regulated Minister responsible for the Economy and the Minister responsible tariffs. for Energy, following a proposal of the ERC, and notably, at the 8.1.1 Retail Trade: request of the operators. Decree No. 2005-22, dated 11 January 2005, The retail market concerns the end consumers. Clients may opt abrogated and codified by the regulatory section of the Energy Code, between two types of contracts: and an Order dated 14 January 2005 complete the provisions of the ■ Contracts with regulated tariffs (proposed only by historical Energy Code concerning the tariffs for the use of public distribution suppliers). The regulated tariffs are fixed jointly by the networks, as well as the rules applying to these tariffs. Ministers of the Economy and Energy upon the proposal of The rates of use of natural gas infrastructure, previously set by the the ERC. There are two types of regulated tariffs: subscription Ministers of Economy and Energy on a proposal from the ERC, are tariffs; and public distribution tariffs. Under an agreement now set directly by ERC. with the European Commission approved in January 2013, article 25 of the Law on Consumer Protection, adopted 17 The operators of transmission and distribution networks are March 2014, the tariffs regulated for non-domestic consumers remunerated by means of tariffs set by the public authorities. The (excluding small businesses whose level of consumption is Third Party Access to Natural Gas Distribution Networks (ATRD) less than or equal to 30 MWh per year the small collective is the tariff set by the public authorities and which ensures the housing) have been removed since 1 January 2016. remuneration of distribution system operators. A natural gas bill ■ Contracts with a market price (proposed by historical therefore corresponds to the billing of several services: the gas suppliers and alternative suppliers). Article L.445-4 of the consumed and the transportation of this gas through the transmission Energy Code specifies that an end consumer cannot choose and distribution network. Moreover, some very large consumers contracts with regulated tariffs if it consumes more than may choose to conclude a distribution contract and a supply contract 30,000 KW of gas per year. The market prices are freely separately. The ATRD, which corresponds to the distribution part of fixed by the suppliers. After opting for a market price, final consumers of less than 30,000 kWh per year are allowed to the invoice, therefore has a significant impact on the evolution of return to regulated tariffs according to the previous article natural gas bills. It has increased significantly in recent years. L.445-4 of the Energy Code. The setting of natural gas tariffs must comply with certain general 8.1.2 Wholesale Trade: principles related to consumer options. Each pricing option depends on the customer’s consumption characteristics. This rate option is As specified in the answer to question 8.1, France is supplied for reserved for customers who are already supplied by the distribution the most part on the basis of long-term contracts (between 15 and networks, but who have the regulatory option of connecting directly 20 years). to a transmission system. It includes an annual subscription,

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The price of gas in the context of long-term contracts evolves Article L.452-6 of the Energy Code provides that: “The administrative principally in accordance with the price of oil products (domestic fuel authority may allow, under conditions laid down decree in Council and heavy fuel oil), with a delay of between three and six months. of State, the operator of a liquefied natural gas facility or of an Gas purchases are generally made through: interconnection structure with a natural gas transmission network located in the territory of another Member State of the European ■ Purchase by agreement, for example by long-term contracts. It is through purchase by agreement that the majority of gas is Union to depart, for all or part of this facility or structure, from the imported from Russia, Algeria and Norway. provisions in this section.” ■ The intermediated market, which includes the organised market (Powernext) and brokers. 9.4 Outline any third-party access regime/rights in

Exchanges on the wholesale market are operated at the Gas Exchange respect of LNG facilities. France Points (GEP), which are virtual exchange points located at the three balancing zones of the French transmission network. Hence, GEP Concerning any third-party access: North is connected to the GRTgaz network while the TRS (Trading ■ Article L.111-97 of the Energy Code provides that: “A right Region South) is connected to the south balancing zones of GRTgaz of access to the transport and distribution facilities of natural and TIGF. These two GEP have merged. gas, as well as to liquefied natural gas facilities, including the facilities that supply auxiliary services, is guaranteed by Since November 1 2018, the price of gas is now the same everywhere the operators that exploit them to customers and suppliers in France, thanks to the creation of the single market called Trading and to their representatives, under conditions defined by the Region France (TRF). contract.” “When the operator and the user are not different legal 8.2 What range of natural gas commodities can be entities, protocols settle the relations between them. These traded? For example, can only “bundled” products contracts and protocols are sent to the Commission for the (i.e., the natural gas commodity and the distribution Regulation of Energy, at the request of the latter.” thereof) be traded? ■ Article L.111-98 of the Energy Code provides that: “A right to access to the facilities defined in article L.111-97 Natural gas commodities can be traded subject to administrative is guaranteed by the operators that exploit them to ensure authorisations. We are not aware of any legal restrictions concerning the execution of the contracts for the transit of natural the trading of unbundled products. gas between the big high pressure gas networks within the European economic area.” ■ Article L.111-99 of the Energy Code provides that: “Networks 9 Liquefied Natural Gas managers mentioned in III of article L.2224-31 of the General Local Authorities Code have a right to access to natural gas distribution networks in accordance to conditions defined by 9.1 Outline broadly the ownership, organisational and regulations.” regulatory framework in relation to LNG facilities. ■ Article L.111-100 of the Energy Code provides that: “Operators shall not discriminate between users or classes As far as liquefied natural gas is concerned, France has four of users. Networks managers mentioned in III of article operational methane terminals (see question 1.1, section 1.1.6). L.2224-31 of the General Local Authorities Code are a The criteria for the qualification as potential sites for the installation special category of users.” of new methane terminals are both technical and financial. ■ Article L.111-101 of the Energy Code provides that: “The exercise of access rights defined in article L.111-97 to L.111- 99 cannot preclude the use of structures or facilities by the 9.2 What governmental authorisations are required to operator that exploit them in order to perform the public construct and operate LNG facilities? service obligations falling upon it.” Moreover, concerning the eligible customers: In order to operate in the liquefied natural gas sector, it is necessary ■ Article L.441-1 of the Energy Code provides that: “Any to follow the authorisation procedure provided for by the Energy customer who uses gas it buys or purchases gas for resale has Code. the right, through its representative, to choose their natural It is also necessary to obtain a planning permit, in accordance with gas supplier.” the Planning Code. Of course, this concerns an installation which is ■ Article L.441-2 of the Energy Code provides that: “Every classified for the protection of the environment. consumer of gas exercises to right provided in article L.441- 1 per consumption site.” Accordingly, all the provisions relating to the environment must be complied with and the appropriate authorisations must be obtained. ■ Article L.441-3 of the Energy Code provides that: “Every natural gas carrier, any natural gas distributor and every operator of installations of liquefied natural gas negotiate 9.3 Is there any regulation of the price or terms of service freely with one or several suppliers of his choice the in the LNG sector? necessary supply contracts of natural gas and electricity for the functioning of his installations, according to competitive, The tariffs and commercial conditions of use of the liquefied natural not discriminatory and transparent procedures, such as in gas installations are drawn up jointly by the Ministers of the Economy particular public consultations or operations in regulated markets.” and Energy upon the recommendation of the ERC, depending on public criteria which are objective and non-discriminatory, bearing ■ Article L.441-4 of the Energy Code provides that: “When a in mind the characteristics of the service rendered and costs linked consumer exercises the right provided in article L.441-1 for a site, the contract to supply and transportation for this site to this service (articles L.134-2,4°, L.452-1 et seq. of the Energy contracted according to a regulated price is automatically Code). terminated, without compensation to any contractor.”

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■ Article L.442-1 of the Energy Code provides that: “The provisions of articles L.121-86 to L.121-94 of the Consumer 11 Competition Code apply to contracts between natural gas suppliers and consumers or non-professionals for natural gas consumption 11.1 Which governmental authority or authorities are less than 30.000 kilowatt per year, as well as offers.” responsible for the regulation of competition aspects, ■ Article L.444-1 of the Energy Code provides that: “The or anti-competitive practices, in the oil and natural local distribution companies or companies from the legal gas sector? separation of the activities of local distribution companies and those referred to in article L.2224-31 of the General Created by Law No. 2008-776, dated 4 August 2008, on the Local Authorities Code can exercise their right provided in modernisation of the economy, the Competition Authority (the France article L.441-1 under the sole supply of all costumers in their service area.” “Authority”) replaces the Competition Council which was established by the Order dated 1 December 1986. This Order was ■ Article L.443-4 of the Energy Code provides that: “In order to supply clients, are recognized as suppliers the persons codified in 2000 in the fourth section of the Commercial Code. installed on the territory of a Member State of the European The Competition Council had itself replaced the Competition Community or, within the framework of international Commission (created in 1977), which replaced the Technical agreements, on the territory of another State, which are Commission on Cartels and Dominant Positions. Articles 95, 96 holders of an authorization delivered by the administrative and 97 of the Law on the modernisation of the economy, focus on authority.” this new Authority and, in this regard, amend the aforementioned provisions of the Commercial Code (www.autoritedelaconcurrence. fr/user/index.php). 10 Downstream Oil This transformation, which aimed to close the gap between the French system for regulating competition and the European norm, 10.1 Outline broadly the regulatory framework in relation gathers together responsibilities and resources within a single to the downstream oil sector. independent authority. The Authority is therefore an independent administrative authority, The Energy Code sets out a limited regulatory framework in relation which is specialised in the monitoring of anti-competitive practices, to refinery activities and the use of oil products in France. expertise in the operation of markets and the control of merger Such regulatory framework notably relates to technical and security operations. At the service of the consumer, it has as an objective rules applicable to oil facilities, and which are governed by the to monitor the free operation of market forces and to help with the provisions relating to classified facilities set out by the Environment competitive operation of the markets at European and international Code (Title I of Book V). levels. It also provides that any project relating to the acquisition or the The Law on the modernisation of the economy transfers to the new construction of a crude oil refinery, as well as the abandonment or Authority the powers of the former Competition Council and accords decommissioning of crude oil refinery facilities shall be notified to new powers: the Competition Authority replaces the Minister of the the administrative authority (article L.641-2 of the Energy Code). Economy with regards to the monitoring of merger operations. In It should be noted that only oil products listed in article 265 ter addition, the Competition Authority is henceforth able to itself carry of the Custom Code are authorised in France. The technical rules out investigations, and possesses the possibility to decide upon pertaining to the use of the authorised oil products, as well as their recommendations in terms of competition questions and to issue features, are defined by the regulation. recommendations to the Minister who is responsible for the sector. This aims to improve the competitive functioning of the markets. Order No. 2008-1161, dated 13 November 2008, which modernises 10.2 Outline broadly the ownership, organisation and regulatory framework in relation to oil trading. the regulation of competition, confers upon the Competition Authority reinforced powers. The Energy Code does not set out such framework in relation to oil trading, since 99% of the oil that France consumes is imported. 11.2 To what criteria does the regulator have regard in Notwithstanding, article L.142-10 of the Energy Code provides that determining whether conduct is anti-competitive? each person who receives or sends to or from foreign countries, transports, including by sea, stores some crude oil or petroleum Anti-competitive practices may take different forms. They are products or distributes petroleum products has to supply to the generally divided into two groups: cartels on the one hand; and authority any documents and information on its contribution to abuse of dominant position on the other hand. the supply of the French market with crude oil and with petroleum They are defined in articles L.420-1 and L.420-2 of the Commercial products in period of difficulties of supply or directly necessary Code. for the appreciation of the respect for the measures of Books I Article L.420-1: “Concerted actions, agreements, express or implied and VI of the Energy Code or for the respect for the international cartels or coalitions are prohibited, even when through the direct commitments of France. Law No. 2015-992, dated 17 August 2015 or indirect intermediary of a company of a group located outside adds a paragraph to article L.142-10 which provides that the public France, when they tend to: authorities have access to the data of consumption of petroleum 1) Restrict access to the market or the free operation of market products, in the respect for measures relative to the information forces by other companies. protected by legal or statutory measures. 2) Hinder the fixing of prices through the free operation of market forces by favouring artificially their increase or their decrease.

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3) Limit or control the production, outlets, investments or 11.3.2 Consulting Role: technical progress. 11.3.2.1 The opinions and recommendations rendered at the 4) Share out the markets or sources of supply.” initiative of the Authority: There are so-called “horizontal” cartels, which involve several Without it being necessary for a matter to be brought before it, the competing firms for the same type of product or service andso- Authority can render opinions upon its own initiative with regard to called “vertical” cartels, which are concluded between operators any questions of competition and to issue general recommendations situated at different levels of the economic chain as, for example, on a market or a particular sector. The Authority will put forward between suppliers and distributors. its point of view each time that it considers that this is necessary. Article L.420-2 of the Commercial Code: “The abusive exploitation This possibility is crucial to the extent that it enables the Authority by a company or a group of companies of a dominant position on an to exercise an advisory and warning role, well before exercising its France internal market or with regard to a substantial part of such market is role as a sanctioning authority. prohibited in accordance with the conditions provided for in article (See www.autoritedelaconcurrence.fr/user/standard.php?id_rub=294; L.420-1. Such abuse may notably consist in a refusal of sale, related “Opinions and recommendations, Consultative role”). sales, or sales subject to discriminatory conditions, as well in the breach of established commercial relations, for the sole reason that 11.3.2.2 Opinions rendered on matters brought before it: the partner refuses to submit to unjustified commercial conditions. Concerning the compulsory referral to the Authority, the Authority In addition, the abusive exploitation by a company or by a group must be consulted when a draft legislative or regulatory text of companies of the state of financial dependency in which a client envisages regulating prices or restricting competition (articles company or supplier finds itself is prohibited when such exploitation L.410-2 and L.462-2 of the Commercial Code). The Authority is likely to affect the functioning or the structure of the competition. renders a reasoned decision to public bodies, in which it formulates Such abuse may consist in a refusal of sale, in related sales, in its observations on the proposed text and suggests, if necessary, discriminatory practices referred to in article L.442-6 or product alternative solutions which are more compatible with competition. range agreements.” Concerning the optional referral to the Authority, the Competition Authority may be called upon to render opinions on any issue of competition upon the request of public bodies (such as the 11.3 What power or authority does the regulator have to Government and Parliament), local authorities, jurisdictions, or preclude or take action in relation to anti-competitive practices? trade union organisations, consumers or professionals. The sectorial authorities, such as the Audiovisual High Council, the 11.3.1 The Dispute Jurisdiction of the Authority: Energy Regulatory Commission and the Authority for the regulation When the financial players infringe competition law, the matter of electronic communications and posts, can also refer matters to may be brought before the Authority, or the latter may assume the Authority. jurisdiction to deal with the matter upon its own initiative. It will Following an examination of the competition situation of the market examine the facts and, at the end of a process where each side in question, the Competition Authority proposes any measure that is is heard, it will take, if necessary, all the steps necessary for the helpful as far as strengthening competition is concerned. practices in question to be stopped. 11.3.3 Leniency: At the end of the process, several decisions are possible: It should also be noted that there is a policy of leniency. Leniency is ■ a decision of non-suit (and there is therefore no need for the a method which enables national competition authorities to stop, or process to continue); to sanction more easily, cartels, in return for a favourable treatment ■ a rejection (on the basis that there are inadequate supporting granted, in certain conditions, to companies which denounce the documents); existence of cartels and which co-operate in the proceedings that are ■ a pronouncement of conservatory measures (faced with an instigated with regard to such cartels (negotiated procedures, French emergency situation, before a decision on the merits has been leniency programme). taken – in the event of a serious and immediate infringement as regards a financial sector or as regards a company); 11.4 Does the regulator (or any other Government ■ a financial sanction (up to 10% of the worldwide turnover of authority) have the power to approve/disapprove the company); mergers or other changes in control over businesses ■ an injunction (to cease an anti-competitive practice or to in the oil and natural gas sector, or proposed comply with competition law); acquisitions of development assets, transportation or ■ a decision concerning non-compliance with an injunction associated infrastructure or distribution assets? If so, what criteria and procedures are applied? How long (possibly accompanied by fines); does it typically take to obtain a decision approving or ■ an injunction against publishing (of the sanction in the disapproving the transaction? media); and ■ decisions accepting undertakings: an alternative to litigation, See the answer to question 11.3. the process of undertakings enables the company which has doubts to present to the Authority undertakings which are In addition, and as regards merger operations (a merger operation such as to put an end to these preoccupations, and before any occurs when two companies that were formerly independent merge, notification of contentions. when they create a common company, or when a company takes control of one of several other companies), there are thresholds of (See www.autoritedelaconcurrence.fr/user/standard.php?id_ turnover which trigger the obligation to notify the operation to the rub=402&id_article=1594; “Control of anti-competitive practices”.) Authority (article L.430-2 of the Commercial Code).

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Once the operation has been notified to the Authority, the latter proceeds with an examination of the operation, within a delay which 12.2 To what extent is regulatory policy in respect of the will depend upon the nature of the operation and the problems oil and natural gas sector influenced or affected by international treaties or other multinational that it comes across during the course of the examination (and for arrangements? further details regarding the time periods within which the Authority reaches a decision, reference should be made to articles L.430-5 and The legislation applicable to the oil and gas sector is widely L.430-7 of the Commercial Code). influenced by community undertakings given by France. Thus, In the event that no particular competition problems are identified recent laws, which have provided a new legal context for the natural or if the undertakings that are presented by the parties rectify the gas market, have been enacted in order to transpose European

France problems that have been noted, the operation may give rise to an Directives into French law. authorisation with or without undertakings at the end of a quick From an environmental point of view (because of its impact in the examination, called phase 1. The decision is rendered within 25 gas legislation and operation), France is also, of course, influenced business days as from the date of receipt of a complete file of by its international undertakings, such as the Kyoto Protocol, as notification. well as its European undertakings. For instance, following the Paris If, on the other hand, a serious infringement of competition remains Agreement signed in April 2016, France has adopted a new law on at the end of this phase, the Authority commences phase 2, in order hydrocarbons in order to meet its carbon neutral goal by 2050. to proceed with an in-depth analysis of the operation. In particular, the Authority will examine whether the operation is such as to impede competition and notably, through the creation, or the strengthening 13 Dispute Resolution of a dominant position or through the creation or the strengthening of a purchase power which would place the suppliers in a situation of economic dependency. The Authority also examines whether the 13.1 Provide a brief overview of compulsory dispute resolution procedures (statutory or otherwise) operation is justified by gains in efficiency which compensate for applying to the oil and natural gas sector (if any), prejudicial effects that may possibly be noted as far as competition is including procedures applying in the context of concerned. disputes between the applicable Government At the end of this examination (normally 65 business days as from authority/regulator and: participants in relation to oil the commencement of phase 2), the Authority renders a collegiate and natural gas development; transportation pipeline and associated infrastructure owners or users in decision which may either authorise the operation without any relation to the transportation, processing or storage specific conditions, or authorise it subject to the provision of of natural gas; downstream oil infrastructure owners undertakings, or prohibit it. or users; and distribution network owners or users in The parties, as well as interested third parties, have two months relation to the distribution/transmission of natural gas. within which to seek an annulment of the decision or an amendment of the decision before the Council of State. 13.1.1 The Settlement of Disputes by the Energy Regulatory On an exceptional basis, the Minister of the Economy may pass over Commission (Natural Gas Sector): the decision of the Authority, adopting a decision on the basis of The ERC may be contacted by concerned parties (except with reasons of public interest. regards to clients that are not eligible), in the event of any dispute relating to access to transportation works, or works concerning the distribution of natural gas and to liquefied natural gas installations, 12 Foreign Investment and International or in relation to the storage of natural gas. After an examination Obligations during which the parties are duly heard and after a possible inquiry, the Commission must reach a decision within two months (this may be extended if necessary) for the resolution of a dispute. A 12.1 Are there any special requirements or limitations on matter may also be brought before the Commission, in parallel, for acquisitions of interests in the natural gas sector conservatory measures. The decisions of the Commission may be (whether development, transportation or associated infrastructure, distribution or other) by foreign appealed before the Court of Appeal of Paris, which may order the companies? suspension of execution of a sentence (www.cre.fr/presentation/ pouvoirs#section3; Settlement of disputes). As far as the distribution of gas is concerned, article 1 of the Decree- 13.1.2 The Settlement of Disputes by a Judge: law dated 12 November 1938 relating to the nationality of public Chapter II of Book V of the New Mining Code, as implemented services concessionaires provides that public authorities can only by the Order dated 20 January 2011, provides for the offences and grant concessions to French citizens. penalties in mining matters. In view of the mixed character of This provision is still in force, even though some modifications have mining legislation, certain questions fall within the jurisdiction of been enacted in order to comply with European legislation and, more administrative judges, whilst others fall within the competence of precisely, with the principle according to which discrimination on civil or administrative judges. grounds of nationality shall be prohibited. As such, this provision 13.1.3 The National Energy Ombudsman: has been amended by Decree No. 70-410, dated 15 April 1970. The National Energy Ombudsman is responsible for examining Pursuant to articles 1 and 2 of this Decree, the condition relating consumer complaints, recommending solutions to disputes to the nationality of public services concessionaires does not apply between consumers and suppliers or DSO of energy, and taking to the distribution of gas when the individuals or the companies are part in campaigns to inform consumers about their rights. If the nationals of an EU Member State or when the company in question consumer (any private, non-professional or professional customer was set up in accordance with the laws of a Member State and has within the micro-enterprise category, i.e. fewer than 10 employees its headquarters, main establishment or registered office in the EU.

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and €2 million in turnover) is in dispute with his energy supplier The Sapin II law clarified the conditions of the waiver of immunity or distributor, he or his representative (consumer association, from execution but only for diplomatic properties: the waiver has to lawyer, etc.) can appeal to the National Energy Ombudsman to be express and special. Also, it makes enforcement measures against assist him in settling the disagreement. After examining the case, the property of a foreign State subject to prior authorisation by the the Ombudsman prepares a written recommendation supported by enforcement judge. This law is presented as intended to prevent any detailed arguments which will enable the dispute to be settled within seizure contrary to the immunity of States from execution. In order two months of the case being brought before him. The field of to cope with any coercive measures, States obviously do not deprive jurisdiction of the National Energy Ombudsman is strictly regulated themselves of the possibility of invoking immunity from execution by articles L.122-1 et seq. of the Energy Code (www.energie- to make their property unseizable. mediateur.fr/accueil.html). The case law has relaxed the conditions under which a State may France be considered to have waived its immunity from execution. Long 13.2 Is your jurisdiction a signatory to, and has it duly considered absolute, the Eurodif case marks the abandonment of the ratified into domestic legislation: the New York absolutist approach to immunity from execution. International law Convention on the Recognition and Enforcement of allows the seizure of property attached to the exercise of a State’s Foreign Arbitral Awards; and/or the Convention on diplomatic representation only in the event of an express and special the Settlement of Investment Disputes between States waiver by that State of its immunity from execution. and Nationals of Other States (“ICSID”)?

France has ratified both conventions (the New York Convention in 13.4 Have there been instances in the oil and natural gas 1959 and the Washington Convention in 1965). sector when foreign corporations have successfully obtained judgments or awards against Government authorities or State organs pursuant to litigation 13.3 Is there any special difficulty (whether as a matter before domestic courts? of law or practice) in litigating, or seeking to enforce judgments or awards, against Government authorities In the past, French Courts did not hesitate to condemn governmental or State organs (including any immunity)? authorities or State organs. For instance, the French Administrative Supreme Court, in its decision dated 30 April 2014, decided to In general, there is no special difficulty, as a matter of law or practice, condemn the French authorities and requesting them to proceed in litigating against Government authorities or State organs before with a re-examination of the request for extension of an exploration national courts. However, concerning arbitration, the question permit submitted by the American company Hess Oil. The French remains whether public entities remain prohibited from submitting authorities were requested to proceed with such re-examination on their dispute to arbitration. Indeed, pursuant to article 2060 of the pain of a monetary penalty. This decision resulted from the non- French Civil Code, disputes concerning public entities and public compliance of the French authorities with a first decision issued establishments cannot be referred to arbitration. This prohibition by the Supreme Court on 17 July 2013, condemning the State and subsists in French domestic arbitration law, albeit with numerous requesting it to re-examine the request for an extension submitted by exceptions. For instance, article 2060 provides that orders can the American oil company. be issued in order to authorise industrial and commercial public establishments to submit their dispute to arbitration. In addition, this prohibition does not apply in public procurements as provided 14 Updates in articles 247 and 361 of the new French Public Procurement Code. However, French case-law promptly distinguished between domestic 14.1 Please provide, in no more than 300 words, a and international arbitration. Indeed, French courts entitled States summary of any new cases, trends and developments and public entities to submit their dispute to arbitration when in Oil and Gas Regulation Law in your jurisdiction. the dispute in question concerns an international commercial transaction. As indicated at question 3.1, point 3.1.1, France has adopted a new The issue relating to immunity from the jurisdiction of Government law to prevent the granting of new exploration permits. authorities or State organs under French law is mainly based on There are no recent landmark cases in the field of oil and gas case-law. French courts consider that, when entering into an regulation in France. However, with regard to competition cases arbitration agreement, the State decided to waive its immunity from in the gas market, the French Competition Authority recently jurisdiction. This waiver concerns the arbitration proceeding in sanctioned ENGIE for abusing its dominant position on the gas itself but also the proceedings before national courts in relation to markets in order to encourage its customers to switch to its gas and the constitution of the arbitral tribunal or the enforcement of the electricity market offers. arbitral award. In particular, ENGIE used its list of customers eligible for By contrast, it has been considered that the State’s decision to enter regulated tariffs for the sale (TRV) of natural gas, which it holds into an arbitration agreement cannot be considered as a waiver by as the incumbent operator, as well as its commercial infrastructure the State of its immunity from execution. dedicated to TRVs, to market its gas and electricity supply offers As a general principle, the immunity from execution does not apply at market prices to private individuals and small professional to State property linked with a commercial, an economic or a private customers. ENGIE also used a misleading commercial argument operation. However, the immunity of execution protects the State’s with consumers in which it guaranteed a higher security of gas properties connected directly with the exercise of sovereignty, unless supply than its competitors to encourage customers to choose its the State decided to waive its immunity. The French Supreme Court offers. On 22 March 2017, the competition authority penalised decided in 2011 and 2013 that such waiver had to be express and ENGIE for abusing its dominant position by using its historical file special. to convert its customers to regulated gas tariffs for a total of €100 million.

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In addition, it is submitting for public consultation, in the context Acknowledgment of another file concerning ENGIE’s pricing practices relating to gas market offers, its proposal for commitments to address the problems Jeantet would like to thank Herman Boumakany for his valuable identified by the Authority. contribution to this chapter. Herman is currently preparing a thesis in international economic law. He joined Jeantet AARPI as a trainee Also, Engie made commitments to the French Competition Authority in the Energy, Mines, Infrastructure and International Arbitration to ensure that its pricing policy reflects the reality of its costs. department headed by Thierry Lauriol. Tel: +33 1 4505 8226 / Email: [email protected] France

Thierry Lauriol Martin Tavaut Jeantet Jeantet 87, avenue Kléber 87, avenue Kléber 75016 Paris 75016 Paris France France

Tel: +33 1 4505 8008 Tel: +33 1 4505 8008 Email: [email protected] Email: [email protected] URL: www.jeantet.fr URL: www.jeantet.fr

Thierry Lauriol, admitted in 1991 to the Paris Bar, obtained certificates Martin Tavaut specialises in energy and environmental law. He has of specialty in Economic Law and International Relations Law. in-depth knowledge of sector-specific regulatory regimes, notably in University of Paris-Sceaux: Ph.D. in 1989 with distinction “très the areas of oil and gas, renewable energy and natural resources. honorable” (Henri Capitant award). Thierry joined Jeantet AARPI in His practice is concentrated in the areas of commercial and corporate 1992, and is the founder and head of the Energy, Mines, Infrastructures work and regulatory affairs, including permitting issues and dispute and International Arbitration Department. He previously spent five resolution. With experience in Argentine, UK and French law firms, years with Coudert Frères. Specific Energy and Mining experience: Martin advises clients on projects in the energy and natural resources all aspects of Energy and Mining Law concerning exploration, sectors in France and in African countries, as well as in projects of prospecting, development, production, transportation, refining and regulatory reform. He graduated from Universidad de Buenos Aires distribution; drafting of legal opinions (under French law, “OHADA” and Université Paris 1 Panthéon Sorbonne, and is admitted to the law and other regional African laws) and international contracts; and Paris and Buenos Aires bars. negotiation and collaboration with State companies, as well as with numerous oil and mining companies. He co-manages the diploma of International Economic Law in Africa at Paris 2 University. Languages: French; English; and Italian.

After years working in the raw materials and energy sector, Thierry Lauriol joined the French international law firm Jeantet and set up the Energy & Mining department in 1993. The firm assists clients in matters relating to the electricity, oil & gas, mining and infrastructure sectors. The team advises and assists investors in the context of studies and project development (including the negotiation and drafting of different contractual aspects of the projects) as well as national authorities with regard to the analysis of specific legal situations and reforms specific to a sector. We regularly advise major European players in the electricity sector on different aspects of their activities, such as key electricity producers in France in the context of the construction of electricity power stations. We also advise operators and financial institutions in relation to major projects in the wind farm sector in France, a rapidly expanding area. Our department has been active for many years on the African continent and, in particular, in West Africa. The firm is part of the Energy Law Group (www.energylawgroup.eu), a network of 30+ independent law firms comprising a network of approximately 500 lawyers with specialist expertise in the energy and natural resources sectors. The ELG, which was founded in 1993 by Thierry Lauriol, offers to its clients leading transversal market advice across 40 jurisdictions (Europe, the Middle East, Africa and beyond). Clients include corporations, banks, State entities, regulators and institutions.

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Gabon

Project Lawyers Jean-Pierre Bozec

Natural gas has been used for several decades for the production of 1 Overview of Natural Gas Sector electricity in Port-Gentil. In 2008, a pipeline was put into operation between gas fields and power stations in Port Gentil and Libreville. 1.1 A brief outline of your jurisdiction’s natural gas With the new gas discoveries, the objectives of the State are to sector, including a general description of: natural create a master plan to determine the most relevant use of the gas gas reserves; natural gas production including potential and to promote the exploration and production of natural the extent to which production is associated or gas, excluding associated gas reserves. Gabon has indeed the non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) ambition to develop the production and domestic use and export of liquefaction and export facilities, and/or receiving and this sustainable energy source. re-gasification facilities (“LNG facilities”); natural gas Gabon’s natural gas resources should be developed in order to pipeline transportation and distribution/transmission provide natural gas not only for domestic consumption but also network; natural gas storage; and commodity sales for the fertiliser plant to be built with a consortium of, notably, the and trading. State of Gabon and Olam in the Port Gentil special economic zone. The 2014 and the draft 2018 Hydrocarbons Laws encourage gas Oil overview exploration and production through specific incentive. Gabon is a Central African country based in the famous Gulf of Guinea, located on the Atlantic side of the African continent and crossed by the equator. Gabon became independent in 1960 and 1.2 To what extent are your jurisdiction’s energy requirements met using natural gas (including LNG)? has since developed a stable and peaceful environment attracting major international investors for, in particular, oil and gas, mines, 2 and forests, which remain the main sources of revenue for Gabon. Gabon is a relatively large country (267,670 km ) but with a small, growing population (about 1.8 million inhabitants). Gabon is among the top five oil producers in Sub-Saharan Africa, has been an oil producer for more than 50 years and had its peak oil The low electricity production in Gabon is provided by fossil fuels production in 1997 when oil production reached 370,000 barrels per (54.4%) and by hydroelectricity (45.1%). Solid biomass, marginally day. Since 1997, oil production has been declining. It was at 198,000 developed, provides 0.4% of the total. barrels a day, with a total production for 2017 at 10.5 million tonnes. The country has insufficient electricity capacity to supply the Since July 2016, Gabon has returned to OPEC membership, which the increasing demand of about 6%–8% per year. country was not part of for several years. According to OPEC’s World The country has, therefore, launched a plan to increase the national Proven Crude Oil Reserves by country, there are a total of 2 billion power generating capacity by 1,200 MW by 2020 through the barrels of proven offshore and onshore reserves, with most of them development of several dams throughout the country and natural being located in the south west of Gabon in the Port-Gentil area. To gas and diesel power plants which development and financing are in face the natural decline of mature fields, the government has oriented progress with notably the Chinese TBEA group, the French Eranove its policy to the exploitation of its offshore reserves (offshore is about Group and Meridiam fund, all in partnership with the Gabonese 70% of the entire reserves) and announced on 7 November 2018 a FGIS sovereign fund. new Hydrocarbons Law for the end of 2018/beginning of 2019 and the launching of the 12th bidding round for 35 shallow and deep offshore blocks to attract more investors. 1.3 To what extent are your jurisdiction’s natural gas requirements met through domestic natural gas Gas overview production? Natural gas production is not yet very important in Gabon; it represented 491 million cubic metres in 2017 mainly operated by As far as natural gas is concerned (including associated gas), it is Perenco. In August 2014, Eni announced a critical gas discovery used in power plants and reinjection in oil wells (due to a country in shallow water and Shell and CNOOC announced a gas discovery ban on gas flaring). The industrial use of natural gas will, however, in a deep pre-salt reservoir offshore which are all in the process of be developed in order to meet the new power plants and fertiliser appraisal. plant needs.

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1.4 To what extent is your jurisdiction’s natural gas 2.4 To what extent is your jurisdiction’s oil production production exported (pipeline or LNG)? exported?

Natural gas is not exported from Gabon. Gabon exports more than 90% of its crude oil. In 2017, it was mainly exported to China (37.8%), Trinidad and Tobago (10.7%), Australia (9.8%), Malaysia (7%), Italy (5.6%) and India (5.5%). 2 Overview of Oil Sector

3 Development of Oil and Natural Gas

Gabon 2.1 Please provide a brief outline of your jurisdiction’s oil sector. 3.1 Outline broadly the legal/statutory and organisational Please see question 1.1 for an overview of the oil and gas sector in framework for the exploration and production Gabon. (“development”) of oil and natural gas reserves including: principal legislation; in whom the State’s th With about 30 oilfields in production, Gabon is currently the8 mineral rights to oil and natural gas are vested; largest oil producer in Africa, but production is declining. The Government authority or authorities responsible for Gabonese Government launched on 7 November its new bidding the regulation of oil and natural gas development; and round (12th) for new oil blocks hopping to attract again new current major initiatives or policies of the Government investors as in 2013 where eight new production sharing contracts (if any) in relation to oil and natural gas development. with Marathon, Petronas, Repsol, Noble and Woodside, Impact Oil & Gas and Ophir were signed After the 2014 Hydrocarbons Law, A Hydrocarbons Law was promulgated in 28 August 2014 by a new Hydrocarbons Law has been prepared and should be soon Law no. 11/2014, notably replacing former Law no. 14/82 in the be adopted by Parliament to support the new bidding round and upstream industry and several laws in the downstream industry. attracting new investors thanks to larger flexibility in negotiations Following works launched in March 2018 for adaptation of the of economic terms and reduction of State take. 2014 Hydrocarbons Law to oil investors’ expectations, a new draft Hydrocarbons Law was discussed with experts and the industry New oil and gas discoveries have been made in 2014 by notably until the end of October 2018 so that a new Hydrocarbons Law Perenco, Vaalco and Eni in the conventional domain, while Shell should be adopted hopefully before the end of 2018 or in early and CNOOC declared a gas discovery in deep waters offshore in 2019, according to the Gabonese Minister in charge of oil. October 2014. The draft 2018 Hydrocarbons Law confirms the Law no. 11/2014 In the meantime, the Gabonese oil and gas sector remains active and the State approach in its relations with operators and willingness with farm-ins and farm-outs as well as changes of control occurring to influence and control more oil and gas activities. in 2017: notably Shell Gabon and Shell Upstream Gabon taken over by Assala Energy (supported by Carlyle); Harvest Dussafu taken As far as upstream activities are concerned, the draft 2018 over by BW Offshore with the entry production of Ruche field Hydrocarbons Law still proposes to operators several types of in September 2018, and certain Total Gabon fields transferred to upstream contract: Perenco and extension of exploitation of Etame PSC for Vaalco ■ services contracts (for geological and geophysical and other agreed in August 2018. studies for State promotion of the oil and gas domain); Major current oil operators in the upstream industry include Total ■ technical evaluation agreements (geosciences and superficial Gabon, Assala Energy, Perenco Oil & Gas Gabon, Addax Petroleum/ appraisal limited to 18 months); Sinopec, Vaalco and Maurel & Prom. ■ exploitation convention for marginal and mature fields; A national oil company, Société Nationale des Hydrocarbures ■ exploration contracts (exploration only, but preference right du Gabon, was established in August 2011, with the specific for PSC negotiation in the event of discovery and rights for aim of holding and managing participations in the exploration indemnity for the contriver); and exploitation of blocks in coordination with the State and ■ production sharing contracts (development and production); which became more and more active in the management of State and participations from 2017. ■ exploration and production sharing contracts (exploration, development and production). According to a model to be approved by a Ministerial Order, which 2.2 To what extent are your jurisdiction’s energy requirements met using oil? cannot, however, derogate from the Hydrocarbons Law. The final four types of oil contracts listed above are approved by Presidential Decree. Please refer to question 1.2 above. No doubt, production sharing contracts (PSCs) should remain the main model used in the upstream industry but some exploitation conventions are likely to also be signed for 15 years for oil and 20 2.3 To what extent are your jurisdiction’s oil requirements years for gas, in particular with national junior companies. met through domestic oil production? The main proposed PSCs terms under the new draft 2018 Oil and other mineral products represented more than 76.8% of Hydrocarbons Law should be welcomed by the industry, as they Gabon’s general exports in 2017. now should allow greater flexibility, long-term relations with operators and lower the State’s take: Currently, Gabon still exports more than 90% of its crude oil and the rest of its production is processed locally by the local refinery named SOGARA, but import of refined products grew in 2017 to about 255,000 tons due to maintenance operations of the refinery.

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Expected PSC terms Expected PSC terms Issues 2014 Law PSC terms under draft 2018 Issues 2014 Law PSC terms under draft 2018 Hydrocarbons Law Hydrocarbons Law Volume, budgets and Volume, budgets and Conventional: 1st tranche: Fully negotiable for gas Work phases negotiable phases negotiable 30.77% minimum but with minimum for commitments provided they do not provided they do not for the State before oil of: exceed six years, subject exceed eight years, during corporate income tax ■■ For conventional to possible limited subject to possible (corresponding to 55% areas: 1st tranche: exploration Production extensions (in the limited extensions (in after tax). 50% minimum for the phase maximum limit of eight the maximum limit of 10 sharing Deep waters: 1st tranche: State. years). years). 23.08% minimum for the ■■ For deep and ultra-deep Gabon Exploitation 15+8+7 years for oil. 10+5+5 years. State before corporate waters: 1st tranche: period 20+7+8 for gas. income tax corresponding 45% minimum for the 15% minimum during to 50% after tax). State. 20% during development development and and exploitation (in 35% deemed to be exploitation (in addition addition to possible included in the above State to possible 20% State 35% on the contractor’s 20% State participation Corporate tax State’s profit oil (no participation acquired at oil profits participation acquired at market price effective corporate market price in the share in the share capital of any income tax to pay). capital of any producing producing contractor). For support to contractor). hydrocarbons, State-owned Minimum of 10% from 15% maximum at market Negotiable for support for equipment of oil company exploration period at value. to hydrocarbons, Hydrocarbons (GOC) market value. for equipment of Administration, for Exploration: XAF 50 per Exploration: minimum of Hydrocarbons training, for development Support Superficiary hectare. XAF 60 per hectare. Administration, for of local communities, fund(s) training, for development for reduction of impact royalty Exploitation: XAF 5,000 Exploitation: minimum of of local communities, for of petroleum activities per hectare. XAF 5,000 per hectare. reduction of impact of on environment – For oil: For oil: petroleum activities on conditions to be set forth ■■ 65% for conventional ■■ 70% for conventional environment. in the implementation domains for oil. domains for oil. decree(s) but likely to be negotiable. ■■ 75% for deep and ■■ 80% for deep and Fund domiciled in an Dismantling Fund domiciled in an ultra-deep waters ultra-deep waters for agreed Gabonese bank or for oil. oil. fund agreed Gabonese bank. Cost stop at the Central Bank. For gas: For gas: Domestic 15% discount on fixed Discount on fixed price to ■■ 65% for conventional ■■ 75% for conventional market price. be provided in the PSC. domains for oil. domains for oil. Provision for diversified 1% of the turnover, Conditions to be set forth ■■ 75% for deep and ■■ 90% for deep and 75% of which is cost in the implementation ultra-deep waters ultra-deep waters for investments recoverable. decree(s). for oil. oil. (PID) Signature Provision for Negotiable. Negotiable. bonus hydrocarbons 2% of the turnover, Conditions to be set forth 75% of which is cost in the implementation Production investments Negotiable. Negotiable. recoverable. decree(s). bonus (PIH) Period extension Negotiable. Negotiable. Pursuant to Decree no. 0211/PR/MPH dated 6 April 2016, access bonus to the upstream oil sector is either by way of tender process or Renewal of through direct consultation, both processes leading to the signature exploitation of hydrocarbons contracts, but subject to a strict procedure. Under Negotiable. Negotiable. authorisation/ Decree no. 0041/MPH/SG/DGH dated 15 January 2016, the permit granting of an exclusive licence for development and operation of a Negotiable with a hydrocarbons deposit that has been declared a commercially viable minimum: discovery is subject to the prior approval, by the administration in For oil: charge of hydrocarbons, of a development plan of the said deposit. Negotiable with a ■■ 7% in conventional The plan is developed by the economic operator. minimum for oil and gas: areas. Proportional ■■ 13% to 17% in Hydrocarbons Law no. 11/14 and the draft 2018 Hydrocarbons Law ■■ 5% in deep and ultra- conventional areas. provides that an independent regulatory agency be created in order mining deep offshore. royalty ■■ 9% to 15% in deep to regulate and control upstream and downstream activities, but the For gas: and ultra-deep Minister in charge of hydrocarbons remains for the moment the offshore. ■■ 4% in conventional entry point in order to enter into Gabon oil and gas activities. areas. ■■ 2% for gas in deep and ultra-deep offshore.

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■ Recover all petroleum costs incurred (for the needs 3.2 How are the State’s mineral rights to develop oil of petroleum operations which are not excluded from and natural gas reserves transferred to investors or recoverability under the PSC accounting procedure), but not companies (“participants”) (e.g. licence, concession, exceeding the percentage of net production per year as set out service contract, contractual rights under Production in the PSCs. Sharing Agreement?) and what is the legal status of ■ Share the remaining production on an accumulated production those rights or interests under domestic law? basis of all production areas with the State according to tranches provided within the PSCs and the profit oil received by the Oil resources belong to the State. While mature oil fields operated contractor. under concession systems, formerly governed by the 1962 Mining ■ Pay the contributions, taxes and royalties provided for in the Gabon Code, still exist until their terms elapse, all upstream oil contracts PSCs, and in particular: signed in Gabon after 1983 are PSCs. Once the PSC is signed, the ■ Proportional mining royalties (depending on the daily 2014 Hydrocarbons Law and the draft 2018 Hydrocarbons Law production and type of fields involved) on the total provide that some petroleum titles are granted to the contractor available production. according to the duration and conditions agreed within the PSC, ■ Annual superficiary royalty (including during the subject to the draft 2018 Hydrocarbons Law provisions which exploration period) as provided by the PSC. should apply from renewal of any permits or authorisation. The ■ Corporate income tax at a rate of 35% of the contractor’s draft 2018 Hydrocarbons Law, however, provides for a new title for oil profit under the 2014 Hydrocarbons Law, while marginal and mature fields: the exploitation convention supported deemed to be included in the State profit oil under the by the exploitation permit where all assets and equipment necessary draft 2018 Hydrocarbons Law. for the oil operations should belong to the State, but for which specific incentive are negotiable. ■ Pay the various bonuses according to the PSC terms. ■ Pay the contributions to the funds provided within the PSCs, notably the hydrocarbons fund, the fund for State 3.3 If different authorisations are issued in respect of equipment, the fund for local communities and the fund different stages of development (e.g., exploration for dismantling equipment. appraisal or production arrangements), please specify ■ Pay taxes on transfer of interests and changes of control. those authorisations and briefly summarise the most important (standard) terms (such as term/duration, ■ Pay certain customs duties, in particular at a rate of 5% scope of rights, expenditure obligations). during the exploitation phase. ■ Pay contributions towards training and specific provisions Exclusive authorisations are granted according to the PSC terms, the for diversified investments and for hydrocarbons Hydrocarbons Law no. 11/14 and the draft 2018 Hydrocarbons Law development. as summarised above in the table in question 3.1 above. ■ Give preference to nationals in recruitment and use of local sub-contractors. Under the draft 2018 Hydrocarbons Law, exploitation permits for marginal and mature fields will be granted for initial period of 15 ■ Contribute to domestic market needs by delivering a years, renewable, for oil and 20 years, renewable, for gas. portion of oil production to the State with a discount to the fixed price of 15% under the 2014 Hydrocarbons Law, but, apparently, negotiable under the draft 2018 3.4 To what extent, if any, does the State have an Hydrocarbons Law. ownership interest, or seek to participate, in the development of oil and natural gas reserves (whether as a matter of law or policy)? 3.6 Are there any restrictions on the export of production? Under the 2014 PSC terms, the State has a participation in any exploitation fields of 20%, while in the draft 2018 Hydrocarbons Under the Hydrocarbons Law no. 11/14 and the draft 2018 Law, the minimum should be 15%. Hydrocarbons Law, when local needs are met, the Minister in The State-owned oil company, Société Nationale des Hydrocarbures charge of hydrocarbons can authorise exports of hydrocarbons. du Gabon (or more commonly “Gabon Oil Company – GOC”), Therefore, and apart from the requirement to contribute to the has an option for a maximum 15% direct participation in the PSCs domestic market needs and certain foreign exchange regulations, that it acquires at market price under the 2014 Hydrocarbons Law, there are no other restrictions on exports of crude oil and natural while under the draft 2018 Hydrocarbons Law, the minimum GOC gas, but implementation decrees and order could, in the future, make participation should be 10% to be acquired at market value. precise the Hydrocarbons Law(s). The State can, in any case, transfer its participation interests to any company it wants (public or private), but the State has also pre- 3.7 Are there any currency exchange restrictions, or emptive rights on transfer of interests. restrictions on the transfer of funds derived from production out of the jurisdiction?

3.5 How does the State derive value from oil and natural Payment of current international transactions made through banks gas development (e.g. royalty, share of production, and supported by documents are, according to regional Economic taxes)? Community of Central African States (CEMAC) foreign exchange regulations applicable in Gabon, usually free. The CEMAC In addition to, notably, personal income tax (from 0–35%), wage tax legislation provides, however, that certain capital movements may (5%), social contributions on wages (24.6%) and withholding tax on be subject to declarations or authorisations. Repatriation of export services (9.5% and 20%), the contractor is required under the usual proceeds is also a requirement of such CEMAC legislation, even Hydrocarbons Law to: if, after repatriation, funds can be transferred through banks quite easily for justified international transactions.

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of a branch of a foreign company or the incorporation of a local 3.8 What restrictions (if any) apply to the transfer or subsidiary, the duration of a branch lasts beyond the usual two-year disposal of oil and natural gas development rights or period for the whole of exploration phase, while the incorporation of interests? a local subsidiary will have to be considered during the exploitation phase only. Partial or total transfers of oil interests to an assignee with good technical and financial reputation are possible under PSCs. In any case, no transfer can jeopardise the State interests, impact the 3.12 Is there any legislation or framework relating to performance of petroleum operations or reduce the technical and the abandonment or decommissioning of physical structures used in oil and natural gas development? If financial capabilities of the contractor.

so, what are the principal features/requirements of the Gabon In addition, the State holds a pre-emption right in respect of any legislation? transfer of interests. A transfer of oil interests to a third party and shares (as opposed Under Gabonese legislation on classified installations, as well as to transfers to affiliated companies and possible partners in the the 2014 and draft 2018 Hydrocarbons Laws, any operator has to PSC, which are only subject to a declaration) is subject to prior decommission its equipment at the end of exploitation. In order authorisation from the Hydrocarbons Administration. to secure these dismantling obligations, contributions to a fund for The assignor must notably inform the Hydrocarbons Administration such dismantling obligations need to be made by the operator from in writing, setting out the name, quality and nationality of the the beginning of production up to a percentage of the value of the assignee, and all the indications relating to its financial and technical contemplated dismantling obligations, to be provided within the capacities, its legal status, and the form and financial conditions of PSC. The contributions need to be deposited in a Gabonese bank the proposed transfer of the oil interest. (or at a central bank under the draft 2018 Hydrocarbons Law) and co-managed by the State and the operator. If the administration does not raise any objection, usually within 60 days following the date of receipt of the information described above, and if the State does not exercise its pre-emption rights 3.13 Is there any legislation or framework relating to within the 60 days, authorisation is usually deemed to be granted. gas storage? If so, what are the principal features/ requirements of the legislation?

3.9 Are participants obliged to provide any security The Hydrocarbons Law no. 11/14 and draft 2018 Hydrocarbons Law or guarantees in relation to oil and natural gas provide that construction, operation of transportation and storage development? of hydrocarbons facilities are subject to an authorisation granted by an Order of the Minister in charge of hydrocarbons according A mother company guarantee is usually required to be provided to to a specification to be provided by regulatory measures notably the State under PSC terms. under Decree no. 0201/PR/MPH dated 6 April 2016, that provides for the rules of construction and exploitation of oil and gas storage, 3.10 Can rights to develop oil and natural gas reserves activity of which is subject to the prior approval of the hydrocarbons granted to a participant be pledged for security, or administration. booked for accounting purposes under domestic law? Storage contract of hydrocarbons have to be approved by the Minister in charge of hydrocarbons. International oil project financings are common in Gabon and past experience has demonstrated that the State may authorise a charge over shares of an oil operator, and confirmed recently that it also 3.14 Are there any laws or regulations that deal specifically accepts a charge on the contractor’s interests. with the exploration and production of unconventional oil and gas resources? If so, what are their key features? 3.11 In addition to those rights/authorisations required to explore for and produce oil and natural gas, what Neither the 2014, nor the draft 2018 Hydrocarbons Laws deal other principal Government authorisations are specifically with unconventional oil and gas resources. required to develop oil and natural gas reserves (e.g. environmental, occupational health and safety) and from whom are these authorisations to be obtained? 4 Import / Export of Natural Gas (including LNG) A Decree dated 16 May 2011 has been adopted whereby any non- Gabonese resident person who wants to invest in the Gabonese hydrocarbons sector through the direct or indirect holding of the 4.1 Outline any regulatory requirements, or specific control of a Gabonese company, or the acquisition of the business of terms, limitations or rules applying in respect of a company operating in Gabon, needs to obtain prior authorisation cross-border sales or deliveries of natural gas from the Minister in charge of economy. The Minister has two (including LNG). months to reply to such application. Under the Hydrocarbons Law no. 11/14 and draft 2018 As far as oil operations are concerned, environmental regulations Hydrocarbons Law, imports and exports of hydrocarbons are now also require, notably, specific authorisation for impact studies and subject to a limited term authorisation when required, according classified installations, which may affect the environment. to specifications to be provided by regulatory measures (not yet Since the Hydrocarbons Law no. 11/14 (hopefully to be maintained adopted). under the draft 2018 Hydrocarbons Law), it is also worth pointing Obviously, compliance to customs clearance and CEMAC foreign out that while oil contractors still have the choice to operate their exchange regulations are required. Gabon oil and gas interests either through registration in Gabon

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5 Import / Export of Oil 6.4 How is access to oil and natural gas transportation pipelines and associated infrastructure organised?

5.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect Transportation agreements are usually agreed between operators of cross-border sales or deliveries of oil and oil to share transportation and storage facilities, but while under the products. Hydrocarbons Law no. 11/14 the independent regulatory agency should control applicable access and tariffs vis-à-vis third parties, Please refer to question 4.1 above, as the same rules apply. the draft 2018 Hydrocarbons Law provides that such transportation agreement would be subject to prior authorisation from the Gabon Hydrocarbons Administration. 6 Transportation

6.5 To what degree are oil and natural gas transportation 6.1 Outline broadly the ownership, organisational and pipelines integrated or interconnected, and how is co- regulatory framework in relation to transportation operation between different transportation systems pipelines and associated infrastructure (such as established and regulated? natural gas processing and storage facilities). Due to the past few regulations applicable to upstream activities, Similar to question 3.13 above, the Hydrocarbons Law no. 11/14 and some transportation pipelines are connected, but through agreements draft 2018 Hydrocarbons Law provide that construction, operation concluded between operators which usually also operate their own of transportation and storage of hydrocarbons facilities are subject private storage and export terminals. When an issue arises in the to an authorisation granted by an Order of the Minister in charge of negotiation of such interconnection agreement, the State’s assistance hydrocarbons according to a specification to be provided by regulatory is usually required in order to facilitate such agreements. The new measures, notably under the abovementioned Decree no. 0201/PR/ independent regulatory agency provided by the Hydrocarbons Law MPH dated 6 April 2016. Decree no. 0039/MPH/SG/DGH dated 15 no. 11/14 and the draft 2018 Hydrocarbons Law, should facilitate January 2016 also regulates conditions of transfer and repatriation of mediation between operators and users of transportation networks. oil products to storage places. Transportation agreements have to be approved by the Minister in 6.6 Outline any third-party access regime/rights in charge of hydrocarbons. respect of oil and natural gas transportation and associated infrastructure. For example, can the regulator or a new customer wishing to transport 6.2 What governmental authorisations (including oil or natural gas compel or require the operator/ any applicable environmental authorisations) are owner of an oil or natural gas transportation pipeline required to construct and operate oil and natural or associated infrastructure to grant capacity or gas transportation pipelines and associated expand its facilities in order to accommodate the new infrastructure? customer? If so, how are the costs (including costs of interconnection, capacity reservation or facility Please refer to question 6.1 above, subject to, notably, land and expansions) allocated? environmental authorisations which must also be obtained. Under the Hydrocarbons Law no. 11/14, use of the transportation network is subject to priority and available capacity of the operator, 6.3 In general, how does an entity obtain the necessary while under the draft 2018 Hydrocarbons Law, implementation land (or other) rights to construct oil and natural gas transportation pipelines or associated infrastructure? measures should make the new regime precise, but it is likely that Do Government authorities have any powers of the owner of infrastructure will keep its priority. compulsory acquisition to facilitate land access? 6.7 Are parties free to agree the terms upon which oil Most of the oil contracts in question (old concessions or PSCs) or natural gas is to be transported or are the terms provide that the operator can erect all the transportation facilities it (including costs/tariffs which may be charged) needs in accordance with the applicable law. Once the place of the regulated? transportation network is agreed between the State and the oil and gas operators, environmental impact studies and a procedure relating According to the Hydrocarbons Law no. 11/14 and draft 2018 to classified installations which may damage the environment, Hydrocarbons Law, tariffs are negotiated between parties, but as well as land issues, are considered. However, under the draft subject to approval by the Minister in charge of hydrocarbons. 2018 Hydrocarbons Law, transportation infrastructures being considered as strategic, and the choice, localisation, installation, modification and dismantling of transportation infrastructures 7 Gas Transmission / Distribution are subject to a prior authorisation from the Minister in charge of hydrocarbons. Implementation decrees should complete the draft 7.1 Outline broadly the ownership, organisational and 2018 Hydrocarbons Law. regulatory framework in relation to the natural gas In any case, the State may support such initiatives by considering the transmission/distribution network. public interests met by such transportation networks and authorising operators to affect the rights of private parties on their land and/or The transmission/distribution of refined and processed oil and gas expropriating some land if necessary. products are subject to State authorisations for storage, transportation and distribution of such products.

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The four main distributors of refined products are Total, Engen, These conditions relate, in particular, to the quality of oil storage Lybia Oil and Petrogabon (local), bearing in mind that the price of and to the nature of stocks for export. petrol, diesel, gasoline and gas are regulated products with fixed In any case, under the Hydrocarbons Law no. 11/14 and draft 2018 prices guaranteed by a public body in charge of the stabilisation of Hydrocarbons Law, this is subject to ministerial authorisation such prices. Since 2016, prices have remained regulated, but are now according to conditions to be completed by regulatory measures to periodically revised according to the international market price. Gas is come. distributed to the population by the above agreed distributors through bottles and tanks. 8.2 What range of natural gas commodities can be The Hydrocarbons Law no. 11/14 and draft 2018 Hydrocarbons Law traded? For example, can only “bundled” products also providing for downstream activities are due to be completed (i.e., the natural gas commodity and the distribution Gabon by regulatory measures (not adopted yet), but there is currently no thereof) be traded? real network of direct distribution of natural gas save for certain industrial uses and for upstream operations. As far as Gabon is concerned and apart from local consumption and industrial gas needs, only crude oil, kerosene and the Gabonese 7.2 What governmental authorisations (including any refinery wastes are traded on international markets for the moment. applicable environmental authorisations) are required to operate a distribution network? 9 Liquefied Natural Gas Apart from the industrial use of certain quantities of natural gas operated and delivered by Perenco to the Gabon electricity operator, 9.1 Outline broadly the ownership, organisational and which requires State approval, there is no network of distribution by regulatory framework in relation to LNG facilities. pipeline of natural gas to the population. LNG facilities are part of a category of facilities regulated under 7.3 How is access to the natural gas distribution network Gabonese law. These are notably subject to authorisation granted by organised? Presidential Decree, after, notably, compliance with the “classified facilities” specifications governed by the 2014 Environmental Code. This is not applicable yet. However, due to the current low level of gas production in Gabon, it is too early to speak about LNG facilities, while such possibilities may be considered in the future for the development of gas fields 7.4 Can the regulator require a distributor to grant capacity or expand its system in order to discovered in 2014 and even other smaller productions thanks to accommodate new customers? the development by Perenco of floating LNG facilities in the region.

This is not applicable yet, but the Hydrocarbons Law no. 11/14 and 9.2 What governmental authorisations are required to draft 2018 Hydrocarbons Law, provide that, if necessary, the State construct and operate LNG facilities? can decide to impose the use of such networks. Any processing of hydrocarbons is subject to a Presidential Decree 7.5 What fees are charged for accessing the distribution under the new Hydrocarbons Law no. 11/14 and the draft 2018 network, and are these fees regulated? Hydrocarbons Law.

This is not applicable yet. 9.3 Is there any regulation of the price or terms of service in the LNG sector? 7.6 Are there any restrictions or limitations in relation to acquiring an interest in a gas utility, or the transfer This is not yet applicable. of assets forming part of the distribution network (whether directly or indirectly)? 9.4 Outline any third-party access regime/rights in respect of LNG facilities. Hydrocarbons being a regulated activity, it is likely that acquisition of interest leading to the direct or indirect transfer of downstream This is not yet applicable. activities will be at least subject to State authorisations (this needs to be specified in regulatory measures to come). 10 Downstream Oil 8 Natural Gas Trading 10.1 Outline broadly the regulatory framework in relation to the downstream oil sector. 8.1 Outline broadly the ownership, organisational and regulatory framework in relation to natural gas trading. Please include details of current major Thanks to the Hydrocarbons Law no. 11/14 and draft 2018 initiatives or policies of the Government or regulator Hydrocarbons Law, the downstream sector is now more organised (if any) relating to natural gas trading. and subject to authorisations, while regulatory measures to come are needed to complete it. Order no. 837 of 28 November 2003 lays down conditions for ■ Authorisation regime: exporting petroleum products to the countries of the CEMAC. ■ by Decree for processing of hydrocarbons;

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■ by Ministerial Order for other downstream activities: submission for bidding for a share of the market, to the detriment of transport, storage, retailing, import, export of refined other competitors. product; and To determine whether a trust is prohibited, the CEMAC Regulations ■ payment of royalties. mentioned above state that practices which significantly restrict ■ Specific regulations: the choices of suppliers and/or users, restrict access to supplies ■ for processing of hydrocarbons: priority for domestic or markets, or create barriers to entry, particularly by prohibiting markets needs and for buying local crude oil and gas; distributors from parallel imports, are incompatible with the ■ stabilisation mechanism for certain refined products; and common market concentrations. ■ minimum stock required for distribution of refined Finally, any monopoly or any situation likely to promote the

Gabon products. acquisition of a market share greater than or equal to 30% constitutes a dominant position. Abusing a dominant position within the common market or in a part thereof is prohibited if trade between 10.2 Outline broadly the ownership, organisation and regulatory framework in relation to oil trading. CEMAC Member States is likely to be affected.

Apart from specific regulation relating notably to import, export, 11.3 What power or authority does the regulator have to transportation and storage of oil, which are subject to ministerial preclude or take action in relation to anti-competitive authorisation, the draft 2018 Hydrocarbons Law could provide for a practices? specific authorisation regarding the trading of oil. CEMAC antitrust authorities, as well as national authorities, can take actions in order to avoid certain practices. The range of actions 11 Competition varies from control with penalties, to prohibitions of certain actions with penalties computed on an amount of turnover depending on the facts in question. 11.1 Which governmental authority or authorities are responsible for the regulation of competition aspects, or anti-competitive practices, in the oil and natural 11.4 Does the regulator (or any other Government gas sector? authority) have the power to approve/disapprove mergers or other changes in control over businesses The regulation of competition aspects or anti-competitive practices in the oil and natural gas sector, or proposed in the oil and gas sector is not subject to a special regime, apart from acquisitions of development assets, transportation or the regulated price of downstream oil and gas products provided in associated infrastructure or distribution assets? If so, what criteria and procedures are applied? How long the Hydrocarbons Law no. 11/14 and the draft 2018 Hydrocarbons does it typically take to obtain a decision approving or Law. We suspect, however, that with the independent regulatory disapproving the transaction? agency provided by the Hydrocarbons Law no. 11/14 and the draft 2018 Hydrocarbons Law, things may change in the near future. According to the abovementioned antitrust regulations, CEMAC Pure competition issues, therefore, currently involve mainly the antitrust authorities can indeed refuse to authorise a merger. The CEMAC regional regulations and national legislation on trust and said CEMAC antitrust regulations are being updated in order to abuse of a dominant position, rather than price. CEMAC Regulation grant such authorities with more and clear powers. no. 1/99/UEAC-CM-639, modified by Regulation no. 12/05, deals with In addition to such CEMAC Regulations, we also note that, as far as anti-competitive practices. It provides for the existence of a Regional hydrocarbons activities are concerned, any change of control of an Competition Council, responsible for advising the Executive Secretary oil contractor is subject to the Minister of Oil’s authorisation, while of CEMAC on all questions or disputes regarding competition. if it is for the benefit of a foreign investor, the Minister in charge of The 1989 domestic competition law lays down the rules of economy must also grant his authorisation according to the Decree competition in the Gabonese Republic and provides for the of 16 May 2011. establishment of a Competition Commission under the authority of the Minister in charge of economy. 12 Foreign Investment and International Obligations 11.2 To what criteria does the regulator have regard in determining whether conduct is anti-competitive? 12.1 Are there any special requirements or limitations on To determine whether conduct is anti-competitive, the CEMAC acquisitions of interests in the natural gas sector Regulations mentioned above provide that any practice liable (whether development, transportation or associated to impede the free play of competition, notably cartels, abuse of infrastructure, distribution or other) by foreign dominance, and mergers which substantially lessen competition, are companies? prohibited. All agreements between companies, any decisions by company associations and concerted practices which may affect trade As indicated above, the Decree dated 16 May 2011 has been adopted, between CEMAC Member States and which have as their effect the whereby any non-Gabonese resident person who wants to invest in restricting or distorting of competition, are also prohibited. This may the Gabonese hydrocarbons sector through the direct or indirect involve or relate to, notably, the limiting or control of production, holding of the control of a Gabonese company or the acquisition markets, technical developments or investments, market shares or of the business of a company operating in Gabon needs to obtain sources of supply, or the application, in respect of trading partners, prior authorisation from the Minister in charge of the economy. The of dissimilar conditions for equivalent services, placing them at a Minister has two months to reply to such application and we never competitive disadvantage, and a concentration on the conditions of a experience any issue with this.

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12.2 To what extent is regulatory policy in respect of the 13.3 Is there any special difficulty (whether as a matter oil and natural gas sector influenced or affected of law or practice) in litigating, or seeking to enforce by international treaties or other multinational judgments or awards, against Government authorities arrangements? or State organs (including any immunity)?

In August 2014, Gabon adopted a code for sustainable development While the State usually refuses to waive its rights for immunity and a new environmental code. Any issues relating to international of execution on its assets, past experience demonstrates that treaties regarding the environment are taken into account and Gabon complies with international arbitration awards, subject to already provide for, for instance, the gas flaring prohibition and the compliance with the domestic enforcement procedure of foreign requirement to repatriate funds for dismantling obligations. decisions and awards. Gabon

13 Dispute Resolution 13.4 Have there been instances in the oil and natural gas sector when foreign corporations have successfully obtained judgments or awards against Government 13.1 Provide a brief overview of compulsory dispute authorities or State organs pursuant to litigation resolution procedures (statutory or otherwise) before domestic courts? applying to the oil and natural gas sector (if any), including procedures applying in the context of The State of Gabon has been recognised as right or liable in some disputes between the applicable Government local, as well as international, arbitration decisions. Such decisions, authority/regulator and: participants in relation to oil as far as the oil industry is concerned, remain, however, confidential. and natural gas development; transportation pipeline and associated infrastructure owners or users in relation to the transportation, processing or storage 14 Updates of natural gas; downstream oil infrastructure owners or users; and distribution network owners or users in relation to the distribution/transmission of natural gas. 14.1 Please provide, in no more than 300 words, a summary of any new cases, trends and developments Under PSC terms relating to upstream activities, any dispute in Oil and Gas Regulation Law in your jurisdiction. between parties shall usually be settled through International Chamber of Commerce (ICC) arbitration or, in some cases, the After the rigid 2014 Hydrocarbons Law, the competitive economic OHADA court for arbitration as well, the seat of which is in Abidjan terms proposed in the draft 2018 Hydrocarbons Law, combined with (Ivory Coast). In other downstream and midstream sectors, local the tender for 35 blocks with new seismic studies acquired, should courts will be competent for any dispute, except otherwise agreed allow Gabon to attract various types of oil and gas companies (major, by the parties, in particular when negotiating major projects like independent, exploration companies, exploitation companies, local refinery or fertiliser plants. companies, etc.) and to relaunch exploration of its oil and gas basin at very interesting conditions. 13.2 Is your jurisdiction a signatory to, and has it duly The tender process for blocks should be opened in early 2019 and ratified into domestic legislation: the New York blocks allocated during the 2nd quarter of 2019. End of negotiations Convention on the Recognition and Enforcement of are contemplated for the end of the 3rd quarter 2019. Foreign Arbitral Awards; and/or the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID”)?

Gabon ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, as well as the ICSID treaty and the OHADA treaty for the harmonisation of business laws (including arbitration laws) in 17 Sub-Saharan countries.

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Jean-Pierre Bozec Project Lawyers Batterie IV BP 11656, Libreville Gabon

Tel: +241 07 51 48 26 Email: [email protected] [email protected] URL: www.project-lawyers.com Gabon Jean-Pierre is an authorised and registered legal advisor in Gabon and remains registered as an “avocat” at the Paris Bar (France) with 24 years’ experience in African transactions, 18 of those years resident in Gabon. Jean-Pierre has wide experience of projects and project financing throughout North, West and Central Africa, in particular as far as energy and mineral resources are concerned. Over the course of his career, he has developed a strong expertise in negotiation and drafting State contracts (production sharing contracts, establishment convention, mining conventions, BOT and concession agreements), in legal and tax structuring of projects in Africa, in particular for oil and gas, utilities, transportation infrastructures and mines. He graduated from Exeter University (UK) with an LL.M. in international business transactions and from Rennes University (France) with a postgraduate degree in business law. The leading experience of Jean-Pierre Bozec in Gabon has been consistently recognised by Chambers Global 2019, The World’s Leading Lawyers, 2019 IFLR 1000, The International Who’s Who of Energy Lawyers 2019 and others.

Project Lawyers is an independent, successful Gabonese law firm, established by Jean-Pierre Bozec; after several years as managing partner of a Gabon international law firm he developed and became dedicated notably to oil and gas projects and financings. Project Lawyers’ team is committed to providing high-quality and innovative legal services to major corporations, financial institutions and international law firms, especially in the energy and mineral resources project and project financing sectors. Project Lawyers has been consistently selected as a leading law firm byChambers & Partners, by Corporate INTL, Who’s Who of Energy Lawyers, as well as Gabon law business firm by Global Experts, IFLR 1000 Energy and Infrastructure Sub-Saharan Africa and others.

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Greece Yannis Seiradakis

Bernitsas Law Eleni Stazilova

a tender for the exploitation of a natural gas storage facility in South 1 Overview of Natural Gas Sector Kavala, which, when operative, will improve the management of the natural gas suppliers’ portfolio thus enhancing security of supply in 1.1 A brief outline of your jurisdiction’s natural gas Greece. sector, including a general description of: natural gas reserves; natural gas production including 1.2 To what extent are your jurisdiction’s energy the extent to which production is associated or requirements met using natural gas (including LNG)? non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) liquefaction and export facilities, and/or receiving and Natural gas is becoming an increasingly important fuel in the Greek re-gasification facilities (“LNG facilities”); natural gas energy mix, rising to a share of 28% in power generation and 15% pipeline transportation and distribution/transmission in the total primary energy supply (“TPES”) in 2016. network; natural gas storage; and commodity sales and trading. 1.3 To what extent are your jurisdiction’s natural gas The Greek demand is fully covered by imported natural gas, requirements met through domestic natural gas which is injected into the National Natural Gas Transmission production? System (“NNGTS”), either through entry points from Bulgaria and Turkey or through the LNG Facility on Revythoussa Island. The Upstream gas operations are almost non-existent, as production of Alexandroupolis LNG terminal, which is due to start commercial natural gas is negligibly small compared to the total consumption. operation in 2020, will comprise an offshore floating unit for the Thus, the country’s natural gas needs are mostly covered by reception, storage and re-gasification of LNG and a transmission imported natural gas and LNG, primarily from Russia, while other system shipping natural gas into the NNGTS, thus securing new large gas suppliers include Algeria and Turkey. natural gas quantities for the supply of the Greek and the regional SE European markets. 1.4 To what extent is your jurisdiction’s natural gas Natural gas transmission within the Greek territory is carried out production exported (pipeline or LNG)? through the NNGTS operated by the Hellenic Gas Transmission System Operator SA (“DESFA”), whereas distribution is conducted Currently, only a small share of the imported natural gas is exported through the Natural Gas Distribution Network. Transmission systems through the NNGTS to Bulgaria and Turkey and further to third and distribution networks can also be privately operated through an countries. However, through the implementation of significant Independent Natural Gas System licence (“INGS Licence”) and a infrastructure projects, Greece is expanding its role as a gas hub for Distribution Network Operation licence (“Distribution Licence”), the SE Europe gas market. respectively, both granted by the Greek Regulatory Authority for Energy (“RAE”). The most significant private projects in this area (both under construction) are the Trans Adriatic Pipeline AG 2 Overview of Oil Sector (“TAP”) which will transport natural gas from the Shah Deniz II field in Azerbaijan to Europe and the Gas Interconnector Greece- 2.1 Please provide a brief outline of your jurisdiction’s oil Bulgaria (“IGB Pipeline”), which will provide a direct link between sector. the national natural gas systems of Greece and Bulgaria, acting as a strategic gas transportation infrastructure and therefore enhancing Oil is the most important fuel in Greece’s energy system. Although supply security to Greece. there is an increasing interest in upstream oil business, Greece In addition to the above developments, the Greek energy market currently has negligible domestic crude oil production and is largely is also undergoing restructuring changes through the privatisations dependent on imports, mainly from Iraq and Russia. Despite the programme implemented by the Hellenic Republic Asset poor oil production, export of oil products has grown, mostly thanks Development Fund (“HRADF”), which has already completed a to Greece’s strong refinery capacity. public tender for the acquisition of a 66% stake in DESFA, and is Further, a public tender launched by the HRADF for the acquisition expected to launch a public tender for the privatisation of the Public of a majority stake in the Hellenic Petroleum S.A. (“HELPE”), a Gas Corporation SA (“DEPA”). The HRADF is also due to launch leading company in the Greek energy sector, with activity focusing

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on the supply, refining and trading of oil products, oil exploration and Over the last few years, as part of its effort to secure additional production, is currently under way and has attracted international revenues, the Greek government has entered into or launched tenders energy players. for the award of a number of lease agreements for the development of hydrocarbons at several offshore and onshore blocks (West Patraikos Gulf, Ioannina, Katakolo, Arta-Preveza, Aitoloakarnania, 2.2 To what extent are your jurisdiction’s energy requirements met using oil? North-West Peloponnese, Sea of Thrace, Ionian Sea, South West Crete and West Crete, etc.). Crude oil accounts for approximately half of the country’s TPES and over half of the total final consumption (“TFC”). 3.2 How are the State’s mineral rights to develop oil

Greece and natural gas reserves transferred to investors or companies (“participants”) (e.g. licence, concession, 2.3 To what extent are your jurisdiction’s oil requirements service contract, contractual rights under Production met through domestic oil production? Sharing Agreement?) and what is the legal status of those rights or interests under domestic law? Crude oil production in Greece, currently derived from two producing fields in the Northern Aegean Sea (Prinos) by a single oil The Greek State’s oil and natural gas development rights may be producer, is insignificant compared to the domestic oil consumption. granted through: (a) a lease agreement (“Lease Agreement”); However, from 2012 onwards the Greek government is actively or (b) a production sharing agreement (“Production Sharing promoting the upstream oil operations. Agreement”) (Article 2, para. 10 of Hydrocarbons Law). Based on Article 2, para. 14 of Hydrocarbons Law, the type of agreement to be concluded is determined on a case-by-case basis through a 2.4 To what extent is your jurisdiction’s oil production exported? Ministerial Decision of the Minister; however, in practice, Lease Agreements are by far the most preferred contractual type. Both types of agreements are signed by the HHRM and the contractor and Domestically produced oil is only used for internal needs; however, are subject to the Minister’s prior approval. export of oil products has grown in the last years, mostly as a result of the increased refining output of imported oil performed by four oil refineries. 3.3 If different authorisations are issued in respect of different stages of development (e.g., exploration appraisal or production arrangements), please specify 3 Development of Oil and Natural Gas those authorisations and briefly summarise the most important (standard) terms (such as term/duration, scope of rights, expenditure obligations). 3.1 Outline broadly the legal/statutory and organisational framework for the exploration and production i. The right of prospecting for hydrocarbons is granted through (“development”) of oil and natural gas reserves a decision issued by the HHRM. More specifically, upon including: principal legislation; in whom the State’s the Minister’s approval, the HHRM issues an invitation for mineral rights to oil and natural gas are vested; submission of applications for prospecting for hydrocarbons, Government authority or authorities responsible for either following submission of application by any the regulation of oil and natural gas development; and interested party or on the HHRM’s initiative (“Prospecting current major initiatives or policies of the Government Invitation”). Within the deadline set out in the Prospecting (if any) in relation to oil and natural gas development. Invitation, the HHRM’s prospecting licence is granted to one or more interested parties for a maximum duration of 18 Law 2289/1995 (“Hydrocarbons Law”), which has transposed months. Directive 94/22/EC on the conditions for granting and using ii. The exploration and production rights are granted through authorisations for the prospection, exploration and production of one of the agreements referred to in our response to question hydrocarbons, constitutes the main applicable legislation governing 3.2, awarded either: (a) following an invitation to tender, the development of hydrocarbons in Greece. Hydrocarbons Law approved by the Minister, and published in the government was substantially amended by Law 4001/2011 (“Energy Law”), gazette and the Official European Union Journal; (b) through which new practices were incorporated, aiming to create a following application of an interested party for an area not more appealing investment climate and to attract serious investments included in a published invitation to tender; or (c) through an in the oil sector. open invitation process (“open door”) for the submission of interest if the area under discussion is available on a permanent The rights to prospecting, exploration and production of basis or has been previously subjected to a tender that was hydrocarbons that exist in onshore areas, sub-lake and submarine not completed or has been abandoned by the contractor, if areas upon which the Greek State exercises sovereignty or the latter has withdrawn from or terminated the respective sovereign rights in accordance with provisions of the United agreement. The exploration right is granted for a maximum Nations Convention on the Law of the Sea are exclusively vested duration of seven years in case of onshore areas and eight in the Greek State (Article 2, para. 1 of Hydrocarbons Law). years in case of offshore areas, starting in both cases from the Such rights are exercised by the Hellenic Hydrocarbon Resources date of execution of the relevant agreement with the Greek State, while the production stage has a maximum duration of Management S.A. (“HHRM”), a new State-owned company that 25 years from the date on which the contractor/lessee notifies was established by virtue of Presidential Decree (“PD”) 14/2012 the Greek State that it has tracked down a commercially (Government Gazette A’ 21/2012) in implementation of Articles exploitable crude oil deposit. Both stages may be extended 145–153 of Energy Law, whereas certain powers are also exercised under certain conditions provided by the same law. by the Ministry of Environment, Energy and Climate Change (the “Minister”).

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3.4 To what extent, if any, does the State have an 3.8 What restrictions (if any) apply to the transfer or ownership interest, or seek to participate, in the disposal of oil and natural gas development rights or development of oil and natural gas reserves (whether interests? as a matter of law or policy)? According to Article 7, para. 4 et seq. of the Hydrocarbons Law, In case of Lease Agreements, the contractor is the exclusive owner transfer by the contractor of its contractual rights and obligations of the extracted hydrocarbons as of the time of their extraction, to a third party is subject to the HHRM’s and Minister’s written while the Greek State acquires co-ownership of the extracted consent. The State may refuse to grant its consent for national hydrocarbons only when lease is paid in kind. On the other hand, in security reasons arising from the nationality and the financial and the Production Sharing Agreement, the State acquires ownership of technical capability of the third party. A pre-emption right is granted Greece the hydrocarbons as of their extraction, while the contractor acquires to the State in case of substitution of the contractor or transfer of ownership solely of part of the extracted hydrocarbons, namely its its shares, including in case of transfer of any affiliate company agreed share, as well as a quantity equal to its expenses. Further, controlling the contractor. Further, provided that the contractor both the Lease Agreement and the Production Sharing Agreement remains jointly liable with the transferee, the contactor may transfer may provide for the State’s participation in a joint venture with the its contractual rights and obligations to an affiliate enterprise, contractor, both in the exploration and the production stage. subject to the HHRM’s and Minister’s written consent. Subject to the State’s pre-emption right, where the contractor is a joint venture, 3.5 How does the State derive value from oil and natural its members may transfer their rights and obligations to each other, gas development (e.g. royalty, share of production, upon written consent of the State and approval by the Minister. taxes)? 3.9 Are participants obliged to provide any security The State’s consideration for the oil and natural gas development or guarantees in relation to oil and natural gas rights comes under the form of royalties/lease fees under a Lease development? Agreement or a share in the extracted hydrocarbons under a Production Sharing Agreement. Such agreements may also provide The Prospecting Invitation specifies the amount of the performance for payment of a signature bonus, a production bonus, as well as guarantee to be provided by the interested party, which must be issued an amount of compensation per annum determined by reference to by a credit institution lawfully operating in the European Union. the surface area used during the exploration and production stage Likewise, under the Lease Agreements, the contractor must provide (“surface fees”). a letter of guarantee issued by a first-class bank lawfully operating in According to Article 8 of Hydrocarbons Law, the contractor’s the European Union, the form and terms of which are substantially income from the exploitation of hydrocarbons is subject to a special stipulated in the Lease Agreement. The amount of such guarantee is 20% income tax and a 5% regional tax, while being exempt from determined on a case-by-case basis, in principle calculated on the basis any further contributions, duties or other obligations. of the minimum expenditure requirement and gradually reduced by the amounts of actual expenditure incurred by the contractor.

3.6 Are there any restrictions on the export of production? 3.10 Can rights to develop oil and natural gas reserves granted to a participant be pledged for security, or According to Hydrocarbons Law, the contractor is free to trade the booked for accounting purposes under domestic law? extracted hydrocarbons either in Greece or abroad by exporting them, unless otherwise stipulated in the respective agreement. Please refer to the restrictions described in our response to question 3.8 above.

3.7 Are there any currency exchange restrictions, or restrictions on the transfer of funds derived from 3.11 In addition to those rights/authorisations required production out of the jurisdiction? to explore for and produce oil and natural gas, what other principal Government authorisations are required to develop oil and natural gas reserves (e.g. As a principle, foreign exchange and movement of capital in Greece environmental, occupational health and safety) and are free, deriving from the country’s capacity as a Member State of from whom are these authorisations to be obtained? the European Union and the Eurozone. However, by virtue of the Legislative Act of 18.07.2015 (Government Gazette A’ 84/2015), The most significant permits/licences that might be required for the capital controls were imposed establishing limitations on cash exploration and production of oil or natural gas are the following: withdrawals and transfer of capital from Greece as an emergency (a) an Environmental Terms Approval, incorporating forest measure in the midst of the financial crisis. Within this framework, intervention and antiquities authorisation (if applicable) most payments abroad are strictly restricted or permitted subject to issued by the Minister (Article 2 of Law 4014/2011 in a prior approval by a capital controls committee. However, Article combination with Ministerial Decision No. 37674/2016 2, para. 4 of the PD 127/1996 provides that the funds derived from (Government Gazette B’ 2471/10.08.2016)); the exploitation of hydrocarbons can be freely transferred abroad. (b) a building permit issued by the competent municipal Although this provision, as lex specialis governing revenues from construction units (Article 29, para. 1 of Law 4495/2017); hydrocarbons, may be interpreted to constitute an exemption from the (c) an installation and operation licence (Article 6, para. 1 (b) of general capital controls restrictions, whether an outbound payment Hydrocarbons Law and Law 3982/2011); is permitted or not is determined on a case-by-case basis by the (d) a forest area designation decision issued by the competent competent committee. Nevertheless, transfer-of-funds restrictions Decentralised Administration (Law 998/1979 as amended in are gradually being loosened, while the Greek Government is in force); and planning to completely abolish capital controls in 2019.

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(e) a Seveso III registration with the Minister (Joint Ministerial Decision 172058 (Government Gazette B’ 17/2.2016)), 5 Import / Export of Oil transposing Directive 2012/18/EU. 5.1 Outline any regulatory requirements, or specific 3.12 Is there any legislation or framework relating to terms, limitations or rules applying in respect the abandonment or decommissioning of physical of cross-border sales or deliveries of oil and oil structures used in oil and natural gas development? If products. so, what are the principal features/requirements of the legislation? Cross-border sales and deliveries of oil and oil products are not subject to any restrictions. However, the Lease Agreements or the Greece According to Article 5, paras 6 and 14 of Hydrocarbons Law, Production Sharing Agreements may provide that in the event of a the contractor is free to waive any prospecting, exploration and state of emergency, the contractor is obliged to sell any hydrocarbons production rights granted thereto through an authorisation or a produced to the State. Lease Agreement/Production Sharing Agreement, respectively, under the specific terms of such agreement. Based on Article 6, para. 7 of Hydrocarbons Law, any equipment and materials from 6 Transportation any unusable facilities can be sold by the contractor, subject to a relevant notification to the HHRM. Further to the above, upon 6.1 Outline broadly the ownership, organisational and completion of the production phase, the contractor must return to regulatory framework in relation to transportation the State any blocks used, free of any encumbrances, in clean and pipelines and associated infrastructure (such as environmentally safe condition (Article 10 of Hydrocarbons Law). natural gas processing and storage facilities).

3.13 Is there any legislation or framework relating to The NNGTS transports gas from the Greek-Bulgarian border gas storage? If so, what are the principal features/ (upstream TSO BULGARTRANSGAZ) and the Greek-Turkish requirements of the legislation? border (upstream TSO BOTAS) to consumers in continental Greece. Pursuant to Article 67, para. 1 of Energy Law, the NNGTS comprises Under Article 6, para. 1 (b) of Hydrocarbons Law, the contractor the main gas transmission pipeline and its branches, together with may construct hydrocarbon storage tanks, following an installation any future extensions thereof, the border metering and regulating and operation permit issued by the Minister, which, in case of stations, compression stations, operation and maintenance centres, offshore facilities, is subject to the prior approval by the Minister the LNG terminal of Revithousa and any other ancillary facilities. of National Defence and the Minister of Shipping and Island Policy. The responsibility for the operation of the NNGTS is vested into The above permit requires the prior issuance of an Environmental DESFA, the latter also being responsible for the maintenance, Terms Approval under Law 4014/2011, while for storage facilities management, exploitation and development of the entire system falling under the provisions of Law 4495/2017, a building permit (Article 67, para. 4 of Energy Law). Currently there is no operating may also be required. INGS in Greece; however, INGS Licences have been issued for the Greek parts of the IGB Project and TAP, in expectation of their commercial operation. 3.14 Are there any laws or regulations that deal specifically with the exploration and production of unconventional Transportation of oil in Greece is mainly carried out by oil tankers oil and gas resources? If so, what are their key and tanker trucks and less by cargo trains. Pipeline transmission is features? very limited, as there are only two oil pipelines currently operating in Greece: a 220 km pipeline stretching from Thessaloniki to a The Greek energy legislation does not include any specific refinery (OKTA) in FYROM owned by HELPE and a shorter provisions on unconventional oil and gas production. However, pipeline in Attica connecting the Aspropyrgos refinery with the Hydrocarbons Law was amended in 2011 to allow conduct of non- Athens International Airport, owned by the airport together with exclusive seismic surveys, as part of the prospecting phase, thus HELPE and Motor Oil Hellas. incorporating a practice that has been successfully followed for more than a decade by other European oil-producing States. 6.2 What governmental authorisations (including any applicable environmental authorisations) are required to construct and operate oil and natural 4 Import / Export of Natural Gas (including gas transportation pipelines and associated LNG) infrastructure?

In addition to the licences/authorisations mentioned in our response 4.1 Outline any regulatory requirements, or specific to question 3.11 above (environmental terms approval, installation terms, limitations or rules applying in respect of cross-border sales or deliveries of natural gas and operation licence, building permit, Seveso III registration), the (including LNG). following permits are required: (i) The right to construct an INGS and ownership thereof are Any activity of import or export of natural gas is not subject to any granted through an INGS Licence issued by RAE pursuant to licensing requirements and thus is freely exercised (Article 81 of Article 74 of Energy Law. According to Article 77 of Energy Energy Law), subject to the obligation to obtain a supply licence for Law, the right to operate and exploit an INGS is granted through an INGS Operation Licence, also issued by RAE. the sale of natural gas to end customers in Greece (please refer to Further, transmission system operators (“TSOs”) operating our relevant response in question 8.1 below). within the Greek territory are subject to the unbundling

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rules set out under Article 62 of Energy Law and Article 9 of Directive 2009/73/EU (“Gas Directive”), thus being 6.5 To what degree are oil and natural gas transportation under the obligation to be certified by RAE as independent pipelines integrated or interconnected, and how is co- system operators (Article 64 of Energy Law). The specific operation between different transportation systems requirements and the licensing procedure are in detail established and regulated? regulated by Ministerial Decision 178065/17.08.2018 (the “Natural Gas Licensing Regulation”). Based on Article 79 of Energy Law, the interconnection of an INGS (ii) The right to transfer oil through a pipeline is granted through with the NNGTS or other transmission systems is regulated through a relevant licence (“Oil Pipeline Transmission Licence”), each INGS’s Operation Code. Further, the NNGTS is interconnected according to Article 8 of Law 3054/2002. with the distribution network, through which gas is transferred to

end users. On the other hand, oil pipelines interconnections are not Greece 6.3 In general, how does an entity obtain the necessary regulated under Greek law, while the existing oil pipelines are not land (or other) rights to construct oil and natural gas interconnected with other transportation facilities. transportation pipelines or associated infrastructure? Do Government authorities have any powers of 6.6 Outline any third-party access regime/rights in compulsory acquisition to facilitate land access? respect of oil and natural gas transportation and associated infrastructure. For example, can the Pursuant to Articles 165–172 and 173, paras. 1, 174 and 175 of regulator or a new customer wishing to transport Energy Law regulating the route and establishment of a gas pipeline, oil or natural gas compel or require the operator/ a decision of the Minister defining the route of the pipeline is owner of an oil or natural gas transportation pipeline required. The procedure to be followed depends on the nature of the or associated infrastructure to grant capacity or owners of the relevant land. More specifically, in case of privately expand its facilities in order to accommodate the new customer? If so, how are the costs (including costs owned land or land owned by municipalities, land owners are under of interconnection, capacity reservation or facility the obligation to provide an easement right (Articles 165–169 and expansions) allocated? 170 of Energy Law), subject to the payment of a compensation, while any communal spaces are made available by the Greek State at no EU internal market regulation typically requires gas TSOs, LNG consideration (Article 170 of Energy Law). In case the realisation system operators, and operators of storage facilities to grant energy of the project needs seaside or seabed access, concession of such companies non-discriminatory access to their infrastructure, as per spaces can be granted through a joint ministerial decision issued Article 32 of the Gas Directive (“Third-Party Access” or “TPA”). according to Article 173, para. 1 of Energy Law. The consideration However, according to Article 36, para. 1 of the Gas Directive and for the above easement rights, where applicable, is determined Article 16 of Energy Law, major new gas infrastructure may, upon through a decision of the competent Decentralised Administration request and by way of a RAE’s decision, be exempted, for a defined (Article 166, para. 4 of the Energy Law). Further to the above, period of time, from the TPA obligation, in accordance with the pursuant to Article 171 of Energy Law, if any expropriation is found procedure and preconditions provided for under Article 36 of the to be necessary for the construction of a gas pipeline, as well as the Gas Directive. necessary buildings of mechanical installations, the expropriation Under Article 10, para. 3 of Law 3054/2002, the holders of an Oil shall then be effected exclusively to the benefit of the State, with Pipeline Transmission Licence are obliged to grant Third-Party the latter in turn granting an access right to the project entity, in Access to their pipeline, as well as to storage facilities, the terms of accordance with Laws 797/1971 and 2882/2001. which are not regulated and thus left to the parties’ free negotiations. Article 1 of Law 367/1976 provides that the land required for the construction of an oil pipeline can be expropriated in accordance with Laws 797/1971 and 2882/2001. 6.7 Are parties free to agree the terms upon which oil or natural gas is to be transported or are the terms (including costs/tariffs which may be charged) 6.4 How is access to oil and natural gas transportation regulated? pipelines and associated infrastructure organised? Natural gas transmission agreements entered into with the NNGTS As provided for under Article 68 of Energy Law, DESFA, in its are based on pre-approved RAE and mandatory templates; currently capacity as the owner and operator of the NNGTS, may enter the fourth revision of the standard framework agreement approved into gas transmission services agreements, LNG facility usage through RAE’s Decision No. 507/2018 (Government Gazette B’ agreements (for the use of Revithousa terminal) and agreements 2473/27.06.2018) is applicable. The charges applying to users for the use of storage facility with third parties (“Users”). As per for accessing the NNGTS are calculated based on a list of tariffs Article 72 of Energy Law, in order for any person to be able to enter published by DESFA, which in turn is determined in accordance with into transmission agreements with DESFA, registration with the the Tariffs Regulation of NNGTS Basic Operation (Government NNGTS Users Registry kept by RAE is required. The registration Gazette B’ 3720/20.10.2017) and the Approval of NNGTS Usage requirements, the process and the relevant documentation are Tariffs (Government Gazette B’ 3513/01.11.2016). regulated by the Natural Gas Licensing Regulation and the Unlike with the gas sector, the contractual and commercial NNGS Users Registry Regulation (Ministerial Decision No. arrangements of the Third-Party Access to oil pipelines are left to Δ1/A/5816/2010 Government Gazette Β’ 451/2010). Please refer the parties’ negotiations, which, however, shall take place in good to our response in question 6.6 below for the Third-Party Access faith and subject to the principles of non-discrimination and fair regime applying in the NNGTS. competition (Article 10 of Law 3052/2002). Similarly, pursuant to Article 10 of Law 3052/2002, third parties are granted access to Oil Transmission Pipelines and storage facilities on a compulsory basis.

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7 Gas Transmission / Distribution 7.5 What fees are charged for accessing the distribution network, and are these fees regulated?

7.1 Outline broadly the ownership, organisational and regulatory framework in relation to the natural gas The charges applying to users for accessing the distribution networks transmission/distribution network. are regulated by RAE through a Tariffs Regulation (currently RAE’s Decision No. 328/2016) and separate Usage Tariffs issued for each Following recent unbundling of the supply and distribution activities, of the EDAs. currently, the distribution of natural gas is carried out by the three newly established natural gas distribution companies (“EDAs”),

Greece 7.6 Are there any restrictions or limitations in relation to each of which is responsible for the operation of a geographically acquiring an interest in a gas utility, or the transfer divided distribution network, namely Attica, Thessaloniki and of assets forming part of the distribution network Thessaly and rest of Greece (Article 80A of Energy Law). (whether directly or indirectly)? Ownership of the existing distribution network lies with DEPA, while, pursuant to Article 80B of Energy Law, any new expansions In line with the EU energy regulation, the Greek distribution of the distribution network will be the respective EDA’s property. network operators are subject to strict unbundling rules, as described A privatisation process is expected to be launched in 2019 for the in Article 80, para. 5 et seq. of Energy Law. Pursuant to Article majority stake in DEPA, sole shareholder of EDA Rest Greece and 18, para. 8 and Annex 1 of Section II of the Natural Gas Licensing majority shareholder of the Attica and Thessaloniki/Thessaly EDAs Regulation, distribution network operators are under the obligation (the remaining stakes belong to private investors). to notify RAE of any intended change in their shareholding and to submit an application for the amendment of their respective licence once such change is effected. 7.2 What governmental authorisations (including any applicable environmental authorisations) are required to operate a distribution network? 8 Natural Gas Trading

A Distribution Licence is required for the construction of a distribution network and a Natural Gas Distribution Network 8.1 Outline broadly the ownership, organisational and Operation Licence must be obtained for the operation and regulatory framework in relation to natural gas commercial exploitation of such network (Article 80, para. 2 of trading. Please include details of current major initiatives or policies of the Government or regulator Energy Law, Article 28 of the Licensing Regulation); both licences (if any) relating to natural gas trading. are issued by RAE.

Depending on the specific technical conditions, construction of a In principle, any activity of sale, purchase, import or export of distribution network may be subject to environmental, building and natural gas is not subject to any licensing requirement and thus such installation/operation licensing. transactions are freely carried out (Article 81 of Energy Law). A supply licence issued by RAE is only required for the supply of 7.3 How is access to the natural gas distribution network natural gas to end customers; thus wholesale trading is not regulated, organised? although RAE can impose restrictions on the supply of natural gas by wholesale customers in order to ensure supply of security and As provided for under Article 80 of Energy Law and the Distribution fair competition. Network Code (RAE’s Decision No. 298/2018, Government Gazette B’ 1507/02.05.2018), third parties may gain access to the distribution 8.2 What range of natural gas commodities can be networks by entering into a distribution services agreement with the traded? For example, can only “bundled” products EDAs. As with the NNGTS, registration with RAE’s NNGTS Users (i.e., the natural gas commodity and the distribution Registry is a prerequisite for accessing the distribution networks as thereof) be traded? well. As per Article 32 of the Gas Directive, the Third-Party Access regime described in our response to question 6.6. above applies for As a principle, natural gas is freely traded in Greece, subject to distribution networks as well. licensing requirements (supply licence, where applicable) and the ownership unbundling rules, set out in Energy Law and the Gas Directive. 7.4 Can the regulator require a distributor to grant capacity or expand its system in order to accommodate new customers? 9 Liquefied Natural Gas Pursuant to Article 58 of the Distribution Network Code, the distribution networks are expanded or upgraded according to a five- 9.1 Outline broadly the ownership, organisational and year development plan, issued by RAE, following proposal of each regulatory framework in relation to LNG facilities. EDA. Such development plan is subject to mandatory online public consultation, while the operators shall prepare the development The LNG terminal of Revithoussa Island is part of the NNGTS and plans taking into account the needs and relevant request of the end thus owned and operated by DESFA, as provided for under Article customers. 67, para. 1 of Energy Law. The Alexandroupolis LNG terminal, currently under development by GASTRADE S.A., a private utility company, once completed will be the second LNG terminal operating in Greece.

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Greek independent authority empowered with the administrative 9.2 What governmental authorisations are required to enforcement of Law 3959/2011 (“Competition Law”), for all fields construct and operate LNG facilities? of commercial activity.

Construction and operation of LNG facilities in Greece are subject to issuance of an INGS Licence (Article 74 of Energy Law) and 11.2 To what criteria does the regulator have regard in determining whether conduct is anti-competitive? an INGS Operation Licence, respectively, both issued by RAE. In general, the licensing requirements are the same as for the transmission systems, as outlined in our response to question 6.2 Pursuant to Articles 1 and 2 of Competition Law, anti-competitive above. behaviours (such as prices/bid rigging, cartels, implementation of

restrictions or controls on the production, trading, technological Greece development or investments, unfair allocation of markets or sources 9.3 Is there any regulation of the price or terms of service of supply, and trading on unequal commercial terms) and abuse of in the LNG sector? dominant position, accordingly, are strictly prohibited.

The charges applying to users for accessing the LNG facilities of Revithousa are regulated through the NNGTS tariffs, as described 11.3 What power or authority does the regulator have to preclude or take action in relation to anti-competitive in our response to question 6.7 above. Other than that, charges for practices? Third-Party Access to INGS LNG facilities are pre-determined by the relevant independent TSO and applied in the terminal usage As regards undertakings, the HCC has extensive investigative agreements entered into with the terminal users (Article 78 of powers, including access to information, interrogation procedures, Energy Law). on-site investigations without prior notice, while heavy administrative fines can be imposed on entities infringing the 9.4 Outline any third-party access regime/rights in Competition Law or obstructing the HCC’s procedures. respect of LNG facilities.

11.4 Does the regulator (or any other Government As per Article 32 of the Gas Directive, a Third-Party Access regime, authority) have the power to approve/disapprove as outlined in our response to question 6.6, applies to LNG facilities mergers or other changes in control over businesses as well. in the oil and natural gas sector, or proposed acquisitions of development assets, transportation or associated infrastructure or distribution assets? If so, 10 Downstream Oil what criteria and procedures are applied? How long does it typically take to obtain a decision approving or disapproving the transaction? 10.1 Outline broadly the regulatory framework in relation to the downstream oil sector. Transactions subject to anti-trust clearance are those that qualify as “concentrations” and meet certain turnover thresholds, as set out According to Article 4 of Law 3054/2002 and Ministerial Decision in Regulation (EC) No. 139/2004 (“ECMR”) and the Competition 16570/2005 (“Oil Licensing Regulation”), the activities of oil Law, respectively. As stipulated under Article 6, para. 1 of the refining, wholesale and retail trading, transportation through Competition Law, all concentrations of undertakings are subject to pipeline and liquid gas bottling are regulated and a relevant licence preliminary control and shall be notified to the HCC within 30 days needs to be acquired, while the importers of crude oil are subject of: (i) the conclusion of the agreement; (ii) the announcement of the to certain security stock obligations, as in detail prescribed under offer to buy or exchange; or (iii) the undertaking of an obligation for Article 12 of Law 3054/2002. the acquisition of a controlling interest, in any case where the total worldwide turnover of the undertakings concerned amounts to at 10.2 Outline broadly the ownership, organisation and least 150,000,000 Euros, and each of at least two of the undertakings regulatory framework in relation to oil trading. involved separately achieves a turnover exceeding 15,000,000 Euros in the Greek market. The duration of the procedure before Pursuant to Article 6 of Law 3054/2002 and the Oil Licensing the HCC depends on the level of complication of each transaction; Regulation, a wholesale trading licence is granted to companies in practice, transactions raising no competition concerns are fairly limited by shares (Société Anonyme), limited liability companies swiftly cleared. or Private Companies (“IKE”) or companies operating under any equivalent form in an EU Member State. Based on the same 12 Foreign Investment and International provisions, certain minimum share capital and storage capacity requirements must be met in order for such licence to be issued. Obligations

11 Competition 12.1 Are there any special requirements or limitations on acquisitions of interests in the natural gas sector (whether development, transportation or associated infrastructure, distribution or other) by foreign 11.1 Which governmental authority or authorities are companies? responsible for the regulation of competition aspects, or anti-competitive practices, in the oil and natural gas sector? In principle, no nationality restrictions apply for the issuance of INGS Licences, INGS Operation Licences, Natural Gas The Hellenic Competition Commission (the “HCC”) is the Distribution Licences, Natural Gas Distribution Network Operation

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Licences, and natural gas supply licences or for obtaining access Network Code, any disputes between the distribution network to the NNGTS or the country’s distribution networks. However, a users and operators are settled either before RAE or through the special (stricter) process is followed for the unbundling certification arbitration procedure established under Article 37 of Energy Law. of non-EU TSOs, as per Article 11 of the Gas Directive and Article 65 of Energy Law. 13.2 Is your jurisdiction a signatory to, and has it duly ratified into domestic legislation: the New York 12.2 To what extent is regulatory policy in respect of the Convention on the Recognition and Enforcement of oil and natural gas sector influenced or affected Foreign Arbitral Awards; and/or the Convention on by international treaties or other multinational the Settlement of Investment Disputes between States arrangements? and Nationals of Other States (“ICSID”)? Greece

As an EU Member State, Greece is actively promoting energy Greece is a signatory to the New York Convention on the Recognition reforms, particularly by transposing the provisions of the third EU and Enforcement of Foreign Arbitral Awards, ratified by Legislative Energy Package for the liberalisation of electricity and natural gas Decree 4220/1961, as well as to the Convention on the Settlement of markets. Further, Greece is a signatory to a number of international Investment Disputes between States and Nationals of Other States treaties and conventions of relevance to the oil and gas industry, (“ICSID”), ratified by Law 608/1968. most notably the Energy Charter Treaty (“ECT”), and the International Convention for the Prevention of Pollution from Ships 13.3 Is there any special difficulty (whether as a matter (“MARPOL”). of law or practice) in litigating, or seeking to enforce judgments or awards, against Government authorities or State organs (including any immunity)? 13 Dispute Resolution Pursuant to Article 94, para. 4 of the Greek Constitution, judgments and awards shall be enforced against the State, local authorities 13.1 Provide a brief overview of compulsory dispute resolution procedures (statutory or otherwise) and public entities. The relevant procedure is governed by Law applying to the oil and natural gas sector (if any), 3068/2002, as amended and in force, as well as the Greek Code including procedures applying in the context of of Civil Procedure. However, it is noted that judgments can be disputes between the applicable Government enforced only against private (not public, e.g. public buildings) authority/regulator and: participants in relation to oil assets of the Greek State. and natural gas development; transportation pipeline and associated infrastructure owners or users in relation to the transportation, processing or storage 13.4 Have there been instances in the oil and natural gas of natural gas; downstream oil infrastructure owners sector when foreign corporations have successfully or users; and distribution network owners or users in obtained judgments or awards against Government relation to the distribution/transmission of natural gas. authorities or State organs pursuant to litigation before domestic courts? According to Article 10, para. 13 of Hydrocarbons Law, all disputes among the parties related either to the performance of the terms of We are not aware of any such notable cases. the hydrocarbons Lease Agreements or arising from non-contractual liability are excluded from the scope of court proceedings before both Greek and foreign courts. Such disputes shall mandatorily be 14 Updates settled through arbitration, either according to Law 2735/1999 for international commercial arbitration or any other internationally 14.1 Please provide, in no more than 300 words, a recognised arbitration system, such as the International Chamber of summary of any new cases, trends and developments Commerce (“ICC”), the London Court of International Arbitration in Oil and Gas Regulation Law in your jurisdiction. or the Arbitration Institute of the Stockholm Chamber of Commerce. The seat of arbitration shall be Athens and the proceedings shall The newly amended NNGTS Operation Code (fourth revision), be carried out in Greek. However, in the latest Lease Agreements aiming to further increase the liquidity of the Greek natural gas entered into between the State and private investors, an alternative market, enabled full compliance with EU Regulation 459/2017 dispute resolution mechanism has been implemented, according to establishing a network code on capacity allocation mechanisms. which, a number of serious disputes between the parties are referred Following this regulatory introduction, as of July 1st of 2018, to a sole expert, while such expert’s decision is subsequently subject NNGTS maintains a fully operational Virtual Trading Point, as to appeal through arbitration. specified in Article 20K of the NNGTS Operation Code. With Any gas-related disputes between energy players and customers the activation of the Virtual Trading Point, natural gas traders can be settled through arbitration before RAE’s arbitration board, in not involved in physical trading are offered for the first time the accordance with Article 37 of Energy Law. Under Articles 106–108 possibility to operate in the Greek market, since it is now possible to of the NNGTS Operation Code, any disputes between DESFA and get involved in natural gas transactions, irrespective of whether they NNGTS Users are resolved by a technical expert and, ultimately, have contracted capacity at entry/exit points or not. by the Courts of Athens. Pursuant to Article 6 of the Distribution

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Yannis Seiradakis Eleni Stazilova Bernitsas Law Bernitsas Law 5, Lykavittou Str. 5, Lykavittou Str. GR-10672 GR-10672 Athens Athens Greece Greece

Tel: +30 210 339 2950 Tel: +30 210 339 2950 Email: [email protected] Email: [email protected] URL: www.bernitsaslaw.com URL: www.bernitsaslaw.com Greece Yannis has a wide-ranging transactional practice which encompasses Eleni is an associate at the Firm and joined in 2017. She advises on complex privatisations, public and private project developments and project finance and energy-related transactions, public procurement mergers and acquisitions, with an expertise in the infrastructure, and public-private partnerships. Eleni has experience in drafting and energy, finance, utilities, telecommunications and transport sectors. negotiating commercial and finance agreements and participating in Yannis’ vast experience in privatisations reaches back to his time as due diligence reviews. She also advises on the legal and regulatory Special Secretary for Privatisations at the Ministry of Finance, in which framework governing tender procedures, acquisition and development capacity he managed the sale of numerous State-owned companies, projects in the conventional and renewable energy sectors, and on notably public utilities. Since joining the Firm, he has been involved in licensing and permit requirements for all types of energy project. Eleni high-profile privatisations of grid operators, motorways, ports, airports represents clients in filing tender bids and legal recourses, petitions and railways. Yannis is an expert in energy law, advising on the and applications arising from their participation in tenders and other structuring, development, financing and implementation of transactions public procurement procedures. Prior to joining the Firm, Eleni worked and projects in the conventional and renewable energy sectors. He as corporate counsel in the architectural and construction sectors in advises extensively on legislative risk and compliance and counts Greece and abroad. leading energy companies, international investors, financiers and Government bodies among his clients. Yannis advises both privately- and State-owned entities and consortiums on project financings and public-private partnerships, with a specialisation in documenting and negotiating concession contracts. He also advises on the regulatory framework for the assignment of public contracts by way of tenders and for developing projects and public-private partnerships.

Bernitsas Law is a market leader in the provision of commercial law services in Greece and one of the largest firms in the country. We count industry frontrunners, listed and private companies, supranational, global and national entities and corporations, and small and medium-sized enterprises from all the major industry sectors among our clients. Bernitsas Law’s Energy team has an expertise in tendering, financing, acquisition and development projects in all energy and resources sectors, including oil and gas, transport, electricity, water and mining. It is at the forefront of the renewables market, with a dynamic practice advising on wind, solar, hydroelectric, biofuel, biomass and geothermal projects. The Firm represents market leaders on the entire life cycle of transactions and advises on licensing and permits, tariffs, trading and import, export and production. We have also been extensively involved in the liberalisation of core markets and the implementation of community legislation. Our clients include market leaders in the conventional energy and renewables industries, leading oil companies, international financing institutions and lending banks, as well as Government bodies, to whom we provide advisory, transactional and litigation services.

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Indonesia Fitriana Mahiddin

SSEK Legal Consultants Syahdan Z. Aziz

(“DGOG”) in April 2016, the Government forecast a need for USD 1 Overview of Natural Gas Sector 24.8 billion in investment to enhance gas infrastructure. A national gas transmission and distribution network has been 1.1 A brief outline of your jurisdiction’s natural gas developed by the Ministry of Energy and Mineral Resources sector, including a general description of: natural (“MEMR”). Gas pipelines and storage facilities may be owned gas reserves; natural gas production including and operated by private companies, subject to the regulations of the extent to which production is associated or the MEMR and the Downstream Oil and Gas Regulatory Agency non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) (“BPH Migas”). liquefaction and export facilities, and/or receiving and re-gasification facilities (“LNG facilities”); natural gas 1.2 To what extent are your jurisdiction’s energy pipeline transportation and distribution/transmission requirements met using natural gas (including LNG)? network; natural gas storage; and commodity sales and trading. In 2017, natural gas satisfied roughly 18.6% of Indonesia’s total Indonesia’s proven natural gas reserves were recorded in the energy requirements. BP Statistical Review of World Energy 2018 (“BP 2018 Report”) at 102.9 trillion cubic feet (“Tcf”). Gas production reached 68.0 1.3 To what extent are your jurisdiction’s natural gas billion m3, representing 60% of the total oil and gas production requirements met through domestic natural gas in Indonesia. Of the foregoing production, 21.7 billion m3 was production? exported as LNG and 8.0 billion m3 was exported through pipelines. According to the PwC Oil and Gas Guide 2018 (“2018 PwC Currently, Indonesia’s natural gas requirements are fully met by Guide”), Indonesia has the sixth largest Coal Bed Methane reserves domestic production, particularly by the allocation of the domestic in the world at 453 Tcf. Shale gas reserves are estimated at 574 Tcf. market obligation (“DMO”) from every Production Sharing Contract (“PSC”) Contractor. PSC Contractors are required by law and contract Indonesia’s main areas for gas production are South Sumatra, East to reserve 25% of their oil and gas production for the domestic market. Kalimantan, Natuna, Sulawesi, and West Papua. According to the BP 2018 Report, the ratio of Indonesia’s natural gas In 2017, a number of upstream projects have been declared as production to consumption in 2017 was 173.5%. strategic projects by the Government of Indonesia (“Government”) This is expected to change. According to the BP Statistical Review in an effort to increase oil and gas production. These include Tangguh of World Energy 2016 report, the MEMR projects that Indonesia Train-3, the Chevron Indonesia Deepwater Development Project, will start importing natural gas by 2019. the Jangkrik Field Development Project, and the development of the Jambaran-Tiung Biru block and Genting’s Kasuri block. According to Petrominer website, the Special Task Force for 1.4 To what extent is your jurisdiction’s natural gas production exported (pipeline or LNG)? Upstream Oil and Gas Business Activities (“SKK Migas”) has targeted a number of upstream projects to commence production in 2018. These include the Lica production facilities optimisation Nearly half of Indonesia’s gas production is exported. According to 3 by PT Medco E&P Indonesia, the Block A Gas Field development the BP 2018 Report, LNG exports in 2017 reached 21.7 billion m by PT Medco E&P Malaka, the SP project by PT PHE ONWJ, to eight countries, including the biggest customers, namely Japan, 3 the CPS Modification by PetroChina Intl. Jabung Ltd., the Ario South Korea, and China. During that same period, 8.0 billion m Dama-Sriwijaya Phase 2 project by PT Tropik Energi Pandan, the was exported by pipeline to Singapore and Malaysia. distribution of Temelat Gas to the Kembang Mountain Station by PT Medco E&P Indonesia, and the development of the Subsea Pipeline 2 Overview of Oil Sector Gas Lift BW Field Poleng by PT Pertamina EP. LNG facilities in Indonesia include Bontang (East Kalimantan), Tangguh (West Papua), and Donggi Senoro (Sulawesi). In a 15 2.1 Please provide a brief outline of your jurisdiction’s oil year roadmap published by the Directorate General of Oil and Gas sector.

According to the BP 2018 Report, there were 3.2 billion barrels

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of proven oil reserves in Indonesia as of the end of 2017, putting Government Regulation No. 55 of 2009 (“GR 35”). The upstream Indonesia in the top 20 of the world’s oil producers. Oil production sector is managed and supervised by SKK Migas. reaches 949,000 barrels of oil per day. This marks a 7.6% increase Due to the unique territorial composition of the archipelagic state from the production rate in 2016. Until November 2017, Indonesia’s of Indonesia, upstream oil activities may be undertaken in onshore oil and gas revenue contributed 4.99% to the State revenue. and offshore areas. Work areas for onshore and offshore operations The SKK Migas Annual Report in 2017 recorded that after are determined by the MEMR based on consultations with and terminating 37 PSCs in 2017, at the end of 2017, Indonesia had a recommendations from the respective regional governments. total of 255 PSCs, comprising 87 PSCs in the production stage and Downstream activities encompass processing, transportation, the remaining 168 in the exploration stage. storage, and trading, and are regulated under Government Regulation Most oil upstream activities are focused in western Indonesia, with No. 36 of 2004 regarding Upstream Oil and Natural Gas Business the main areas for oil production being Sumatra, the Java Sea, East Activities, as has been amended by Government Regulation No. 30 Indonesia Kalimantan, and Natuna. The Government has been encouraging of 2009 (“GR 36”). Downstream operations fall under the auspices exploration activities in eastern parts of Indonesia, where, according of the MEMR and BPH Migas. to the 2018 PwC Guide, 39 tertiary and pre-tertiary basins show Through Government Regulation No. 79 of 2014, the Government rich promise in hydrocarbons. Major companies are involved in has stipulated national energy policy to be implemented from 2014 oil exploration and exploitation in Indonesia, including Chevron to 2050, focusing primarily on energy availability for national Pacific Indonesia, Total E&P, ConocoPhillips, and ExxonMobil. needs, prioritisation of energy development, utilisation of national In the downstream sector, there are nine oil refineries in the country energy resources, and national energy reserves. The target for the with a combined installed capacity of 1.1 million barrels per day. availability of primary energy, which includes natural oil and gas, is approximately 400 million tonnes of oil equivalent (“MTOE”) in 2025 and approximately 1,000 MTOE in 2050. 2.2 To what extent are your jurisdiction’s energy requirements met using oil? The President of Indonesia, Joko Widodo, announced a list of national strategic projects through Presidential Regulation No. 3 of In 2017, oil satisfied roughly 39.5% of Indonesia’s energy 2016 regarding the Acceleration of the Implementation of National requirements. Strategic Projects, as lastly amended by Presidential Regulation No. 56 of 2018, which include several downstream oil and gas projects, namely the development of the Bontang and Tuban refineries, 2.3 To what extent are your jurisdiction’s oil requirements upgrading existing refineries, and the construction of fuel oil and met through domestic oil production? LPG tank storage in the eastern parts of Indonesia. A presidential decree and presidential instruction seek to accelerate these projects According to the BP 2018 Report, Indonesia’s oil consumption in and mandate enhanced cooperation among relevant Government 2017 reached 77.3 million tons, 60% of which was met by domestic institutions for the achievement of these objectives. production.

3.2 How are the State’s mineral rights to develop oil 2.4 To what extent is your jurisdiction’s oil production and natural gas reserves transferred to investors or exported? companies (“participants”) (e.g. licence, concession, service contract, contractual rights under Production According to the 2017 SKK Migas Annual Report, Indonesia Sharing Agreement?) and what is the legal status of exported 102.7 million barrels of oil in 2017, with Thailand, those rights or interests under domestic law? Singapore, and Malaysia as the top three countries Indonesia exports oil to, at 17.9, 12.4, and 12.1 million barrels respectively. Private companies earn the right to explore and exploit oil and gas resources by entering into cooperation contracts, mainly based upon a production sharing scheme, with the Government (through SKK 3 Development of Oil and Natural Gas Migas), thus acting as a Contractor to SKK Migas. One entity can hold only one PSC, and a PSC is normally granted for 30 years, typically comprising six plus four years of exploration and 20 years 3.1 Outline broadly the legal/statutory and organisational of exploitation. All financial risks of operations under the PSC are framework for the exploration and production (“development”) of oil and natural gas reserves borne by the Contractor. If a work area proceeds to the exploitation including: principal legislation; in whom the State’s stage, the Contractor is entitled to cost recovery. mineral rights to oil and natural gas are vested; In the traditional production sharing scheme that has been used over Government authority or authorities responsible for the past years in Indonesia, the production output is typically subject the regulation of oil and natural gas development; and to a first tranche petroleum (“FTP”) requirement, cost recovery and current major initiatives or policies of the Government (if any) in relation to oil and natural gas development. certain taxes, and the remaining portion is distributed among the Contractor and the Government in the proportions set out in the PSC Indonesia’s oil and gas sector is governed by Law No. 22 of 2001 (the “Cost Recovery PSC”). In early 2017, the Government, through regarding Oil and Gas (November 22, 2001) (the “Oil and Gas MEMR Regulation No. 8 of 2017 regarding Gross Split PSC, as Law”). The State retains mineral rights throughout Indonesian amended by MEMR Regulation No. 52 of 2017 (“MEMR Reg. territory and the Government holds the mining authority. 8/2017”), introduced the gross-split production sharing scheme, in which the production output is split at gross (without FTP, cost The oil and gas sector comprises upstream and downstream recovery or tax deductions) in a sharing proportion stipulated at activities, which are separately regulated and organised. Upstream the beginning of a field development and subject to fluctuation activities include exploration and exploitation and are regulated depending on certain variables and progressive components (the under Government Regulation No. 35 of 2004 regarding Upstream “Gross Split PSC”). Oil and Natural Gas Business Activities, as lastly amended by

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has the authority to decide whether the operation will be resumed by 3.3 If different authorisations are issued in respect of Pertamina, the initial Contractor, or jointly between the two. different stages of development (e.g., exploration appraisal or production arrangements), please specify those authorisations and briefly summarise the most 3.5 How does the State derive value from oil and natural important (standard) terms (such as term/duration, gas development (e.g. royalty, share of production, scope of rights, expenditure obligations). taxes)?

In both Cost Recovery PSC and Gross Split PSC contexts, when a Indonesia does not impose royalties on PSCs, but secures the State’s commercial discovery is made, the Contractor must prepare a Plan minimum income through the FTP mechanism in Cost Recovery of Development (“POD”) for the relevant field. The first POD is PSCs. FTP is the first take of oil or gas immediately after production

Indonesia approved by the MEMR based on the considerations of SKK Migas in a work area in one calendar year that is received by the State prior and kicks off the exploitation stage. Subsequent PODs are approved to cost recovery and profit calculation. FTP therefore secures the by SKK Migas. State’s minimum income. The amount of FTP is determined in the Other authorisations differ in each PSC model. relevant Cost Recovery PSC. For a Cost Recovery PSC, expenditures throughout the PSC term Taxes applicable to PSCs include income tax, VAT, import duties, are planned ahead by the Contractor in an annual Work Plan and regional taxes, and other levies. The PSC may stipulate whether the Budget (“WP&B”) to be approved by SKK Migas. A Contractor tax laws and regulations applicable at the time of the PSC execution must also prepare an Authorisation for Expenditure (“AFE”) for shall apply (stabilised) or whether the PSC shall follow every specific work and can only execute the work upon SKK Migas’ tax law and regulation issued over time. In addition, Contractors approval of the relevant AFE. are required to pay non-tax State revenues such as exploration and exploitation fees and bonuses, including signing bonus and For a Gross Split PSC, as there is no cost-recovery mechanism, production bonus. SKK Migas only approves the annual work plan. The budget is only presented to SKK Migas for its consideration in approving the The sharing proportion between the Government and the Contractor annual work plan, but is not subject to SKK Migas’ approval. SKK for a Cost Recovery PSC is typically 85:15 for oil and 70:30 for gas, Migas has the authority to adjust the production split for each field respectively. For a Gross Split PSC, the initial sharing proportion by considering the progressive components stipulated in MEMR between the Government and the Contractor is 57:43 for oil and Reg. 8/2017. 52:48 for gas, respectively.

3.4 To what extent, if any, does the State have an 3.6 Are there any restrictions on the export of ownership interest, or seek to participate, in the production? development of oil and natural gas reserves (whether as a matter of law or policy)? Subject to obtaining requisite export approvals, a Contractor is entitled to export its production entitlement, subject to its DMO by Extracted oil and gas remains owned by the State until it passes the which 25% of the Contractor’s entitlement must be allocated for the point of export or other delivery point. Thereafter, the Government domestic market. is entitled to a certain percentage of the production output as apportioned under the PSC, as is the Contractor. 3.7 Are there any currency exchange restrictions, or Under the Oil and Gas Law, entities in the form of a State-owned restrictions on the transfer of funds derived from enterprise (“SOE”), regional-owned enterprise (“BUMD”), a production out of the jurisdiction? cooperative, small business, or private business entity may enter into a PSC with SKK Migas to undertake upstream oil and gas business The Indonesian Currency Law and Bank Indonesia (“BI”) activities. Pertamina, as an SOE and the State oil company, can Regulation No. 17/3/PBI/2015 regarding the Mandatory Use of hold participating interests (“PI”) in numerous PSCs as a Contractor Rupiah restrict most transactions within Indonesian territory from of SKK Migas. There is no maximum limit on the PI that an SOE, being carried out using foreign currency. Core upstream activities BUMD, or Pertamina may hold. in Indonesia are exempted from this requirement for a certain Upon the first POD approval, a Contractor is required to offer 10% period of time, such as expenditures in relation to firm commitment, PI in its PSC to a BUMD that (i) is a regional entity wholly owned over/under lifting, and domestic oil and gas sales transactions by by the regional Government, (ii) is owned at least 99% by the upstream players, which are exempted for 10 years. regional government and the remaining by an regional government- BI also requires all oil and gas export proceeds be deposited affiliated entity, (iii) is established pursuant to a regional government in a foreign exchange bank in Indonesia before being remitted regulation, and (iv) does not conduct any business activity other overseas. This requirement is contained in BI Regulation No. than management of such offered PI. The BUMD may accept or 16/10/PBI/2014, as amended by BI Regulation No. 17/23/PBI/2015 decline the offer based on its financial capability, and in the latter regarding Receipt of Export Proceeds in Foreign Exchange and event the offer must be tendered to an SOE. Withdrawal of Offshore Loan Foreign Exchange. In addition, MEMR Regulation No. 23 of 2018 regarding the Minister of Trade (“MOT”) Regulation No. 94 of 2018 regarding Management of Oil and Gas Working Areas which Production Provisions on the Use of a Letter of Credit for the Export of Certain Sharing Contract Will Expire, as lastly amended by MEMR Goods requires that the export of oil and gas products, including Regulation No. 28 of 2018 (“MEMR Reg. 23/2018”), stipulates petroleum oil and oil obtained from minerals containing bitumen, that Pertamina may elect to resume the operations of a work area crude oil, condensed oil, liquefied natural gas, liquefied propane, whose PSC is expiring, irrespective of whether the initial Contractor liquefied butane, other mixtures of propane and butane used as motor has applied for an extension. If both Pertamina and the initial fuel, and others, shall be paid through a Letter of Credit (“L/C”) Contractor express a willingness to operate a work area, the MEMR received from a foreign exchange bank in Indonesia or an export

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financing institution established by the Government. However, performance bond in an amount equivalent to 10% of the WP&B for the MOT can suspend this requirement for any exporter that is yet the first two years of the exploration period, with a minimum sum unable to implement the obligation to use an L/C as its method of of USD 1 million. payment. This suspension may be granted for a limited time and is Further, a parental guarantee may be required by SKK Migas for a subject to a consideration from the relevant technical ministry, i.e., company intending to acquire PI in a PSC, subject to SKK Migas’ the MEMR through the DGOG. assessment of the company’s audited financial statements.

3.8 What restrictions (if any) apply to the transfer or 3.10 Can rights to develop oil and natural gas reserves disposal of oil and natural gas development rights or granted to a participant be pledged for security, or interests? booked for accounting purposes under domestic law? Indonesia

During the first three years of the exploration period (the “Firm PI cannot be pledged as security. This is primarily because a PI Commitment” period), a Contractor is not allowed to (i) transfer transfer can only be conducted upon approval of the Government, the majority of its PI to a non-affiliated party, or (ii) transfer a and there is no guarantee that the Government will approve the certain percentage of its PI that would result in the PI transferee transfer of PI to the pledgee if execution comes. holding a higher percentage of PI than any other initial Contractors. Change of operatorship in a PSC during the Firm Commitment is also prohibited. After such period, transfer of PI may be conducted 3.11 In addition to those rights/authorisations required to explore for and produce oil and natural gas, what upon the approval of the MEMR based on the consideration of SKK other principal Government authorisations are Migas. required to develop oil and natural gas reserves (e.g. A PSC typically provides an approval or notification requirement for environmental, occupational health and safety) and the transfer of all or a portion of the Contractor’s PI to an affiliate or from whom are these authorisations to be obtained? non-affiliated third party. From 2007 onwards, PSCs have stipulated that transfers of PI to affiliates and changes of control in a party to In conducting petroleum activities, PSC Contractors are required a PSC require prior written consent of the MEMR (through SKK to comply with the provisions of occupational health and Migas). Similarly, MEMR Regulation No. 48 of 2017 (“MEMR safety, environmental management, and community development Reg. 48/2017”) stipulates that a transfer of PI in a PSC requires prior regulations. In the exploration phase, PSC Contractors must approval of the MEMR. complete an environmental monitoring and environmental GR 35 also imposes a requirement that if all or a portion of the management (“UKL/UPL”) report. During the exploitation of a rights of the Contractor are transferred to a non-affiliate or to proposed development, PSC Contractors must further conduct an another company that is not a partner in the same working area, environmental assessment (“AMDAL”), which is subject to the the MEMR can “request” that the Contractor offer the interest to a relevant Government authority’s approval. PSC Contractors are national company. also required to make periodic reports to the relevant Government authorities regarding their compliance with the UKL/UPL or Any transfer of PI must follow the guidelines and procedures AMDAL. In addition, the Environmental Law requires PSC stipulated in SKK Migas Working Guidelines (“PTK”) No. 057 of Contractors to obtain an environmental licence from the Minister of 2014 regarding the transfer of PI. The party receiving the transfer Environment and Forestry. is subject to SKK Migas’ review and approval since an entity must possess the requisite financial capability and skills to hold PI in a The DGOG is responsible for supervising the implementation of PSC. health, safety and environment (“HSE”) regulations in the oil and gas sector and imposing sanctions for non-compliance. The DGOG Pursuant to MEMR Reg. 48/2017, indirect transfer of PI through the designates Mining Inspection Enforcement teams to examine work transfer of shares of the Contractor requires MEMR approval with safety compliance in oil and gas businesses. If the facilities and SKK Migas’ consideration if the transfer pertains to majority shares, techniques satisfy work health and safety standards, the DGOG thus resulting in a direct change of control of the Contractor. If the shall issue certifications for installations and equipment. Non- transfer results in an indirect change of control of the Contractor, compliance with applicable HSE rules subjects the company to the transfer needs only to be reported to the MEMR through SKK administrative sanctions up to revocation of the licence. Migas. In addition, the direct and indirect transfer of PI as well as change of control is subject to taxes imposed by Government Regulation No. 3.12 Is there any legislation or framework relating to the abandonment or decommissioning of physical 79 of 2010, as amended by Government Regulation No. 27 of 2017 structures used in oil and natural gas development? If (as amended, “GR 79/2010”), and Minister of Finance Regulation so, what are the principal features/requirements of the No. 257/PMK.011/2011. legislation?

3.9 Are participants obliged to provide any security New-generation PSCs stipulate an express obligation to carry out or guarantees in relation to oil and natural gas an abandonment and site restoration (“ASR”) programme and to development? provide ASR funds. The Oil and Gas Law highlights post-operation obligations as a A Contractor must provide a performance bond by the time of means of ensuring environmental management and protection, and execution of the PSC, the amount of which depends on the type of GR 35 obligates Contractors to allocate funds for post-operation the contract area. The performance bond for open areas, a portion of activities. MEMR Reg. 23/2018 also stipulates that outstanding the contract area that is carved out based on PSC and areas for which post-operation obligations of a PSC nearing expiry are to be carried the PSC has expired, is 10% of the total Firm Commitment value, out by the entity that has been appointed by the MEMR to resume with a minimum sum of USD 1.5 million. Areas that have never the PSC, which could be PT Pertamina (Persero) and/or another been developed or are being or have been produced are subject to a Contractor.

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In 2018, the MEMR issued Regulation No. 15 of 2018 regarding Post-Operation Upstream Oil and Gas Business Activities (“MEMR 4 Import / Export of Natural Gas (including Reg 15/2018”). This Regulation requires PSC Contractors to LNG) conduct post-operation activity by using post-operation activity funds. A post-operation activity plan is required to be prepared 4.1 Outline any regulatory requirements, or specific and submitted to SKK Migas through the submission of a WP&B terms, limitations or rules applying in respect of (if the PSC is in the exploration stage) or as part of the field cross-border sales or deliveries of natural gas development plan (if the PSC is in the exploitation stage). Prior (including LNG). to implementing post-operation activities, PSC Contractors are also required to obtain an approval of the post-operation activity plan Cross-border sales of natural gas can only be conducted if (i)

Indonesia from the DGOG. PSCs that do not contain provisions regarding the domestic need for natural gas has been fulfilled, (ii) there is post-operation obligations are subject to MEMR Reg. 15/2018. The insufficient domestic infrastructure, or (iii) domestic purchasing procedures to reserve and deposit ASR funds are also set forth in power is insufficient to satisfy the relevant gas field’s economics. SKK Migas PTK No. 040 of 2018. Pursuant to MEMR Regulation No. 6 of 2016 regarding Provisions More specific decommissioning obligations are contained in various and Procedures for Stipulating the Allocation and Utilization as well regulations, such as MEMR Regulation No. 02P/1992, which as Pricing of Natural Gas (“MEMR Reg. 6/2016”), the allocation requires land reclamation, and Government Regulation No. 17 of of natural gas production is prioritised (i) for the Government’s 1974 regarding Supervision of Implementation of Offshore Oil and programme to provide natural gas for transportation, households, Gas Exploration, which requires dismantlement of facilities that are and small-scale customers, (ii) to increase national oil and gas no longer used. A PTK in 2015 on Work Completion Approval also production, (iii) for the fertiliser industry, (iv) for industries that use lists well-plugging as one of the items constituting completion of natural gas as a raw material, (v) for the provision of power, and (vi) drilling work. for industries that use natural gas as fuel. Cross-border deliveries of natural gas are subject to import or export approvals from the MOT, which takes into account the import or export recommendation from 3.13 Is there any legislation or framework relating to the DGOG. The DGOG considers domestic supply and demand in gas storage? If so, what are the principal features/ requirements of the legislation? issuing such recommendation. In regard to imports in general, an additional licence is required in the form of a Business Registration Number (“NIB”), in accordance with Government Regulation No. Gas storage is generally regulated under GR 36 as a downstream 24 of 2018 regarding Electronic Integrated Business Licensing activity. Gas storage activities may be conducted upon obtaining an Services (“GR 24”). The NIB acts as an import licence issued by the oil and gas storage licence from the Capital Investment Coordinating Online Single Submission system implemented under the auspices Board (“BKPM”) c.q. DGOG, except if the gas storage activities are of the Coordinating Ministry of Economic Affairs (“CMEA”). ancillary to the entity’s main processing, transportation, or trading Although the import of natural gas is not specifically subject to a activities. A company engaging in gas storage business is obligated NIB pursuant to GR 24, in practice entities importing natural gas are to offer facility sharing to a third party by considering the technical required to obtain a NIB. and economic aspects. Facility sharing is specifically regulated under BPH Migas Regulation No. 6 of 2005. 5 Import / Export of Oil 3.14 Are there any laws or regulations that deal specifically with the exploration and production of unconventional oil and gas resources? If so, what are their key 5.1 Outline any regulatory requirements, or specific features? terms, limitations or rules applying in respect of cross-border sales or deliveries of oil and oil products. The general provisions on the exploration and production of unconventional oil and gas resources are subject to the Oil Cross-border sales of oil are subject to fulfilment of the DMO (for and Gas Law and its implementing regulations. There are two upstream players). With regard to crude oil, the MEMR recently specific regulations on unconventional oil and gas resources. issued Regulation No. 42 of 2018 regarding the Priority to Use The first Regulation, MEMR Regulation No. 5 of 2012 regarding Crude Oil for Meeting Domestic Needs (“MEMR Reg. 42/2018”). Procedures on the Stipulation and Offering of Unconventional Oil This Regulation requires Pertamina and/or holders of the crude and Gas Working Area, sets forth provisions on the offering of the oil processing licence to prioritise the utilisation of crude oil from unconventional working area through direct offering or regular domestic PSC Contractors before considering importation and tender. provides a requirement for a prioritisation for PSC Contractors’ The second Regulation, MEMR Regulation No. 38 of 2015 regarding crude oil portion to be sold domestically. No later than three months the Acceleration of the Unconventional Oil and Gas Business, sets before commencing the export recommendation period for the forth provisions that enable an acceleration of unconventional oil entire Contractor’s portion of volume of crude oil, PSC Contractors and gas sales for PSC Contractors. This Regulation allows the PSC or their affiliates are required to offer their portion to Pertamina and/ Contractors to sell unconventional oil and gas produced before or holders of the crude oil processing licence through a negotiation obtaining the first POD, provided that the sales obtain approval process using a business-to-business scheme. From the negotiation from the MEMR by taking into account the consideration from SKK process, Pertamina may directly appoint a PSC Contractor for the Migas. purchase of the crude oil, which may be made in the form of a long- term contract with a period of 12 months. However, it is not yet clear regarding the implementation of this new Regulation.

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As discussed in question 4.1 above, cross-border deliveries of oil are several times, lastly by Presidential Regulation No. 148/2015. subject to import or export approvals from the MOT, which takes The President has also issued a regulation and an instruction to into account the import or export recommendation from the DGOG. enhance cooperation among governmental entities in smoothing the The DGOG considers domestic supply and demand conditions in preparation and operation of nationally strategic projects. issuing such recommendation. Specifically in regard to import of oil, there is an additional licence in the form of a NIB issued by the 6.4 How is access to oil and natural gas transportation OSS administered by CMEA. pipelines and associated infrastructure organised?

6 Transportation Access to oil and natural gas transportation pipelines and associated infrastructure is organised by BPH Migas by relying on the transportation master plan stipulated by the MEMR. Indonesia 6.1 Outline broadly the ownership, organisational and regulatory framework in relation to transportation pipelines and associated infrastructure (such as 6.5 To what degree are oil and natural gas transportation natural gas processing and storage facilities). pipelines integrated or interconnected, and how is co- operation between different transportation systems established and regulated? Gas transportation by pipeline is regulated under GR 36 and MEMR Regulation No. 19 of 2009 regarding Natural Gas Business through The MEMR periodically stipulates a transportation master plan Pipelines, and is controlled by BPH Migas. It can only be carried for natural gas that is relied upon by BPH Migas in controlling and out by a business entity established in Indonesia that has obtained supervising the implementation of gas transportation activities by a transportation licence from the BKPM c.q. DGOG, unless such business entities, including determining the joint use of transportation transportation is conducted by a PSC Contractor as a continuation and storage facilities as well as associated infrastructure. of its upstream activities. The MEMR, as mandated by the Oil and Gas Law, has established a transportation master plan. This master plan is relied upon by BPH 6.6 Outline any third-party access regime/rights in Migas to, inter alia, determine transmission routes and distribution respect of oil and natural gas transportation and associated infrastructure. For example, can the networks, tender Special Rights, and determine tariffs in accordance regulator or a new customer wishing to transport with techno-economic principles. oil or natural gas compel or require the operator/ owner of an oil or natural gas transportation pipeline or associated infrastructure to grant capacity or 6.2 What governmental authorisations (including expand its facilities in order to accommodate the new any applicable environmental authorisations) are customer? If so, how are the costs (including costs required to construct and operate oil and natural of interconnection, capacity reservation or facility gas transportation pipelines and associated expansions) allocated? infrastructure?

A pipeline or storage facility operator cannot be required to expand its In addition to a gas transportation licence from the BKPM c.q. facilities to accommodate new customers. Facility sharing is obligated DGOG, a business entity must also obtain Special Rights from by GR 36 only to the extent the relevant facility has sufficient capacity the MEMR to transport gas by pipeline within the stipulated so that the facility sharing will not impair the operations of the facility transmission and distribution routes by way of tender. An owner. Facility sharing is also subject to economic considerations, environmental licence must also be obtained by preparing the such as the facility owner’s investment return rate. BPH Migas is the relevant environmental document, which can be an AMDAL or a authority that oversees and regulates facility sharing. UKL/UPL, depending on the length and pressure of the pipelines.

6.7 Are parties free to agree the terms upon which oil 6.3 In general, how does an entity obtain the necessary or natural gas is to be transported or are the terms land (or other) rights to construct oil and natural gas (including costs/tariffs which may be charged) transportation pipelines or associated infrastructure? regulated? Do Government authorities have any powers of compulsory acquisition to facilitate land access? In general, and subject to BPH Migas’ authority to set tariffs for the Generally speaking, land rights will be obtained by negotiating transportation of natural gas through pipelines, parties may agree with owners and occupiers, in accordance with prevailing laws. on the terms of the agreement for the transportation and storage of To the extent these facilities are used for upstream activities within natural gas. A “contractual regime” is in its early stages of evolution. the framework of a cooperation contract, the Contractor will have BPH Migas has the authority to determine and supervise the tariffs for to comply with the Oil and Gas Law, GR 35 and the relevant natural gas transportation through pipelines that will be charged by implementing regulations to be issued thereunder. Contractors are the operator of the pipeline to the users. The relevant operator must responsible for the payment of these rights. Land that is purchased submit the proposed tariff to BPH Migas. BPH Migas will then verify for a facility will become the property of the State, while land that and evaluate the proposed tariff. BPH Migas will discuss with the is leased for a facility will be leased in the name of the Contractor. related pipeline operator and the users before determining the tariff. Title to land purchased for facilities used for downstream activities For the transportation of natural gas, the applicable regulation provides outside of a cooperation contract may be held in the name of the that the agreement between a gas pipeline operator and user must be business entity engaging in the transportation or storage activity. set forth in a gas transportation agreement. The regulation also requires Projects that serve the public interest may enjoy more Government the operator of the gas pipeline to prepare an access arrangement involvement in the land procurement process, as stipulated in outlining the terms and conditions for the joint use of the pipelines Presidential Regulation No. 71/2012, as has been amended owned by the operator. This, as well as the tariff, must be approved

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by BPH Migas. The access arrangement will include management guidelines and technical and legal rules. The gas transportation 8 Natural Gas Trading agreement must be in accordance with the access arrangement. Crude oil transportation is not subject to the Government’s approval, 8.1 Outline broadly the ownership, organisational and whereas fuel oil is relatively more heavily regulated in terms of regulatory framework in relation to natural gas distribution, pricing and availability. trading. Please include details of current major initiatives or policies of the Government or regulator (if any) relating to natural gas trading. 7 Gas Transmission / Distribution Natural gas trading is governed under GR 36. It must be conducted by a business entity established in Indonesia by obtaining a Indonesia 7.1 Outline broadly the ownership, organisational and trading business licence from the BKPM c.q. DGOG. The trading regulatory framework in relation to the natural gas business licence is further categorised into wholesale trading and transmission/distribution network. limited trading, depending on the scale of business and ownership of facilities. Natural gas trading may also be carried out by PSC Please refer to question 6.1 above. Contractors directly based on its contractual right under the PSC. Such activity does not require a trading business licence. 7.2 What governmental authorisations (including any Natural gas trading must adhere to the provisions of priority applicable environmental authorisations) are required businesses as well as the price stipulation under MEMR Reg. to operate a distribution network? 06/2016.

Please refer to question 6.2 above. 8.2 What range of natural gas commodities can be traded? For example, can only “bundled” products 7.3 How is access to the natural gas distribution network (i.e., the natural gas commodity and the distribution organised? thereof) be traded?

Please refer to question 6.4 above. This will depend on how BPH Migas regulates distribution and trading activities and whether the Government will issue multiple trading and distribution licences for a given area. Bundling of 7.4 Can the regulator require a distributor to grant capacity or expand its system in order to several products is possible since one entity may hold both a accommodate new customers? distribution and a trading licence.

No. This requirement only applies to gas transportation and 9 Liquefied Natural Gas processing activities.

9.1 Outline broadly the ownership, organisational and 7.5 What fees are charged for accessing the distribution regulatory framework in relation to LNG facilities. network, and are these fees regulated?

LNG facilities may be operated by upstream players as an ancillary Under Government Regulation No. 1/2006, the monthly fees activity to their main activities under the PSC, or by a downstream charged for accessing the gas distribution network are 3% or 2% of business entity that engages in processing or trading activities. the transmission tariff per 1,000 standard cubic feet for up to 100 billion standard cubic feet or above 100 billion standard cubic feet, respectively. 9.2 What governmental authorisations are required to construct and operate LNG facilities?

7.6 Are there any restrictions or limitations in relation to acquiring an interest in a gas utility, or the transfer Prior POD approval from the MEMR is required for the operation of assets forming part of the distribution network of LNG facilities at the upstream level. At the downstream level, (whether directly or indirectly)? the construction and operation of LNG facilities must obtain a processing or wholesale trading licence from the MEMR. In both Direct acquisitions of an interest in a gas utility or the transfer sectors, it may be necessary to obtain other relevant licences from of assets forming part of the distribution network will require central and regional governments, such as licences related to HSE revocation of the existing Special Right and issuance of a new and land. Special Right to the acquirer. Indirect acquisitions or transfers of assets (by way of share transfers) may be subject to foreign share 9.3 Is there any regulation of the price or terms of service ownership restrictions regulated under the Negative Investment List in the LNG sector? (see question 12.1 below). Gas pricing is stipulated by considering the economics of fields, domestic and international gas prices, and added value from the domestic utilisation of natural gas. The stipulation of gas prices for domestic needs must also consider the purchasing power of domestic consumers as well as support for the Government’s programme to provide natural gas for transportation, households and small-scale customers.

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9.4 Outline any third-party access regime/rights in 11.3 What power or authority does the regulator have to respect of LNG facilities. preclude or take action in relation to anti-competitive practices? Please refer to question 6.6 above. The KPPU is not necessarily authorised to preclude anti-competitive practices. However, should the KPPU deem certain agreements, 10 Downstream Oil conduct or positions in the relevant market (including the oil and gas market) in violation of the Anti-Monopoly Law, it may lawfully issue decisions and sanctions. The KPPU also has the authority to provide 10.1 Outline broadly the regulatory framework in relation advice, on request, regarding a planned merger, consolidation, to the downstream oil sector. Indonesia or acquisition of companies. This advice does not constitute the KPPU’s approval or rejection of the planned restructuring scheme Downstream oil activities are regulated in GR 36. It encompasses oil and does not preclude the KPPU from performing an assessment of processing, storage, transportation and trading, each of which requires the merger, consolidation, or acquisition after the same is effectuated. a specific licence from the MEMR. A downstream company is allowed to carry out an ancillary downstream activity as a supporting activity to its main business without obtaining a separate business licence, 11.4 Does the regulator (or any other Government provided that the other downstream activity is not used to generate authority) have the power to approve/disapprove profit, in which case the company must obtain a separate licence. mergers or other changes in control over businesses in the oil and natural gas sector, or proposed Only business entities established in Indonesia are eligible to obtain acquisitions of development assets, transportation or downstream business licences, subject to the applicable foreign associated infrastructure or distribution assets? If so, shareholding restriction stipulated in the Negative Investment List. what criteria and procedures are applied? How long does it typically take to obtain a decision approving or disapproving the transaction? 10.2 Outline broadly the ownership, organisation and regulatory framework in relation to oil trading. The MEMR has the authority to approve a transfer of shares of a Contractor that will result in a direct change of control of the Contractor, Depending on the oil commodities being traded, oil trading activities although the MEMR’s consideration in granting its approval is not fall under the auspices of the MEMR or BPH Migas. In addition focused on competition issues. The MEMR’s approval or rejection of to the downstream licence from the BKPM c.q. DGOG, trading of the transfer of shares shall be issued within 28 working days as of SKK oil fuel can only be conducted after registering the specific type of Migas’ receipt of the correct and complete application. However, in oil fuel with BPH Migas and obtaining a NIB from BPH Migas. practice, the approval process can take seven to nine months. Oil trading is classified into wholesale trading and limited trading, Prior consultation with the KPPU can only be conducted for mergers, depending on the scale of business and ownership of facilities. consolidations, and acquisitions. Upon the KPPU’s assessment of the relevant documents, the KPPU shall issue its advice, guidance or 11 Competition written opinion regarding the proposed restructuring to the concerned business actors within 90 days of the submission of the required documents. 11.1 Which governmental authority or authorities are responsible for the regulation of competition aspects, or anti-competitive practices, in the oil and natural 12 Foreign Investment and International gas sector? Obligations

While BPH Migas can impose penalties on business entities engaged in the natural gas sector, the Commission for the Supervision of Business 12.1 Are there any special requirements or limitations on Competition (“KPPU”) is responsible for implementing Indonesia’s acquisitions of interests in the natural gas sector Anti-Monopoly Law. The KPPU may issue decisions that certain (whether development, transportation or associated agreements, conduct or positions in the relevant market (including the infrastructure, distribution or other) by foreign companies? natural gas market) are anti-competitive and therefore in violation of Law No. 5 of 1999 regarding Prohibition of Monopolistic Practices and Unfair Business Competition (the “Anti-Monopoly Law”). The New Negative Investment List, issued in Presidential Regulation No. 44 of 2016 regarding List of Business Fields that Are Closed and Business Fields that Are Open with Requirements in the Field of 11.2 To what criteria does the regulator have regard in Capital Investment, stipulates the foreign shareholding limitations determining whether conduct is anti-competitive? for various business fields. Among others, onshore drilling is closed to foreign investment, while offshore drilling is restricted to The provisions and criteria on anti-competition are regulated under a maximum of 75% foreign shareholding. the Anti-Monopoly Law. The prohibitions can be categorised as follows: prohibited 12.2 To what extent is regulatory policy in respect of the agreements; prohibited conduct; and abuse of a dominant position oil and natural gas sector influenced or affected in a given market sector. by international treaties or other multinational arrangements?

As a matter of international law, international treaties and other multinational agreements are binding upon the State upon

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ratification. Ratification of such international instruments is Arbitration and Alternative Dispute Resolution. In general, normally done by way of a presidential regulation, which will be Indonesia has bound itself to enforce foreign arbitral awards if further implemented by a ministerial regulation. All regulations and (i) the award is rendered by a tribunal in a country bound by the decrees issued afterward must not deviate from the provisions of 1958 New York Convention on the Recognition and Enforcement the international treaty or the national regulation enacted in light of Foreign Arbitral Awards or a bilateral treaty with Indonesia, (ii) thereof. Therefore, once an international treaty is binding upon the dispute is commercial in nature, as that term is understood under the Government, regulatory policy or activity shall develop in Indonesian law, and (iii) the award does not contravene Indonesian accordance with the international treaty. Among others, Indonesia law or notions of public order or policy. is a party to the United Nations Convention on the Law of the Sea Enforcement of international arbitral awards in Indonesia against (“UNCLOS”), the 1987 Montreal Protocol, and the International Government authorities or State organs appears to be difficult.

Indonesia Convention on Civil Liability for Oil Pollution Damage and the A precedent for this is Karaha Bodas v. Pertamina, where an protocols and amendments thereof. Indonesian court annulled an arbitral award in favour of Karaha Additionally, tax treaties and bilateral investment treaties may Bodas. be relevant, although the Government recently announced that Indonesia will be withdrawing from all bilateral investment treaties 13.4 Have there been instances in the oil and natural gas to which it is a party. sector when foreign corporations have successfully obtained judgments or awards against Government authorities or State organs pursuant to litigation 13 Dispute Resolution before domestic courts?

13.1 Provide a brief overview of compulsory dispute Not to our knowledge. resolution procedures (statutory or otherwise) applying to the oil and natural gas sector (if any), including procedures applying in the context of 14 Updates disputes between the applicable Government authority/regulator and: participants in relation to oil and natural gas development; transportation pipeline 14.1 Please provide, in no more than 300 words, a and associated infrastructure owners or users in summary of any new cases, trends and developments relation to the transportation, processing or storage in Oil and Gas Regulation Law in your jurisdiction. of natural gas; downstream oil infrastructure owners or users; and distribution network owners or users in A draft of a new oil and gas law, which is widely expected to reform relation to the distribution/transmission of natural gas. the oil and gas regulatory framework, is being prepared by the House of Representatives. Expected changes include the establishment In the upstream sector, the dispute resolution mechanism is of oil and gas managing agencies in the form of SOEs to replace stipulated in the PSC. Pursuant to SKK Migas PTK 007, as SKK Migas, increased privileges for Pertamina in acquiring work has been amended several times, disputes in relation to service areas, the contracts or licensing mechanisms in the upstream sector, providers to upstream businesses as well as the procurement the prescribed maximum period for exploration activities, and an thereof may be resolved in court or through arbitration held in obligation to dedicate production to the domestic market through a Indonesia in accordance with the provisions of the contract. In the Safeguarding Business Entity established by the law itself. event of a dispute between a Special Rights holder in relation to In February 2018, the MEMR issued four regulations which revoke the implementation of gas transportation by pipeline, BPH Migas 32 regulations in the energy and mineral resources sector, in order has the authority to intervene. If such intervention does not yield to improve investment and economic growth by simplifying the a settlement between the disputing parties, the dispute may be regulatory regime. The 32 regulations included 11 regulations in referred to a district court. the oil and gas sector, and three regulations related to SKK Migas. Also in February 2018, the MEMR issued MEMR Reg 15/2018, 13.2 Is your jurisdiction a signatory to, and has it duly which stipulates the provisions related to PSC Contractors’ ratified into domestic legislation: the New York obligation to conduct post-operation activities using post-operation Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and/or the Convention on activity funds (see question 3.12 above). the Settlement of Investment Disputes between States In April 2018, the MEMR issued MEMR Reg. 23/2018, which and Nationals of Other States (“ICSID”)? revokes MEMR Regulation No. 15 of 2015. As briefly discussed in question 3.4 above, this Regulation provides four possible actions Yes, Indonesia is a signatory to and has ratified both the New for working areas with expiring PSCs, namely: (i) PSC extension by York Convention on the Recognition and Enforcement of the PSC Contractor; (ii) takeover of the PSC by Pertamina; (iii) joint Foreign Arbitral Awards and the Convention on the Settlement of management between the PSC Contractor and Pertamina; or (iv) Investment Disputes between States and Nationals of Other States. tender of the working area. To date, there have been three expiring PSCs that have been granted to Pertamina, namely the Mahakam, Rokan, and East Kalimantan blocks. 13.3 Is there any special difficulty (whether as a matter of law or practice) in litigating, or seeking to enforce The MEMR also issued MEMR Regulation No. 24 of 2018 judgments or awards, against Government authorities and MEMR Regulation No. 46 of 2018, which amend MEMR or State organs (including any immunity)? Regulation No. 26 of 2017 regarding the Mechanism for the Recovery of Investment Costs in Upstream Oil and Gas Activities. Indonesia does not recognise foreign court decisions, but These recent regulations add several new provisions on the recovery international arbitration awards can be enforced in Indonesia of investment cost, including (i) the time period for SKK Migas through the mechanism provided in Law No. 30 of 1999 regarding to verify the investment cost recovery, and (ii) the time period and

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late payment penalty related to the settlement of investment cost recovery if an expiring PSC is not renewed and is transferred to a new PSC Contractor. Another key Regulation issued by the MEMR in 2018 is MEMR Reg. 42/2018, which requires the holders of crude oil processing licences to prioritise the utilisation of crude oil from domestic PSC Contractors before considering importation (see question 5.1 above). Indonesia Fitriana Mahiddin Syahdan Z. Aziz SSEK Legal Consultants SSEK Legal Consultants Mayapada Tower, 14th Floor Mayapada Tower, 14th Floor Jl. Jend. Sudirman Kav. 28 Jl. Jend. Sudirman Kav. 28 Jakarta, 12920 Jakarta, 12920 Indonesia Indonesia

Tel: +62 21 521 2038 / +62 21 2953 2000 Tel: +62 21 521 2038 / +62 21 2953 2000 Fax: +62 21 521 2039 Fax: +62 21 521 2039 Email: [email protected] Email: [email protected] URL: www.ssek.com URL: www.ssek.com

Fitriana Mahiddin is a supervising partner of SSEK’s oil and gas Syahdan Z. Aziz joined SSEK in 2005 and is a partner at the firm. practice. Fitriana is heavily involved in mergers and acquisitions, His practice includes oil and gas law, energy and natural resources, foreign investment and project finance, with a focus on the oil and gas, project finance and infrastructure, foreign capital investment, mergers mining and private power sectors. and acquisitions, and general corporate matters. Since joining SSEK in 1999, Fitriana has represented numerous Syahdan received his Bachelor of Laws in economic law from the leading offshore and local upstream oil and gas companies. Her University of Indonesia. He earned his Master of Laws after completing experience includes preparing and negotiating farm-in/farm-out a one-year programme in international economic and business law at agreements, joint operating agreements and gas sales contracts, and the University of Groningen, the Netherlands. setting up branch offices and project companies for clients. Syahdan’s recent projects include advising an Indonesian State-owned Fitriana is recognised by Asialaw as a leading lawyer for energy and oil and natural gas company on the acquisition of a petrochemical natural resources and is included in the IFLR1000 guide to the leading company and acting for a Japanese petroleum company on fuel sale financial and corporate lawyers and law firms. and storage agreements. He advised a leading multinational energy corporation on its potential exposure on the retirement of certain Fitriana earned her Master of Laws in international business law from offshore and onshore assets and acted for a multinational drilling rig Vrije Universiteit, the Netherlands. She is a member of the Indonesian operator in a potential cooperation in Indonesia. Advocates Association and the Association of Indonesian Legal Consultants. Syahdan is a member of the Indonesian Advocates Association.

SSEK Legal Consultants was established in 1992 and has 25 years of experience working with clients in Indonesia and helping them achieve their business and investment goals. SSEK is a full-service commercial law firm and works with domestic and global corporates on the largest, most complex projects across all sectors in Indonesia. SSEK is regularly recognised by independent legal publications as a leading law firm in every major practice area. SSEK was named the 2014 Indonesian Law Firm of the Year by Who’s Who Legal, the sixth year it has received this honour, the most of any Indonesian law firm, and was recognised as the 2013 and 2011 Indonesian Law Firm of the Year by Chambers Asia-Pacific. SSEK combines an unsurpassed insight into Indonesian corporate law with the global outlook of its award-winning lawyers to offer clients innovative and timely solutions to their real-world problems.

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Italy Fiorella F. Alvino

Nunziante Magrone Giovanna Branca

in national legislation more stringently than required as a minimum 1 Overview of Natural Gas Sector by EU legislation. This refers in particular to the rules of legal, organisational and 1.1 A brief outline of your jurisdiction’s natural gas decisional separation introduced by the Authority for Energy and sector, including a general description of: natural Gas Services and the Integrated Water System, recently renamed gas reserves; natural gas production including in the Regulatory Authority for Energy Networks and Environment the extent to which production is associated or (ARERA), with Resolution no. 11/07, in order to substitute the non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) effects of a real proprietary separation. In fact, this has extended liquefaction and export facilities, and/or receiving and the scope of application of the functional unbundling to activities re-gasification facilities (“LNG facilities”); natural gas different from transport and distribution (i.e. storage to LNG), and pipeline transportation and distribution/transmission on the other hand has envisaged the adoption of a very penetrating network; natural gas storage; and commodity sales model of governance aimed at regulating relations between the and trading. parent company and subsidiaries in order to: ■ guarantee the neutrality of the management of infrastructures Italy has experienced a profound change in domestic economic essential for the development of a free energy market; policies, determined by a different theoretical approach to the role of ■ prevent discrimination in accessing commercially sensitive the State in the economy, which has reduced direct participation in information; and regulatory activities. This change led to the launch of a privatisation ■ prevent the cross-transfers of resources between the segments process that is affecting all of the most important State-run businesses of the supply chain. and, thanks to EU directives, to the opening up of competition in those areas traditionally considered natural monopolies. The constant path towards greater market competitiveness has been implemented with: Thus, the overlapping of liberalisation and privatisation processes 1. Legislative Decree no. 93/11, acknowledging the so-called at both a national and European level has made it impossible to “Third Energy Package”; maintain the traditional approach to energy policy based on the direct intervention of the State in ensuring the pursuit of the priority 2. Legislative Decree no. 130 of 13/08/2010, (the so-called “Storage Decree”) and subsequent amendments; and objectives of the public service and security of supply. The State has thus changed its energy policy goals from its decision-making 3. the ARERA’s resolutions on gas balancing. position to that of utilities sector regulator. The storage activity allows a dynamic optimisation of the available With these objectives and on these assumptions, the European infrastructure in order to satisfy users’ demand. Parliament and the Council of the European Union issued various In Italy, it is an activity subject to concession by the Ministry for directives in the 1990s to try to liberalise the gas sector, the most Economic Development (MiSE), and the main operator is Stogit important being Directive no. 98/30/EC, which outlines the which manages about 96% of the total storage capacity, with nine regulatory framework which all EU countries will have to follow. operating concessions, 16.7 billion cubic metres of capacity and In Italy, it was transposed by Legislative Decree no. 164 of 1,992 billion cubic metres of gas handled in the storage system 23/05/2000, the so-called “Letta Decree” (from the then Minister in 2017. The remaining portion is managed mainly by Edison of Industry). This decree completely revolutionised the gas sector Stoccaggio. in Italy: from an integrated vertical market fully concentrated in the The tariff, defined on the basis of criteria established by the ARERA hands of the State monopoly of Eni to a market open to competition and approved by the latter every year, is the lowest in Europe. The during production, supply and sale. storage system is managed by each operator as a single integrated The legislative process was further pursued at Community level, system (hub) for which users access a single tariff at national level. as a new European directive was adopted in the first half of 2003, Through a perception system, the two storage companies receive which incorporates much of Directive no. 98/30/EC and continues their reference revenues approved by the authority. The rules with the liberalisation of the gas market. for access to capacity and storage facilities are laid down by the ARERA. In relation to the so-called “Second Gas Directive” (2003/55/EC), many of the provisions contained therein were actually implemented The national gas system is fuelled by about 90% of imported gas.

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The major import infrastructures in operation are: with 23.4%, followed by Algeria with 12.9%, Iraq with 10.7%, ■ the TAG pipeline for the import of gas originating from Azerbaijan with 10.1%, Libya with 5.9%, Saudi Arabia with 5.8%, Russia, which is connected to the National Pipeline Grid in Kazakhstan with 4.4%, Kuwait with 3.0%, Iran with 2.5% and the Tarvisio (Udine); Netherlands with 2.0%. ■ the Transitgas pipeline for the import of Dutch and Norwegian In 2018 there has been a strong increase in the weight of the Islamic gas, which goes from Wallbach, located in Switzerland, up Republic of Iran which has become the second largest supplier of to Passo Gries (VB), where it is connected to the National crude oil in the Italian economy with a share that reaches 12.9%. Pipeline Grid; ■ the TTPC (Trans Tunisian Pipeline Company) pipeline,

which crosses the Strait of Sicily up to Mazara del Vallo (TP), 1.4 To what extent is your jurisdiction’s natural gas Italy where it is connected to the National Pipeline Grid; production exported (pipeline or LNG)? ■ the Greenstream pipeline, which connects Libya and Italy at the entry point of Gela; In 2017, export volumes remain unchanged in comparison to past years. The development of transport capacity in the 10-year period ■ the regasification plant of the company GNL Italia al Panigalia (La Spezia); (2016–2025) planned by Snam Rete Gas S.p.A. (SNAM) should allow, starting from 2019, export volumes to increase to about 5 ■ the Adriatic LNG terminal, which is a regasification terminal off the coast of Rovigo; and billion cubic metres by 2022. ■ the OLT Offshore LNG Toscana, which is a floating regasification terminal off the coast of Livorno in Tuscany. 2 Overview of Oil Sector The following entry point is currently being built: ■ the TAP (Trans Adriatic Pipeline), which will be an 2.1 Please provide a brief outline of your jurisdiction’s oil interconnector pipeline between Greece and Italy through sector. Albania, with an entry point in Italy at the Municipality of Melendugno, in Puglia. There are only modest oil and gas wells in Italy; they are very The following projects have been authorised: fragmented and often located at a great depth or offshore. This has ■ the IGI Poseidon pipeline (Company: IGI Poseidon), which made it difficult both to locate and to exploit them. should be an interconnector between Greece and Italy, with th an entry point in Otranto (Lecce); Italy is the world’s 49 largest oil producer. ■ the regasification terminal offshore (Company: Api Nova The most important oil deposits in Italy are located in mainland and Energia) of Falconara Marittima in the Marche Region; and offshore Sicily. ■ the regasification terminal (Company: LNG Medgas There are also important oil deposits in Val d’Agri, in Basilicata, and Terminal) of Gioia Tauro in the Calabria Region. in Porto Orsini, in the Ravenna area of the Adriatic. The following project is under evaluation: Exploration for oil is still continuing today, with oil production ■ the regasification terminal of Monfalcone (Company: at around 80,000 barrels per day, while gas production is at Smart Gas S.p.A.) in the Friuli Venezia Giulia Region. The approximately 15 billion cubic metres per day. The oil production outcome of the Environmental Impact Assessment (VIA) has peak in Italy was reached in 1997, and the current exhaustion speed been negative. is 3.1%. The GALSI project (a pipeline from Algeria to Sardinia and then from Sardinia to Toscany) has been abandoned since it is no longer 2.2 To what extent are your jurisdiction’s energy a priority EU energy project and after a long dispute with the requirements met using oil? Friuli Venezia Giulia Region. The Spanish company, Gas Natural International, also abandoned the construction project for the Zaule In the last year, 36% of Italy’s energy requirements were met using regasifier. oil. Hence, it is the primary source for meeting energy demand.

1.2 To what extent are your jurisdiction’s energy 2.3 To what extent are your jurisdiction’s oil requirements requirements met using natural gas (including LNG)? met through domestic oil production?

Italy is the third European market for natural gas consumption Domestic production represents approximately 7% of Italy’s total oil (approximately 71 billion cubic metres in 2016), a dependency on consumption; the remaining 93% is therefore imported from abroad. imports for approximately 92% of gas consumption. Natural gas has Italian production corresponds to 1% of world production, with the not had much of an impact on primary energy consumption, which remaining reserves, approximately 1 billion barrels, representing has remained almost stable, while gross electrical energy production 0.1% of the world’s crude oil reserves. increased from 40% to 42% due to the impact of natural gas. Based on the data available as of February 2018, the import of natural gas increased by 15.8% compared to 2016. 2.4 To what extent is your jurisdiction’s oil production exported?

1.3 To what extent are your jurisdiction’s natural gas In 2017, there was an increase in exports of crude oil, semi- requirements met through domestic natural gas processed and finished products of +5.3% compared with 2016. production? Italian exports are mainly directed to EU countries.

In 2017, 80.7% of the value of crude oil and natural gas supplies was covered by the leading 10 countries: Russia remained in first place

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Instruction of University and Research, ISPRA and Avvocatura di 3 Development of Oil and Natural Gas Stato) as well as the representatives of the Regions. For offshore permits, the Ministry of Transport and Agricultural and Forestry 3.1 Outline broadly the legal/statutory and organisational Policies are involved. framework for the exploration and production Projects are subject to an environmental screening and/or (“development”) of oil and natural gas reserves Environmental Impact Assessment by the MATTM or the Region including: principal legislation; in whom the State’s concerned. Onshore permits are issued by the Ministry in mineral rights to oil and natural gas are vested; Government authority or authorities responsible for accordance with the Regions concerned. the regulation of oil and natural gas development; and The involvement of local communities is guaranteed by the role Italy current major initiatives or policies of the Government played within the context of the procedure by the Municipal and (if any) in relation to oil and natural gas development. Provincial administrations concerned, which must express their opinion on the construction of the plants and carry out a check on Hydrocarbon reserves are owned by the State; their exploration and the compliance of the works with planning regulations. consequent exploitation are considered in the public interest and are An exploration permit may last for up to 12 years (six years + carried out by private enterprises under a legal concession regime possible extensions (maximum extensions of three years each)). (mineral rights). Production licences issued by the MiSE are exclusive ones. In The general principles that apply to mineral rights are set forth in general, the licence-holder, after a positive finding on its part, is Royal Decree no. 1443 of 29/07/1927, as amended, inter alia, by granted the right to produce on the basis of a programme for the Law no. 6 of 1957. development of the deposit approved at the time of the granting of In the 1990s, the Italian legislator adopted a new national energy plan the licence. (Law no. 9 of 09/01/1991) and new provisions for the granting and The surface area of a licence is much smaller than that of an exercise of licences related to hydrocarbon prospection, exploration exploration permit, but is not, in general, strictly connected to the and production (Legislative Decree no. 625 of 25/11/1996). deposit found by exploration, as in such area, the licence-holder The liberalisation and privatisation process in the energy sector also may also carry out further exploration (geophysical and drilling) to impacts the oil sector with the Letta Decree and Legislative Decree increase the production of the deposits already found. no. 239 of 23/08/2004 (“Marzano Law”). Onshore production licences are granted by the MiSE in accordance The environmental aspects are regulated by Legislative Decree no. with the Region concerned and once the environmental procedures 152 of 03/04/2006. have been completed. The MiSE plays a key role as, through its central and local structures, Production licences have a duration of 20 years, which may be it assesses projects from a technical and economic standpoint, issues extended by up to a further 10 years. the relevant permits, and supervises the due performance of the The sole concession grants the exclusive right to carry out both works and compliance with safety regulations. The MiSE exercises exploration and production activities and has a duration of 30 years, its functions throughout the useful lifespan of a deposit, from the which may be extended by up to a further 10 years. exploration and production phases until its final shutdown and clean- up. Applying environmental legislation, the MiSE coordinates its activities with the MATTM and with the Regions, which will assess 3.3 If different authorisations are issued in respect of the environmental compatibility of offshore and onshore extraction different stages of development (e.g., exploration projects, respectively. appraisal or production arrangements), please specify those authorisations and briefly summarise the most important (standard) terms (such as term/duration, 3.2 How are the State’s mineral rights to develop oil scope of rights, expenditure obligations). and natural gas reserves transferred to investors or companies (“participants”) (e.g. licence, concession, Production licences are granted to exploration permit-holders who service contract, contractual rights under Production have found liquid and gas hydrocarbons, and who can show that Sharing Agreement?) and what is the legal status of they have adequate financial and technical resources which allow those rights or interests under domestic law? “good governance” of the deposit. Mineral rights are made up of prospection and exploration permits, The Directorial Decree granting the production licence, for which production licences and sole concessions. the MiSE is responsible for issuing, contains all the regulations and restrictions established by the bodies which have examined the Exploration permits are exclusive permits, issued at the request of project during the administrative process of which the Directorial the oil company, which must submit the exploration programme Decree is the last step (the bodies include the MATTM or the Region which it intends to develop and the geological and geophysical for environmental compatibility aspects, the Provinces, and the studies underlying the choice of the area on the basis of the Municipalities for the construction of plants and wells). possible presence of liquid/gas hydrocarbons. Applications may be submitted in competition for the same area by other operators for The MiSE also establishes rules in relation to the licence-holder’s three months from the publication of the first request in the Official obligations, facilities and safety which, if not complied with, may Journal of the European Union. lead to the revocation of the licence according to specific procedures laid down by law. Exploration permits are issued following a single procedure (lasting a maximum of 180 days) governed by article 1, paragraphs 77 and The most important regulations relate to the environmental 79 of Law no. 239 of 23/08/2004, and subsequent amendments. impact of extraction activities, and the facilities must be operated in compliance with the technical requirements imparted by the The project is selected by the MiSE, having obtained the opinion competent bodies in the document approving the Environmental of a consultative organ, the CIRM, which is represented by the Impact Assessment. competent State administrations (MiSE, MATTM, Ministry of

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The main bodies responsible for checking the environmental area 50% is allocated to the MiSE to ensure the full performance of the are the ARPA (Agenzia Regionale per la Protezione dell’Ambiente – monitoring activities and safety checks, including environmental Regional Agency for the Protection of the Environment), which are ones for offshore exploration and production plants. technical bodies present in every Region of Italy which specifically Moreover, under Italian law, upstream oil and gas operators are deal with checking that the chemical and physical parameters of the subject to the following tax regime: (i) general corporate income tax plants comply with the limit values laid down by environmental (IRES); (ii) regional tax on productive activities (IRAP); and (iii) legislation (the most important one being Legislative Decree no. value-added tax (VAT). 152/2006 and subsequent amendments) and the limits laid down by the licences authorising each specific facility.

3.6 Are there any restrictions on the export of Italy The MiSE has a chemical laboratory which carries out checks production? connected to the workers’ health, and on the emissions arising from the treatment of the gas and oil. Should the above parameters Under Italian legislation, there are no restrictions on the export of be exceeded, in relation, for example, to water discharges or natural gas and/or oil. emissions into the air, on the basis of specific provisions of law, the plant operator will incur criminal and administrative sanctions and the closure of the production facility may also be ordered until 3.7 Are there any currency exchange restrictions, or functioning conditions are returned to below the parameters. restrictions on the transfer of funds derived from production out of the jurisdiction? This happened, for example, in the case of the ENI S.p.A. plant in Val d’Agri, Basilicata, which was closed down in 2017 for months There are no currency exchange restrictions or restrictions on the in order for environmental safety conditions to be met. transfer of funds derived from production out of Italy.

3.4 To what extent, if any, does the State have an ownership interest, or seek to participate, in the 3.8 What restrictions (if any) apply to the transfer or development of oil and natural gas reserves (whether disposal of oil and natural gas development rights or as a matter of law or policy)? interests?

ENI S.p.A. (ENI) was the State-owned company in the Italian oil The transfer of mineral rights is subject to prior authorisation by and natural gas industry until the enactment of the Letta Decree, the MiSE. which implemented the principles of Directive no. 98/30/EC on common rules for the internal natural gas market. 3.9 Are participants obliged to provide any security SNAM is the main Italian Transmission System Operator. or guarantees in relation to oil and natural gas development? Legislative Decree no. 93/2011 implemented the European “Third Energy Package” and established the adoption of the Independent In compliance with the Ministerial Decree of 25/03/2015 and the Transmission Operator model, thus requiring a functional separation relative implementing Decree of 15/07/2015, mineral rights are of SNAM from ENI. granted to applicants which meet the requirements of a general Law Decree no. 1/2012 and DPCM of 25/05/2012 then provided nature, and which possess the technical ability, and economic and for a full ownership unbundling regime to be implemented by ENI, organisational capacity in line with the performance and realisation selling the SNAM’s shares. of the programme submitted, with a registered office in Italy or in another Member State of the European Union or, upon conditions of 3.5 How does the State derive value from oil and natural reciprocity, in other countries. The applicants must have technical gas development (e.g. royalty, share of production, and administrative structures in the European Union adequate for the taxes)? envisaged activities, or must submit a declaration by which a legal representative undertakes to set them up if the permit is granted. Licence-holders must comply with works programmes and pay In order to assess its economic capacity, the applicant must submit fees in proportion to the surface area covered by mineral rights and a copy of its financial statements for the last three financial years royalties, in proportion to the quantity of hydrocarbons produced. and the turnover for the last three years, and must show that the With respect to hydrocarbon exploration and production, the net equity is higher than zero. Furthermore, certain minimum royalties are applied on the basis of the value of production. The requirements must be met in relation to the ratio between net debt royalties for onshore production are currently 10% (7% royalty and and net equity. 3% to the oil prices reduction fund) if 20,000 tonnes per year are If the applicant is a physical individual, he must provide, when exceeded, while for offshore production they are 7% (4% royalty and submitting the application, an initial security deposit of 120,000.00 3% safety and environmental share) if they exceed 50,000 tonnes euros, set up by a bank guarantee or through an insurance per year for oil, and are applied to the sale value of the quantities guarantee policy, issued by an authorised insurance company duly produced. Royalties for the production of onshore hydrocarbons are operating within Italy. They must also submit financial guarantees split, as follows: 55% to the Regions; 30% to the State; and 15% to commensurate with the works programme submitted. the Municipalities. Mineral rights will not be granted to companies having a fully However, for the Regions included in Objective 1 (the Regions of paid-up share capital of less than 120,000.00 euros, and physical southern Italy including Basilicata, the main Italian oil producer), individuals who have not provided the security deposit of 120,000.00 the State’s share of 30% is also assigned directly to the Regions. The euros. rate of 3% for offshore permits is paid in full to the State and 50% Should the applicant be a company, the issuance of the permit is allocated to the MATTM to ensure the full performance of the is subject to the presentation of appropriate bank or insurance monitoring and fight against sea pollution activities. The remaining guarantees commensurate with the value of the environmental

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recovery work provided at the time of filing of the relevant mineral rights. For onshore activities, the programme for the application, in the amounts and in the ways laid down by the Decree clean-up of the area will be authorised by the UNMIG Section in of 15/07/2015. accordance with the competent Region. At the end of the works, Should the applicant be a joint venture, each joint venture party the UNMIG Section will draw up the report that the area has been must provide pro rata evidence of the bank and insurance policies. cleaned up according to the authorised programme and will send a This can be provided by only the sole representative for the entire copy of it to the Ministry and to the Region. joint venture; however, all the joint venture parties are, in any event, responsible jointly and severally for all the obligations arising under 3.13 Is there any legislation or framework relating to the concession. gas storage? If so, what are the principal features/ Italy requirements of the legislation?

3.10 Can rights to develop oil and natural gas reserves granted to a participant be pledged for security, or Gas storage is subject to concession. The ways in which the booked for accounting purposes under domestic law? concession is granted are established in Legislative Decree no. 93/2011. The setting up of mortgages on oil fields and gas fields is subject to Storage concessions are granted by decree of the MiSE, together approval by the MiSE. with the Region concerned, after an environmental compatibility clearance has been obtained from the administration concerned.

3.11 In addition to those rights/authorisations required The single procedure for the granting of the concession is structured to explore for and produce oil and natural gas, what in various phases which give points to the project on the basis of the other principal Government authorisations are following criteria: required to develop oil and natural gas reserves (e.g. a) completeness and rationality of the storage project and environmental, occupational health and safety) and the relevant works programme proposed on the basis of from whom are these authorisations to be obtained? geological studies and application of simulation models; b) planned times for the performance of the works and for full Exploration permits and production licences must be preceded by operation in relation to the storage performances provided for Environmental Impact Assessments for which the MATTM and the in terms of working gas and performance of the delivery and competent Region are responsible. injection point; For production licences, the extraction activities must be carried out c) manner of the performance of the works, with particular regard and the plants must be operated in compliance with the technical to safety and environmental protection, and environmental or regulations laid down by the competent bodies in the document safety-at-work certifications; approving the Environmental Impact Assessment. d) envisaged efficiency of the storage; The main bodies responsible for environmental checks are those e) minimum duration of inflow/outflow; described in question 3.3 above. f) use of original potential of the deposit (ratio between working Furthermore, Legislative Decree no. 145 of 18/08/2015 contains gas and the original deposit); and obligations for offshore facilities, and expressly provides that the g) ratio between operating costs/working gas. licence-holder is financially responsible for the prevention and Points from 0 to 10 are assigned to the project for each of the criteria repair of the environmental damage caused by sea operations from a) to c), points from 0 to 5 are assigned for each of the criteria through hydrocarbon activities carried out by it or on its behalf. from d) to g), with points for the project equal to the sum from a) to g) for a maximum total of 50 points. 3.12 Is there any legislation or framework relating to Should the project not reach sufficient quality levels, equal at least the abandonment or decommissioning of physical to a total of 26 points, it will be rejected and, if there is competition, structures used in oil and natural gas development? If excluded from the ranking. so, what are the principal features/requirements of the legislation? If there is a favourable outcome, the decree provides for the limits to be allocated to storage with the relevant shares and guarantee Should a licence-holder wish to decommission physical structures clauses on the attaining of minimum targets as specified in the because it intends to shut down a sterile or exhausted deposit or application; in particular, for working gas. one which can no longer, in any event, be used, or is not capable The decree granting the concession is served on the licence-holder, of further assuring production in commercial quantities, it must ask the MATTM, the Regions and the Municipality are all involved in for authorisation from the UNMIG Section of the MiSE providing the process, and it is published in the Official Bulletin as well as details of the shutdown. The licence-holder must draw up a on the website of the MiSE, setting forth the works programme technical report on the shutdown of the deposit, providing details of approved and the relevant performance times and, if there is the actions carried out, and must send it to the competent UNMIG competition, the reasons adopted for the selection. The same decree Section. Notice must be given of the shutting down of an onshore approves any additional appurtenant actions. The decree shall deposit to the Region concerned. The competent UNMIG Section also be published, by the applicant, in the Official Journal and in a must draw up a report on the shutting down of the deposit. In the national daily newspaper. programmes for exploration, drilling and production activities, the The procedure has an overall maximum duration of 180 days, licence-holder must provide details of the necessary actions for the subject to the times necessary for the compulsory sub-procedures characterisation and possible clean-up of the site for the purposes for which other administrations are responsible. of its release without any restrictions arising from previous drilling Concessions for the storage of natural gas shall remain in force for activities. The competent UNMIG Section will certify completion 30 years, which may be extended, no more than once, by another of the shutdown and removal of the physical structures, and will 10 years. send such certification to the Ministry for the cancellation of the

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As to safety, despite a high dependency on imports, Italy has the 3.14 Are there any laws or regulations that deal specifically highest degree of diversification of routes and sources of supply in with the exploration and production of unconventional Europe. oil and gas resources? If so, what are their key features? Italy’s central position for the energy future of the European Union can also be seen from the list of 248 PCIs in the areas of In Italy there is no law that specifically disciplines the exploration gas, electricity and oil, which include Italian projects involving and production of unconventional oil and gas resources, but under gas (“Support to the North-Western Market and Trans-Frontier article 144, paragraph 4-bis, introduced by Law 164/2014, the Bidirectional Flows” and “Strengthening for New Imports from the search for and extraction of shale gas and shale oil and the issue South (Adriatic Line)”). Italy of the relative mining rights are prohibited. For this purpose any Legislative Decree no. 93 of 01/06/2011 implemented the technique of pressure injection in the subsoil of liquid or gaseous provisions of European Directive no. 2009/73/EC in Italy. Article fluids, including any additives, aimed at producing or favouring the 16, as amended by article 26, of Law no. 115 of 29/07/2015 provides fracturing of rock formations in which shale gas and shale oil are that the transportation network operator shall send annually to the trapped, is forbidden. ARERA and MiSE the 10-year development plan for the network, containing the works necessary to guarantee the adequacy of the system and the safety of supplies, and taking account of the economic 4 Import / Export of Natural Gas (including efficiency of the investments and protection of the environment. LNG) Article 8 provides that the transportation system operators must have a continuous bidirectional capacity throughout all the trans- 4.1 Outline any regulatory requirements, or specific frontier interconnections between Member States, including in the terms, limitations or rules applying in respect of connection between Italy and Central Europe, through the Transitgas cross-border sales or deliveries of natural gas gas pipeline in Switzerland. (including LNG). The most important transportation system operator in Italy is SNAM. Legislative Decree no. 93/2011 provides that imports under long- The first 10-year plan (2016–2025) presented by SNAM provides term agreements are subject to a MiSE authorisation approving the for the realisation of the following projects by 2023: “Support to relevant gas supply agreement, whilst imports under short-term the North Western Market and Trans-Frontier Bidirectional Flows”; agreements (up to one year of duration) may be carried out subject “Strengthening for New Imports from the South (Adriatic Line)”; to a simple communication to be submitted to the MiSE prior to the “Interconnection with Slovenia”; and the performance, within a execution of the relevant gas supply agreement. period to be agreed, of the following projects: “Potential Imports Furthermore, according to the MiSE Decree of 19/03/2008, from the North-East”; “Further Strengthening of the South”; and the importers from non-EU countries are obliged to offer a certain quota “Galsi Project”. of gas imported to the domestic gas trading market.

6.2 What governmental authorisations (including 5 Import / Export of Oil any applicable environmental authorisations) are required to construct and operate oil and natural gas transportation pipelines and associated 5.1 Outline any regulatory requirements, or specific infrastructure? terms, limitations or rules applying in respect of cross-border sales or deliveries of oil and oil The transportation of methane gas produced domestically or products. imported from abroad takes place through the National Gas Pipeline Network (Rete Nazionale dei Gasdotti – RNG). Under Italian legislation, oil imports and exports are not subject to The RNG, as well as transporting gas to interconnection points any authorisations or communications to any regulatory authority. through the Regional Transportation Network (Rete Regionale di However, Italian law provides for certain obligations to be respected, Trasporto – RRT), local distribution networks and storage facilities, such as maintaining a minimum level of stocks of crude oil and/or supplies large industries and thermoelectric power plants. petroleum products. The legislation on the classification of the RNG is set forth in the Ministerial Decree of 22/12/2000 and subsequent amendments and 6 Transportation integrations, while the legislation on the classification of the RRT is set forth in the Ministerial Decree of 29/09/2005 and subsequent amendments and integrations. 6.1 Outline broadly the ownership, organisational and Operators of stretches of the RNG and RRT must submit every year regulatory framework in relation to transportation to the Ministry, by 31 July, an application for the updating of the pipelines and associated infrastructure (such as natural gas processing and storage facilities). networks. As well as a complete list of the existing stretches, the operators must provide a list of any new gas pipelines that have entered into operation, planned ones and finally those shut down as Italy is part of three of the four priority energy corridors included at 30 June of the same year. in projects of common interest (PCI) established by the European Commission. By 30 September, the Ministry shall examine the applications and, having obtained the opinion of the ARERA and of the Regions The European Commission has reported on Italy’s good performance concerned, shall publish by 30 November on its website the decree in terms of energy safety, efficiency, research and innovation, and updating the RNG and RTR, which shall enter into force from 1 decarbonisation. January of the following year.

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The construction of the pipelines and associated infrastructure is subject to a Sole Authorisation under article 52-quinquies of 6.7 Are parties free to agree the terms upon which oil Presidential Decree no. 327/2001 (the “Public Expropriation Act”), or natural gas is to be transported or are the terms (including costs/tariffs which may be charged) which replaces any other licence or approval required by law, regulated? including Environmental Impact Assessments.

The Environmental Impact Assessment (for which the Ministry of The ARERA is responsible for regulating the tariffs for the gas Environment and/or of the competent Region is responsible) is part transportation and dispatching service. of the procedure for the issue of the Sole Authorisation. By Resolution no. 575/2017/R/gas, the ARERA approved criteria The Sole Authorisation implies the Declaration of Public Utility of Italy for tariffs for the natural gas transportation service for the transition the project and the expropriation constraint. period 2018–2019, adopting the provisions of “Adjustment of tariffs for the transport and dispatching service of natural gas for 6.3 In general, how does an entity obtain the necessary the regulatory period 2014–2017 and for the transition period land (or other) rights to construct oil and natural gas 2018–2019” (RTTG). In particular, the resolution provides for the transportation pipelines or associated infrastructure? extension, for the years 2018–2019, of the main regulatory criteria Do Government authorities have any powers of in force in the period 2014–2017, with the introduction of some compulsory acquisition to facilitate land access? corrective measures. By Resolution no. 795/2017/R/gas, the Authority also approved, If the land is owned by the State, or by the Region or Municipality, for the year 2018, the tariffs for the transportation and dispatching the applicant must ask the competent authority for the issuance of a service and the measurement fees, as well as the proposal of the land concession. coefficients relating to the self-consumption quotas, network losses Should the land be owned by a private subject, the applicant needs and unrecorded gas to be allocated to the final users. to reach an agreement with the owner to obtain the easement rights for the new pipelines. However, the issuance of the Sole Authorisation gives the applicant 7 Gas Transmission / Distribution the right to start the expropriation procedures. 7.1 Outline broadly the ownership, organisational and 6.4 How is access to oil and natural gas transportation regulatory framework in relation to the natural gas pipelines and associated infrastructure organised? transmission/distribution network.

As gas transportation is classified as a public service, owners of The natural gas distribution system consists of three different pipeline infrastructures and operators of gas transportation and “levels”: the legislative level; the regulations level; and the dispatching must grant access to their own network infrastructure regulatory level. to applicants, on a non-discriminatory basis and with the aim of The legislative level is essentially composed of articles 14, 15 and granting the neutrality of gas transportation. 16 of the Letta Decree, which identify the general provisions for the In order to regulate the conditions of access, each network owner/ gas distribution service. Mention must also be made to article 46- operator is required to adopt its own network code (Codice di Rete) bis of Law Decree no. 159/2007, converted into Law no. 222/2007, on the basis of a standard format approved by the ARERA. which required of subsequent Ministerial Decrees the establishing of uniform tender criteria for the awarding of the service and identification of the minimum territory for the tenders according 6.5 To what degree are oil and natural gas transportation to optimum territorial catchment areas (Bacini Ottimali di Utenza pipelines integrated or interconnected, and how is co- – ATEM), thus superseding the “old” community ambits. With operation between different transportation systems established and regulated? respect to the awarding of the gas distribution system, article 24 of Legislative Decree no. 93/2011 definitively provided that it must take place exclusively through ATEM tenders. The RNG is interconnected to: the RRT; local distribution networks; and storage facilities, and supplies large industries and With regard to the regulations level, the following are significant: thermoelectric power plants. (a) the Ministerial Decrees of 19/01/2011 and 18/10/2011, which respectively split Italy into 177 ATEMs and identified the individual Municipalities pertaining to each ATEM; (b) the Ministerial Decree 6.6 Outline any third-party access regime/rights in of 12/11/2011 (amended recently by the Ministerial Decree of respect of oil and natural gas transportation and 20/05/2015), which, among other things, laid down the criteria associated infrastructure. For example, can the regulator or a new customer wishing to transport for the assessment of tenders and bids for the awarding of the gas oil or natural gas compel or require the operator/ distribution service; (c) the Ministerial Decree of 05/02/2013, which owner of an oil or natural gas transportation pipeline approved the format of the service contract; and (d) the Ministerial or associated infrastructure to grant capacity or Decree of 22/05/2014, which approved the guidelines for the expand its facilities in order to accommodate the new calculation of the reimbursement value for gas distribution systems. customer? If so, how are the costs (including costs of interconnection, capacity reservation or facility Finally, of no less importance is the regulatory level, made up of expansions) allocated? a myriad of measures issued by the ARERA, of which mention must be made to Resolution no. 113/2013/R/gas (which governs As gas transportation is classified as a public service, operators the procedural process for any observations of the authority to must grant access to third parties, provided that they have adequate be made to the contracting authorities on tender regulations) and capacity, and the necessary works are technically and economically Resolution no. 367/2014/R/gas, containing “Tariff Regulations for feasible (see question 6.4 above). Gas Distribution and Measurement Services for the Regulatory Period 2014–2019”.

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7.2 What governmental authorisations (including any 7.5 What fees are charged for accessing the distribution applicable environmental authorisations) are required network, and are these fees regulated? to operate a distribution network? The tariff system to access the distribution network is regulated Gas distribution is a “public service activity”. The party authorised by the ARERA. The 2014–2019 tariff period was regulated by to grant the distribution service is the local authority, and the service Resolution no. 367/2014/R/gas. must be awarded exclusively through a tender procedure for periods of not more than 12 years. The dealings between the grantor and the 7.6 Are there any restrictions or limitations in relation to

concessionaire are governed by service contracts, on the basis of a Italy acquiring an interest in a gas utility, or the transfer contract format drawn up by the ARERA and approved by the MiSE of assets forming part of the distribution network (see the Ministerial Decree of 05/02/2013). (whether directly or indirectly)?

7.3 How is access to the natural gas distribution network There are no limitations on the acquisition of the share capital of organised? natural gas utilities. If the share capital of the distributor company is held by local authorities, private partners have to be selected The tender regulations for the awarding of the gas distribution through a public tender procedure (see question 7.3 above). service are laid down in the Ministerial Decree of 12/11/2011 and subsequent amendments and integrations. This decree, inter alia, laid down the rules for the identification of the contracting 8 Natural Gas Trading authority and established its duties. In particular, the contracting authority carries out the tender procedure and awards the contract by 8.1 Outline broadly the ownership, organisational and delegation of the local authorities (the grantor) and takes care of all regulatory framework in relation to natural gas dealings with the operator. In this respect, operators must comply trading. Please include details of current major with a series of information obligations (of a technical, financial, initiatives or policies of the Government or regulator contractual and tariff nature) with respect to the local authorities (if any) relating to natural gas trading. (the grantor). The sale of natural gas is governed by articles 17 and 18 of the The decree also deals with other significant aspects, such as the Letta Decree, as amended by article 30 of Legislative Decree no. 93 calculation of the reimbursement value of the gas distribution of 01/06/2011, as well as by the Ministerial Decree of 29/12/2011, system to the outgoing operator, and the way in which the invitation which provides for the criteria on the basis of which undertakings to tender shall be drawn up. are registered in the list of undertakings authorised to sell natural gas The incoming operator, as well as being entitled to operate the to end-customers throughout Italy, consisting of: a) the availability distribution system, will take over the outgoing operator’s right to of natural gas and of the modulation service for customers having receive a tariff component for the recovery and remuneration of an annual consumption of not more than 50,000 cubic metres; b) a the capital invested by the same outgoing operator to construct the demonstration of the provenance of the gas and of the reliability of facilities. In this way, the incoming operator is partially compensated the transportation system; and c) the adequacy of the technical and for the disbursement made to pay the outgoing operator. financial capacities of the undertaking. The tender is carried out by adopting a restricted procedure, with the There is therefore an accreditation system at the MiSE for the exception of when an outgoing operator manages more than 60% performance of these activities. of the redelivery points; in this case, an open procedure is adopted. From 01/01/2003, sales have been completely liberalised, the The contract will be awarded according to the criterion of the most classification of “suitability” is extended to all customers, including advantageous economic offer. domestic ones (article 22, paragraph 2 of the Letta Decree) who may Sixty days before publication of the tender documentation, the freely choose their supplier. contracting authority must send the tender regulations to the ARERA, The wholesale market is managed by the Energy Market Operator together with the guidelines containing minimum development (Gestore dei Mercati Energetici) and exchanges take place on a conditions and the justifying note containing any discrepancies virtual platform. from the standard tender regulations. The ARERA then has 30 days Shippers active on the market can purchase natural gas from: private within which to submit its observations to the contracting authority counterparties through exchange platforms; PB-GAS (spot market); (otherwise, the silence-consent rule shall apply: see Regulation no. or the platform for the balancing out of natural gas. 113/2013/R/gas). The authority’s intervention is simply consultative and does not condition the subsequent development of the tender In order to limit dominant positions, there are maximum market procedure. In fact, any observations of the authority do not bind the shares. The wholesale market share is limited to a maximum cap of contracting authority. 40% of domestic consumption. If this cap is exceeded, gas release mechanisms are provided for at regulated prices. It is also possible to raise the threshold to 55% if there are undertakings to develop 7.4 Can the regulator require a distributor to grant and to increase storage capacity by 4 billion cubic metres over five capacity or expand its system in order to accommodate new customers? years. With regard specifically to retail sales, the ARERA supervises Gas distribution is a public service and, therefore, distributors the transparency of contractual conditions and service quality, must allow access to their networks to new operators which are maintaining also the power to fix the tariffs which retailers must authorised to reach new final users. If the distributor denies access, offer on the so-called “protected market”, together with their offers the ARERA will examine the refusal, and in case of unlawful refusal on the “free market” to end-customers defined as vulnerable. will oblige the operator to grant access.

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8.2 What range of natural gas commodities can be 9.3 Is there any regulation of the price or terms of service traded? For example, can only “bundled” products in the LNG sector? (i.e., the natural gas commodity and the distribution thereof) be traded? The ARERA is responsible for approving LNG tariffs. By Resolution no. 653/2017/R/gas, ARERA approved the tariff In order to balance out the gas market, the party responsible for the regulation criteria for LNG regasification tariffs for the transition balancing, SNAM, carries out sales and purchases on the exchange period 2018–2019, extending, for these years, the provisions platform for (i) Title Products, daily products exchanged on the contained in the resolution relative to the “Adjustment of tariffs day before or on the same day but effective from the time of the Italy for the LNG re-gasification service for the 2014-2017 regulatory transaction up until the gas day, they provide simply for the transfer period” (RTRG 2014–2017). of title of the quantity of gas being purchased or sold without further specification, (ii)Locational Products, which are those that, in order to keep the market in balance, provide for the modification of the 9.4 Outline any third-party access regime/rights in respect of LNG facilities. gas flows at a specific entry or exit point starting from a certain time of the gas day, and (iii) Temporal Products, which are those which, in order to keep the network in balance, provide for the modification Please see question 9.1 above. of the gas flows in a certain period of the gas day. These same methods are regulated by the AEGGSI (see Resolution 10 Downstream Oil no. 349/2017/R/gas and Resolution no. 661/2017/R/gas).

10.1 Outline broadly the regulatory framework in relation 9 Liquefied Natural Gas to the downstream oil sector.

Starting from Legislative Decree no. 32 of 11/02/1998, a procedure 9.1 Outline broadly the ownership, organisational and was started in Italy for the liberalisation of distribution in the oil regulatory framework in relation to LNG facilities. sector.

Regasification terminals receive liquid gas transported by ship and The authority responsible for issuing authorisations for fuel transform it into gaseous form. In this way, natural gas can be distribution facilities is the Municipality in the territory of which the entered directly into the transportation network. facility is to be found. This is regulated by article 24 of the Letta Decree which: provides Law no. 239/2004 liberalised the production, import, export and for an obligation on undertakings controlling infrastructure essential storage of mineral oils. to the functioning of the gas system, including regasification With regards to the discipline of minimum stocks, Legislative facilities, to allow access to other undertakings; and governs in an Decree no. 249/2012 implemented Directive no. 2009/119/EC, absolute way cases of legitimate refusal to access (refusal of access implementing the principles provided for by the Community Law must be set forth in a reasoned declaration and must be immediately (2009) (Law no. 96/2010). communicated to the ARERA and to the Italian Anti-Trust Authority The State is responsible for the issue of authorisations for (AGCM), as well as to the MiSE. The ARERA shall decide by a the operation of refineries, and the integrated environmental reasoned measure in relation to the refusal within three months of authorisation is required. such communication). The construction of regasification terminals involves a very 10.2 Outline broadly the ownership, organisation and complex authorisation process, of which the main steps include: an regulatory framework in relation to oil trading. Environmental Impact Assessment of the infrastructure project; the performance of Conference of Services (Conferenza dei Servizi), The sale of fuel takes place mainly through the distribution network. which establishes with the local authorities any financial and environmental compensation for the territory on which the facility The Italian network is made up of approximately 21,000 sales is to be constructed; and a Sole Authorisation of the construction points, and is characterised by being more convenient for consumers and operation of the facility by the MiSE. but also by having higher system costs. Of all the facilities of the Italian distribution network:

9.2 What governmental authorisations are required to ■ approximately 50% are owned by integrated oil companies; construct and operate LNG facilities? ■ approximately 32% are owned by non-integrated oil companies which display the brand of integrated oil The construction of regasification terminals is subject to a very companies; and complex authorisation procedure, the main steps of which are: ■ approximately 18% (therefore, approximately 3,800 sales points) are so-called “pompe bianche”, which means they (i) an assessment of the environmental impact of the display their own brand and obtain supplies independently on infrastructure project; the so-called off-network market. (ii) carrying out Conference of Services – responsible, inter alia, for establishing with the local authorities any financial and environmental compensation for the territory on which the facility is to be constructed; and (iii) Sole Authorisation from the MiSE for the construction and operation of the facility.

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■ the aggregate turnover realised by the parties to the 11 Competition concentration in Italy exceeds 495 million euros; and ■ the aggregate turnover in Italy of the undertaking to be 11.1 Which governmental authority or authorities are acquired exceeds 50 million euros. responsible for the regulation of competition aspects, If the above conditions are met, the concentration must be notified or anti-competitive practices, in the oil and natural to the AGCM before completion (after signing and normally prior gas sector? to closing, although this is not mandatory), and the purchaser(s) is (are) the entity responsible for the notification filing. The ARERA is responsible for the promotion of competition and Parties are under the duty to inform the AGCM of a transaction efficiency through regulation of the electric energy, gas and water Italy meeting the turnover thresholds, once it has become certain; such services sector, and the AGCM is responsible for the protection of pre-notification phase generally lasts at least two weeks. competition and the market. As mentioned, once notified, the transaction can, in principle, be Under Legislative Decree no. 93 of 01/06/2011, the dealings completed before clearance by the AGCM is obtained. between the ARERA and the AGCM are based on the principle of loyal cooperation and carried out, in particular, through joint After notification has taken place, the AGCM is bound to decide examination procedures, reports and exchanges of information. whether to clear the transaction or to open an in-depth investigation within 30 days. This same period can in some exceptional In 2012, these authorities signed a memorandum of understanding circumstances be extended for a further 30 days. to better coordinate their activities to protect the market.

11.2 To what criteria does the regulator have regard in 12 Foreign Investment and International determining whether conduct is anti-competitive? Obligations

The oil and gas market is not a very competitive market in Italy and is characterised by few players despite the liberalisation process. 12.1 Are there any special requirements or limitations on acquisitions of interests in the natural gas sector In the gas sector, as already stressed in question 8.1 above, the law (whether development, transportation or associated (i.e. article 3 of Legislative Decree no. 130/2010) has established infrastructure, distribution or other) by foreign fixed maximum market shares in order to avoid dominant positions. companies? Furthermore, an agreement between undertakings to limit competition through price control, distribution of market shares, or There are no specific limitations on the entry to the Italian market of within the context of participation in public tenders, for example, foreign companies and capital. in the awarding of a Municipal service for the distribution of gas to Certain limits may apply in mergers and acquisitions and in end-users, is not allowed. participation in tender procedures, if adequate reciprocity guarantees do not exist between Italy and the foreign company’s country of origin. 11.3 What power or authority does the regulator have to preclude or take action in relation to anti-competitive practices? 12.2 To what extent is regulatory policy in respect of the oil and natural gas sector influenced or affected If the AGCM ascertains a breach of competition law, it shall order by international treaties or other multinational the termination of the infringement. arrangements? If the AGCM considers that there has been a serious infringement, it Italian regulatory policy is largely influenced by the implementation can impose a fine of up to 10% of the worldwide turnover achieved of EU legislation. by each undertaking during the previous financial year. The percentage applied will depend on the duration and gravity of the infringement. 13 Dispute Resolution AGCM Resolution no. 25152 of 22/10/2015 contains guidelines detailing the criteria for the determination of sanctions in case of antitrust violations. 13.1 Provide a brief overview of compulsory dispute resolution procedures (statutory or otherwise) applying to the oil and natural gas sector (if any), 11.4 Does the regulator (or any other Government including procedures applying in the context of authority) have the power to approve/disapprove disputes between the applicable Government mergers or other changes in control over businesses authority/regulator and: participants in relation to oil in the oil and natural gas sector, or proposed and natural gas development; transportation pipeline acquisitions of development assets, transportation or and associated infrastructure owners or users in associated infrastructure or distribution assets? If so, relation to the transportation, processing or storage what criteria and procedures are applied? How long of natural gas; downstream oil infrastructure owners does it typically take to obtain a decision approving or or users; and distribution network owners or users in disapproving the transaction? relation to the distribution/transmission of natural gas.

Merger transactions are under the control of the AGCM. The Regional Administrative Courts (at first instance) and the Council of State (at second instance) have jurisdiction over disputes Law no. 287/1990 (“Antitrust Law”) provides that concentrations between the operators and the government authorities and regulators. that are not subject to mandatory filing pursuant to the European Merger Control Regulation must be notified to the AGCM if, as a The Regional Administrative Court of Milan has sole jurisdiction consequence of the transaction: over disputes against ARERA resolutions.

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It is also important to mention that the AGCM can challenge, before the Regional Administrative Courts, any general administrative 13.4 Have there been instances in the oil and natural gas acts, regulations and provisions of any public administration sector when foreign corporations have successfully obtained judgments or awards against Government (government, local authorities, agencies, etc.) that violate antitrust authorities or State organs pursuant to litigation rules. before domestic courts?

13.2 Is your jurisdiction a signatory to, and has it duly The most frequent disputes in which foreign companies are involved ratified into domestic legislation: the New York in are related to market trading, tender procedures for distribution Convention on the Recognition and Enforcement of contracts, fees and taxes, and there have been cases of judgments Italy Foreign Arbitral Awards; and/or the Convention on in their favour. the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID”)? 14 Updates Italy has duly ratified both the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the ICSID Convention. 14.1 Please provide, in no more than 300 words, a summary of any new cases, trends and developments in Oil and Gas Regulation Law in your jurisdiction. 13.3 Is there any special difficulty (whether as a matter of law or practice) in litigating, or seeking to enforce In the last 10 years, Italian legislation in the oil and gas sector has judgments or awards, against Government authorities or State organs (including any immunity)? been oriented towards the transition from a monopoly situation to a free market. There are no special difficulties in enforcing judgments or awards It is a slow path that is facing some difficulties. In order to facilitate against any public authorities (governmental, environmental and/or competition in the market, the Law of 04/08/2017 has foreseen the local authorities). end of the enhanced protection service in 2019. This means that the ARERA will cease to establish and update, every three months, the economic conditions (prices) for the supply of electricity and natural gas and protection services for small customers; end-consumers will have to turn to the free market.

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Fiorella F. Alvino Giovanna Branca Nunziante Magrone Nunziante Magrone Foro Buonaparte Foro Buonaparte 70-20121 Milano 70-20121 Milano Italy Italy

Tel: +39 02 6575 181 Tel: +39 02 6575 181 Fax: +39 02 6570 013 Fax: +39 02 6570 013 Email: [email protected] Email: [email protected] URL: www.nunziantemagrone.it URL: www.nunziantemagrone.it Italy

Fiorella Alvino is a partner at NUNZIANTE MAGRONE. She Giovanna Branca has significant experience in environmental law specialises in commercial law, corporate law, private equity, M&A within the context of the cleanup and remediation of industrial sites, and capital markets, with an additional focus on international joint the recovery of disused industrial areas and waste management. She ventures. She has assisted corporate clients and credit institutions in advises national and international clients in significant real estate several major national and international transactions. She contributes transactions covering all planning law aspects and in the construction to publications and seminars in the sector, and plays an active role of renewable energy power plants. She deals with procurement in associations of law firms dealing with M&A. She was named the processes for works, services and supplies, as well as concessions for leading female business lawyer in Italy, based on a survey of women public works and services and the related litigation. She has written business lawyers and in-house counsel selected by The Legal publications for lexitalia.it and other journals in the administrative area, 500 and Chambers and Partners. She was nominated by Who’s and has spoken at numerous conferences and seminars. Who Legal in 2018, and in previous years, as one of the leading practitioners in “Mergers & Acquisitions” and “Corporate Governance” in Italy. She was the winner of the ILO Client Choice Award in the “General Corporate” sector, given by the International Law Office. After graduating cum laude in law from the University of Milan, she completed the Seminar in American Legal Studies at the Centre for International Legal Studies, Salzburg, Austria; the Orientation Program in the US Legal System at the University of Georgetown, Washington, D.C., USA; and the Master of Laws (LL.M.) at Harvard Law School, Cambridge, Massachusetts, USA.

NUNZIANTE MAGRONE is an independent Italian law firm with offices in Milan, Rome and Bologna and approximately 100 attorneys. NUNZIANTE MAGRONE is a multidisciplinary law firm: Thanks to the specific expertise of its attorneys, the firm assists its clients in all major areas of business law through its macro departments. The firm places a strong emphasis on the interaction between individual practice areas and the need for its attorneys to expand their knowledge, as much as possible, to permit them to perform their duties thoroughly and efficiently. All this has contributed to the success of the firm in attracting a high-profile and diverse clientele: from SMEs to multinationals; from non-profits to NGOs; fromtrade associations to co-operatives; from banks to investment funds; and so forth. NUNZIANTE MAGRONE’s areas of expertise include: Corporate and M&A; Banking and Finance; Business Contracts; Insolvency and Restructuring; Administrative and Regulatory Matters; Dispute Resolution; International Arbitration; Energy and Natural Resources; Privacy and IT; Employment; Real Estate and Retail; Criminal Law; Antitrust; and Tax.

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Kazakhstan

Unicase Law Firm Zhanar Abdullayeva

The growth in exports in cubic metres was +51.8% compared to last 1 Overview of Natural Gas Sector year, in monetary terms, +80.6%. Investments in fixed assets in January–May 2018 amounted to 3.5 1.1 A brief outline of your jurisdiction’s natural gas trillion tenge (approx.). This exceeds last year’s figure by more than sector, including a general description of: natural a third (2.5 trillion tenge for the same period in 2017). More than gas reserves; natural gas production including 40% of investments are directed towards the extraction of oil and the extent to which production is associated or gas. non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) The national operator “KazTransGaz” reported that the gas industry liquefaction and export facilities, and/or receiving and at present comprises a sophisticated gas-transportation system re-gasification facilities (“LNG facilities”); natural gas under the control of the national operator “KazTransGaz”, which pipeline transportation and distribution/transmission includes over 50,000 km of gas distribution lines, 19,000 km of network; natural gas storage; and commodity sales gas pipelines, 57 compressor stations and three underground major and trading. storage facilities. The national operator is fulfilling the energy requirements for 8.5 million people and 45,000 companies. The Currently, Kazakhstan occupies 22nd place in the world and 3rd place main trunk pipelines are Central Asia – Centre, Bukhara – Ural and among the CIS countries, after Russia and Turkmenistan, in proven Central Asia – China. reserves of “blue fuel”. Recoverable gas reserves were proved at 3.9 trillion cubic metres, including associated gas – 2.6 trillion cubic metres and natural free gas – 1.3 trillion cubic metres. Kazakhstan’s 1.2 To what extent are your jurisdiction’s energy natural gas is almost entirely “associated” gas, meaning it is requirements met using natural gas (including LNG)? produced along with crude oil and condensate in almost all deposits, the main deposits being in Tengiz and Karachaganak. Based on information from official sources, around 80% of the About 30% of the produced gas is used domestically, 30% is country’s energy needs are met by natural gas. Although the exported, and the remaining volumes are pumped back into the domestic production volume allows the Republic to meet its needs reservoir to maintain reservoir pressure in order to increase the for gas, certain regions are still experiencing a gas shortage. The recovery of liquid hydrocarbons, and are also used by subsoil users Beineu – Basoy – Shimkent pipeline provides gas distribution for for their own technological needs. the southern regions of Kazakhstan. The main share of the production of “blue fuel” is provided by large Back in 2014, the government approved the “Concept for the fields – Karachaganak (49%), Tengiz (31%) and Kashagan (14%). development of the gas sector of the Republic of Kazakhstan until In the future, as the production of liquid hydrocarbons continues, 2030”. The document identified the particulars for the sector’s these large oil and gas fields will gradually move into the gas development: a general scheme of gas distribution until 2030, category with more gas production. according to which gas distribution should be spread to 11.5 million people. In addition, there are plans for gas supply to cover more In the first half of 2018, natural gas production reached 28.6 billion than 1,600 settlements. To this end, by 2020, investment projects cubic metres, which is 8.3% more than the previous year. Of will be implemented in nine regions of the Republic, extending the these, 43% (against 38.6% a year earlier) originate in the Atyrau total length of gas pipelines in Kazakhstan to more than 7,000 km. region – 12.3 million cubic metres. This is 20.4% more than last year. Another 36.3% was provided by gas producers in the East Kazakhstan region (10.4 billion cubic metres, almost the same as 1.3 To what extent are your jurisdiction’s natural gas a year earlier), and 11.9% by companies of the Aktobe region (3.4 requirements met through domestic natural gas billion cubic metres, +3.6% compared to last year). Gas production production? in a seven-month period (January–July 2018) amounted to 32.8 billion cubic metres (+7% compared to last year). At the same time, Today, the level of gasification in the country is almost 60%. Nine during the reporting period, 12.3 billion cubic metres of gas was regions have a gas supply, these being mainly western and southern. exported. At the same time, some parts of the central and northern regions still remain without gas. However, modernisation plans are aiming at Exports of natural gas in the first quarter of 2018 amounted to 7.2 improving the situation in the near future. billion cubic metres in volume and $495 million in value terms.

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field is processed at the onshore Bolashak plant. Kashagan is 1.4 To what extent is your jurisdiction’s natural gas Kazakhstan’s first offshore oil and gas field in the Caspian Sea and production exported (pipeline or LNG)? is the largest international investment project in the country. Tengizchevroil (TCO) develops the Tengiz and Korolyov oil and Exports of natural gas in the first quarter of 2018 amounted to 7.2 gas fields in the Atyrau Region (west Kazakhstan). billion cubic metres in volume and $495 million US dollars in value terms. The largest importers of Kazakh gas are Russia (35.5%), Major projects include Tengiz, Karachaganak, CNPC- Ukraine (27.8%), China (15.4%) and Switzerland (14.6%). Aktobemunaigas, Uzenmunaigas, Mangistaumunaigas, and Kumkol, all of which amount to 1 million bpd. According to the In the domestic market of the Republic of Kazakhstan, gas Ministry of Energy of Kazakhstan, the industry has managed to transported through distribution networks increased in price for demonstrate a boom, the volume of crude oil production in the Kazakhstanis during the year by 8.2% per cubic metre of natural gas Republic reaching 86.2 million tons by the end of 2017, which is Kazakhstan and by 11.1% per kilogram of liquefied gas. 10.5% more compared to 2016 and exceeded the planned figure of The price of liquefied gas sold in cylinders increased by 4.1% per 84.5 million tons by 2%. year – up to 2,618 tenge (approximately $7) per 50 litres on average In general, according to the plans of the Ministry of Energy of in the country. the Republic of Kazakhstan, in 2018 Kazakhstan will produce 87 Kazakhstan is developing its relationship with China and, in June million tons of crude oil. Production of hydrocarbons in the country 2017, China and Kazakhstan signed an agreement on gas supplies. will be increased against the background of growth in world oil Kazakhstan confirmed its plans to reach the figure of 5 billion cubic prices (in January 2018, prices reached their highest point since metres of gas exports to China by October 2018. 2014) and commitments to reduce oil production in the framework of OPEC + agreements. 2 Overview of Oil Sector 2.2 To what extent are your jurisdiction’s energy requirements met using oil? 2.1 Please provide a brief outline of your jurisdiction’s oil sector. Since only a small part of the energy needs of Kazakhstan are met with the use of oil, as Kazakhstan’s power generation largely comes As the industry’s commercial guide provides, Kazakhstan is ranked from coal-fired power plants, the oil industry accounts for about 5% th 11 in the world in terms of proven oil reserves (producing 1.73 of the country’s energy requirements. million barrels per day (bpd) in 2017). Kazakhstan has the Caspian Sea’s largest recoverable crude oil reserves. While current proven oil reserves total 30 billion barrels, possible onshore and offshore 2.3 To what extent are your jurisdiction’s oil requirements hydrocarbon reserves dwarf proven reserves, with an estimated met through domestic oil production? 60–100 billion barrels left to uncover, mostly in the Kazakh part of the Caspian Sea. Some experts estimate that the offshore Kashagan In March–April 2018, Kazakh enterprises significantly improved field alone may contain 35 billion to 50 billion barrels of oil. the performance of gasoline production. In March, 297,100 tons of Kazakhstan’s vast natural resources are projected to meet 2–3% of products were produced (compared to 246,100 tons a year earlier), predicted global oil demand in the next decade. and in April 290,800 tons were produced (compared to 206,000 a year earlier). The Government of Kazakhstan and foreign investors continue to focus heavily on the hydrocarbons sector, which, since 1991, As a result, for the first four months of 2018, in Kazakhstan gasoline has received approximately 60% of the foreign direct investment production increased by a total of 10.4% more than in the same in Kazakhstan, and constitutes approximately 53% of its export period in 2017. revenue. The growth of domestic production led to a decrease in imports: The national oil and gas company, KazMunaiGas (KMG), is largely in the first quarter, the volume of imported fuel from abroad responsible for arranging the temporary exploration and production decreased by 326,000 to 286,600 tons. As a result, the share of rights for oil and gas blocks. It also plays a role in almost all imported (Russian) gasoline at gas stations decreased from 30.1% in contracts with foreign oil and gas companies. Kazakhstan’s share January–March 2017 to 24.4%. The trend is evident; however, the of the Caspian Pipeline Consortium (CPC) is also included in importance of imports is still great, as Russian manufacturers supply KMG’s portfolio. KMG holds stakes in 47 enterprises conducting a quarter of the Kazakhstan market. petroleum operations (including TengizChevrOil and the North With the completion of the modernisation of the Pavlodar and Caspian Operating Company), pipeline and sea transportation of Atyrau refineries, the import dependence of the motor fuel market hydrocarbons and water as well as services. has decreased. Kazakhstan attracts significant investment in its vast upstream Today, the market supply of domestic petroleum products amounted oil and gas resources, and it is more crucial than ever that the to 90% for gasoline, 90% for diesel fuel and more than 57% for jet Government multiplies its efforts to increase the attractiveness of fuel. This year, the modernisation of the Shymkent refinery will be its investment climate. For example, by the time the huge offshore completed, and the total volume of oil refining in 2018 will increase Kashagan project started commercial production in October 2016 by more than 1 million tons compared to 2017, amounting to 16 after years of delays, investment in the project was estimated at $50 million tons in total. billion. Kazakhstan plans to increase investment in the oil and gas sector through innovation development and investment stimulation 2.4 To what extent is your jurisdiction’s oil production measures that are set forth in the new Subsoil Use Code and in the exported? Tax Code. Oil production at the Kashagan field started in October 2016 and Almost 80% of the oil produced in Kazakhstan is exported. reached 190,000 bpd in March 2017. Oil and gas from the Kashagan

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According to statistics for 2018, the price of export deliveries of crude oil increased by 27.2% over the same period last year, while 3.2 How are the State’s mineral rights to develop oil the physical volume of exports increased by 3%. In total, the value and natural gas reserves transferred to investors or companies (“participants”) (e.g. licence, concession, of exports of crude oil and gas condensate increased by 46%, while service contract, contractual rights under Production the trade surplus of the country increased by 79%. Sharing Agreement?) and what is the legal status of In the second part of 2018, 33.2 million tons of crude oil was those rights or interests under domestic law? exported at a value of $12.8 billion, which is 51% of the annual forecast of the Ministry of Energy of the Republic of Kazakhstan. The subsoil use rights to develop the oil and gas reserves are Oil production increased by 10% and amounted to 42.6 million tons. acquired when a contract or licence is granted, can be transferred About 78% of all oil produced was exported, compared to 83% last based on civil and legal transactions, and can be transferred in

Kazakhstan year. The volume of crude oil in the domestic market increased accordance with legal succession procedures following corporate by 38% and amounted to 9.4 million tons. The price of oil in the reorganisation, except for reformation or inheritance. Subsoil use domestic market is 2.5 times lower than the export market. The rights are granted by the State on the basis of a subsoil use licence implementation of this volume will amount to 466 billion tenge or and subsoil use contract. $1.5 billion. A subsoil use licence is required to perform the following operations: geological study; exploration of solid minerals; use of subsoil space; and prospecting. 3 Development of Oil and Natural Gas A subsoil use contract is required to conduct subsoil exploration and production. 3.1 Outline broadly the legal/statutory and organisational framework for the exploration and production 3.3 If different authorisations are issued in respect of (“development”) of oil and natural gas reserves different stages of development (e.g., exploration including: principal legislation; in whom the State’s appraisal or production arrangements), please specify mineral rights to oil and natural gas are vested; those authorisations and briefly summarise the most Government authority or authorities responsible for important (standard) terms (such as term/duration, the regulation of oil and natural gas development; and scope of rights, expenditure obligations). current major initiatives or policies of the Government (if any) in relation to oil and natural gas development. The right to subsoil use is granted to conduct the following Exploration and production of oil and gas as well as all other operations: minerals are controlled by a number of laws and directives. 1) exploration and production – the exploration period lasts for The main legislation is the newly adopted Code of the Republic six years, with a possible extension period for a maximum of Kazakhstan “On Subsoil and Subsoil Use” (hereafter, the of 12 years or, in cases of offshore operations and complex “Subsoil Code”), the product of two years of extensive drafting explorations (for wells that are 6,000 or more metres deep), they last for nine years, with a possible extension for a work performed jointly by external consultants and government maximum of 18 years. The production period cannot exceed representatives with subsoil use expertise. The Subsoil Code is the 25 years, or 45 years for large fields; and essential law controlling the oil and gas and mining sector, which 2) production – the production period cannot exceed 25 years, sets out the fundamental legal framework. or 45 years for large fields. The legal regulation of the subsoil sector, according to the Subsoil Subsoil use contracts are drafted on the basis of the model subsoil Code, is based on the following principles: rational management of contract, with deviations allowed in certain cases according to the the State’s subsoil reserves; subsoil use in return for a fee; ecological procedures outlined in the Subsoil Code. safety during subsoil use operations; availability of information; and stability of subsoil use conditions. In general, duties of the State in regard to management of the 3.4 To what extent, if any, does the State have an ownership interest, or seek to participate, in the subsoil are allocated to the central Government, competent body development of oil and natural gas reserves (whether and/or local executive bodies. The Ministry of Investment and as a matter of law or policy)? Development of the Republic of Kazakhstan with its Committee of Geology and Subsoil Use and Subsoil Use Department, and the State participation in the oil and gas industry has increased over Ministry of Energy of the Republic of Kazakhstan, undertake the the last few years, with the National Company KazMunayGas overall regulatory, supervisory, secondary legislative functions representing the State’s interests in almost every large subsoil use within the oil and gas sector. The government is vested with the contract. responsibility for organising and managing the State subsoil stock, outlining subsoil allotments, establishing the procedures for the The oil and gas contracts in the Caspian Sea require mandatory conclusion of subsoil use contracts/licences, and appointing the equity participation of the National Company in the amount of not “competent body” for execution and implementation of contracts/ less than 50% of ownership interest. licences and overall monitoring of compliance with subsoil use The State also exercises the pre-emptive right to acquire the legislation. The competent body appoints a special committee that transferred subsoil use rights and/or objects connected with the conducts the auctions, following which the subsoil use contracts are subsoil use rights in relation to strategic objects (fields). executed. Local executive bodies grant land plots to subsoil users, Strategic fields are defined as subsoil plots: supervise the protection of the land, and participate in negotiations 1) containing geological reserves of oil exceeding 50 million with subsoil users for environmental and social protection, among tons or natural gas exceeding 15 billion cubic metres; other functions. 2) located in the Kazakhstan sector of the Caspian Sea; or 3) containing a uranium deposit.

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Pre-emptive rights are realised by the national holding company or a national company by decision of the competent body. 3.8 What restrictions (if any) apply to the transfer or disposal of oil and natural gas development rights or Entities intending to acquire subsoil use rights shall apply to the interests? competent body for a permit. The competent body may refuse to issue a permit in certain cases prescribed by the Subsoil Code for reasons The alienation and/or transfer/disposal of subsoil use rights shall concerning whether the subsoil use right leads to a concentration of be executed with the consent of the competent authority and after subsoil use rights or a failure to observe national security. obtaining a waiver of the State’s priority right over strategic objects. Permission to transfer subsoil use rights or related objects is not 3.5 How does the State derive value from oil and natural required in the following in the following situations: gas development (e.g. royalty, share of production, ■ the transfer is in favour of a subsidiary in which at least 99%

taxes)? Kazakhstan of the interest, shares or other equity belongs to a subsoil user, provided the subsidiary is not registered in a low-tax The main value realised by the State from oil and gas developments country; derives from taxation, its participation in oil and gas contracts and ■ the transfer is among organisations, including legal its share in the production from previously executed Production succession, in which 99% of interest, shares or other equity Sharing Agreements. belong directly or indirectly to the same entity, provided the In general, the fiscal regime that applies to the oil and gas industry holder of subsoil use rights is not registered in a low-tax consists of a combination of corporate income tax, rent tax on country; and exports, bonuses and mineral extraction tax. ■ the transfer of objects is related to subsoil use rights circulating on an organised securities market.

3.6 Are there any restrictions on the export of production? 3.9 Are participants obliged to provide any security or guarantees in relation to oil and natural gas Except for some of the conditions described below, Kazakhstan has development? no restrictions on oil exports. Kazakh legislation provides that the right to use subsoil is granted In order to ensure domestic needs are met, oil produced at the on the basis of auction. The auction offer is provided by a potential exploration phase and a certain amount produced at the production subsoil user at the application stage. The auction offer must stage shall be sold within Kazakhstan. contain the signature bonus amount, as well as confirmation of The State has the right to purchase production at a price not creditworthiness and the ability to cover the announced signature exceeding the world market price or agreed under a third-party sales bonus, as well as many other social financial obligations. contract. The national operator executes the State’s pre-emptive The minimum amount of the signature bonus, in accordance with the right to purchase raw gas and commercial gas from the producers, tax legislation of Kazakhstan, amounts to approximately $18,000– calculated on the basis of the formula approved by the Government. $65,000, and the winner is determined among other parameters on Additionally, the Government is entitled to require part or all of the the basis of the amount of the signature bonus offered. production volume during a military or emergency period. Some oil products might be restricted by the Government’s resolutions, which on a monthly basis approve the transportation 3.10 Can rights to develop oil and natural gas reserves granted to a participant be pledged for security, or schedules of the import and export volumes of oil. booked for accounting purposes under domestic law?

3.7 Are there any currency exchange restrictions, or The subsoil use rights may not be transferred to trustee management, restrictions on the transfer of funds derived from except the national company. The subsoil use rights can be pledged, production out of the jurisdiction? provided the required consents have been granted and the pledge is registered with the competent authority in accordance with the rules Currency regulation of Kazakhstan contains certain limitations for registration of the movable property law. Enforcement of the on financial transactions. The Law “On Currency Regulation pledge must be carried out through a public auction. and Currency Control” provides that payments between residents and non-residents on commercial loans for a period of more than 180 days are subject to registration with the National Bank of 3.11 In addition to those rights/authorisations required to explore for and produce oil and natural gas, what Kazakhstan. other principal Government authorisations are The repatriation requirement provides for the return of the currency required to develop oil and natural gas reserves (e.g. received as a result of a foreign trade operation to the country. environmental, occupational health and safety) and from whom are these authorisations to be obtained? The National Bank also establishes the rules, conditions and procedures for the implementation of foreign exchange control of imports and exports for repatriation. According to the Subsoil Code, subsoil use operation, including forecasting and planning of production, should fall within the In addition, the currency legislation of Kazakhstan provides for ecological law requirements. The main conditions prescribe setting a special currency regime in the event of a threat to the stability maximum permissible emissions and restricting or prohibiting of the security of the economy or the State financial system. This specific activities or parts of activities. The subsoil use operations foreign exchange regime is a special regime for conducting foreign shall also meet industrial safety requirements. The operations are exchange operations, the purpose of which is to create conditions for prohibited without a positive industrial safety review and positive eliminating threats to the security of the economy and the stability State ecological review. of the financial system of Kazakhstan.

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Compliance with environmental requirements is governed by commercial gas, exercised through the national operator, and further environmental regulations, which set out procedures for obtaining introduces the regulation of gas sales. The Gas Law introduces environmental permits, and provide for State monitoring and rather strict regulations on gas and the gas supply sector, which expertise in relation to the environment and natural resources, as may adversely affect the investment climate in Kazakhstan, since it well as the protection of the environmental rights of individuals and introduces a number of restrictions on particular types of activities legal entities. and significant State control over the sale of gas in the country, Moreover, the subsoil user’s emergency response obligations may which expands the possibilities for nationalising the components of be secured by a guarantee, bank deposit or insurance. the gas supply system. Commercial gas transportation

3.12 Is there any legislation or framework relating to The following gas transmission companies have the exclusive right

Kazakhstan the abandonment or decommissioning of physical to execute the transportation of commercial gas by trunk pipeline structures used in oil and natural gas development? If outside of Kazakhstan: so, what are the principal features/requirements of the 1) the national operator (KazTransGas JSC); legislation? 2) producers of commercial gas; Subsoil use and environmental legislation requires that certain 3) subsoil users and the owners of commercial gas produced during processing of their raw gas; and decommissioning procedures be carried out by the subsoil user in accordance with the liquidation or conservation plan, the estimated 4) the entities which transport gas produced abroad through the start and end date and liquidation/conservation plan, which must territory of Kazakhstan. be approved by the competent authorities. In order to ensure the The following entities carry out the wholesale of commercial gas: subsoil user’s obligations are fulfilled in relation to clean-up, the 1) the national operator (KazTransGas JSC); Subsoil Code requires subsoil users to ensure the pledged bank 2) producers of commercial gas; deposit is in place, which will secure against these obligations. 3) subsoil users and owners of commercial gas produced during Owners maintain a list of abandoned and unpreserved subsurface processing of their raw gas; sites. 4) owners of commercial gas produced outside of Kazakhstan and imported for consumption purposes; 3.13 Is there any legislation or framework relating to 5) owners of commercial gas produced from Kazakhstan’s gas storage? If so, what are the principal features/ natural gas outside of Kazakhstan; and requirements of the legislation? 6) the gas transmission companies in the event of the sale of gas to the national operator and/or to the owners of gas filling The law requires a licence and some permits for construction and compressor stations. operation of underground and above-ground gas storage facilities. Wholesale of LNG (cross-border sales) In addition, the Committee on the Regulation of Natural Monopolies Wholesale may be conducted by the following entities: and the Protection of Competition of the Ministry of National Economy of Kazakhstan must approve gas storage tariffs (hereafter, 1) producers of LNG; the “Committee on Natural Monopolies”). 2) owners of LNG produced outside of Kazakhstan and imported into Kazakhstan for consumption; 3) owners of LNG produced during processing of their 3.14 Are there any laws or regulations that deal specifically hydrocarbon feedstock; with the exploration and production of unconventional oil and gas resources? If so, what are their key 4) the gas network companies in the event of the sale of LNG to features? the owners of gas filling stations or to gas stations; and 5) owners of LNG, acquired from 1) and 2) in case the sale will Unconventional oil resources are usually distinguished by the fact occur outside of Kazakhstan. that their extraction is impossible using conventional measures and requires the use of special methods. When changing the types and/ 5 Import / Export of Oil or methods of planned work for the geological study of the subsoil, as well as their volumes, the subsoil user is obliged to make the appropriate changes in the project documents and submit them to 5.1 Outline any regulatory requirements, or specific the authorised body for the study of the subsoil. terms, limitations or rules applying in respect of cross-border sales or deliveries of oil and oil products. 4 Import / Export of Natural Gas (including LNG) The State regulation of cross-border sales or deliveries of oil and oil products is carried out through various instruments, including customs duties, taxes, and requirements for preliminary booking 4.1 Outline any regulatory requirements, or specific in the transportation schedule, which is approved annually. The terms, limitations or rules applying in respect of relationships between Customs Union members are further regulated cross-border sales or deliveries of natural gas (including LNG). by the Union’s regulations. Transfer pricing regulations are also applicable to cross-border sales The Law on Gas and Gas Supply (the “Gas Law”) establishes of oil and oil products. provisions for the State’s pre-emptive right to purchase raw and

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6 Transportation 6.4 How is access to oil and natural gas transportation pipelines and associated infrastructure organised?

6.1 Outline broadly the ownership, organisational and regulatory framework in relation to transportation The Law on Pipelines, as well as the current legislation on natural pipelines and associated infrastructure (such as monopolies, provides for the right of shippers to equal access to natural gas processing and storage facilities). the services of main pipelines, if there is free carrying capacity, subject to the restrictions established by law. If capacity is limited, The main legislative basis for the construction, ownership and transportation services are provided as a priority established by the operation of trunk pipelines is the Law on Main Pipelines (“the Law Law on Pipelines, where priority is given to shippers who supply oil on Pipelines”) and also includes a further step in the efforts of the to domestic refineries. The Law on Pipelines also provides for the Government of Kazakhstan to control strategic areas of the country. possibility of exchange (swap) operations in order to supply oil to Kazakhstan The Republic of Kazakhstan has a priority right to a share of at domestic refineries and gas to the domestic market and/or outside least 51% (which will pass through the National Company) in any Kazakhstan with the written consent of the owner of the pipeline new trunk pipeline projects. The priority right gives Kazakhstan (or another person legally with pipeline rights) and the competent the right to jointly participate with investors in the creation and/or authority. construction of new trunk pipelines. Transportation is prohibited by the transport organisation if the An exception to the priority right of Kazakhstan is the expansion commercial gas does not meet the national technical standards of existing trunk pipelines. The Law on Pipelines reflects the or does not provide documentation regarding the observance provisions of the Civil Code and the Law on National Security, of the preferential right of the State to purchase certain volumes which give Kazakhstan official and priority rights in connection of commercial gas. Similar requirements for compliance with with the alienation of main pipelines and direct or indirect interest technical requirements apply to oil transportation. in “strategic facilities” – property of strategic importance to the national security of Kazakhstan. 6.5 To what degree are oil and natural gas transportation Please note that gas pipelines operators will also need to obtain a pipelines integrated or interconnected, and how is co- licence from the licensing authority. operation between different transportation systems established and regulated?

6.2 What governmental authorisations (including Kazakhstan is directly connected with the transport infrastructure of any applicable environmental authorisations) are Russia. Oil and gas pipelines are interconnected and subject to the required to construct and operate oil and natural gas transportation pipelines and associated rules and supervision of the Government. infrastructure? According to Kazakh legislation, the schedule for transporting oil through trunk pipelines is developed in accordance with the relevant Since the priority right for the construction of new pipelines belongs agreements between the owner or operator and the company for to the State, an investor intending to build a new trunk pipeline subsoil use. The schedule has been developed taking into account should submit a commercial proposal to the competent authority. If the internal needs for supplies of the Republic of Kazakhstan, Kazakhstan waives its priority right, such an investor can participate, determined by the competent authority. develop and build a trunk pipeline independently or by any other party on terms that are no more favourable than those offered by the 6.6 Outline any third-party access regime/rights in Republic of Kazakhstan. respect of oil and natural gas transportation and The competent authorities issue special licences for the design of associated infrastructure. For example, can the oil pipelines, construction and repair and installation work on the regulator or a new customer wishing to transport trunk pipeline network, gas pipelines, processing plants and other oil or natural gas compel or require the operator/ owner of an oil or natural gas transportation pipeline infrastructure, including other permits during construction. or associated infrastructure to grant capacity or expand its facilities in order to accommodate the new 6.3 In general, how does an entity obtain the necessary customer? If so, how are the costs (including costs land (or other) rights to construct oil and natural gas of interconnection, capacity reservation or facility transportation pipelines or associated infrastructure? expansions) allocated? Do Government authorities have any powers of compulsory acquisition to facilitate land access? The supplier may be asked to expand its capacity to accommodate new customers. If the restriction of ownership of new trunk According to the Law on Pipelines, the gas pipeline network is pipelines requiring 51% of State ownership extends to expansion, recognised as one property complex. The Pipeline Act provides the costs of expansion will be distributed between the State and the that trunk pipelines may be privately or publicly owned, with investor. Otherwise, the costs will mainly depend on the investor. the exception of individuals and foreign legal entities. Land for The cost of connecting the pipeline to the main pipeline shall be construction of the main pipeline receives special “protected area” borne by the owner of this pipeline. status and includes the land occupied by the main pipeline, as well The legislation on natural monopolies regarding the principle as a buffer zone. The owner of the main pipeline is not obliged to of equality provides that access to gas transmission pipelines is acquire land ownership, although he may receive a temporary land provided to organisations that supply gas for: use right in accordance with the general rules of the Land Code. 1) utilities; 2) the public for domestic needs;

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3) enterprises that use gas as raw materials or as fuel in ongoing Retail sales of commercial gas are carried out by gas distribution technological processes; companies, owners of automatic gas filling compressor stations, 4) power plants and industrial facilities; and operators, producers and owners of commercial gas produced 5) other consumers. outside Kazakhstan and imported for consumption, into retail sales to industrial consumers. The gas consumption of the system is In case of insufficient pipeline capacity, access to oil pipelines is connected directly to the main or connecting pipeline. granted based on the following order of priority: 1) organisations that supply oil to Kazakh refiners; 2) owners of trunk pipelines for the transportation of oil and 7.2 What governmental authorisations (including any applicable environmental authorisations) are required petroleum products; to operate a distribution network? 3) entities that transport products to implement decisions of the Kazakhstan Government of Kazakhstan; The law provides for a licence for the operation of the distribution 4) entities that have invested in the construction of the main network to operate gas pipelines, which must be obtained from the pipeline (or to increase the capacity of the main pipeline); and licensing authority. In addition, this licensing activity must strictly 5) organisations that have committed to supply the minimum comply with the requirements of legislation on environmental mandatory volumes of oil (petroleum) in accordance with protection, health, safety and subsoil use. agreements with the owner of the main pipeline. The organisations of the gas distribution network must be accredited by an authorised State body. The activities of distribution network 6.7 Are parties free to agree the terms upon which oil organisations are subject to monitoring by the national operator or natural gas is to be transported or are the terms (KazTransGas JSC). (including costs/tariffs which may be charged) regulated? 7.3 How is access to the natural gas distribution network Services (goods, works) for the transportation of oil and gas through organised? trunk pipelines are considered natural monopolies. For natural monopolies, tariffs, terms of their increase, decrease and the limit of The tariff for domestic natural gas transportation through main services provided are predetermined. According to the law, tariffs gas pipelines within Kazakhstan and the storage of gas are subject for regulated services should not be lower than the cost of expenses to regulation and approval by the Natural Monopoly Committee. required for the provision of regulated services, and also consider The tariff is determined in compliance with the methodology of the possibility of making a profit, ensuring the effective functioning tariff calculations for gas transportation services through main gas of a natural monopoly. pipelines. Similar methodology applies to gas storage. The Law on Agreements between natural gas market participants are governed Pipelines, as well as the current legislation on natural monopolies, mainly by the relevant secondary legislation. There are several provides for the right of shippers to equal access to the services main types of agreements on the transportation or storage of natural of main pipelines, if there is free carrying capacity, subject to the gas, approved by a decree of the Government of Kazakhstan. The restrictions established by law. transport agreement, in particular, should include the obligation of the transport system operator to transport at a regulated price 7.4 Can the regulator require a distributor to grant according to the volume of natural gas. capacity or expand its system in order to accommodate new customers?

7 Gas Transmission / Distribution The State may require the operators of natural gas distribution systems to expand their capacity to accommodate new customers. 7.1 Outline broadly the ownership, organisational and However, the rights of existing customers should not be infringed or regulatory framework in relation to the natural gas limited to serve new customers. transmission/distribution network. 7.5 What fees are charged for accessing the distribution The legislation of Kazakhstan provides for a unified system of network, and are these fees regulated? commercial gas distribution (unified system), which includes: 1) the national operator (KazTransGas JSC); The Committee of Natural Monopoly regulates the activities of gas 2) commercial gas producers; distributors. The territorial division of the Committee on Natural 3) owners of commercial gas produced in the processing of raw Monopolies approves the price of each gas distributor in accordance gas produced by them; with government policies in regulated markets. 4) entities that transport gas produced abroad through the territory of Kazakhstan; 7.6 Are there any restrictions or limitations in relation to 5) owners of commercial gas produced outside of Kazakhstan, acquiring an interest in a gas utility, or the transfer from raw gas produced in Kazakhstan under international of assets forming part of the distribution network agreements; (whether directly or indirectly)? 6) gas transmission and gas distribution organisations; 7) owners of gas filling compressor stations; and With certain exceptions, the Gas Law grants the State the right of first purchase (State priority right) in connection with transfers of: 8) industrial consumers of commercial gas. ■ gas pipelines, gas distribution and consumption systems and The authorised State body monitors the production, transmission, other technological facilities (including installations and storage and marketing of LNG and commercial and natural gas. infrastructure) associated with the production, transportation, storage, sale or consumption of commercial gas; and

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■ shares in common ownership of objects of a single commercial gas supply system and interests in the entities 9 Liquefied Natural Gas that own such objects. The State exercises its right through the national operator, 9.1 Outline broadly the ownership, organisational and KazTransGas JSC. An exception applies when transferred assets regulatory framework in relation to LNG facilities. are of strategic importance for the sustainable development of a society, such as large gas pipelines (or interests in the entities that The regulation of the LNG sphere is still underdeveloped in are their owners, or the parent companies of such organisations), Kazakhstan and in many respects similar provisions in legislation and in this case the right is exercised directly by the State, taking concerning natural gas are applied to LNG. into account a different set of procedural requirements. However, LNG in Kazakhstan is produced at three gas processing plants: certain transactions are exempted from the right of priority of the

Tegiz; Kazakh; and Zhanazhol, and at three oil refineries: Atyrau Kazakhstan State, including: oil refinery; Pavlodar oil refinery; and PetroKazakhstan oil ■ transfer of automatic gas filling compressor stations and gas products. The new Gas Law introduced provisions that regulate the consumption systems by industrial consumers; and transportation, storage, sale and calculation of LNG in Kazakhstan. ■ transfer of shares between closed branches.

9.2 What governmental authorisations are required to 8 Natural Gas Trading construct and operate LNG facilities?

The regulation of LNG is similar to the regulation of natural gas and 8.1 Outline broadly the ownership, organisational and is ensured by the general rules of the Gas Law and the Licensing regulatory framework in relation to natural gas Law; see our answers to questions 6.1 and 6.2 for more details. trading. Please include details of current major initiatives or policies of the Government or regulator (if any) relating to natural gas trading. 9.3 Is there any regulation of the price or terms of service in the LNG sector? The Gas Law requires third-party investors to form partnerships with the public and private sectors to process associated gas into Sale of LNG by individuals and legal entities is carried out based on commercial gas, liquefied petroleum gas or liquefied natural gas for the prioritised satisfaction of the domestic need within the general subsequent supply to meet the domestic needs of Kazakhstan for plan of Kazakh gasification. The Gas Law provides the regulatory gas priority. framework for wholesale trade and retail sales of liquefied petroleum The Gas Law ensures the country’s energy and environmental gas, as most of Kazakhstan’s gas is associated gas. security and prioritises domestic gas supply within the concept of The Gas Law provides that the wholesale trade of liquefied a unified system of commercial gas supply. The objects of the gas petroleum gas can be performed only by: supply system, regardless of ownership and membership, will be ■ producers; combined into a single system. All of its facilities operate under ■ owners of the gas produced during the processing of the control of a single dispatch control department, which ensures hydrocarbons owned by them; reliable operation and safety and provides domestic consumers with ■ owners of the gas produced outside of Kazakhstan and commercial gas. imported for consumption; and The Gas Law establishes the provisions of the pre-emptive right of ■ gas networking organisations in the sale of the liquefied the State to purchase raw and commercial gas, exercised through the petroleum gas to the owners of gas filling points and/or national operator. automatic gas filling stations. In recent years, China has sharply increased its purchases of LNG. At the same time, the Gas Law prohibits further gross resale of Exports of Kazakh gas to China will be increased to 10 billion cubic liquefied petroleum gas, except for resale to the owners ofgas metres per year. This became known in the course of bilateral filling points and/or automatic gas filling stations by gas networking negotiations between the national company KazMunayGas and the organisations. China National Petroleum Corporation. Following the meeting, Retail sales of liquefied petroleum gas are carried out solely by: an agreement was reached on a prospective increase in the export ■ gas-distributing organisations; of Kazakh gas to China, the press service of the national company ■ owners of gas filling points; reports. ■ owners of automatic gas filling stations; and ■ producers or owners of liquefied petroleum gas produced 8.2 What range of natural gas commodities can be during the processing of hydrocarbon raw materials owned traded? For example, can only “bundled” products by them or produced outside of Kazakhstan and imported for (i.e., the natural gas commodity and the distribution consumption in the retail sale of liquefied petroleum gas to thereof) be traded? industrial consumers.

Kazakhstan legislation provides that commercial and liquefied gas may be sold to consumers in order to protect the environment and 9.4 Outline any third-party access regime/rights in the health of the Kazakh population. The exception is raw gas sold respect of LNG facilities. to industrial consumers as a raw material. There is no special regime or rights in respect of LNG facilities in As for commercial gas, the Gas Law defines the following: raw gas; Kazakhstan legislation; please refer to our similar description with natural gas; LNG; and LPG. regards to natural gas above.

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1) anti-competitive agreements among market entities; 10 Downstream Oil 2) cartels; 3) vertical agreement, where the resale price is determined or 10.1 Outline broadly the regulatory framework in relation the obligation of the party not to sell to the competitor of the to the downstream oil sector. buyer or the seller; and 4) anti-competitive actions of the market entities. The Oil Products Turnover Law is the primary regulation of the downstream oil sector. The Law governs the process of production 11.3 What power or authority does the regulator have to and turnover of oil products including gasoline, aviation fuel, diesel preclude or take action in relation to anti-competitive fuel and mazut. practices?

Kazakhstan The Law does not, however, cover that relating to when individuals or legal entities sell oil products for non-entrepreneurial purposes, The Natural Monopoly Committee can initiate an investigation and oil products production and turnover associated with the upon receipt of a complaint or at its own initiative. It can also can framework of mobilisation preparation, mobilisation and defence request the information necessary for conducting the investigation needs. from any entity operating on the market or from State bodies. Upon The Law sets forth the tasks and objectives of State regulation over completion of proceedings, the Natural Monopoly Committee may oil products production and turnover, characterises in detail the oil impose fines or remedial measures and terminate contracts which product producer duties and obligations, changes the oil products’ violate the competition legislation, etc. sale and transportation conditions and regulates their wholesale and retail procedure. 11.4 Does the regulator (or any other Government authority) have the power to approve/disapprove 10.2 Outline broadly the ownership, organisation and mergers or other changes in control over businesses regulatory framework in relation to oil trading. in the oil and natural gas sector, or proposed acquisitions of development assets, transportation or associated infrastructure or distribution assets? If so, Kazakhstan legislation contains certain requirements such as what criteria and procedures are applied? How long obligations to supply oil products to the local market and obligations does it typically take to obtain a decision approving or to obtain necessary documentation (documents, certificates, disapproving the transaction? declarations, waybills, etc.). Export regulations will apply to trading outside of Kazakhstan. The Subsoil Code stipulates that an acquisition of subsoil use rights The Oil Products Turnover Law regulates oil trading by producers or objects associated with the subsoil use rights are subject to prior of oil products, suppliers of oil, wholesale suppliers of oil products permission by the competent authority. In general, a company that and entities of retail realisation of oil products. holds, directly or indirectly, subsoil use rights or the related rights must seek the State’s pre-emptive rights waiver in case the strategic object is involved. 11 Competition Preliminary consent or the notification of the Natural Monopoly Committee is required for the transactions like: 11.1 Which governmental authority or authorities are ■ reorganisation; responsible for the regulation of competition aspects, ■ alienation of more than 50% of interest/shares; or anti-competitive practices, in the oil and natural ■ acquisition of assets value of which exceeds 10% of the gas sector? balance sheet value of the market participant; ■ acquisition of controlling functions in relation to the market The Committee of Natural Monopoly and protection of competition participant; and and consumer rights of the Ministry of National Economy of the ■ participation of similar persons in controlling organs of more Republic of Kazakhstan (the “Natural Monopoly Committee”), than one entity. the administrative body responsible for anti-competitive practices on the national level is responsible. The law provides detailed procedure of the cases the consent or notification is required as well as procedure to obtain such consent. The Natural Monopoly Committee is the State body that is responsible for the protection of competition and regulation of Also, alienation of shares or equity interests in companies owning prices in natural monopolies. strategic assets (e.g. national electricity network, main pipelines, international airports, etc.) requires preliminary consent of the Government of Kazakhstan. 11.2 To what criteria does the regulator have regard in determining whether conduct is anti-competitive? 12 Foreign Investment and International The new Entrepreneur Code, enacted in 2016, has replaced previous Obligations regulations in this sphere. The restrictions of the new law have similar extraterritorial effects and apply to activities outside Kazakhstan in case such activities restrict competition within Kazakhstan. 12.1 Are there any special requirements or limitations on acquisitions of interests in the natural gas sector There are no sector-specific provisions governing anti-competitive (whether development, transportation or associated practices in the natural gas sector and the Natural Monopoly infrastructure, distribution or other) by foreign Committee applies the relevant provisions of the new law. companies? Generally, the law prohibits the following anti-competitive activities: For foreign companies, the same rules apply as for local entities

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when acquiring interests in gas utility companies, subject to the rules Kazakhstan has signed the Convention on the Settlement of described above in question 11.4. You should also pay attention to Investment Disputes between States and Nationals of Other States the fact that the State has a priority right to own 51% of the newly and has ratified the Convention. built main pipelines as already described.

13.3 Is there any special difficulty (whether as a matter 12.2 To what extent is regulatory policy in respect of the of law or practice) in litigating, or seeking to enforce oil and natural gas sector influenced or affected judgments or awards, against Government authorities by international treaties or other multinational or State organs (including any immunity)? arrangements? Under the laws of Kazakhstan, a party may protect its interests by all As a matter of law, in case of a clash between domestic legislation available legal means, starting from filing a lawsuit in court, ending Kazakhstan and provisions of binding international treaties and agreements, with indispensable measures of execution of decisions. the latter shall prevail. Kazakhstan has joined the International Gas Union, where it is represented by KazTransGas JSC. 13.4 Have there been instances in the oil and natural gas Many international instruments, along with numerous bilateral sector when foreign corporations have successfully governmental agreements, may influence Kazakhstan’s regulatory obtained judgments or awards against Government policy in the field. authorities or State organs pursuant to litigation “The Framework Convention for the Protection of the Marine before domestic courts? Environments of the Caspian Sea” was signed by all five states bordering the Caspian Sea. The main goal of this Convention is Yes, there have been numerous instances involving foreign to protect the Caspian environment from all sources of pollution corporations with successful outcomes of the court proceedings. including the protection, preservation, sustainment and practical use Many occasions involved taxation issues, challenging the decisions of the biological resources of the Caspian Sea. of the governmental organs on various issues. In addition, Kazakhstan adopted the Law “On Improvement of Examples of such practices have an extremely extensive history, the Investment Climate” dated 12 June 2014, which stimulates and each case is distinguished by a multitude of details, which investors’ activities in priority sectors of the economy and provides unfortunately cannot be investigated by the performer, since it is investors with a package of incentives. not known whether these decisions were fully implemented or not.

13 Dispute Resolution 14 Updates

13.1 Provide a brief overview of compulsory dispute 14.1 Please provide, in no more than 300 words, a resolution procedures (statutory or otherwise) summary of any new cases, trends and developments applying to the oil and natural gas sector (if any), in Oil and Gas Regulation Law in your jurisdiction. including procedures applying in the context of disputes between the applicable Government As part of the gasification programme in the Republic of Kazakhstan, authority/regulator and: participants in relation to oil and in pursuance of the “Five Social Initiatives of the President” and natural gas development; transportation pipeline dated 5 March 2018, the company KazTransGas JSC plans to and associated infrastructure owners or users in relation to the transportation, processing or storage build the Saryarka gas pipeline along the Kyzylorda-Zhezkazgan- of natural gas; downstream oil infrastructure owners Karaganda-Temirtau-Astana route with a length of 1,081 km. This or users; and distribution network owners or users in section of the gas pipeline will provide natural gas to the population relation to the distribution/transmission of natural gas. of Astana, Karaganda, Temirtau, Zhezkazgan and nearby settlements along main gas pipeline routes. The parties to the agreement may specify in the contract the The oil and gas industry in Kazakhstan has been recognised as arbitration clause, except in cases where the dispute can be resolved one of the most developed among the CIS countries and the legal only in the State courts of the Republic of Kazakhstan. The arbitral framework as well as the infrastructure developments are being award is also considered final and binding. harmonised and developed even further.

13.2 Is your jurisdiction a signatory to, and has it duly ratified into domestic legislation: the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and/or the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID”)?

Kazakhstan is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Although Kazakhstan has not formally ratified the Convention, it is considered binding with regards to enforcement of foreign arbitral awards.

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Zhanar is a Partner at Unicase Law Firm, co-heading the oil & gas Kazakhstan and mining and energy departments. Zhanar has more than 14 years’ experience advising foreign investors, development banks, research institutions, and leading national and international companies on a wide range of legal issues related to foreign investments, oil & gas and mining, energy and renewables, tariffs, project finance, and M&A. Zhanar gained specialised experience by advising major Kazakh companies, international investors and quasi-public sector companies on a wide range of issues, including industry-specific regulation. Zhanar’s experience includes advising on major energy M&A transactions in Kazakhstan over last two years, including transaction and negotiation support, structuring cross-border deals, and advising on regulatory issues. Zhanar has authored many articles and publications, and has also acted as a speaker at many conferences and forums.

Unicase is one of the strongest local teams, well known for its regulatory and law-making capabilities, which together with a strong transactional background and expertise allows the firm to win major transactional projects and continue to be the first-choice advisers in Kazakhstan. Unicase’s practice extends to advising on natural resources and energy, infrastructure projects, the FMCG and pharmaceutical sectors, construction, finance and securities. The firm has strong transactional, corporate, litigation and regulatory teams with sector-specific expertise in advising all types of sector clients. The experience of the team includes acting for the Government authorities, private sector companies, and international and local investors. Unicase has unique insight and expertise in the renewable energy sector, supporting Kazakhstan’s ambition to harmonise its renewable energy legislation. The firm’s clientele comprises 20% of the Fortune 500 oil and gas companies, including Shell, Exxon and Total, as well asmajor development banks and FMCG sector leaders.

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Mexico Jorge Cervantes

González Calvillo, S.C. Diana María Pineda Esteban

Sinaloa and Nayarit are attractive LNG export points to Asian 1 Overview of Natural Gas Sector markets. For instance, Sempra announced its desire to increase the LNG capabilities of its existing facility in Ensenada, Mexico, for 1.1 A brief outline of your jurisdiction’s natural gas which it negotiated a Memorandum of Understanding for the off- sector, including a general description of: natural take with the French company Total. The project will have a total gas reserves; natural gas production including export capacity of 2.5 metric tons per annum (“mtpa”) for phase 1 the extent to which production is associated or and 12 mtpa for phase 2. non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) The policy of increasing the country’s gas pipeline network by 67% liquefaction and export facilities, and/or receiving and as of 2012, to reach 18,895 km by 2018, is based on the imports re-gasification facilities (“LNG facilities”); natural gas of gas by private companies and the growing participation of the pipeline transportation and distribution/transmission Federal Electricity Commission (“CFE”) in the NG/LNG market. network; natural gas storage; and commodity sales These new market conditions have begun to adopt NAESB-type and trading. agreements, which allow for back-to-back trading and import transactions with traders in the U.S., which allows Mexico to move Mexico’s current scenario in the natural gas (“NG”) sector is towards a liquid market. However, an interconnected NAESB an invitation for long-term investments from public and private system where all players can be purchasers and/or sellers at the stakeholders, either through direct participation in upstream tenders same time is still pending. for exploration and production (“E&P”) contracts, to favour the increase of domestic production, to achieve the liquidity of the new trading market, or to continue expanding the NG pipeline system. 1.2 To what extent are your jurisdiction’s energy requirements met using natural gas (including LNG)? There was a slight increase in comparison with NG reserves of 2017:

2017 2018 More than 80% of electricity generated in Mexico comes from fossil 1P: 10,402.05 MMMCF 1P: 10,022.42 MMMCF fuels or carbon. Mexico is transitioning towards cleaner energies 2P: 19,300.89 MMMCF 2P: 19,337.87 MMMCF in the generation of electric power. The general trend in thermal 3P: 28,950.34 MMMCF 3P: 30,020.35 MMMCF generation is a reduction in petroleum-based fuels and an increase in NG. In 2016, NG generation concentrated 37.1% of the total In 2016, domestic production reached a volume of 5,811.4 mmcfd, installed capacity, equivalent to 27,274 MW. 9.2% lower compared to 2015. Associated gas production in 2016 It is expected for NG to become the predominant fuel, concentrating averaged 4,545.5 mmcfd, representing a 5.8% decrease. The 60.3% of the total consumption for power generation by 2031. By volume of non-associated gas was 1,266 mmcfd; 19.6% lower than 2030, it is estimated that generation will reach 505 terawatt hours. registered in 2015. Imports have increased around 15% in the last decade. Historical domestic demand for NG has grown in the last 10 years at an average 1.3 To what extent are your jurisdiction’s natural gas annual rate of 3%. The power sector is the largest fuel consumer, requirements met through domestic natural gas production? concentrating around 51% of total demand. In 2017, the value of imports broke records derived from growing demand in Mexico, in Mexico’s production of NG has steadily decreased since 2009, addition to attractive prices in the United States (“U.S.”), lower in when it reached its maximum level of extraction, estimated at 7,030 relation to the costs of local extraction. The increase resulted from mmcfd, to 5,068 mmcfd in 2017, which represents a fall of 28%. the commencement of operations of 3,392 km of gas pipelines. In addition, 24 companies other than Petróleos Mexicanos (“Pemex”), The increase in constant demand had to be met through imports. In the State Productive Enterprise (“SPE”), reserved 36% of the 1998, Mexico bought 146 mmcfd in foreign markets. As of June capacity of the National Pipeline System (“SISTRANGAS”). 2018, it imports 5,106 mmcfd from the U.S.; an increase of 3,397%. Mexico’s coastline (of more than 11,000 km and with more flexible Domestic production during 2017 and 2018 has been below 5,000 regulations in the Pacific Coast compared to other jurisdictions such mmcfd, as shown in the graph below. as the U.S.) and places in the regions of Baja California, Sonora,

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The current legal framework is enforced by: ■ The Ministry of Energy (“Sener”) – responsible for national energy policy. ■ The Ministry of Finance and Public Credit (“SHCP”) – has the authority to verify and regulate oil revenues of the state and to determine the economic conditions of E&P Contracts. ■ CNH – responsible for the bidding and award of E&P Contracts, as well as the regulation of hydrocarbon E&P activities. ■ CRE – responsible for issuing technical and economic Mexico regulations, granting and managing permits, verifying compliance, imposing sanctions on midstream and downstream activities and the entire power sector chain. ■ The Agency of Security, Energy and Environment (“ASEA”) – responsible for regulating and supervising industrial and operational safety, and environmental protection in the Source: CNH hydrocarbons sector. The constitutional amendments of late 2013 established full guiding principles for government authorities in the sector: 1.4 To what extent is your jurisdiction’s natural gas production exported (pipeline or LNG)? 1. Hydrocarbons in the subsoil belong to the Mexican Nation. 2. Free competition between SPEs and private companies to Mexico is an important consumer of NG produced in the U.S. It benefit consumers. is estimated that in 2031, demand for dry NG will reach a volume 3. Strengthening of SPEs and regulatory agencies. of 9,659.9 mmcfd; imports are projected to reach 4,613.6 mmcfd, 4. Transparency and accountability. while exports will be zero. 5. Environmental protection and promotion of clean energies. Rising demand and higher import volumes from the U.S. justified CNH and CRE have managerial, technical and operational autonomy. the construction of numerous import gas pipelines connecting the These commissions were created as part of a wave of institutions U.S. and Mexico. The current network will be boosted by the new with an autonomous mandate in the 1990s, which included the Bank submarine pipeline that will connect Texas with Veracruz, adding of Mexico. The logic behind the new institutional arrangement was 2,600 mmcfd of capacity. to consolidate public agencies of a technical nature, with highly specialised personnel, whose decisions are impartial and isolated from any political influence or special interests. Other relevant regulations and policies are: a. Open and non-discriminatory access to midstream facilities for NG and petroleum products, which means that (i) spare capacity is accessible to any potential user, and (ii) terminal and pipeline companies should not give discriminatory treatment between users, who may request/demand that the company offers them the special conditions granted to other users under equivalent circumstances. b. Public Policy on Minimum Stocks of Refined Products, and Public Policy on Minimum Stock of NG, which intend to strengthen energy security through an obligation to maintain minimum inventories, to reduce risk of lack of supply. c. Asymmetric regulations applicable to Pemex, to control Source: Sener its dominant market power upon the opening of the energy sectors to private investment. d. Quality specifications of fuels throughout the value chain, 2 Overview of Oil Sector to protect the environment and health, promote equivalent conditions for competition, and protect end consumers. e. Regulation of vertically integrated entities and restriction of 2.1 Please provide a brief outline of your jurisdiction’s oil cross-ownership. sector.

Oil and gas activities are governed by federal law. The primary legal 2.2 To what extent are your jurisdiction’s energy framework includes the Constitution, Hydrocarbons Law (“HL”), requirements met using oil? Hydrocarbons Revenue Law (“HRL”), Law of the Regulatory Coordinated Bodies in Energy Matters (governs the organisational According to the World Bank, electricity production is dominated framework of the National Hydrocarbons Commission (“CNH”) by fossil fuels, which account for 90% of electricity in Mexico. and the Energy Regulatory Commission (“CRE”)) and Law of the Combined-cycle gas power plants already represent the biggest National Agency for Industrial Safety and Environmental Protection share and are growing fast. NG is substituting other energy sources of the Hydrocarbons Sector, among other federal regulations, rules, like fuel oil and diesel. A steady decline in oil production since general administrative provisions, and guidelines. the 1980s is slowly decoupling the Mexican economy from oil exports. By 1982, these represented 18% of the country’s GDP,

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while in recent years this percentage has decreased to 4%. A marked ■ A bill prohibiting the use of fracking is being analysed by increase in imports is also taking place, mainly refined products and Mexico’s congress. dry gas from the U.S. 3.2 How are the State’s mineral rights to develop oil 2.3 To what extent are your jurisdiction’s oil requirements and natural gas reserves transferred to investors or met through domestic oil production? companies (“participants”) (e.g. licence, concession, service contract, contractual rights under Production Sharing Agreement?) and what is the legal status of There has been a downward trend in oil production for the past 10 those rights or interests under domestic law? years, to an average annual growth rate of -3.8%. Data published by

Sener shows that in 2017, production averaged 1.94 mmbd, its lowest Mexico Mexico does not grant concessions to exploit mineral rights by level since 1980. Nearly 80% of crude oil is produced offshore. private investors. Please see question 3.2 for information on The decrease in local production has translated into reduced refining granting instruments. volumes and increase of imports. In January 2018, Mexico reached its highest level of import of motor-fuels, accounting for 75% of To date, 107 E&P Contracts have been signed by the Mexican local consumption. government with IOCs and local petroleum companies. The main difference between a concession-based vs. contractually- based oil development framework is that the concession is granted 2.4 To what extent is your jurisdiction’s oil production to provide a public service or exploit property of public domain, exported? meaning that the concession creates a right in favour of the concessionaire while the contract-based model allows the state Nearly 56% of Mexico’s crude oil production is distributed to export to maintain the original rights over the hydrocarbons and their terminals. During 2017, Pemex exports numbered 1.166 mmbd. development, for which it contracts the E&P activities with an SPE Mexico destined most of that export to the U.S. However, Mexico or private entity. is the biggest importer of U.S. refined products.

3.3 If different authorisations are issued in respect of 3 Development of Oil and Natural Gas different stages of development (e.g., exploration appraisal or production arrangements), please specify those authorisations and briefly summarise the most 3.1 Outline broadly the legal/statutory and organisational important (standard) terms (such as term/duration, framework for the exploration and production scope of rights, expenditure obligations). (“development”) of oil and natural gas reserves including: principal legislation; in whom the State’s Mexico’s oil development is highly regulated from different angles: mineral rights to oil and natural gas are vested; Government authority or authorities responsible for energy; and environmental/social matters. the regulation of oil and natural gas development; and Once an E&P Contract is executed, the former operator will have the current major initiatives or policies of the Government rights and obligations to perform the E&P activities, meaning that (if any) in relation to oil and natural gas development. it will not require a special permit or licence by CNH to do so, but will rather have to obtain several approvals from CNH throughout The national energy model allows the participation of the SPEs (i.e., the term of the contract, including but not limited to: Pemex) and private companies in equality of circumstances. ■ Exploration and Appraisal Plans. Hydrocarbons in the subsoil belong to the Nation. Development ■ Authorisation in connection with a change of control in the rights are granted by CNH, in form of entitlements to SPEs or field operator. through international bidding rounds for the award of production ■ Suspending the E&P activities. sharing, profit sharing or licence contracts. ■ Additional terms. The primary regulator and counterparty of oil producers is CNH. ■ Drilling. Other governmental bodies actively participate in E&P, including ■ Gas flaring. SHCP, ASEA, the Ministry of Economy, in connection with the percentage of local content requirements, and the Mexican Other considerations related to the development of hydrocarbons Petroleum Fund, whose purpose is to receive, manage and distribute are: the income derived from E&P activities. ■ Authorisations for surface exploration are studies carried out Important regulatory considerations are: in order to locate the possible existence of hydrocarbons in the subsoil. ■ The state’s profits from private investment in oil and gas are in the royalties, taxes, bonuses, and other fees. ■ Prior to the granting of an entitlement or the publication of a call for a public bid, Sener, in coordination with the Ministry ■ Farm-outs have allowed Pemex to develop strategic alliances of the Interior (“SEGOB”), carries out a study of social with IOCs. impact with respect to the subject area of the entitlement or ■ There are local-content requirements in the regulations that the contract. establish that E&P activities must reach an average of 35% ■ In order to take into account the interests and rights of the by the year 2025 of local content in the entitlements and communities and indigenous peoples, Sener must carry contracts. out the necessary informed consultation procedures, in ■ The current legal framework provides high care for coordination with SEGOB and the corresponding agencies. environmental protection and social impact. Given the high number of regulations, there is an area of opportunity ■ CNH has exercised its autonomy in the form of sanctions to to cut bureaucratic roadblocks. CNH agrees that there is a space to Pemex for breaching gas flaring limitations. make the regulatory process leaner and more efficient and intends to

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work on expediting processes to approve exploratory and appraisal Without exception, private participants may neither acquire title to, plans. nor grant security interests in hydrocarbons in the subsoil until such Performance of midstream and downstream activities require a applicable consideration (in cash or in-kind) is paid to the state. permit granted by CRE or Sener: Upon the energy reform, the national oil company Pemex retained certain E&P rights through the entitlements granted to it in Round Oil conditioning that includes industrial processes carried out Zero: 34,800 million barrels of oil equivalent in prospective Crude treatment outside a contract area or an resources, which represents 31% of the country’s total and 20,589 entitlement area and prior to million barrels of oil equivalent in 2P reserves, that is, 83% of total refining. 2P reserves. Includes physical and chemical Mexico processes to which NG is subjected, as well as associated 3.5 How does the State derive value from oil and natural condensates, to obtain refined Gas processing gas development (e.g. royalty, share of production, products and petrochemicals, taxes)? capable of being marketed, or used as an input for industrial transformation. In accordance with the HRL, the state receives tax contributions The set of physical and chemical from entitlements to SPEs. In connection with E&P Contracts, in processes to which the crude oil is general, the state receives a royalty and a fee for the exploratory Refining subjected to convert it into refined phase. In licence contracts it also collects an additional amount of products and petrochemicals. the value of the hydrocarbons and, if applicable, a signing bonus Deposit and safeguard of offered by the operator in the bidding process. In production- hydrocarbons, refined products Storage and petrochemicals in deposits sharing and profit-sharing contracts, the state receives a percentage and confined facilities. of the profits of the project, either in-kind or in cash, respectively. The activity of receiving, The payment of the considerations does not exempt the operators delivering and, where appropriate, from complying with the tax obligations established in the fiscal driving hydrocarbons, refined laws and regulations. products and petrochemicals, from one place to another by pipelines Transportation or other means; it does not entail 3.6 Are there any restrictions on the export of the transfer of title to or marketing production? of said products. It excludes the gathering of hydrocarbons within the contract/entitlement area. Generally speaking, there are no restrictions to the export of production. However, for the export of NG and refined products, Logistical activity that includes Sener, as a policy, grants export permits trying to not affect the the transfer and storage of NG or refined products, from a domestic balance and supply. Distribution specific location to one or several assigned destinations, for its retail sale or final consumption. 3.7 Are there any currency exchange restrictions, or restrictions on the transfer of funds derived from The activity of offering users or production out of the jurisdiction? end-users: ■■ the sale of hydrocarbons, refined products or There are none. petrochemicals; ■■ management or contracting 3.8 What restrictions (if any) apply to the transfer or transportation, storage or Marketing disposal of oil and natural gas development rights or distribution services; and/or interests? ■■ the provision or intermediation services. The operator must obtain CNH’s authorisation prior to any sale, Marketing permits do not assignment, transfer or disposal of all or part of its rights/obligations entail the ownership of the under the E&P Contract and to transfer the corporate control or infrastructure or the provision of services. operational management. Sales performed directly to the Notwithstanding the foregoing, consortium members acting as consumer of NG or petroleum operators must notify CNH of any change in its capital structure Retail sale products, among other fuels, that does not result in a change of control of the operator. Such in facilities with a specific or multimodal purpose. provisions do not distinguish between direct or indirect changes in the capital structure of any of the contractors, so any indirect changes must also be notified. 3.4 To what extent, if any, does the State have an E&P Contracts generally allow the consortium members to change ownership interest, or seek to participate, in the the operator with prior authorisation from CNH. development of oil and natural gas reserves (whether as a matter of law or policy)? CNH recently approved that a banking institution can have the shares of another private contractor, the Egyptian company Cheiron, who used its participation in a Farm-out Contract as a guarantee to The Nation is the owner of the hydrocarbons in the subsoil. Once obtain financing from Natixis. E&P activities are performed by state or private participants, the state receives the consideration provided in the HRL.

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the contractor, in terms of the E&P Contract, industry best practices, 3.9 Are participants obliged to provide any security the and the field operator’s SASISOPA. or guarantees in relation to oil and natural gas development? For purpose of developing the abandonment activities, the field operator shall open an investment trust known as an “abandonment trust”, at a reputable and creditworthy Mexican banking institution. Participants of bidding processes must present a bid guarantee to be The contractor may not use the funds deposited in the abandonment able to submit economic proposals for the award of contract areas. trust for any purpose other than conducting the abandonment The bid guarantee is kept by CNH until the awarded party signs the activities, and shall not be entitled to pledge, assign or otherwise E&P Contract. If the winner fails to sign on the set date, CNH will dispose of the resources in the abandonment trust. enforce the bid guarantee. In addition, E&P Contracts provide for the following guarantees: Mexico ■ Performance guarantee. 3.13 Is there any legislation or framework relating to gas storage? If so, what are the principal features/ ■ Corporate guarantee, which is the ultimate parent or duly- requirements of the legislation? capitalised affiliate guarantee to secure compliance of all the unpaid obligations of the contractor. Storage of NG is subject to a permit granted by CRE, subject to If the awarded party desires to sign the E&P Contract through a “open and non-discriminatory access”. Please see question 2.1. special purpose vehicle, the entity that participated in the bidding Storage assets should operate in accordance with (i) General Terms process, usually the IOC, will have to sign the E&P Contract as joint and Conditions (“GTCs”), which should be drafted following obligor of the field operator (SPV). certain guidelines provided by CRE in its regulations, and (ii) the SASISOPA, for purposes of industrial safety and environmental 3.10 Can rights to develop oil and natural gas reserves protection. granted to a participant be pledged for security, or booked for accounting purposes under domestic law? 3.14 Are there any laws or regulations that deal specifically with the exploration and production of unconventional According to the HL, field operators will have the right to report, oil and gas resources? If so, what are their key for accounting and financial purposes, the entitlement or the E&P features? Contract, as well as the expected benefits thereof. ASEA issued the General Administrative Provisions (“DACGs”) 3.11 In addition to those rights/authorisations required that establish the guidelines on industrial safety, operational safety to explore for and produce oil and natural gas, what and environmental protection to perform the activities of E&P of other principal Government authorisations are hydrocarbons in unconventional deposits onshore. required to develop oil and natural gas reserves (e.g. environmental, occupational health and safety) and According to such DACGs, risks should be minimised to a level from whom are these authorisations to be obtained? that is as low as reasonably feasible. The mechanisms related to the reduction of risks and environmental impacts, and response to Other authorisations related to oil and gas production are mentioned emergencies must follow the following order of priority: in question 3.3 and, in addition, operators must consider the a) Physical integrity of the people. following: b) Protection of the environment. ■ Preparation of the Risk Analysis for the hydrocarbons sector. c) Protection of the facilities. ■ Authorisation to change the use of land in forest lands. General provisions covered by this regulation are: ■ Authorisation of the Management System for Industrial, ■ Industrial safety and environmental protection. Operational and Environmental Safety (“SASISOPA”), ■ Design, construction, pre-commencement and maintenance. which is an integral set of documented elements for prevention, control and improvement in matters of industrial ■ Drilling and management of fluids. and operational safety and environmental protection. ■ Finishing of the wells. ■ Preparation of the environmental baseline to determine pre- ■ Return fluid management. existing environmental damage and liabilities for which the ■ Gathering and mobilisation of hydrocarbons. contractor will not be liable. ■ Production tests. Transformation activities are subject to obtaining the relevant ■ Decommissioning and abandonment. permits, such as NG processing, oil treatment, compression, decompression, liquefaction, and regasification. 4 Import / Export of Natural Gas (including 3.12 Is there any legislation or framework relating to LNG) the abandonment or decommissioning of physical structures used in oil and natural gas development? If so, what are the principal features/requirements of the 4.1 Outline any regulatory requirements, or specific legislation? terms, limitations or rules applying in respect of cross-border sales or deliveries of natural gas (including LNG). Abandonment includes all activities for the removal and dismantling of materials, including permanent plugging and technical closure of Import and export are subject to a permit granted by Sener, in wells, removal and dismantling of all plants, platforms, facilities, addition to the registrations related to foreign trade before SHCP. machinery and equipment used during the E&P activities, as well as environmental damage restoration in the contract area affected by

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According to the guidelines and the different modalities of use, 5 Import / Export of Oil affectation or, where appropriate, acquisition of the lands agreed between the entitlement holder or contractors and the owners of the 5.1 Outline any regulatory requirements, or specific land, land owners will be entitled to a consideration, as applicable: terms, limitations or rules applying in respect the payment of damages to goods or rights other than the land, as of cross-border sales or deliveries of oil and oil well as the forecast of the damages that could be suffered due to products. the project to be developed; the rent for the occupation, easement or use of the land; and, in the case of projects that achieve the Import and export are subject to a permit granted by Sener. commercial extraction of hydrocarbons, a percentage of the income Marketing and sale are subject to different permits, depending on corresponding to the entitlement holder or contractor. Mexico the scope of the activity. Please see question 3.3.

6.4 How is access to oil and natural gas transportation 6 Transportation pipelines and associated infrastructure organised?

Gathering facilities are part of the “Petroleum Activities” 6.1 Outline broadly the ownership, organisational and (actividades petroleras) under the “Extraction” phase. CNH has not regulatory framework in relation to transportation issued any other type of regulation. However, pipelines used in the pipelines and associated infrastructure (such as “transportation” of oil and NG, as such term is defined in the HL, are natural gas processing and storage facilities). subject to a transportation permit from CRE and open-access and non-discriminatory obligations. “Transportation” within the contract area to the processing facility usually falls under the “gathering” activity per Mexican regulations. The distinction between “transportation” vs. “gathering” has 6.5 To what degree are oil and natural gas transportation heavy implications under statutory provisions, since pipeline pipelines integrated or interconnected, and how is co- operation between different transportation systems “transportation” is subject to open-access principles whereas the established and regulated? “gathering” pipelines are not.

The model E&P Contract used by CNH so far provides a prohibition Pemex still maintains most of the gathering facilities, which makes to the field operator to lease the necessary gathering facilities, in their participation almost necessary in E&P production to a certain order to ensure the continuity of the E&P activities. extent. As a result of the energy reform and the opening of the Most gathering facilities are currently owned by Pemex who markets, new IOCs have initiated operations of their awarded E&P can provide services to private field operators or purchase the Contracts, which means that we anticipate an increase in the number hydrocarbons produced by the field operator, setting transfer of and capacity of gathering facilities. custody and ownership before the gathering facility. As explained in detail below, oil and gas pipelines for transportation activities are regulated differently from gathering facilities, i.e., 6.2 What governmental authorisations (including with open and non-discriminatory access obligations. Operations any applicable environmental authorisations) are of integrated pipeline networks or “systems” require a permit from required to construct and operate oil and natural CRE. Managers of interconnected pipelines and storage facilities gas transportation pipelines and associated may form integrated systems. Such managers are responsible for infrastructure? coordinating the different pipeline and storage facilities permit- holders to ensure the continuity, quality, safety and efficiency in the Gathering facilities are part of the “Petroleum Activities” under provision of transportation of storage services, guaranteeing open the “Extraction” or “Production” phase, as these terms are defined and non-discriminatory access. Managers of integrated systems in the model E&P Contract. This means that, from the standpoint cannot be entities with permits or contracts, as applicable, to of energy regulators, they do not require an additional permit, produce, market and distribute hydrocarbons, refined products and licence or governmental authorisation to be operated. Nonetheless, petrochemicals. the gathering activity should be included by field operators in the preparation of their SASISOPA. 6.6 Outline any third-party access regime/rights in respect of oil and natural gas transportation and 6.3 In general, how does an entity obtain the necessary associated infrastructure. For example, can the land (or other) rights to construct oil and natural gas regulator or a new customer wishing to transport transportation pipelines or associated infrastructure? oil or natural gas compel or require the operator/ Do Government authorities have any powers of owner of an oil or natural gas transportation pipeline compulsory acquisition to facilitate land access? or associated infrastructure to grant capacity or expand its facilities in order to accommodate the new Hydrocarbons development is a strategic area of federal jurisdiction, customer? If so, how are the costs (including costs of interconnection, capacity reservation or facility meaning that the development of E&P activities has preference over expansions) allocated? other potential use of the land (i.e., agriculture). The law provides procedures for securing land rights, which shall be obtained by Gathering facilities are not subject to open-access principles, as the field operator. Additionally, Sener issued the guidelines that opposed to pipeline transportation (beyond the frontier of the establish parameters to determine the consideration for commercial contract area) or storage. Pipeline transportation services are extraction that the entitlement holder or contractor will deliver to subject to regulated tariffs, proposed by the operators and approved the owners when their projects reach the commercial production of by CRE. hydrocarbons.

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■ Indigenous communities’ consultation, in certain cases. 6.7 Are parties free to agree the terms upon which oil ■ Archaeological authorisation, depending on the region. or natural gas is to be transported or are the terms (including costs/tariffs which may be charged) ■ Authorisation to change the use of land in forest lands. regulated? ■ Construction licence and other local and municipal authorisations related to the construction phase. Generally speaking, gathering services shall be negotiated freely Not an authorisation itself but two important actions related to between the field operator and the carrier. CNH’s model E&P government agencies are: (a) the securement of rights of way and Contract provides that the contractor may not lease any gathering its registration before the Public Registry of Property, so that the lines that are indispensable for the regular commercial production; property titles of the relevant lands include the right of way granted however, such contractor may obtain or provide services related to for the pipeline; and (b) open-access pipelines should favour the Mexico the shared use of these facilities. development of open season tender-type processes to allocate the capacity or size whether they need to expand a projected pipeline. This process is highly regulated in terms of the process, the timeline, 7 Gas Transmission / Distribution and the results, and the applicant shall obtain CRE’s approval before developing the tender. 7.1 Outline broadly the ownership, organisational and regulatory framework in relation to the natural gas 7.3 How is access to the natural gas distribution network transmission/distribution network. organised?

Transmission (understood as “Transportation” in the Mexican Access is guaranteed by open and non-discriminatory access regulation) as well as distribution is subject to permits granted by to the transportation and distribution networks, which means CRE. When the transportation or distribution is performed through that any interested party can request capacity on a system or an pipelines, it is subject to open and non-discriminatory access (please interconnection. see question 2.1). A significant achievement in the marketing of NG since the energy From December 1, 2012 to August 1, 2017, 3,392 km have been reform was the separation of NG transport and marketing activities. added to the national gas pipeline network, with an increase of 29% This means that permit-holders of transport by NG pipeline do not and 14 new gas pipelines completed. market the hydrocarbon. At the end of 2016, CRE had 57 open-access permits for NG Regarding the marketing of NG, as part of the asymmetric through pipelines, of which 34 are in operation and 23 are under regulations imposed to Pemex, CRE submitted it to implement a construction. These permits represent a total length of 18,994.4 km. Program of Gradual Assignment of Contracts, which establishes With respect to NG distribution permits, at the end of 2016, CRE that within a maximum term of four years, Pemex should make accounted for 23 with an accumulated length of 67,918 km and available to third-party marketers the transfer of part of its portfolio coverage of 3.3 million users distributed throughout the country. of contracts representing 70% of its total volume of traded NG. The The National Center of Natural Gas Control (“CENAGAS”), a final phase of this Program is happening during the year 2018. recently created independent system operator of the state’s NG Distribution used to be arranged in different zones until late 2017, pipeline system, led the first Open Season 2016–2017 to reserve when CRE approved a single-zone scheme. transport capacity in the SISTRANGAS and promote effective open access in it. This event encouraged competition in the marketing 7.4 Can the regulator require a distributor to grant activity and allowed the entry of new players in the market, for the capacity or expand its system in order to benefit of final consumers. accommodate new customers? The first annual auction of capacity available in in-bond pipelines was made on February 17, 2017 by CENAGAS, where it awarded Pipeline operators subject to open access shall extend the route or 29.2% of the available capacity in internment/importation pipelines, expand the capacity of their systems, at the request of any interested which will allow the generation of greater investments with the entry party, provided that: of new actors to the gas market. Three companies were winners i. the extension or expansion is technically feasible and of 220,741 MMBtu/d on four routes of the NET Mexico Pipeline economically viable in terms of the provisions of the system, which is interconnected to the SISTRANGAS at the border regulation; and compression station (Camargo) and supplies NG from Agua Dulce ii. the proposing party guaranteed the off-take of the service (Texas) to the National Gas Pipeline System and the Los Ramones through the contractual vehicle provided by the operator in Transportation System. their GTCs. The extension or expansion of the systems will be made with prior 7.2 What governmental authorisations (including any authorisation of modification of the respective permit from CRE. applicable environmental authorisations) are required to operate a distribution network? 7.5 What fees are charged for accessing the distribution network, and are these fees regulated? ■ Pipeline transportation or distribution permit is required from an energy standpoint. Pipeline operators shall submit to CRE the proposed tariffs for the ■ Environmental impact assessment authorisation. regulator’s approval. ■ Preparation of the SASISOPA. ■ Social impact assessment.

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7.6 Are there any restrictions or limitations in relation to 9.4 Outline any third-party access regime/rights in acquiring an interest in a gas utility, or the transfer respect of LNG facilities. of assets forming part of the distribution network (whether directly or indirectly)? LNG facilities are subject to open and non-discriminatory access.

Generally speaking, there are no restrictions or limitations in connection to the acquisition of an interest in a gas utility. Please 10 Downstream Oil see section 11 for potential competition restrictions. For the transfer of assets which imply a transfer of the permit, CRE’s 10.1 Outline broadly the regulatory framework in relation Mexico approval is required. to the downstream oil sector.

8 Natural Gas Trading Downstream activities, like marketing and retail sale, require a permit granted by CRE. The regulatory framework of downstream activities includes: 8.1 Outline broadly the ownership, organisational and a. HL and the Regulations to the Third Title of the HL, regulatory framework in relation to natural gas which provide the general framework of the refining, trading. Please include details of current major transportation, storage, distribution, marketing and retail sale initiatives or policies of the Government or regulator of hydrocarbons and refined products. (if any) relating to natural gas trading. b. DACGs for Open and Non-discriminatory Access on Pipeline Transportation and Storage of NG and DACGs of refined The marketing activity requires a permit granted by CRE; products and petrochemicals, which allows downstream contracting terms, conditions, and tariffs should be freely negotiated players access to logistics assets (with the exception of by the parties. logistics for self-use). c. Public Policy on Minimum Stocks of Petroleum Products 8.2 What range of natural gas commodities can be (please see question 2.1). traded? For example, can only “bundled” products d. Public Policy on Minimum Stocks of Natural Gas (please see (i.e., the natural gas commodity and the distribution question 2.1). thereof) be traded? e. Asymmetric regulations applicable to Pemex. f. Mexican Official Standard NOM-016-CRE-2016 on quality Both bundled products or services can be freely traded by SPEs or specifications of fuels throughout the value chain. private entities. g. A programme to register the SASISOPA of retail sale of NG, and retail sale or distribution of refined products and liquefied 9 Liquefied Natural Gas petroleum gas.

10.2 Outline broadly the ownership, organisation and 9.1 Outline broadly the ownership, organisational and regulatory framework in relation to oil trading. regulatory framework in relation to LNG facilities. Import and export of oil is subject to a permit granted by Sener. LNG facilities have a similar treatment to NG facilities. Its storage Marketing and sale of oil or oil products is subject to different and pipeline transportation (transmission) is subject to open and permits, depending on the scope of the activity to be performed. non-discriminatory access. Moreover, transformation activities are Please see question 3.3. subject to obtaining other relevant permits before CRE or Sener. Please see question 3.3. 11 Competition 9.2 What governmental authorisations are required to construct and operate LNG facilities? 11.1 Which governmental authority or authorities are responsible for the regulation of competition aspects, Required permits and authorisations differ on a case-by-case or anti-competitive practices, in the oil and natural basis, depending on the specifications of the project. The most gas sector? common permits include liquefaction, storage, environmental impact assessment and risk, social impact assessment, SASISOPA, In Mexico, competition enforcement began in 1993 with the archaeological clearance, land use and zoning, earthworks enactment of the Federal Economic Competition Law (“FECL”) authorisation and water rights, among others. Other ancillary and the creation of a specialised antitrust agency within the Federal permits or authorisations may include power generation, pipeline government. In 2013, constitutional amendments resulted in a new interconnection, and the approval of the proposed open season fully independent agency (“COFECE”) to monitor, promote and procedure. ensure competition and free access to the markets in all sectors and industries (except for telecom, entrusted to another agency). COFECE has powers to investigate and penalise monopolies (cartel 9.3 Is there any regulation of the price or terms of service in the LNG sector? behaviour and abuse of conduct) and illicit concentrations; regulating essential inputs or facilities, and eliminating barriers to competition, and other restrictions to the efficient operation of markets. Although CRE regulates the applicable tariffs, which shall be submitted by the COFECE’s transversal powers include the oil and gas sector, CRE asset operator CRE’s approval. has specific powers in certain competition matters in midstream and

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downstream, to promote the efficient development and competition will be granted. With the purpose of obtaining income for the state of the industry, whereas CNH has similar powers in the upstream that contributes to the long-term development, it will carry out the segment. E&P activities through entitlements with SPEs (Pemex), or through contracts with these or with private entities.

11.2 To what criteria does the regulator have regard in As a result of the energy reform, restrictions to foreign participation determining whether conduct is anti-competitive? were removed, with the exception of: ■ supply of fuels and lubricants for aircraft; and Generally, FECL and its regulations provide for ex ante (v.g. ■ the participation in cabotage activities, which could affect opinions for bidding guidelines, or merger control procedure), and the participation of foreign entities in projects involving the

ex post (investigations for cartel behaviour, monopolisation or illicit offshore transportation of oil and gas and its derivatives. Mexico concentrations, recommendations for correction of market failures) mechanisms to prevent and sanction anti-competitive behaviour. 12.2 To what extent is regulatory policy in respect of the Mexican antitrust law has been substantially influenced by the U.S. oil and natural gas sector influenced or affected and European law on the subject. by international treaties or other multinational arrangements? In the oil and gas sector, where the goal has been to end Pemex’s long- held monopoly in all segments of the value chain and prevent new concentrations from occurring, the HL sets forth certain pre-emptive Mexico has several foreign trade agreements with other countries, measures and asymmetric regulations to promote competitive markets the most important being the recently renegotiated agreement with such as legal, operative and accounting separation of vertically the U.S. and Canada (“USMCA”). Although the final draft of such integrated entities and restriction of cross-ownership. agreement has not been issued yet, public communications from the government state that energy-related investments will be protected by the USMCA and that Mexico will ensure the open markets and 11.3 What power or authority does the regulator have to free participation of private players. preclude or take action in relation to anti-competitive practices? Mexico and the U.S. have executed an agreement in connection with cross-border deposits, where it is considered that there are up to 172 billion barrels of crude oil and 304 billion cubic feet of NG. This COFECE may investigate and punish conducts harshly with actual or agreement obliges the two countries to exchange information when potential anti-competitive effects in Mexican markets. the existence of a cross-border deposit is detected or presumed. CRE may revoke permits for midstream and downstream activities If proven, Pemex or the companies that participate on the side of upon a permit holder breaching a COFECE decision, as well as issuing Mexico would have to sign a “unitisation” agreement (unification regulations of tariffs and rates, until receiving COFECE’s favourable of deposits) with the U.S. firms. Subsequently, it will be necessary opinion on the existence of effective competition conditions. to define what percentage corresponds to each side of the border, according to the location of the deposit and the corresponding expert 11.4 Does the regulator (or any other Government reports. Both processes must be authorised by both governments authority) have the power to approve/disapprove before production begins. mergers or other changes in control over businesses in the oil and natural gas sector, or proposed acquisitions of development assets, transportation or 13 Dispute Resolution associated infrastructure or distribution assets? If so, what criteria and procedures are applied? How long does it typically take to obtain a decision approving or 13.1 Provide a brief overview of compulsory dispute disapproving the transaction? resolution procedures (statutory or otherwise) applying to the oil and natural gas sector (if any), COFECE has pre-merger control powers in all sectors, including including procedures applying in the context of energy. Authorisation for a transaction shall be denied if it is deemed disputes between the applicable Government authority/regulator and: participants in relation to oil to hinder, harm or impede competition and free market access and natural gas development; transportation pipeline regarding equal, similar or substantially related goods or services. and associated infrastructure owners or users in Concentrations must be notified when the transaction meets certain relation to the transportation, processing or storage thresholds based on transaction size (approx. US $70 million), of natural gas; downstream oil infrastructure owners and value of the assets and turnover in Mexico, as well as smaller or users; and distribution network owners or users in relation to the distribution/transmission of natural gas. transactions between larger companies.

The HL allows for E&P Contracts to provide for arbitration for the 12 Foreign Investment and International resolution of disputes thereunder, with the exception of disputes Obligations relating to the administrative rescission of E&P Contracts, which must be heard by Mexican federal courts. The model E&P Contract provides: (a) arbitration (in practice, 12.1 Are there any special requirements or limitations on UNCITRAL rules have been used so far), conducted in Spanish, acquisitions of interests in the natural gas sector sitting in The Hague, Netherlands; or (b) in case of serious breaches (whether development, transportation or associated infrastructure, distribution or other) by foreign listed in the model contract, administrative rescission by and before companies? CNH, which includes the unauthorised transfer of rights under the contract, unjustified breaches in the Program of Minimum In the case of oil and hydrocarbons in the subsoil, the property of Works, intentional wrongful reports, among others. The model the Nation is inalienable and imprescriptible, and no concessions

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contract acknowledges that contractors have the rights contained in CRE and CNH, as part of their autonomy, have issued important international treaties signed by Mexico (i.e., investment protection). resolutions that do not necessarily favour the SPEs, Pemex and CFE: Midstream and downstream agreements can be subject to arbitration, ■ CRE denied a petition by CFE to keep a percentage of the federal courts of law, or any other dispute resolution mechanism. revenues generated in the gas pipelines, based on CFE’s CRE has the power and authority to intervene in disputes, either predominant market position. through a mediation process or via claims filed by users of permit- ■ CRE initiated an investigation against CFE in connection holders (i.e., users of a pipeline transportation system). with complaints of new players in the electricity sector, in relation to CFE’s delays in executing connection agreements to the national grid. 13.2 Is your jurisdiction a signatory to, and has it duly ■ CRE fined Pemex twice in 2017, (i) for not complying with Mexico ratified into domestic legislation: the New York the specifications of fuels, and (ii) for not granting non- Convention on the Recognition and Enforcement of Pemex truck carriers access to its facilities for delivery of Foreign Arbitral Awards; and/or the Convention on refined products. Each fine was for an approximate amount the Settlement of Investment Disputes between States of US $400,000. and Nationals of Other States (“ICSID”)? ■ Pemex tried to retain all the capacity in port terminals against open access; however, CRE forced the SPE to grant access in Mexico has been part of the NY Convention since 1971 and recently favour of competition. signed the ICSID Convention, in January 2018.

13.3 Is there any special difficulty (whether as a matter 14 Updates of law or practice) in litigating, or seeking to enforce judgments or awards, against Government authorities or State organs (including any immunity)? 14.1 Please provide, in no more than 300 words, a summary of any new cases, trends and developments in Oil and Gas Regulation Law in your jurisdiction. There is no particular difficulty in the enforcement of judgments (local or foreign) and arbitral awards against the government or, for Near to the fifth anniversary of the energy reform: example, the SPEs, other than heavy workload of federal courts and delayed procedures. ■ Mexico received the largest foreign direct investment in history, of more than U.S. $192 billion; total private It is noted that the most relevant causes of termination are handled investment in the energy sector will be more than U.S. $200 in administrative rescission exclusively. There is no waiver of billion in the coming years. sovereign immunity by the Mexican government in E&P Contracts. ■ A total of 107 E&P Contracts have been signed with CNH. Expected investments in upstream sum U.S. $160 billion; 67 13.4 Have there been instances in the oil and natural gas contracts related to seismic studies activities will detonate sector when foreign corporations have successfully investments for U.S. $2.1 billion. obtained judgments or awards against Government ■ 86 contracts to exploit renewable sources such as solar, wind authorities or State organs pursuant to litigation or geothermal will provide U.S. $8.6 billion. before domestic courts? ■ There is the interest of several national and international companies in building about 48 storage terminals for If so, please provide relevant examples and a brief explanation of hydrocarbons and refined products. the result in each case. ■ For the first time, a private company guaranteed its financing Yes; COMMISA vs. Pemex, where Pemex was condemned to pay commitments through the rights granted by CNH in an E&P nearly U.S. $400 million to a contractor hired to build offshore Contract. platforms. Although the arbitral award has been issued, final ■ For the first time, a floating production, storage, and quantification and enforcement is pending. offloading (“FPSO”) unit will operate in Mexico for a private company; the FPSO will be capable of processing 90,000 To date, and after the opening of the markets in 2013, there has not barrels of crude oil per day, 75 mmcfd, 120,000 barrels been one particular case filed by a contractor against the Mexican of water injection per day and have a storage capacity of government (CNH). 900,000 barrels of crude oil.

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Jorge Cervantes Diana María Pineda Esteban González Calvillo, S.C. González Calvillo, S.C. Montes Urales 632, Piso 3 Montes Urales 632, Piso 3 Col. Lomas de Chapultepec Col. Lomas de Chapultepec Mexico City 11000 Mexico City 11000 Mexico Mexico

Tel: +52 55 5202 7622 Tel: +52 55 5202 7622 Email: [email protected] Email: [email protected] URL: www.gcsc.com.mx URL: www.gcsc.com.mx Mexico Partner. Jorge specialises in M&A, Project Finance, Private Equity, Senior Associate. Diana joined González Calvillo, S.C. in 2015, as a Energy and Infrastructure transactions. He has extensive experience part of the energy practice team. Her 10-year professional experience advising parties in a wide range of complex cross-border and national includes oil, gas, power generation, litigation, arbitration and dispute transactions in Mexico, representing sponsors, developers, investors, resolution, representing multinational and Mexican companies in financial institutions, banks, lenders and governments on all kinds public bids, energy projects, public procurement and project and risk of acquisitions, dispositions, joint ventures, projects and financings. evaluation related to the same matters. Since 2014, she has been a His experience encompasses a range of transactional and regulatory Professor of Civil Law at Universidad Iberoamericana in Mexico City. work and has included some very relevant transactions involving Ms. Pineda coordinated the legal department of a binational trading oil and gas, power plants, renewable energy, petrochemicals, LNG, and infrastructure firm from 2013 to 2015. Ms. Pineda obtained a pipelines, telecommunications, real estate, hotels and infrastructure master’s degree at Columbia University in Negotiation and Conflict projects in general. Resolution, complementing six years of profound litigation practice. Mr. Cervantes has been recognised by prominent international Formerly, Ms. Pineda focused her practice on civil, commercial and publications such as Latin Lawyer, Euromoney’s Expert Guides, constitutional litigation before Mexican Courts of Law. Chambers and Partners, Who’s Who Legal, IFLR1000, Best Lawyers and LACCA Approved. He often participates as speaker in national and international project finance and energy forums.

Founded in 1987, González Calvillo, S.C. is a leading Mexican law firm that has rewritten the model of the full-service law firm by combining its transactional and deal-making core with superb support practice areas. The firm’s business and legal practice is well diversified and provides a complete range of legal services directed to all kinds of businesses and industries. The firm is proud to be considered one of the few law firms in the country to have the sophistication of practice to process the demands of the evolving business environment. Thefirm’s professionals, state-of-the-art facilities and information technology allow it to provide legal services that are up to the highest global standards. González Calvillo encourages and incentivises a business vision in its practice to create added value for its clients, with in-depth experience to proactively detect opportunities and assist in their development and implementation.

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Moldova

Schoenherr Andrian Guzun

(c) is the founder (sole shareholder) of Moldovatransgaz SRL 1 Overview of Natural Gas Sector (MTG) – the main Moldovan transport system operator (TSO), inter alia ensuring the gas transit on Moldova’s territory 1.1 A brief outline of your jurisdiction’s natural gas through trunk pipelines to the underground storage facility in sector, including a general description of: natural Bohorodchany (Ukraine) and the Balkan region. The activity gas reserves; natural gas production including of transmission of natural gas of MTG is performed through the extent to which production is associated or its transmission network (including magistral pipelines with non-associated natural gas; import and export of a total length of 656.24 km and pipeline branches with a natural gas, including liquefied natural gas (LNG) total length of 903.42 km) (www.moldovatransgaz.md/ro/ liquefaction and export facilities, and/or receiving and re-gasification facilities (“LNG facilities”); natural gas activities/transmission/map). pipeline transportation and distribution/transmission The Government of Moldova (GoM) seems to be aware of the network; natural gas storage; and commodity sales fact that, in order to ensure a secured supply of natural gas, it has and trading. to take certain measures, including diversification of the supply sources (e.g. by identification of local sources), implementation of In 2017, the natural gas for the Moldovan market was entirely LNG-related projects and building of natural gas storage facilities acquired from the Russian company P.A.O. “Gazprom” (Gazprom) (The Government Decision no. 102 dated 5 February 2013 “on the – 1,033.9 million cubic metres. Such a volume is 4.5 million cubic Energy Strategy of the Republic of Moldova until 2030”). metres less than the volume of the natural gas acquired in 2016. It In this context, in 2014 a new TSO was established – I.S. is to be mentioned that in 2017 the natural gas average acquisition Vestmoldtransgaz (VMTG), a state-owned entity, which is to operate price was USD 162.05/1,000 cubic metres, which was USD the Iasi (Romania)-Ungheni (Moldova) gas interconnector (with a 31.45/1,000 cubic metres less than in 2016 (http://anre.md/files/ total length of 43.2 km) and the projected Ungheni-Chisinau natural raport/Raport%20anual%20de%20activitate%20a%20ANRE%20 gas pipeline. On 27 October 2017 VMTG was put on sale by the in%20anul%202017.pdf). The Republic of Moldova did not export Moldovan Public Property Agency. The tender book (regarding natural gas in 2017. such sale) provided for the obligation of the potential buyer to invest Pursuant to the data published by the National Agency for Energy up to EUR 93 million in the first two years after the acquisition (The Regulation (NARE) (http://anre.md/ro/content/lista-titularilor- Official Gazette of the Republic of Moldova no. 371-382 dated 27 de-licen%C5%A3%C4%83), NARE issued two licences for the October 2017). Eurotransgaz S.R.L. (a subsidiary of the Romanian transmission of natural gas, 13 licences for the supply of natural entity Transgaz S.A.) was selected as the winner of the tender gas at regulated tariffs, 25 licences for the distribution of natural (https://app.gov.md/ro/content/comunicat-1). The representatives gas, six licences for the supply of natural gas at non-regulated tariffs of Transgaz S.A. declared their intention to start exports of natural (by means of compressed natural gas stations) and two licences for gas to the Republic of Moldova at the end of 2019 – beginning of the supply of natural gas at non-regulated tariffs (by means of gas 2020 (http://transgaz.ro/ro/comunicat-de-presa-15-iunie). network). On a parallel note, on 30 December 2016, the GoM issued a decision The main player on the Moldovan natural gas market is on approval of the results of a tender on selection of an entity, which “Moldovagaz” S.A. (MG), an entity having as shareholders Gazprom is to perform works on geological exploration of hydrocarbons (50%), Moldova (35.33%), the Committee of Management of the on the territory of Moldova. The company Frontera Resources Property of Transnistria (13.44%) and other minority shareholders International LLC was designated as a winner of such tender: it (1.23%), and a supplier of natural gas, which inter alia: obtained the right to perform such works on geological exploration (a) concluded the agreement with Gazprom on the supply of and the right of further exploitation (The Government Decision no. natural gas (i.e. for the entire volume of imported natural gas 1439 dated 30 December 2016) (pursuant to certain sources, on a of 1,033.9 million cubic metres); territory of cca. 12,000 square km). (b) is the founder (sole shareholder) of 12 main natural gas We are not aware of any current LNG-related projects in place in distribution system operators (DSOs). Pursuant to the reports Moldova; LNG is currently not traded in Moldova. Also, there is of the DSOs, the total length of the natural gas network of no (underground) storage of natural gas in the territory of Moldova such operators is 21,750.50 km (http://anre.md/files/raport/ (www.infoeuropa.md/files/analiza-tematica-privind-prevederile- Raport%20anual%20de%20activitate_2016.pdf); and acordului-de-asociere-rm-ue-in-sectorul-energetic-gaze-naturale- si-energie-electrica.pdf).

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Diesel and 0.09% for Gasoline), Slovakia (0.72% for Gasoline) and 1.2 To what extent are your jurisdiction’s energy Hungary (0.59% for Gasoline). The LPG is mainly imported from requirements met using natural gas (including LNG)? the following countries: the Russian Federation (64.1%); Romania (31%); Belarus (2.5%); and Kazakhstan (2%). In 2018, the total gross consumption of energy in the Republic of Further, pursuant to the Energy Balance of Moldova for 2017, a Moldova is expected to constitute 2,896 Mtoe, out of which the volume of only 7 Mtoe of petroleum products is ensured by means consumption of natural gas is to constitute 803 Mtoe (cca. 27.7%), of primary production. The same volume is forecasted for 2018. of coal – 65 Mtoe (cca. 2.2%), of petroleum products – 948 Mtoe (cca. 32.8%), of bio-fuel and waste – 770 Mtoe (cca. 26.6%), and Pursuant to the data published by NARE (http://anre.md/ro/content/ of electric energy – 310 Mtoe (10.7%) (“Elaborarea Balanţei titulari-de-licen%C5%A3%C4%83-0), 25 licences have been issued for the import and wholesale of Diesel and Gasoline, 11 licences for energetice de perspectivă a Republicii Moldova pentru anul 2018”). Moldova the import and wholesale of LPG, 88 licences for the retail of Diesel Although the total gross consumption of energy in the Republic of and Gasoline by means of fuel stations, and 72 licences for the retail Moldova has been increasing during the period from 2010–2017 of LPG by means of fuel stations. (2,633 Mtoe in 2010, 2,643 Mtoe in 2013 and 2,844 Mtoe in 2016), the share of natural gas in such consumption is continuously decreasing (cca. 36.5% in 2010, cca. 31.5% in 2013 and cca. 2.2 To what extent are your jurisdiction’s energy 28.8% in 2017) (“Elaborarea Balanţei energetice de perspectivă a requirements met using oil? Republicii Moldova pentru anul 2018”). In 2018, the total gross consumption of energy in Moldova is expected to constitute 2,896 Mtoe, out of which the consumption 1.3 To what extent are your jurisdiction’s natural gas of petroleum products is to constitute 948 Mtoe (cca. 32.8%) requirements met through domestic natural gas production? (“Elaborarea Balanţei energetice de perspectivă a Republicii Moldova pentru anul 2018”). In 2017, Moldova’s natural gas requirements were met exclusively The volume of petroleum products consumed in Moldova, as well through imports – acquisition from the Russian company P.A.O. as the share of petroleum products in the total gross consumption of “Gazprom” (Gazprom) – 1,033.9 million cubic metres (http:// energy in Moldova, have been continuously increasing during the anre.md/files/raport/Raport%20anual%20de%20activitate%20 period of 2010–2017 (776 Mtoe (cca. 29.4%) in 2010, 785 Mtoe a%20ANRE%20in%20anul%202017.pdf). A similar situation is (cca. 29.7%) in 2013 and 922 Mtoe (cca. 32.4%) in 2017). expected for 2018 (“Elaborarea Balanţei energetice de perspectivă a Republicii Moldova pentru anul 2018”). 2.3 To what extent are your jurisdiction’s oil requirements met through domestic oil production? 1.4 To what extent is your jurisdiction’s natural gas production exported (pipeline or LNG)? Pursuant to the forecasted energy balance for 2018 (“Elaborarea Balanţei energetice de perspectivă a Republicii Moldova pentru The Republic of Moldova did not export natural gas in 2017 and is anul 2018”), a volume of petroleum products of 948 Mtoe is not expected to export natural gas in 2018 (“Elaborarea Balanţei expected to be imported, whereas the expected volume of petroleum energetice de perspectivă a Republicii Moldova pentru anul 2018”). products primarily produced in the Republic of Moldova is of only 7 Mtoe (cca. 0.7% of the total petroleum products oil consumption).

2 Overview of Oil Sector 2.4 To what extent is your jurisdiction’s oil production exported? 2.1 Please provide a brief outline of your jurisdiction’s oil sector. Pursuant to the forecasted energy balance for 2018 (“Elaborarea Balanţei energetice de perspectivă a Republicii Moldova pentru Pursuant to the Activity Report of NARE for 2017 (http://anre. anul 2018”), a volume of petroleum products of 15 Mtoe is expected md/files/raport/Raport%20anual%20de%20activitate%20a%20 to be exported in 2018. ANRE%20in%20anul%202017.pdf), the consumption of oil products in Moldova is mainly ensured by imported petroleum products. In 2017 the volume of imported main petroleum products 3 Development of Oil and Natural Gas constituted cca. 809,272 tons: ■ cca. 568,935 tons of Diesel; 3.1 Outline broadly the legal/statutory and organisational ■ cca. 167,986 tons of Gasoline; and framework for the exploration and production (“development”) of oil and natural gas reserves ■ cca. 72,351 of Liquefied Petroleum Gas (LPG). including: principal legislation; in whom the State’s If compared to 2016, the volume of imports increased by 2.6% mineral rights to oil and natural gas are vested; (+20,363 tons), mostly due to an increase in the volume of import of Government authority or authorities responsible for Diesel (+26,412 tons). the regulation of oil and natural gas development; and current major initiatives or policies of the Government Similar to 2016, in 2017 the main supplier of petroleum products to (if any) in relation to oil and natural gas development. the Republic of Moldova was Romania (with a share of 81.2% for Diesel and of 97.8% for Gasoline). Other suppliers of petroleum The main legal framework in the domain of exploration and products worth mentioning are the Russian Federation (16.8% for extraction of natural resources, including oil and natural gas, Diesel and 0.25% for Gasoline), Belarus (0.5% for Gasoline and on the territory of the Republic of Moldova is constituted of the 1.2% for Diesel), Bulgaria (0.8% for Diesel), Lithuania (0.1% for Natural Resources Code no. 3 dated 2 February 2009 [Ro. Codul

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Subsolului] (CS), the Law of the Republic of Moldova no. 534 dated when it comes to the right of exploration and extraction of natural 13 July 1995 “on Concessions” [Ro. Legea cu privire la concesiuni] resources) implies the following general steps (Article 25 PPP Law): (Concessions Law) and the Law of the Republic of Moldova no. 179 (a) preparation by GoM of the list of goods to be conceded; dated 10 July 2008 “on Public-Private Partnerships” [Ro. Legea cu (b) elaboration of a feasibility study (on the technical and privire la parteneriatul public-privat] (PPP Law). Certain rules on economic justification of the public-private partnership the production of natural gas are stipulated in the Natural Gas Law project); no. 108 dated 27 May 2016 (Natural Gas Law). (c) approval of the feasibility study by the Public Property The most important rules and principles on the exploration and Agency; extraction of natural resources, including oil and natural gas, on the (d) preparing by the Public Property Agency of the documents, territory of Moldova are, as follows: which are necessary for the tender (including description Moldova (a) all the subsoil resources (including oil and natural gas) of the object, conditions of the private-public partnership, constitute the state’s public property (Article 6(1) CS); template public-private partnership agreement); (b) the subsoil sectors cannot be alienated – only transferred into (e) appointment by the public partner of the commission on use (Article 6(2) CS); selecting of the private partner; (c) the period of extraction of subsoil resources depends on the (f) publication by Public Property Agency of the information period of operation of the minefield, in accordance with the about the intended public-private partnership. Such approved technological documentation (Article 15(3)b) CS); information is to be valid not less than 30 calendar days and not more than 90 calendar days, as of the date of publication (d) generally, a right of use over a sector of subsoil (including for of such information with the Official Gazette of the Republic exploration and extraction of oil and/or natural gas) appears of Moldova (Article 26 PPP Law); on the basis of: (g) publication of the website of the Public Property Agency (i) a decision of the GoM, as a result of the tender for the of the documents for the tender on selection of the private exploration and extraction of mineral resources (Article partner; 16(1) CS); and (h) receipt and examination of the offers; (ii) a concession agreement (Article 18 CS). (i) adoption of the decision on appointment of the private The main conditions of use provided by the concession partner. The results of the tender are approved by means of a agreement are: decision of the GoM; and ■ type and term of use; (j) conclusion of the concession agreement. Pursuant to the PPP ■ limits of the attributed subsoil sector; Law, the concession agreement is a form of the public-private ■ conditions of attribution of the subsoil sector; partnership. ■ volumes of geological analysis works; A concession agreement cannot be concluded for more than 50 ■ implementation of subsoil and environment protection years (Article 13(4) Concessions Law). In case of concession measures; of the right to extract natural resources, the retribution for such ■ forecasted volume of extraction of subsoil resources; extraction is made in the form of periodical payments (a share from the volume of production/sales) (Article 15 Concessions Law). ■ forecasted deadline for putting the objectives into operation; and The Concessions Law expressly stipulates that the state guarantees ■ forecasted deadline for land remediation (Article the protection of the investments of the user (investor); it cannot 19(1) CS); interfere with the user (investor)’s business activity, unless such (e) the concession agreement is concluded between the user activity violates the provisions of the applicable legislation (Articles (investor) and the Ministry of Agriculture, Regional 18(2)d), 23(1) Concessions Law). Development and Environment (MARDE) and contains the conditions of use of the conceded subsoil sectors (Articles 3.3 If different authorisations are issued in respect of 18(4), 19 CS); different stages of development (e.g., exploration (f) the activity of production of natural gas requires obtaining appraisal or production arrangements), please specify a licence issued by NARE (Article 12(2) Natural Gas Law); those authorisations and briefly summarise the most and important (standard) terms (such as term/duration, (g) certain other rules may apply, depending on the concrete scope of rights, expenditure obligations). circumstances of the project (e.g. rules on the authorisation of the construction works, rules on the industrial security of For conclusion of the concession agreement, the potential user the dangerous industrial objects, etc.) (Law no. 163 dated (investor) is to submit with MARDE the information on its financial 9 July 2010 “on authorization of execution of construction means, special technological equipment and staff, which are works” (Law 163/2010); Law no. 116 dated 18 May 2012 necessary for the respective type of works on the subsoil sector. “on industrial security of dangerous industrial objects” (Law 116/2012)). Further, the investor’s activity on the subsoil sector requires a list of permits (issuable by the Moldovan authorities). A general (non- exhaustive) list of such permits is indicated below: 3.2 How are the State’s mineral rights to develop oil (a) licence for production of natural gas (issuing authority: and natural gas reserves transferred to investors or NARE, validity term: 25 years (Article 12 Natural Gas Law), companies (“participants”) (e.g. licence, concession, service contract, contractual rights under Production state fee: Moldovan Lei (MDL) 3,250 (Article 12 Law no. Sharing Agreement?) and what is the legal status of 165 dated 22 July 2011 “on regulation by authorization of the those rights or interests under domestic law? entrepreneur activity” (Law 165/2011)) (cca. EUR 166)); (b) act on confirmation of the geologic limits [Ro. perimetru The procedure of transfer (from the state to the user (investor)) of geologic] (issuing authority: Agency for Geology and Natural Resources, validity term: five years, state fee: free of charge) the right of possession and use over a sector of subsoil (including (Article 22 CS, p.32 Title III, Annex 1 Law 165/2011);

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(c) conclusion of the state ecology expertise (issuing authority: consideration. In particular, the following types of fees/taxes can Public Services Agency, validity term: the period of be distinguished: implementation of the project, state fee: free of charge) (Article (a) statutory taxes (resources rents (Article 70 CS)) for certain 52 CS, p. 63 Title II, Annex 1 Law 165/2011); activities, provided by the Tax Code of the Republic of (d) environment permit (as a result of the environmental impact Moldova: assessment) (issuing authority: Environment Agency, validity ■ 2% of the contractual value of the works – for exploration term: four years, state fee: free of charge) (Article 56 CS, p. 59 activities (Article 309 Tax Code); Title II, Annex 1 Law 165/2011); ■ 5% of the contractual value of the works – for geological (e) emissions authorisation (issuing authority: Environment exploration activities (Article 313 Tax Code); and Agency, validity term: one to four years, state fee: MDL 500 (cca. EUR 25) – MDL 4000 (cca. EUR 205)) (P. 60 Title II, ■ 20% of the value of the extracted resources – for extraction Moldova Annex 1 Law 165/2011); of natural gas and oil (Annex 2, Title VIII Tax Code); (f) build-up certificate for projection of works of public utility of (b) compensation of the state’s costs in connection with the national interest (issuing authority: Ministry of Economy and exploration activity (Article 71 CS); Infrastructure (MoEI ), validity term: 24 months, state fee: free (c) the retribution provided by the concession agreement, in of charge) (Chapter II Law 163/2010, p. 23 Title III, Annex 1 the form of periodical payments (a share from the volume Law 165/2011); of production/sales) – for extraction of natural resources (g) construction authorisation(s) for works of public utility of (including natural gas and oil) (Article 15 Concessions Law). national interest (issuing authority: MoEI, validity term: for the Generally, the amount of the retribution (calculation formula) period of construction works, state fee: free of charge) (Chapter is indicated in the investor’s offer (bid) for participation with V Law 163/2010, p. 7 Title II, Annex I Law 165/2011); the tender, organised in respect of the conceded goods; and (h) positive conclusion of the expertise in the domain of industrial (d) fees in connection with the issuance of certain types of security (issuing entity: an authorised expertise entity, validity permits (licence, authorisations, certificates). term: five years, fee: depends on the complexity of the activity, equipment, etc.) (Article 9 Law 116/2012, p. 1 Title III, Annex 3.6 Are there any restrictions on the export of I Law 165/2011); and production? (i) sanitary authorisation for the functioning of the facility (issuing authority: National Agency Public Health Agency, The Moldovan legislation does not provide for specific restrictions validity term: five years, state fee: free of charge) (Article 23² on the export of oil (petroleum products) or natural gas, except for Law no. 10 dated 3 February 2009 “on state supervision of public health”, p. 29 Title III, Annex I Law 165/2011). crises or emergency situations (in respect of the natural gas).

3.7 Are there any currency exchange restrictions, or 3.4 To what extent, if any, does the State have an restrictions on the transfer of funds derived from ownership interest, or seek to participate, in the production out of the jurisdiction? development of oil and natural gas reserves (whether as a matter of law or policy)? Pursuant to the Law no. 62 dated 21 March 2008 “on Foreign The Moldovan legislation neither contains a prohibition on the Exchange Regulation” (Law 62/2008) the payments and transfers incorporation by the Moldovan state (as the owner of the subsoil within the current monetary (currency) transactions [Ro. operatiuni resources), through the Moldovan authorities, of entities exploring valutare curente] between residents and non-residents are generally and/or extracting oil and natural gas or on the participation of the state performed without restrictions. In this context, the law provides with the share capital of such entities, nor provides for a mandatory for a list of transactions qualified as current monetary (currency) participation of the state with the share capital of the entities exploring transactions [Ro. operatiuni valutare curente], including the and/or extracting oil and natural gas. transactions performed within the international trade with goods with an initial repayment term of one year (Article 5(2)a) Law From the currently available information, the GoM issued on 30 62/2008). December 2016, a decision on the approval of the results of a tender on selection of the entity Frontera Resources International LLC to On the other side, it is to be taken into consideration that the perform works on geological exploration of hydrocarbons on the general rule under the Law no. 1466 dated 29 January 1998 “on territory of the Republic of Moldova. Pursuant to the Decisions of the Regulation of the Repatriation of Money, Goods and Services the GoM no. 895 dated 20 July 2016 and no. 1439 dated 30 December Derived from Foreign Economic Transactions” (Law 1466/1998) is 2016, the works of exploration and potential exploitation (extraction) that the local (Moldovan) entities are obliged to register with their hydrocarbons on the territory of the Republic of Moldova are conceded local bank account the financial means derived from the export to the investor on the basis of a concession agreement, the state being of goods abroad within three years, calculated as of the date of entitled to receive a share from the volume of production/sales. We shipment of the respective goods (Article 3(1)a) Law 1466/1998). are not aware of any participation of the state with the entity Frontera There is a risk of application of a fine [of 0.05% of the amount of Resources International LLC or with another entity performing works non-repatriated funds for each calendar day of delay (but not more of exploration and potential exploitation (extraction) of hydrocarbons than 18% of the amount of non-repatriated funds)] (Article 5(3),(4) on the territory of the Republic of Moldova. Law 1466/1998) in case of the local entity’s failure to repatriate the financial means derived from the export of goods abroad within the indicated statutory period. Payment of fines does not exempt the 3.5 How does the State derive value from oil and natural entity from its obligation to repatriate either the financial means or gas development (e.g. royalty, share of production, the goods (Article 5(5) Law 1466/1998). taxes)?

The exercise of certain activities in connection with oil and natural gas development (production) is done against payment of

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the subsoil sector (investor) is to create a fund for the liquidation of 3.8 What restrictions (if any) apply to the transfer or such mining workings, facilities and structures, as well as for the disposal of oil and natural gas development rights or rehabilitation of the degraded plots of land. The size of such fund interests? depends on the concrete project (Article 68 CS).

Except for cases of reorganisation of the entity (Article 30 CS), the transfer, partially or entirely, to a third party of the conceded goods 3.13 Is there any legislation or framework relating to (rights or interests) is prohibited. Neither of the permits (licence, gas storage? If so, what are the principal features/ requirements of the legislation? certificates, authorisations), issued for exploration and exploitation (extraction) of natural resources (including natural gas and oil), can The Natural Gas Law is the primary legislation regulating the

Moldova be transmitted to a third party. activity of natural gas storage. Such activity is performed on the basis of a licence, issued by NARE for a period of 25 years (Article 3.9 Are participants obliged to provide any security 12(2)d),(9) Natural Gas Law). The number of such licences is not or guarantees in relation to oil and natural gas limited. From the currently available information, there are no development? licences issued by NARE for the activity of storage of natural gas. The natural gas storage operator (SO), which is a part of a vertically Both the tender conditions and the concession agreement may integrated undertaking (VIU), is to be independent from other contain an obligation for the investor (private partner) to provide activities which are not connected with the activity of natural gas guarantee(s) in connection with its offer (bid) and/or for the storage (Article 52(1) Natural Gas Law). To ensure the independence execution of its rights under the respective agreement. of the SO, the following minimum requirements are to be met: (a) management separation, meaning that those persons 3.10 Can rights to develop oil and natural gas reserves responsible for the management of the SO may not participate granted to a participant be pledged for security, or in company structures of the VIU responsible, directly or booked for accounting purposes under domestic law? indirectly, for the day-to-day operation of the production and supply of natural gas; The PPP Law admits the right of the investor (private partner) to (b) appropriate measures must be taken to ensure that the pledge the object of the public-private partnership (including rights professional interests of persons responsible for the to explore and extract natural resources (including natural gas and management of the SO are taken into account, in a manner oil)), under the condition of procuring of the public partner (state that ensures that they are capable of acting independently; authority)’s consent (Article 34(3) PPP Law). Such provision is, and however, in conflict with the provision of the CS (as indicated at (c) the SO must have effective decision-making rights, question 3.8 above), pursuant to which the transfer to a third party independent from other parts of the VIU, with respect to of the conceded goods (rights or interests) is prohibited (i.e. the assets necessary to operate, maintain or develop the natural pledge of certain rights (having as potential effect, the transfer of gas storage (Article 52(2) Natural Gas Law). such rights to a third party) is also prohibited). Access to the storage and pipeline storage is to be granted to all the existing and potential users in a transparent, objective and non- discriminatory manner. In order to ensure the supply of natural 3.11 In addition to those rights/authorisations required to explore for and produce oil and natural gas, what gas to the consumers and organise access to ancillary services, other principal Government authorisations are access to the gas storage facilities is granted on the basis of the required to develop oil and natural gas reserves (e.g. tariffs established in accordance with the methodology approved by environmental, occupational health and safety) and NARE. from whom are these authorisations to be obtained? The SO has the obligation to publish on its electronic page the information required for ensuring an efficient access to the gas A general (non-exhaustive) list of permits (issuable by the Moldovan storage operated by such SO (Article 54 Natural Gas Law). authorities for the investor’s activity on the subsoil sector) is indicated at question 3.3 above. 3.14 Are there any laws or regulations that deal specifically with the exploration and production of unconventional 3.12 Is there any legislation or framework relating to oil and gas resources? If so, what are their key the abandonment or decommissioning of physical features? structures used in oil and natural gas development? If so, what are the principal features/requirements of the On 26 February 2016 the Parliament of the Republic of Moldova legislation? adopted the Law no. 10 “on promotion of use of energy from renewable sources” (Law 10/2016) (Law 10/2016 entered into The CS provides for the obligation of the user (investor) to liquidate force on 25 March 2018). In this context, it is to be taken into or conserve the mining workings, facilities and structures at the consideration that the activity of production of the bio-gas (which expiry of the agreement, when finalising the exploitation of the is to be supplied into the natural gas networks) and bio-fuel (which resources or at the early termination of use of the subsoil (Article is to be acquired by the main petroleum products importers) are 67 CS). Such user (investor) needs to ensure that the state of subject to licensing (Article 21(1) Law 10/2016). mining workings and drillings will cause no harm to peoples’ life and health, environment, buildings and constructions, or possibility In this context, the activity of production of bio-gas is performed of use of the subsoil sector for other activities. The liquidation on the basis of the licence for production of natural gas (Article or conservation of the mining workings is to be conducted in 21(5) Law 10/2016) issued by NARE for a term of 25 years (Article accordance with the technical projects coordinated with the Agency 12(2)a) Natural Gas Law), whereas the activity of production of bio- for Geology and Natural Resources. In addition, the beneficiary of fuel is produced on the basis of a licence issued by NARE for a term of 25 years (Article 21(9) Law 10/2016) to persons which are:

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(i) registered in the Republic of Moldova and not involved in an (cca. EUR 400,000) – for the importers of Gasoline and/or insolvency process; and (ii) presenting the financial report for the Diesel; and previous year or a bank account excerpt (for persons initiating the (b) holding of storages for the storage of LPG with a capacity of activity) (Article 21(6) Law 10/2016). at least 150 cubic metres – for the importers of LPG (Article The producers of bio-gas (which is to be supplied into the natural 14(1) Petroleum Products Market Law). gas networks) and of the bio-fuel (which is to be acquired by the The farmers are exempt (in certain conditions) from the requirement main petroleum products importers) need to comply with certain to hold a licence for the import of petroleum products (Diesel). quality standards (Article 27(2) Law 10/2016). They are, however, required to request an authorisation from NARE Producers of bio-gas (which is to be supplied into the natural gas (Article 19 Petroleum Products Market Law), issuable in case the networks) have non-discriminatory and regulated access to the respective farmers cumulatively fulfil the following conditions: Moldova natural gas networks (against published (non-discriminatory, cost- (a) own or lease agricultural land; based, transparent and foreseeable) tariffs) (Article 28(2) Law (b) own or lease Diesel storages; and 10/2016). (c) own or lease agricultural equipment functioning on the basis On the other side, the importers of main petroleum products have of Diesel (Article 20(2) Petroleum Products Market Law). the obligation to acquire annually (from local or foreign producers) The Diesel import authorisation is to indicate the quantity of Diesel quantities of bio-fuel to be used in the main oil products mix, in to be imported (on the basis of the area of agricultural land owned order to reach the minimum annual level set by NARE (Article and/or leased) (Article 20(3) Petroleum Products Market Law). 29(3) Law 10/2016). The export (re-export) of petroleum products can be performed only by the importers of petroleum products (i.e. by entities holding 4 Import / Export of Natural Gas (including licences for the import of petroleum products) and on the basis of an authorisation granted by NARE (Article 21 Petroleum Products LNG) Market Law).

4.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect of 6 Transportation cross-border sales or deliveries of natural gas (including LNG). 6.1 Outline broadly the ownership, organisational and regulatory framework in relation to transportation Pursuant to the Natural Gas Law, the transactions of the sale- pipelines and associated infrastructure (such as purchase of natural gas, including import or export transactions, natural gas processing and storage facilities). transactions of the sale-purchase of interconnection capacities, of other ancillary products, where the producers, TSOs, DSOs, SOs The Law of the Republic of Moldova no. 592 dated 26 September and suppliers participate, are performed on the wholesale natural 1995 “on the magistral pipeline transmission” [Ro. Legea privind gas market (Article 95(1) Natural Gas Law). transportul prin conducte magistrale] (Law 592/1995) stipulates The sale-purchase transactions on the wholesale natural gas market that the transmission pipelines may be owned both by private entities are performed on the basis of bilateral agreements, taking into or by the state. However, the plots of land, on which such pipelines consideration the supply and demand, as a result of competitive are located, are owned by the state and transferred into the use of the mechanisms or of negotiations. All the natural gas market private entities (TSOs) (Article 5(1) Law 592/1995). There are no participants have the right to engage in bilateral transactions, specific limitations, when it comes to financing of construction of including bilateral transactions of export or import of natural gas. transmission pipelines, including of state importance. The sources The transactions on the sale-purchase of natural gas on the natural of financing can be either the state budget, the funds of the pipelines gas wholesale market are to be conducted in a transparent, public transport operators, bank credits and loans. and non-discriminatory manner (Article 95(2),(3) Natural Gas Generally, agricultural plots of land with low quality [Ro. bonitate Law). scazuta] or plots of land which are not suitable for agricultural purposes are used for the construction of transmission pipelines. Agricultural plots of land of high quality are used for the 5 Import / Export of Oil construction of transmission pipelines in exceptional cases and only on the basis of a decision of the GoM (Article 5(3) Law 592/1995). 5.1 Outline any regulatory requirements, or specific The expropriation of the plots of land (if needed) and the change terms, limitations or rules applying in respect of the destination of such plots of land which are to be used for of cross-border sales or deliveries of oil and oil the construction of transmission pipelines are also performed on the products. basis of decisions of the GoM. Apart from those indicated above, the Natural Gas Law contains The Law of the Republic of Moldova no. 461 dated 30 July 2001 certain conditions for the exercising by the system operators “on the Petroleum Products Market” [Ro. Legea privind piata (including of the TSOs) of the right of use over the (privately produselor petroliere] (Petroleum Products Market Law) indicates owned) plots of land for execution of works which are necessary that the import of petroleum products is performed on the basis of inter alia for the construction, rehabilitation and modernisation of a licence issued by NARE for a period of five years (Article 7(2¹) the network (e.g. consent, prior notification, obligations) (Chapter Petroleum Products Market Law). X Natural Gas Law). To ensure the energy security of the country, certain special requirements are imposed to the importers of petroleum products: (a) holding of Gasoline/Diesel storage with a capacity of at least 5,000 cubic metres and a capital of at least MDL 8 million

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6.2 What governmental authorisations (including 6.5 To what degree are oil and natural gas transportation any applicable environmental authorisations) are pipelines integrated or interconnected, and how is co- required to construct and operate oil and natural operation between different transportation systems gas transportation pipelines and associated established and regulated? infrastructure? Pursuant to the Natural Gas Law, in order to execute its duties, The Law 592/1995 requires that the construction of transmission including with regard to the cross-border transmission of natural pipelines is to be ensured by specialised construction organisations. gas, the TSO is to cooperate with the TSOs from the neighbouring Such organisations are responsible for the compliance of the countries, in compliance with the agreements concluded with such construction works with the applicable legislation, liable for operators (Article 55(4) Natural Gas Law). Moldova the damages caused during the construction works (including Also, the individuals/legal entities are generally entitled to request compensation of the rehabilitation of the land), and obliged to the connection of their use/production/storage facility to the correct the defects detected at the constructed pipeline during the transmission network of the TSO performing the activity within the first three years of exploitation (Article 11 Law 592/1995). territory indicated in its licence. Given the impact of a potential project of construction of transmission pipelines and depending on the concrete circumstances 6.6 Outline any third-party access regime/rights in of such project, certain permits (certificates, authorisations) are respect of oil and natural gas transportation and required (including the conclusion of the state ecology expertise, associated infrastructure. For example, can the the environment permit (as a result of the environmental impact regulator or a new customer wishing to transport assessment), the build-up certificate for projection of works of oil or natural gas compel or require the operator/ public utility of national interest, the construction authorisation(s), owner of an oil or natural gas transportation pipeline the positive conclusion of the expertise in the domain of industrial or associated infrastructure to grant capacity or security, the sanitary authorisation). expand its facilities in order to accommodate the new customer? If so, how are the costs (including costs of interconnection, capacity reservation or facility 6.3 In general, how does an entity obtain the necessary expansions) allocated? land (or other) rights to construct oil and natural gas transportation pipelines or associated infrastructure? Further to questions 6.4 and 6.5 above, a TSO is obliged to grant Do Government authorities have any powers of to existing/potential users access to the natural gas transmission compulsory acquisition to facilitate land access? network in a transparent, objective and non-discriminatory manner. In order to manage the access of third parties to the gas transmission As indicated at question 6.1 above, the plots of land, on which system, the TSO is under obligation to keep an electronic register such pipelines are located, are owned by the state and transferred indicating the information with regard to each access point, including into the use of the private entities (TSOs). The Natural Gas Law the identity of the third party, the existing supplier, the address of indicates that such transfer into use (for the purpose of construction, the consumption point, the contracted flow, the connection point, maintenance, exploitation, rehabilitation and modernisation of the the delimitation point, the pressure in the delimitation point and the natural gas transmission and distribution networks) is performed on characteristics of the measure equipment (Article 55(5) Natural Gas a free-of-charge basis (Article 74(1) Natural Gas Law). Law). The (privately owned) plots of land needed for construction of Access to the natural gas transmission network can generally transmission pipelines can be expropriated by the GoM, if the be refused: (a) in case of absence of system capacity; (b) when respective construction works are to be considered of public utility granting access would prevent the TSO from executing its public [Ro. cauza de utilitate publica] and under the condition of payment service obligations; or (c) in cases of serious economic and financial to the expropriated owner of a compensation (Article 78 Natural difficulties which have incurred due to the “take or pay” obligations Gas Law). (Article 58 Natural Gas Law). Also, as indicated at question 6.1 above, the Natural Gas Law The TSO refusing access to the system due to absence of capacity provides for a right of access by the system operators (including the is obliged to take necessary measures to ensure the access of the TSOs) through privately owned plots of land for execution of works, third party to the system, under the condition that (a) such measures which are necessary, inter alia, for the construction, rehabilitation are economically justifiable, or (b) when the third party requesting and modernisation of the network (consent, prior notification and access is ready to bear the costs in connection with such necessary obligations). measures (Article 58(4) Natural Gas Law). The TSO is obliged to inform NARE on each case of congestions 6.4 How is access to oil and natural gas transportation and of refusal of access to the natural gas transmission system, as pipelines and associated infrastructure organised? well as on the measures which are intended to be taken to resolve such situations (Article 58(6) Natural Gas Law). A TSO is obliged to grant to existing/potential users access to its natural gas transmission network in a transparent, objective and non- discriminatory manner, on the basis of an agreement and at tariffs 6.7 Are parties free to agree the terms upon which oil or natural gas is to be transported or are the terms established in accordance with the methodology approved by NARE (including costs/tariffs which may be charged) (Article 55(1) Natural Gas Law). The TSO has the obligation to regulated? publish on its electronic page the information necessary for ensuring efficient access to the gas transmission network operated by such Generally, under the Natural Gas Law, the access of third parties TSO (Article 55(7) Natural Gas Law). to the natural gas transmission system is performed based on an agreement and at tariffs established in accordance with the

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methodology approved by NARE. However, we understand that discriminatory manner, on the basis of an agreement and at tariffs the terms which are not expressly regulated by NARE may be established in accordance with the methodology approved by NARE negotiated between parties. (Article 55(1), (2) Natural Gas Law). The DSO has the obligation to publish on its electronic page the information necessary for ensuring efficient access to the gas distribution network operated 7 Gas Transmission / Distribution by such DSO. In order to manage the access of third parties to the gas distribution system, the DSO is under obligation to keep an electronic register indicating the information with regard to each 7.1 Outline broadly the ownership, organisational and regulatory framework in relation to the natural gas access point, including the identity of the third party, the existing transmission/distribution network. supplier, the address of the consumption point, the contracted flow,

the connection point, the delimitation point, the pressure in the Moldova Both the activity of transmission of natural gas and the activity of delimitation point and the characteristics of the measure equipment distribution of natural gas can be performed on the basis of licences (Article 55(5), (7) Natural Gas Law). only; such licences are issued by NARE, for a period of 25 years and Access to the natural gas distribution network can be generally against a state fee of MDL 3,250 (cca. EUR 160) (Article 12 Natural refused: (a) in case of absence of system capacity; (b) when Gas Law). The TSO is to also obtain a certificate confirming the granting access would prevent the DSO from executing its public compliance with the independence and unbundling rules. service obligations; or (c) in case of serious economic and financial There are currently two licences for transmission of natural gas and difficulties incurred due to the “take or pay” obligations (Article 25 licences for distribution of natural gas issued by NARE. The 58 Natural Gas Law). The DSO refusing access to the system due general principles on access to the natural gas transmission network to absence of capacity is obliged to take the necessary measures to (which are similar to those of access to the natural gas distribution ensure the access of the third party to the system, under the condition network) are outlined at question 6.6 above. (i) such measures are economically justifiable, or (ii) when the third party requesting access is ready to bear the costs in connection with In order to ensure a general view over the Moldovan natural gas such necessary measures (Article 58(4) Natural Gas Law). legislation, please note that the Third Gas Directive (Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in 7.4 Can the regulator require a distributor to grant natural gas and repealing Directive 2003/55/EC) has been fully capacity or expand its system in order to transposed into the Natural Gas Law. However, TSOs are currently accommodate new customers? exempted from complying with the TSO unbundling rules of the Third Gas Directive (until 1 January 2020). From a mere legal point As indicated at question 7.3 above, the DSO refusing access to the of view, the TSOs, therefore, need to comply with the Second Gas system due to absence of capacity is obliged to take the necessary Directive (Directive 2003/55/EC of the European Parliament and measures to ensure the access of the third party to the system, under of the Council of 26 June 2003 concerning common rules for the the condition (a) such measures are economically justifiable, or (b) internal market in natural gas and repealing Directive 98/30/EC) when the third party requesting access is ready to bear the costs only transposed into Article 24 Natural Gas Law (providing for in connection with such necessary measures. In connection with ownership unbundling). the refusal of the DSO (i.e. in granting access to its natural gas distribution network) the third parties may address a claim to NARE, Unbundling obligations are also imposed to DSOs (Article 44 which is to check execution by the DSO of its obligations under the Natural Gas Law): if the DSO is a part of a VIU, such DSO is to be law; the DSO is to provide the information on the measures required independent from other activities which are not related to natural for the development of the natural gas distribution network, as well gas distribution, at least from functional, decision-making and as on the concrete terms for execution of such development. organisational points of view.

7.5 What fees are charged for accessing the distribution 7.2 What governmental authorisations (including any network, and are these fees regulated? applicable environmental authorisations) are required to operate a distribution network? The fees for the DSOs’ services are approved by NARE and The licence for the activity of distribution of natural gas is the published with the Official Gazette of the Republic of Moldova main permissive act entitling an entity to perform such activity (Article 55(2) Natural Gas Law). of distribution of natural gas. Depending on the concrete circumstances of the activity, certain other permits are or may be 7.6 Are there any restrictions or limitations in relation to required (the conclusion of the state ecology expertise, environment acquiring an interest in a gas utility, or the transfer permit, urbanism certificates, construction authorisations, positive of assets forming part of the distribution network conclusions of the expertise in the domain of industrial security, (whether directly or indirectly)? sanitary authorisations for the functioning of the facility, etc.). Except for the limitations under the unbundling rules, there are no restrictions or limitations in relation to acquiring an interest in 7.3 How is access to the natural gas distribution network a natural gas utility, or the transfer of assets forming part of the organised? distribution network.

A DSO is obliged to grant to existing/potential users access to the natural gas distribution network in a transparent, objective and non-

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8 Natural Gas Trading 9.4 Outline any third-party access regime/rights in respect of LNG facilities.

8.1 Outline broadly the ownership, organisational and regulatory framework in relation to natural gas As there are no LNG facilities in Moldova, access to LNG facilities trading. Please include details of current major is not particularly regulated. initiatives or policies of the Government or regulator (if any) relating to natural gas trading. 10 Downstream Oil There is an assumption of an open natural gas market under the

Moldova Natural Gas Law. 10.1 Outline broadly the regulatory framework in relation All the transactions on the sale-purchase of natural gas and of other to the downstream oil sector. ancillary products are executed on the natural gas market, which is constituted of the natural gas wholesale market and the natural gas The main normative act in the domain of petroleum products is the retail market (Article 92(1) Natural Gas Law). Petroleum Products Market Law. The import, wholesale and retail Transactions on the sale-purchase of natural gas between the of Diesel, Gasoline and LPG is performed on the basis of a licence producers, TSOs, DSOs, SOs and suppliers, including import issued by NARE for a period of five years. and export transactions and transactions on the sale-purchase of interconnection capacities, are executed on the natural gas wholesale 10.2 Outline broadly the ownership, organisation and market. On such market, the sale-purchase transactions are made on regulatory framework in relation to oil trading. the basis of bilateral agreements, taking into account the supply and demand, as a result of competitive mechanisms or of negotiations The wholesale of petroleum products is performed at non-regulated (Article 94(3) Natural Gas Law). prices, on the basis of negotiated agreements. With regard to Transactions on the sale-purchase of natural gas with end consumers the retail of petroleum products, please note that NARE has the are executed on the retail market of natural gas, on the basis of the attribution to impose a maximum retail price. agreements on the supply of natural gas [Ro. contracte de furnizare a gazelor naturale] concluded between the suppliers and end consumers. The supply of natural gas to household consumers and 11 Competition small enterprises is generally performed at regulated prices (Article 95 Natural Gas Law). 11.1 Which governmental authority or authorities are responsible for the regulation of competition aspects, 8.2 What range of natural gas commodities can be or anti-competitive practices, in the oil and natural traded? For example, can only “bundled” products gas sector? (i.e., the natural gas commodity and the distribution thereof) be traded? NARE has the general duty to create the necessary conditions for an effective competition on the natural gas market, including by We are not aware of any restrictions to the types of commodities promoting in its normative acts the principles of equity, transparency that can be traded. and non-discrimination. NARE monitors the natural gas market and performs controls on the timely detection of the abuses on the natural gas market. 9 Liquefied Natural Gas Such attributions of NARE, however, do not affect the competence of the Competition Council of the Republic of Moldova (CC) to 9.1 Outline broadly the ownership, organisational and ensure the application of the legislation on the protection of the regulatory framework in relation to LNG facilities. competition in the territory of Moldova.

Currently, there are no LNG facilities in Moldova. 11.2 To what criteria does the regulator have regard in determining whether conduct is anti-competitive? 9.2 What governmental authorisations are required to construct and operate LNG facilities? The Competition Law no. 183 dated 11 July 2012 (Competition Act) is the main normative act setting the legal framework for the While LNG is not expressly excluded from the scope of the Natural protection of competition, including prevention of and counteraction Gas Law, the latter does not contain LNG-specific norms. to the anti-competitive practices and unfair competition, as well as on the implementation of economic concentrations.

9.3 Is there any regulation of the price or terms of service in the LNG sector? 11.3 What power or authority does the regulator have to preclude or take action in relation to anti-competitive practices? No, there is no such particular regulation.

Pursuant to provisions of the Competition Act, CC has the right to: (a) investigate the anti-competitive practices, unfair competition and other violations in the domain of competition, state aid and advertising; (b) ascertain violations of the legislation on the

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protection of competition, on state aid and on the advertising; and (c) impose interim measures with regard to such violations and also 12 Foreign Investment and International apply sanctions. Obligations

11.4 Does the regulator (or any other Government 12.1 Are there any special requirements or limitations on authority) have the power to approve/disapprove acquisitions of interests in the natural gas sector mergers or other changes in control over businesses (whether development, transportation or associated in the oil and natural gas sector, or proposed infrastructure, distribution or other) by foreign acquisitions of development assets, transportation or companies? associated infrastructure or distribution assets? If so,

what criteria and procedures are applied? How long There is a general rule in the Law no. 81 dated 18 March 2004 “on Moldova does it typically take to obtain a decision approving or the investments in the entrepreneurial activity” (Law 81/2004), disapproving the transaction? pursuant to which the investments in the Republic of Moldova cannot be subject to discrimination on the basis of citizenship, CC is competent to: examine the notifications on economic domicile, residence, place of registration or activity, state of origin concentrations [Ro. concentrare economica] filed by the concerned of the investor or of the investment, etc. (Article 6(1) Law 81/2004). entities (phase I); initiate investigations, in case notified economic concentration is qualified as presenting doubts in respect of its We are not aware of any special requirements or limitations compatibility with the competition environment (phase II); and on acquisitions of interests in the natural gas sector by foreign issue decisions on the compatibility of the economic concentration companies (if compared with the requirements for local companies). with the competition environment (Chapter IV Competition Act, Regulation no. 17 dated 30 August 2013 “on economic 12.2 To what extent is regulatory policy in respect of the concentrations”). oil and natural gas sector influenced or affected The following types of economic concentrations are covered by the by international treaties or other multinational arrangements? Competition Act: (a) mergers between (two or more) previously independent The regulatory policy in respect of the oil and natural gas of the undertakings, or certain parts of undertakings previously independent; or Republic of Moldova is especially influenced by the provisions of the Treaty Establishing the Energy Community, dated 25 October (b) acquisition, by one or several: persons already controlling 2005 (the EC Treaty). Moldova is a member of the Energy one or several undertakings; or undertakings, either by acquisition of shares or assets or on the basis of an agreement Community as of 1 May 2010. By adopting the Energy Community or by other means, of direct or indirect control over one or Treaty, Moldova made legally binding commitments to adopt several undertakings or parts of thereof, including creation of core European Union energy legislation, the so-called “acquis a joint venture, which will fulfil durably all functions of an communautaire”. autonomous economic entity. With the adoption of the Natural Gas Law, the Republic of Moldova An economic concentration needs to be notified with the CC if the transposed the Third Energy Package. Numerous secondary following thresholds are reached (on the basis of the turnover in the legislative acts are yet to be adopted as a precondition for Moldova previous financial year): to implement the natural gas acquis in real terms. (a) the combined turnover of undertakings concerned exceeded MDL 25 million (cca. EUR 1.28 million); and 13 Dispute Resolution (b) at least two of the undertakings concerned had a total turnover exceeding MDL 10 million (cca. EUR 510,000) in the Republic of Moldova. 13.1 Provide a brief overview of compulsory dispute The local competition legislation applies equally to economic resolution procedures (statutory or otherwise) concentrations carried out by local and/or foreign entities. applying to the oil and natural gas sector (if any), including procedures applying in the context of The notifying party may start pre-notification contacts with CC disputes between the applicable Government (the relevant information concerning the proposed merger shall be authority/regulator and: participants in relation to oil submitted at least three working days before the date of the meeting). and natural gas development; transportation pipeline Once CC considers that it has all data and documents enabling it and associated infrastructure owners or users in relation to the transportation, processing or storage to decide on the case, it will declare the notification effective. This of natural gas; downstream oil infrastructure owners is the date from which the term of 30 business days for issuing a or users; and distribution network owners or users in decision starts running. Within such term of 30 business days, CC relation to the distribution/transmission of natural gas. is to issue a decision: ■ declaring the merger compatible with the competition Pursuant to the Natural Gas Law, the disputes between the gas environment; or companies in connection with the Natural Gas Law may be examined ■ launching an investigation, if CC concludes that the merger by NARE. NARE is to issue a decision on the respective dispute raises serious doubts on the merger’s compatibility with the within two months (extendable by a further two months), as of the competition environment. date of filing by a gas company of the respective claim (Article In case the merger enters into phase II, the overall duration of the 109(1) Natural Gas Law). Further, NARE examines the disputes assessment may take up to 120 business days. (including cross-border disputes) in connection with the refusal of a TSO to grant access to its transmission network (Article 109(2) Natural Gas Law). Also, NARE examines, within 30 business days, (extendable by a further 30 business days) the disputes between the

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end consumers, system users and the gas companies, in connection with the provisions of the Natural Gas Law (Article 109(3) Natural 14 Updates Gas Law). Apart from this, the Natural Gas Law stipulates that the litigations 14.1 Please provide, in no more than 300 words, a between the participants to the natural gas market are resolved in summary of any new cases, trends and developments court (Article 111 Natural Gas Law). A court judgment can be in Oil and Gas Regulation Law in your jurisdiction. appealed within 30 calendar days, as of the date of issuance of the judgment. Further, the decision of the Court of Appeal can be The Natural Gas Law: contested with the Supreme Court of Justice within two months, as The Directive 2009/73/EC of the European Parliament and of the of the date of communication of the integral decision of the Court Council of 13 July 2009 concerning common rules for the internal Moldova of Appeal. market in natural gas and repealing Directive 2003/55/EC (the The Petroleum Products Market Law does not contain special Third Gas Directive) has been fully transposed into the Natural (additional) procedures of resolution of disputes between the Gas Law of Moldova. However, TSOs are currently exempted participants to the petroleum products market. Hence, the litigations from complying with the TSO unbundling rules of the Third Gas between the participants to the petroleum products market are to be Directive (until 1 January 2020). From a mere legal point of view, resolved either in court or by an arbitral tribunal, as indicated in the the TSOs, therefore, need to comply with the Directive 2003/55/ above paragraph. EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC (the Second Gas Directive) only. 13.2 Is your jurisdiction a signatory to, and has it duly ratified into domestic legislation: the New York Secondary legislation in natural gas domain: Convention on the Recognition and Enforcement of NARE intitiated the public consultancy in respect of certain drafts of Foreign Arbitral Awards; and/or the Convention on normative acts (to be approved in compliance with the Natural Gas the Settlement of Investment Disputes between States Law), including the Natural Gas Networks Code, the Regulation on and Nationals of Other States (“ICSID”)? supply natural gas, Regulation on connection to natural gas networks and supply of natural gas transmission and distribution services. Yes, Moldova has ratified: Ungheni-Chisinau natural gas pipeline extension: (a) the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards – on 10 July 1998; Eurotransgaz S.R.L. (a subsidiary of the Romanian entity Transgaz and S.A.) was declared as winner of the tender related to privatisation (b) the Convention on the Settlement of Investment Disputes of VMTG (Moldovan TSO). In this context, the representatives of between States and Nationals of Other States – on 5 May Transgaz S.A. declared their intention to start exports of natural gas 2011. to the Republic of Moldova at the end of 2019 – beginning of 2020. This means that the project on extension of Ungheni-Chisinau pipeline is to be finalised by the end of 2019 – beginning of 2020. 13.3 Is there any special difficulty (whether as a matter of law or practice) in litigating, or seeking to enforce Draft law on creating and maintaining a minimum level of petroleum judgments or awards, against Government authorities products stocks: or State organs (including any immunity)? The Moldovan authorities have drafted a law on creating and maintaining a minimum level of petroleum products stocks. The Generally, there is no special difficulty in litigating, or seeking to draft is in compliance with Directive 2009/119/EC of 14 September enforce judgments or awards, against Government authorities or 2009 imposing an obligation to maintain minimum stocks of crude state organs (including any immunity). However, for cost and time oil and/or petroleum products. However, the timeline for the law’s efficiency, companies often try to resolve disputes without seeking adoption is not clear. The draft law foresees its entry into force on a judicial remedy. 1 January 2021. Entrance into force of the Law 10/2016: 13.4 Have there been instances in the oil and natural gas Law 10/2016 entered into force on 25 March 2018. The purpose of sector when foreign corporations have successfully the law is the institution of a legal framework for promotion and use obtained judgments or awards against Government authorities or State organs pursuant to litigation of energy from renewable sources (including bio-gas and bio-fuel). before domestic courts?

We are not aware of any such dispute resolution cases.

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Andrian Guzun Schoenherr Str. Alexandru cel Bun no.51 Chisinau Municipality MD-2012 Moldova

Tel: +373 22 240 300 Fax: +373 22 240 301 Email: [email protected] URL: www.schoenherr.eu

Andrian Guzun, associate, joined Schoenherr in Chisinau in September Moldova 2009 and is a member of Schoenherr’s Corporate/M&A, IP, Real Estate, Regulatory and Compliance & White Collar Crime practice groups. Prior to joining Schoenherr, Andrian worked as an attorney at law specialising in Criminal Law and Real Estate. He holds a Bachelor of Laws (LL.B. 2007) in Public Law and a Master of Laws (LL.M. 2008) in Civil Law from the Moldova State University and was admitted to the Moldovan Bar in 2008. Andrian is fluent in English, Romanian and Russian.

Schoenherr is a leading full-service law firm in Central and Eastern Europe. With 13 offices located in Belgrade, Bratislava, Brussels, Bucharest, Budapest, Chisinau, Istanbul, Ljubljana, Prague, Sofia, Vienna, Warsaw and Zagreb, as well as country desks for Albania, Bosnia-Herzegovina, Macedonia and Montenegro, Schoenherr provides its clients with comprehensive coverage of the CEE/SEE region. *More than 300 legal professionals work across borders in both a centralised and de-centralised manner, according to the individual client’s needs and requirements. Quality, flexibility, innovation and practice-oriented solutions for complex assignments in the field of business law are at the core of the Schoenherr philosophy. *Schoenherr is in compliance with the respective local legal standards and conduct rules in all countries; therefore, the local firm name may vary from jurisdiction to jurisdiction. The energy industry is a complex and highly competitive sector. It is obvious that there is a need for professional advisers who understand the business of companies active in this sector, and who have the experience and capacity to handle complex international energy projects. Schoenherr can assist you with a multi-disciplinary group of lawyers drawn from across the firm’s broad international network that specialise in the specifics of the energy sector. The energy group comprises of lawyers from all practice areas with a detailed understanding of the energy sector and of the needs of international energy clients. Sharing our knowledge and cooperating tightly between our practice groups and between our international offices, our energy group can help you to respond to the changes in the industry and to keep pace with market and regulatory developments. Our lawyers are regularly involved in both international and domestic energy matters including transactions, development projects, mergers and acquisitions, privatisations, public-private partnerships, regulatory matters, public procurement, strategic advice, competition matters and dispute resolution.

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Mozambique Paula Duarte Rocha

HRA Advogados Tiago Arouca Mendes

The next step will be to improve the transportation and distribution 1 Overview of Natural Gas Sector of natural gas (including natural gas storage facilities) as it is at a very early stage, with the transport network consisting of the 1.1 A brief outline of your jurisdiction’s natural gas Mozambique-South Africa pipeline and the recent distribution sector, including a general description of: natural network (a partnership between State-owned Empresa Nacional gas reserves; natural gas production including de Hidrocarbonetos and Korean Kogas) restricted only to certain the extent to which production is associated or districts of the capital city, Maputo. New transport pipelines shall be non-associated natural gas; import and export of developed, connecting the gas-rich north and south of Mozambique. natural gas, including liquefied natural gas (LNG) liquefaction and export facilities, and/or receiving and There are currently no secondary markets for the sale and purchase re-gasification facilities (“LNG facilities”); natural gas of natural gas in Mozambique. pipeline transportation and distribution/transmission New players in the market with large-scale projects in the pipeline network; natural gas storage; and commodity sales include Yara, which intends to produce fertilisers, Shell, which is and trading. interested in producing liquid fuels and Baobab Resources, with the aim of producing 1.3 million tonnes of iron and steel per year. Mozambique has been in the spotlight for its discoveries of natural gas reserves which are estimated to hold over 100 trillion cubic feet The development of local content policies is on the Mozambican (expected to double following the prospection phase) setting it to Government’s agenda and the operators have been conducting be one of the largest proved natural gas reserve holders in Africa. public bids aiming at including Mozambican workforce in the projects to be carried out in the Rovuma Basin. Two onshore fields located in the south of Mozambique (in Pande and Temane) are already well-established, being operated by Sasol, a South African energy firm which exports natural gas via a pipeline 1.2 To what extent are your jurisdiction’s energy that connects the Pande and Temane fields to South Africa – after requirements met using natural gas (including LNG)? processing the gas in a central processing facility. More recently, all attention turned to the Rovuma Basin area, close to the border of Total primary energy consumption in Mozambique is of 0.185 Tanzania – more specifically Areas 1 and 4, which are both offshore, quadrillion BTUs. where multinational oil and gas companies have been investing Despite massive potential for electricity and fuel generation, lack of in prospection and, soon hereafter, construction of platforms and socio-economic development and access to electricity and natural drilling for natural gas. gas networks in Mozambique means that energy consumption Whilst the US billion-dollar Coral South FLNG project, led by remains heavily dependent on firewood and other wood fuels (such as Italian multinational ENI (with participating interests by Exxon charcoal). Renewable energies represent 79.6% of total consumption, Mobil, CNODC, ENH, Kogas and Galp Energia) in the Area 4 of followed by petroleum at 17%, then natural gas at 3% and coal at the Rovuma Basin, is in its implementation phase and with various 0.4%. (Source: International Energy Statistics, 2012.) Note that wood signed contracts for infrastructure development, the US-based fuels are, perhaps inaccurately, included in the “Renewables” section. Anadarko project (in Area 1) is expected to bring to the country investments amounting to a few more billion US dollars, along with 1.3 To what extent are your jurisdiction’s natural gas additional infrastructure development opportunities and for that requirements met through domestic natural gas has been carrying out investment rounds and initiating discussions production? with prospective buyers (in Japan, France, etc.) for the gas to be processed in the North of Mozambique. Mozambique currently fully meets its natural gas needs and, as Currently, no LNG facilities exist in Mozambique; however, such, does not import natural gas. following the execution of several important agreements during the last years between the concessionaires of Areas 1 and 4 and 1.4 To what extent is your jurisdiction’s natural gas the Mozambican Government, all is becoming aligned for the production exported (pipeline or LNG)? construction of what could be the first floating LNG facility in Africa, which shall have the capacity to produce up to 20 million Currently, most of Mozambique’s natural gas is exported to South tonnes per year starting from 2023 (current estimate). Africa (via the Temane-Pande pipeline), corresponding to roughly 82% of total production.

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■ Decree no. 31/2012, August 8 (Regulation on Resettlement 2 Overview of Oil Sector Process Resulting from Economic Activities); ■ Decree no. 56/2010, November 22 (Environmental Regulation 2.1 Please provide a brief outline of your jurisdiction’s oil for Petroleum Operations); sector. ■ Law no. 15/2011, August 10 (Public-Private Partnerships, Large Projects and Business Concessions, also known as the Compared to the country’s burgeoning natural gas sector, the oil “Mega-Projects” Law); sector in Mozambique is relatively incipient. ■ Decree no. 16/2012, June 4 (Regulation of the Mega-Projects Law); and Oil production was due to commence in 2015 in an oil field discovered next to the Temane natural gas field, also operated by ■ Decree-law no. 2/2014, December 2 (Special Regime for the Sasol. Production is expected to reach 15,000 barrels per day, and Rovuma Basin – Areas 1 and 4). Mozambique shall be used for exports to South Africa. Additionally, for downstream, one should also bear in mind: ■ Council of Ministers Resolution no. 63/2009, November 2 (Strategy for Development of a Natural Gas Market); 2.2 To what extent are your jurisdiction’s energy requirements met using oil? ■ Decree no. 45/2012, December 28 (Regulation on Import, Sale and Distribution of Petroleum Products); and Please see question 1.2 above. Oil represents 17% of the energy ■ Decree no. 9/2009, April 1 (Importation of Petroleum Products). consumed in Mozambique, its volume steadily increasing in the last few years, reflecting the country’s accelerating economic growth. This legal framework is supplemented by concession contracts that specify rights and duties of the concessionaire and the Government.

2.3 To what extent are your jurisdiction’s oil requirements The Constitution of Mozambique provides that all-natural resources, met through domestic oil production? whether located on/in land, underground, inner waters, territorial sea, and the continental platform or in the Mozambican exclusive We currently have no information indicating that Mozambique has economic area are the property of the State. The Ministry of Natural already started producing crude oil (see question 2.1 above). Resources (“MIREME”) is responsible for directing and executing the governmental natural resource policies and for the supervision of the National Petroleum Institute (“Instituto Nacional de Petróleo” – 2.4 To what extent is your jurisdiction’s oil production “INP”), created by the Council of Ministers under Decree no. 25/2004, exported? August 20, the INP being the regulatory authority responsible for the administration and promotion of the Petroleum Operations. We currently have no information indicating that Mozambique has In Mozambican legislation, “Petroleum Operations” are defined as already started producing crude oil (see question 2.1 above). planning, preparing and performance of reconnaissance, appraisal, development, production, storage, transportation and the termination 3 Development of Oil and Natural Gas of such activities or the end of use of the infrastructure, including the implementation of Decommissioning Plans, sale or delivery of oil to the export point or agreed delivery point, such point being where 3.1 Outline broadly the legal/statutory and organisational oil is delivered for consumption or use or loaded as merchandise, framework for the exploration and production including in the form of liquefied natural gas. (“development”) of oil and natural gas reserves including: principal legislation; in whom the State’s The High Authority of the Extractive Industry (“Alta Autoridade mineral rights to oil and natural gas are vested; da Indústria Extractiva”) was established in 2014 to supervise Government authority or authorities responsible for Petroleum Operations, but is not yet operational. the regulation of oil and natural gas development; and Also, the Mozambican Government has fulfilled its plan (established current major initiatives or policies of the Government a few years ago) of creating an authority that is responsible (if any) in relation to oil and natural gas development. for regulating, controlling and supervising the energy sector in Mozambique, i.e., the Energy Regulatory Authority (“Autoridade The principal legislation relating to the exploration and development Reguladora de Energia” – “ARENE”) through the approval of Law of the country’s oil and natural gas reserves is as follows: no. 11/2017, September 8 (the “Law”). ■ Constitution of the Republic of Mozambique; Among the several powers attributed to ARENE, it is important to ■ Law no. 21/2014, August 18 (Petroleum Law); highlight its active role on three important fronts; namely: ■ Decree no. 34/2015, December 31 (Petroleum Law (a) to instruct and process public tender procedures for the Regulation), amended by Decree no. 48/2018 of August 6; assignment of concessions for the production, transportation, ■ Ministerial Diploma no. 272/2009, December 30 (Licensing distribution and sale of electric energy and distribution and of Facilities and Petroleum Operations Regulation); sale of natural gas, to issue the respective opinion, as well as ■ Decree no. 56/2010, November 22 (Environmental Regulation to request the transfer of concessions; of Petroleum Operations); (b) to instruct and process the granting of licences for the ■ Law no. 27/2014, September 23 (Petroleum Tax Law); processing, distribution and marketing of liquid fuels, and to ■ Decree no. 32/2015, December 31 (Specific Regime of issue opinions on applications for the transfer of licences; and Taxation and Tax Benefits of the Petroleum Operations); (c) to establish and approve the tariffs and prices for energy, gas ■ Decree no. 63/2011, December 7 (Employment of Foreign and petroleum products regulated under the law and ensure Citizens in the Oil and Mining Sectors); its application. However, its members have not yet been appointed, and it is also awaiting the approval of its statute ■ Council of Ministers Resolution no. 27/2009, June 8 (Strategy and the regulation of the Law (which should take place before for Concession of Areas for Petroleum Operations); the end of the year).

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In addition to the aforementioned entities that play regulatory The MIREME has recently approved a new template EPCC, a and supervisory roles, the State participates in Petroleum draft of which is published on the INP website (www.inp.gov.mz/ Operations through the national oil company “Empresa Nacional pt/Politicas-Regime-Legal/Modelo-de-Contratos-de-Pesquisa- de Hidrocarbonetos, E.P.” (“ENH”), and any investor wishing to e-Producao). The approval of such template follows the recent explore Mozambican oil resources must associate with ENH. ENH enactment of the main diplomas regulating this sector (the participates in all phases of Petroleum Operations, from research to Petroleum Law and its Regulations). The annexes of the template production refinery, transportation, storage and commercialisation EPCC include the template Joint Operating Agreement (“JOA”). of oil and gas and their derivatives, including LNG and GTL, both The Reconnaissance Concession confers a non-exclusive right to in and out of the country. perform preliminary appraisal and evaluation of the contract area The Petroleum Law and its Regulations aim to ensure increased and is granted for a maximum period of two years, non-renewable, competitiveness and transparency in the sector, as well as to and allows drilling up to a depth of 100 metres. Mozambique reinforce the role of the State, the protection of national interests and The EPCC confers on its holder an exclusive right to perform the involvement of Mozambican nationals. In equal circumstances, Petroleum Operations, as well as a non-exclusive right to construct preference is given to Mozambican persons or to foreigners that and operate production and transportation infrastructure. The associate with Mozambican persons in the granting of concession exclusive exploration right under the EPCC shall not exceed eight rights. Additionally, it is established that oil and gas companies years and is subject to area abandonment provisions. In the event of should be listed on the Mozambican Stock Exchange (which is still a discovery, the concession-holder may maintain the exclusive right at an incipient stage). to complete the work initiated within a specific area, in relation to the appraisal period, to comply with his work and appraisal obligations 3.2 How are the State’s mineral rights to develop oil and to determine commercial value and allow oil development and and natural gas reserves transferred to investors or production. The concession-holder may maintain the exclusive companies (“participants”) (e.g. licence, concession, right, under the development plan approved by the Government, to service contract, contractual rights under Production develop and produce oil and gas in the development area, subject to Sharing Agreement?) and what is the legal status of renewal for equal or shorter periods, as deemed most advantageous those rights or interests under domestic law? for national interest. The Pipeline Construction and Operation Concession allows the Petroleum Operations are performed under concession agreements concession-holder to construct and explore oil or gas pipelines which are generally attributed by public tender process; however, for the transportation of crude oil and natural gas, should such they may be attributed by simultaneous or direct negotiations in operations not be covered under the EPCC agreement. Similarly, relation to areas that had already been declared available when (i) the infrastructure construction concession agreement allows no concession was granted pursuant to a previous public tender, (ii) the concession-holder to construct and operate oil production there is rescission, relinquishment and abandonment, or (iii) there infrastructure, such as processing and conversion facilities that are is a need to join adjacent areas to a concession, when justified for not covered by an approved appraisal and production plan. technical and economic reasons. Concession contracts are of an administrative nature. In the case of the Pipeline Construction and Operation, such agreements must also be thorough and include the specification of the oil or gas pipeline and provisions regarding the rights of use of land. 3.3 If different authorisations are issued in respect of different stages of development (e.g., exploration appraisal or production arrangements), please specify 3.4 To what extent, if any, does the State have an those authorisations and briefly summarise the most ownership interest, or seek to participate, in the important (standard) terms (such as term/duration, development of oil and natural gas reserves (whether scope of rights, expenditure obligations). as a matter of law or policy)?

Private investment in upstream interests for conducting Petroleum According to the Petroleum Law, the State reserves the right to Operations are granted through concession contracts and are generally participate in Petroleum Operations involving any person and may attributed by a public tender process. Such rights may also be attributed participate at any stage, according to the contractually agreed terms by simultaneous or direct negotiations in relation to areas that had and conditions. Such State participation is made through ENH and already been declared available when (i) no concession was granted any investor interested in exploring Mozambican oil resources must pursuant to previous public tender, (ii) rescission, relinquishment and associate with ENH. No indication is given as to what such stake abandonment, or (iii) the need to join adjacent areas to a concession, should be, but we note that in the recent 5th Licensing Round, the where justified, due to technical and economic reasons. ENH stake was indicated as 10%. Concession contracts are administrative contracts, subject to the authorisation of and supervision by the Administrative Court, the 3.5 How does the State derive value from oil and natural main clauses therein being subject to publication in the official gas development (e.g. royalty, share of production, gazette. taxes)? The following rights may be conferred under concession contracts: ■ reconnaissance; In addition to the bonus payments, training programmes, relinquishment fund and other financial obligations set out in ■ exploration and production (“EPCC”); the concession contracts, entities entitled to perform Petroleum ■ pipeline construction and operation; and Operations are subject to all of the following general taxes: income ■ infrastructure construction and operation. tax; value-added tax; municipal tax (when applicable); and also to From the list referred above, the EPCC contract is the key contract the specific petroleum tax regime. The petroleum tax regime levies applicable to upstream activities, as it grants an exclusive right to a Production Tax (“Imposto sobre a produção do petróleo”) on oil carry out petroleum exploration and production. and gas produced in each concession area.

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The cost recovery and production sharing mechanisms are also approval and must observe Mozambican law. Such governmental regulated, drawing on the traditional concepts of cost oil, available approval is also necessary for the direct or indirect transfer of the oil, profit oil and produced oil. Costs incurred by the concessionaire participation interest in the concession agreement, including through on oil operations, excluding interest and other financial costs, the assignment of shares or any other form of ownership stake of the are recovered from 60% of the annual available oil – the portion entity holding the concession rights. exceeding this limit is transferred to the following years. In In order to ensure compliance with the terms and conditions of turn, profit oil is shared between the State and the concessionaire the petroleum exploration authorisations, operators must present according to a variable scale, the result of which is obtained through financial guarantees in terms to be regulated. a mathematical formula. The special rules foreseen to determine the Personal Income Tax 3.9 Are participants obliged to provide any security (“Imposto sobre o Rendimento das Pessoas Singulares” – “IRPS”) or guarantees in relation to oil and natural gas Mozambique or Corporate Income Tax (“Imposto sobre o Rendimento das development? Pessoas Colectivas” – “IRPC”) due on the income obtained from oil operations include, namely: (i) the characterisation of deductible The Petroleum Law also provides that operators should provide and non-deductible costs and expenses; (ii) amortisation rules; (iii) a financial guarantee to ensure performance of the terms and thin capitalisation rules; (iv) registration of inventory; and (v) a conditions set out in the authorisation. withholding flat tax rate of 10% on the payment of services related to concession agreements undertaken by non-resident entities. 3.10 Can rights to develop oil and natural gas reserves Transfer pricing rules are also further developed, including the granted to a participant be pledged for security, or application of the arm’s length principle to the transfer of assets booked for accounting purposes under domestic law? between different concession agreements held by the same concessionaire. The concession contract and the rights and duties arising thereunder The tax regime also tightens the ring-fencing rules and clarifies cannot be freely transferred and are subject to governmental that the IRPC of entities running Petroleum Operations under approval as set out under question 3.8 above. a concession agreement should, as a general rule, be calculated individually for every concession area (costs and income should 3.11 In addition to those rights/authorisations required also be determined separately in relation to each area) and each to explore for and produce oil and natural gas, what concession agreement area must have its own Tax Identification other principal Government authorisations are Number (“Número Único de Identificação Tributária” – “NUIT”). required to develop oil and natural gas reserves (e.g. environmental, occupational health and safety) and from whom are these authorisations to be obtained? 3.6 Are there any restrictions on the export of production? An environmental impact assessment (“EIA”) approved by the In addition to the production sharing rules set out under the Ministry of Coordination of Environmental Affairs (“MICOA”) must petroleum tax regime, the Petroleum Law also sets out that the be presented with the respective development plan. Additionally, Government should ensure that no less than 25% of the oil and gas the concession right-holder must present the necessary licences for produced in the national territory is destined for the national market use and enjoyment of land (secured according to the land legislation) and to regulate the acquisition, price and other matters inherent to and the authorisations for performance of Petroleum Operations on the use of the aforementioned oil and gas quota. We further note land or at sea. that the oil companies are obliged to give the State preference in International standards as well as specifically legislated technical the acquisition of oil produced in the concession area, according to requirements and health and safety rules for employees must also special legislation, when required for reasons of national interest. be complied with.

3.7 Are there any currency exchange restrictions, or 3.12 Is there any legislation or framework relating to restrictions on the transfer of funds derived from the abandonment or decommissioning of physical production out of the jurisdiction? structures used in oil and natural gas development? If so, what are the principal features/requirements of the legislation? Mozambique does not have a specific foreign exchange regime for oil and gas operations, besides the special regime approved for Areas 1 and 4 in the Rovuma Basin, which only apply to these projects. In The Environmental Impact Study Report comprehends general, such operations are subject to the general foreign exchange the decommissioning and rehabilitation plan. A detailed regime and to the terms and conditions set out in the individual Decommissioning Plan shall be prepared in consultation with the concession agreements. As a result, the movement of funds in INP and submitted no less than two years prior to the date on which and out of Mozambique is subject to exchange controls and to the production operations are expected to cease, for the approval of the registration and approvals of the Central Bank of Mozambique. Minister with authority over the petroleum industry. The Decommissioning Plan shall include, among others, the following items: 3.8 What restrictions (if any) apply to the transfer or disposal of oil and natural gas development rights or (a) tail-end production schedules and the economic threshold for interests? termination of operations; (b) alternatives for continuing Petroleum Operations; The direct transfer of rights and duties attributed under a concession (c) further use or subsequent disposal of facilities; contract to a subsidiary or to a third party is subject to governmental (d) plans for plugging and abandonment of production wells;

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(e) a schedule of decommissioning activities and description of equipment needed for the restoration of land sites and/or the 5 Import / Export of Oil seabed; (f) an inventory of dangerous material and chemicals existent in 5.1 Outline any regulatory requirements, or specific the facilities and plans for their removal; and terms, limitations or rules applying in respect (g) evaluation of the environmental impact of termination and of cross-border sales or deliveries of oil and oil abandonment activities. products. Activities falling in the A Category must proceed with the following stages: (i) pre-assessment of the proposed project by the relevant The export (i.e., cross-border sale) or delivery of petroleum and environmental department and provision of written response petroleum products is subject to licensing. (including the indication of the number of the required copies of Only entities licensed to distribute petroleum products may provide Mozambique Terms of Reference (“ToR”) and Studies on the Pre-Feasibility and bunker services for the re-exportation of those products, provided Scoping Activities (“EPDA”) to be submitted); (ii) appointment of a that such activities are carried together with sales in the national Government-registered environmental consultant; (iii) working with market. Entities not based in the country, which seek to carry out the environment consultant to develop an EPDA; and (iv) working bunker activities from Mozambique for the international shipping of with the environment consultant to develop the ToR. Subsequently, products which are located in the country or purchased in a foreign it will be required to submit the number of copies of the EPDA and currency exclusively for that purpose, and activities for transporting ToR defined in the written response to the pre-assessment tothe those products to and from neighbouring countries, must do so relevant environmental department. through the licensed entities. Concerning the import of refined Having received these documents, the relevant environmental oil and liquefied petroleum gas, IMOPETRO (at least 51% held Government department has 30 working days to respond to the by the State company PETROMOC, S.A., and by the authorised applicant, either approving the EPDA and ToR or requesting distributors in proportion to their market stake) has exclusivity on alterations and re-submission. If the application is successful, the import and sale of such products to retailers in Mozambique. the contracted Government-registered environment consultant undertakes the EIA based on the approved ToR. 6 Transportation

3.13 Is there any legislation or framework relating to gas storage? If so, what are the principal features/ 6.1 Outline broadly the ownership, organisational and requirements of the legislation? regulatory framework in relation to transportation pipelines and associated infrastructure (such as natural gas processing and storage facilities). Presently, the main production of natural gas comes from the onshore Pande and Temane fields, which are connected by pipeline to South As referred to above, an EPCC may attribute the non-exclusive right Africa. Natural gas storage facilities shall be built after production to construct and operate production and transportation infrastructure of offshore natural gas commences and no specific legislation exists to transport the crude oil and natural gas produced in the concession beyond the current legal framework. area, unless such pipelines already exist and are available in commercially acceptable terms. When such rights are not granted 3.14 Are there any laws or regulations that deal specifically under an EPCC, they may be attributed under a Pipeline Concession with the exploration and production of unconventional Contract. oil and gas resources? If so, what are their key features? The holders of pipeline rights – whether under the EPCC or the Pipeline Concession Contract – are obliged to transport third-party oil on a non-discriminatory and commercially acceptable basis To date, there are no specific laws or regulations that deal with the provided (i) there is available pipeline capacity, and (ii) there are exploration and production of unconventional oil and gas resources. no unsurpassable technical issues that would exclude the pipeline from satisfying such third-party requests. The holders of pipeline 4 Import / Export of Natural Gas (including rights may be obliged to increase the pipeline capacity to allow the LNG) above as long as (i) such increase does not cause an adverse effect on the pipeline’s technical integrity or safety, and (ii) third parties have sufficient funds to bear the cost of increase in pipeline capacity. 4.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect of cross-border sales or deliveries of natural gas 6.2 What governmental authorisations (including (including LNG). any applicable environmental authorisations) are required to construct and operate oil and natural gas transportation pipelines and associated No specific regulatory limitations or rules apply. The national infrastructure? legislation and internationally accepted rules and principles governing the transport, storage and use of hazardous material must Upstream pipeline construction rights may be attributed under an be complied with. EPCC or under a Pipeline Concession Contract and in either case an EIA approved by the MICOA must be presented with the respective development plan. Additionally, the concession right-holder must present the necessary licences for use and enjoyment of land (secured according to the land legislation) and the authorisations for performance of Petroleum Operations on land or at sea.

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The Minister responsible for the energy sector may waive 6.3 In general, how does an entity obtain the necessary compliance with the obligation provided above, on behalf of the land (or other) rights to construct oil and natural gas holder of the licence for distribution, a landing terminal, storage or transportation pipelines or associated infrastructure? oil pipelines, as applicable, if reasonable efforts have been made Do Government authorities have any powers of compulsory acquisition to facilitate land access? to meet the requirements of third parties and to prove that it is not possible to receive, send, handle, store, mix or manage the third- party petroleum products or carry out the requested modification of According to the Mozambique legal regime, land is owned by the petroleum facility. the State and cannot be sold, disposed of or pledged. However, a lesser right can be granted that allows the use and enjoyment of The holders of licences or operators of the petroleum facilities must land (“Direito de Uso e Aproveitamento de Terra” – “DUAT”). The act with transparency in the negotiation of access to their facilities, grant of a concession entitles the holder to apply for a licence of use and they may not impose discriminatory conditions. Mozambique and enjoyment of land under the general land legislation (Law no. The holders of licences for distribution, loading terminals, storage 19/97, October 1) and to require that rights of way be granted. Fair or oil pipelines must make available, in non-discriminatory terms, indemnification will need to be paid to any holders of DUAT and the the relevant records on the petroleum facility in question, to third resettlement of the population must be ensured. parties who request it, in order to facilitate the negotiation of acceptable commercial terms. 6.4 How is access to oil and natural gas transportation If, within a period of six months after the notification of the request pipelines and associated infrastructure organised? for access to the petroleum facility or to increase its respective capacity, the parties have not reached an agreement on the Please see question 6.6 below. commercial or operational terms which ensure the access sought, the matter, depending on the terms of the contract, may be submitted for resolution: 6.5 To what degree are oil and natural gas transportation pipelines integrated or interconnected, and how is co- (a) to an independent commission; operation between different transportation systems (b) to arbitration proceedings; or established and regulated? (c) to the competent judicial authorities. It is up to the Minister responsible for the energy sector to establish There are presently no oil pipelines. The current natural the methodology for third-party access to petroleum facilities. gas transportation and distribution network consists of the Mozambique-South Africa pipeline and a recent distribution In addition to its needs for supply to the national market, the entity network limited to certain districts of the capital city, Maputo. in possession of a storage infrastructure in the ocean terminals must Reports indicate that a new pipeline is under construction further reserve at least 15% of the capacity of its facilities for third-party north, connecting to the Mozambique-South Africa pipeline. access to products for the national market.

6.6 Outline any third-party access regime/rights in 6.7 Are parties free to agree the terms upon which oil respect of oil and natural gas transportation and or natural gas is to be transported or are the terms associated infrastructure. For example, can the (including costs/tariffs which may be charged) regulator or a new customer wishing to transport regulated? oil or natural gas compel or require the operator/ owner of an oil or natural gas transportation pipeline Tariffs for third-party access to pipelines are not regulated and or associated infrastructure to grant capacity or should be established in commercially reasonable terms and on a expand its facilities in order to accommodate the new non-discriminatory basis, according to the standards that apply in customer? If so, how are the costs (including costs the petroleum industry, and negotiations be conducted in good faith. of interconnection, capacity reservation or facility expansions) allocated? If six months after submitting the respective request, the parties have not reached an agreement on the commercial or operational Any holder of a licence for distribution, landing terminals, storage terms for access, the matter may be submitted to resolution by an or oil pipelines, is obliged to receive, issue, handle, store, mix, independent committee, arbitration or the competent courts of law. or manage, without discrimination and in non-discriminatory commercial terms, third-party petroleum products at their petroleum storage facilities, landing terminals or oil pipelines, provided that: 7 Gas Transmission / Distribution (a) there is available space at the petroleum facility in question; and (b) there are no insurmountable technical problems which 7.1 Outline broadly the ownership, organisational and impede the use of the petroleum facility to meet requirements regulatory framework in relation to the natural gas of third parties. transmission/distribution network. If the available capacity of the petroleum facility in question, or the dimensions or route of pipelines, are insufficient to meet the As mentioned above, the transport and distribution of natural gas requirements of third parties, the licence-holder shall be obliged is at a very early stage with the transport network consisting of to make a modification to the facility so that, in commercially the Mozambique-South Africa pipeline and the recent distribution acceptable terms, third-party requests can be met, provided that: network restricted only to certain districts of the capital city, Maputo. However, new transport pipelines are expected to be (a) such modification does not have an adverse effect onthe technical integrity or the safe operation of the petroleum developed, connecting the gas-rich north and south of Mozambique. facility; and Decree no. 44/2005, November 29, establishes the Regulation for (b) third parties have sufficient funds to support the costs of the Distribution and Commercialisation of Natural Gas, pursuant to required modification. which these rights are attributed by means of concession agreements

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resulting from a public tender process. The attribution of rights through direct negotiations is only envisaged when the public tender 7.6 Are there any restrictions or limitations in relation to process had no bidders or in areas that have not been designated acquiring an interest in a gas utility, or the transfer of assets forming part of the distribution network as concession areas for a distribution network or independent (whether directly or indirectly)? local networks by the MIREME. The concessionaire must be a commercial company, necessarily held by the successful tenderer(s), The concessionaire owns the distribution network and the with the registered office and administration in Mozambique. installations and equipment necessary for its operation until the end The concessionaire may be given exclusive distribution and of the concession period and is barred from burdening or disposing commercialisation rights in the whole or part of a concession area in any manner, whether fully or partially, the fixed assets effected for a certain period; however, once such exclusivity has ended, to the concession without obtaining the prior approval of the consumers are entitled to acquire natural gas from third parties. MIREME. The assignment of the concession contract is subject to Mozambique The concession period for natural gas distribution and the prior approval of the granting authority. commercialisation networks is granted for a maximum of 25 years, and the concession for exploration of independent local networks shall have a maximum duration of 10 years. 8 Natural Gas Trading

7.2 What governmental authorisations (including any 8.1 Outline broadly the ownership, organisational and applicable environmental authorisations) are required regulatory framework in relation to natural gas to operate a distribution network? trading. Please include details of current major initiatives or policies of the Government or regulator (if any) relating to natural gas trading. The concessionaire must obtain a licence for use of the land necessary for the construction, installation and exploration of the concession infrastructure and pay the related taxes and compensations. The State reserves the right to control the trading of liquefied hydrocarbons and gas, including LNG. Construction may only commence after the necessary environmental licence has been obtained from the Ministry of the Environment and The State, its institutions and other public law entities have a all studies and the MIREME must approve detailed engineering determining role in promoting the realisation of the existing projects relating to the distribution network. Furthermore, the natural resources potential so as to provide access to the benefits construction of natural gas infrastructure must necessarily involve of petroleum production and contribute to the social and economic a licensed assembly and installation company. development of the country. The existing Petroleum Regulation involves bringing the legal framework of the oil business to the current economic order in the 7.3 How is access to the natural gas distribution network country, the developments in the oil sector, ensuring competitiveness organised? and transparency, and safeguarding national interests. The MIREME establishes the rules of negotiated access to the distribution network and the concessionaires should negotiate 8.2 What range of natural gas commodities can be access rights with transparency, being barred from imposing any traded? For example, can only “bundled” products discriminatory conditions. The concessionaire should publish its (i.e., the natural gas commodity and the distribution thereof) be traded? main commercial terms of use within the two years following the end of its exclusivity, should such exclusivity have been initially granted. The Petroleum Law provides that a trading licence is required for the trading of gas, and defines gas as “oil that under normal atmospheric 7.4 Can the regulator require a distributor to grant conditions is in the gaseous state”, as well as unconventional gas, capacity or expand its system in order to including methane gas associated with coal and bituminous shale accommodate new customers? gas.

One of the general duties of the concessionaire is to supply natural gas in the best manner to serve consumer needs and interests and to 9 Liquefied Natural Gas contribute to the country’s economic and social development. For such purpose, the concessionaire must, in the terms set out in the concession contract, supply all consumers who are in a condition to 9.1 Outline broadly the ownership, organisational and pay for such supply and comply with any other conditions necessary regulatory framework in relation to LNG facilities. for such purpose. The current available general legal framework is silent in respect of the specific regulation of LNG facilities. Only Mozambique’s 7.5 What fees are charged for accessing the distribution Special Regime for Natural Gas Liquefaction Projects in Areas network, and are these fees regulated? 1 and 4 of the Rovuma Basin (Decree-law 2/2014, December 2) – which applies to concessionaires under existing EPCCs – As mentioned in question 7.3 above, the MIREME establishes regulates any special purpose vehicles (“SPVs”) established by the rules for negotiated access to the distribution network and the such concessionaires and any persons entering into contracts with concessionaires should negotiate access rights with transparency, concessionaires or SPVs (contractors, financiers and employees) being barred from imposing any discriminatory conditions. We as well as their subcontractors, and in connection with activities further note that the MIREME regulates a maximum price for relating to the development and operation of Offshore Areas 1 or natural gas supplied to final consumers (Ministerial Decree no. 4 and which are undertaken under existing EPCCs or any other 210/2012, September 12). contracts with the Government of Mozambique.

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Accordingly, any SPVs established by concessionaires must be The aforementioned licences are generally granted by the incorporated in Mozambique, although SPVs for the purposes MIREME; however, licences for retail activities in a petrol station of raising finance or undertaking sales and shipping activities are granted by the Provincial Directorates (“Direcções Provinciais”) may be incorporated in any “transparent” jurisdiction where responsible for energy (except for storage or supply of compressed the Government of the jurisdiction can verify the ownership, natural gas or when located within national roads protection areas, management, control and fiscal situation of the investor (subject which are within the authority of the MIREME), and licences for to Mozambican Government consent). While this “transparent” retail activities in resale stations are granted by the Municipality or jurisdiction standard is equivalent to the standard imposed on new District Government in the respective areas of jurisdiction. concessionaires under the Petroleum Law, unlike the requirements An entity may hold more than one of the aforementioned licences, of the Petroleum Law, neither the existing concessionaires of Areas as long as that does not condition the development of competitive 1 and 4 nor their SPVs are required to be listed on the Mozambican markets for the petroleum products in accordance with the activities Stock Exchange. the entity pursues. However, the holder of a distribution licence Mozambique cannot hold a retail licence except (i) in the case of liquid gas and 9.2 What governmental authorisations are required to compressed natural gas, and (ii) for the operation of a sole point construct and operate LNG facilities? of fuel supply for the purposes of training in each of the country’s provinces. In Areas 1 and 4 of the Rovuma Basin, the Government shall In exceptional cases, the Minister responsible for the energy sector approve the development plan submitted by the concessionaires may authorise the distributor to operate more than one point of prior to any construction of LNG facilities. Also, when applicable, supply per province. a master depletion plan may be approved for the management of The production licence comprises the categories of large-scale the tanks. production and small-scale production. The retail licence covers the operation of retail activities at fuel supply points and the operation 9.3 Is there any regulation of the price or terms of service of retail activities at points of resale. in the LNG sector? 10.2 Outline broadly the ownership, organisation and Currently, no LNG facilities exist in Mozambique. The future regulatory framework in relation to oil trading. LNG facilities planned by Anadarko and ENI are not expected to commence production until 2023. There are no specific requirements relating to the trade in oil as a commodity in Mozambique. 9.4 Outline any third-party access regime/rights in respect of LNG facilities. 11 Competition The Petroleum Law (covering LNG processing) provides that the Mozambican Government may authorise concessionaires that 11.1 Which governmental authority or authorities are have discovered oil and non-associated gas deposits to develop responsible for the regulation of competition aspects, projects for the design, construction, installation, ownership, or anti-competitive practices, in the oil and natural financing, operation, maintenance, use of wells, installations and gas sector? ancillary equipment, either onshore or offshore, for the production processing, liquefaction, delivery and sale of gas in the domestic or The publication of Law no. 10/2013 (the “Competition Law”) foreign markets. on April 11 established the legal framework for competition in Petroleum production, including LNG production activities, may Mozambique and created the Competition Regulatory Authority be undertaken and authorised by the Government under an EPCC (“CRA”) to enforce it. The Competition Law is not specific for without the need for further licensing or concession. the oil and natural gas sector and comes as a result of the efforts made in recent years by the Mozambican Government to streamline economic initiatives and liberalise some key sectors, such as 10 Downstream Oil communications, ports, railways and financial services. A step further was taken recently with the publication of the Statute of the CRA on August 1, 2014. 10.1 Outline broadly the regulatory framework in relation to the downstream oil sector. The CRA was conferred broad supervisory and sanctioning powers with regard to restrictive competition practices (such as cartel Decree no. 45/2012, December 28, defines the regime for production, agreements and abuses of dominant position), and charged with importation, receipt, storage, handling, distribution, trade, transport, clearing or prohibiting concentrations between undertakings that exportation and re-exportation of petroleum products and the are subject to mandatory notification in Mozambique. The CRA’s respective sale prices in the national territory. This Decree provides decisions may be appealed in court, namely to the Judicial Court for the following licences: of the City of Maputo, in the case of procedures leading to the (a) Production Licence; application of fines and other sanctions, and to the Administrative Court, with regard to merger control procedures and requests for (b) Storage Licence; exemptions relating to restrictive agreements. The Statute also (c) Distribution Licence; establishes a duty of co-operation on the part of undertakings and (d) Retail Licence; other entities subject to the activities of the CRA, in order to ensure (e) Exploration of Oil Pipeline Licence; and the adequate performance of the authority’s duties. (f) Exploration of Unloading Terminal Licence.

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relevant persons, request documents and conduct searches and 11.2 To what criteria does the regulator have regard in seizures and the sealing of the premises. The CRA will co-ordinate determining whether conduct is anti-competitive? closely with the other sectorial regulatory authorities. The CRA may assign different priorities to certain practices or The new Competition Law has a wide scope, as it applies to both sectors (under the designated “principle of opportunity”) and in the private companies and State-owned companies, and covers all last quarter of each year should publish its enforcement priorities for economic activities with effects in Mozambican territory (with a the following year. number of exceptions). The practical application of the law will depend largely on the It prohibits agreements and practices which restrict competition, organisation and functioning of the CRA, and the priorities it will both between competitors (“horizontal” practices), and between set for the enforcement of competition law. Please refer to question companies and their suppliers or customers (“vertical” practices), 11.2 above for measures and sanctions that may be applied to anti- Mozambique as well as abusive practices by dominant undertakings (including, competitive practices. among others, the refusal to grant access to essential infrastructure, unjustified termination of a business relationship) and abuse of the economic dependence of suppliers or customers. 11.4 Does the regulator (or any other Government authority) have the power to approve/disapprove However, prohibited practices may be justified and exceptionally mergers or other changes in control over businesses allowed if they lead to economic efficiencies, as well as if they in the oil and natural gas sector, or proposed promote the competitiveness of small and medium enterprises and acquisitions of development assets, transportation or the consolidation of the national economy (as long as such practices associated infrastructure or distribution assets? If so, do not eliminate competition and are indispensable for the objective what criteria and procedures are applied? How long to be achieved). does it typically take to obtain a decision approving or disapproving the transaction? The new law introduces merger control and all concentrations which meet the market share or annual turnover criteria, to be determined The Competition Law should, in principle, apply to this sector. by the Council of Ministers, will be subject to mandatory However, there is one exception to its scope which relates to cases notification to the CRA, within seven working days after conclusion of a specific need for protection of a sector of the economy, in the of the agreement or its project, and cannot be implemented before benefit of the national interest or consumers’ interest. clearance. As the Competition Law is not yet being enforced, it is not possible Violation of the prohibitions contained in the new law subjects to comment on timings. infringing firms to fines up to 5% of the turnover of each company in the previous year. In addition, the breach of the duties to notify concentrations within the statutory period and to co-operate with the 12 Foreign Investment and International CRA is punishable with fines up to 1% of annual turnover. Obligations The law also provides for penalty payments, where appropriate, as well as potentially serious ancillary sanctions, not only because the offender may find itself excluded from participating in tenders for 12.1 Are there any special requirements or limitations on five years, but because it can even find itself confronted with the acquisitions of interests in the natural gas sector (whether development, transportation or associated possible break-up of the offending undertaking. Finally, agreements infrastructure, distribution or other) by foreign and practices concluded in breach of the law are null and void. companies? Recently, a proposal for a regulation implementing the Competition Law was made public, which, among other topics, further defines In order for foreign legal entities to be holders of the right to carry the subjective and material scope of the prohibitions under the out Petroleum Operations, they must be registered in Mozambique Competition Law and determines the legal criteria for mandatory and demonstrate that they have the technical capability and adequate notification of concentrations to the CRA, with regard to the market financial resources for the effective conduction of Petroleum shares and turnover of the parties. Specifically, pursuant to the Operations. referred proposal, notification is mandatory on undertakings having Additionally, foreign legal entities which directly or indirectly a market share equal or superior to 20% and an annual turnover hold or control legal entities that own rights under a concession above 100 million meticais (approximately EUR 2.5 million and contract shall be established, registered and administered under USD 3.3 million). a transparent jurisdiction. This is understood as jurisdictions Even though the application of the rules on merger control is whereby the Government, in an independent manner, may verify dependent on the approval of the new regulation, when the new the ownership, management and control, and fiscal situation of a CRA starts functioning, the provisions on prohibited practices foreign legal person who wishes to participate or participates in restrictive of competition shall be fully applicable, and the violation Petroleum Operations. Foreign legal entities that associate with of such rules subjects the undertakings concerned to fines of up to Mozambican legal entities shall have a pre-emption right in the 5% of the turnover of the preceding year, as well as other negative granting of concession contracts. procedural consequences. In the context of the acquisition of goods or services by Petroleum Operations right-holders, single or collective foreign entities that 11.3 What power or authority does the regulator have to provide services to the Petroleum Operations must associate with preclude or take action in relation to anti-competitive single or collective Mozambican entities. practices?

The CRA has broad supervisory, regulatory, investigatory and sanctioning powers, pursuant to which it will be able to inquire

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Arbitration between the State of Mozambique and foreign investors 12.2 To what extent is regulatory policy in respect of the shall be conducted in accordance with: oil and natural gas sector influenced or affected (a) the law that governs arbitration, conciliation and mediation as by international treaties or other multinational arrangements? alternative methods of conflict resolution; (b) the rules of the International Centre for the Settlement of Disputes between States and Nationals of Other States While defining its scope, the Law states that it establishes the rules (“ICSID”), adopted in Washington on March 15, 1965, or for the granting of rights to carry out Petroleum Operations in the pursuant to the Convention on the Settlement of Disputes Republic of Mozambique and beyond its borders insofar as it is in between States and Nationals of Other States; accordance with international laws. (c) the rules set out in the ICSID’s Additional Facility adopted The definition of “good petroleum industry practice” refers to on September 27, 1978 by the Administrative Council of the

all those practices and procedures that are generally employed International Centre for Settlement of Investment Disputes Mozambique in the international petroleum industry and aimed at the prudent between States and Nationals of Other States, whenever the management of petroleum resources, including the conservation foreign entity does not meet the nationality requirements of pressure, ensuring the regularity of Petroleum Operations and provided for in Article 25 of the Convention; and observing safety aspects, environment preservation and technical (d) the rules of such other international instances of recognised and economic efficiency. standing as agreed by the parties in the concession contracts referred to in this Law, provided that the parties have expressly The Government ensures the rigorous observation of the protection defined in the contract the conditions for implementation and rehabilitation of environmental norms, in the terms of the law including the method for the designation of the arbitrators and the conventions and good international practices. and the time limit within which the decision must be made. Furthermore, the holders of petroleum operation concession rights shall perform them in accordance with the environmental legislation 13.2 Is your jurisdiction a signatory to, and has it duly and other legislation applicable and adopt measures for the protection ratified into domestic legislation: the New York of the environment which are in accordance with internationally Convention on the Recognition and Enforcement of accepted standards. Petroleum Operations right-holders have an Foreign Arbitral Awards; and/or the Convention on obligation to promote public safety and adopt the required measures the Settlement of Investment Disputes between States to ensure the safety and hygiene of their workers in accordance with and Nationals of Other States (“ICSID”)? the national and international regulations applicable in the Republic of Mozambique. Mozambique is a signatory to and has ratified both the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Convention on the Settlement of Investment 13 Dispute Resolution Disputes between States and Nationals of Other States (“ICSID”).

13.1 Provide a brief overview of compulsory dispute 13.3 Is there any special difficulty (whether as a matter resolution procedures (statutory or otherwise) of law or practice) in litigating, or seeking to enforce applying to the oil and natural gas sector (if any), judgments or awards, against Government authorities including procedures applying in the context of or State organs (including any immunity)? disputes between the applicable Government authority/regulator and: participants in relation to oil In Mozambique, the Government or any Government authority is and natural gas development; transportation pipeline and associated infrastructure owners or users in subject to the law and the judicial authorities. As mentioned above, relation to the transportation, processing or storage Law no. 7/2014, February 28, regulates the judicial processes of natural gas; downstream oil infrastructure owners between the administration and any individual or company and or users; and distribution network owners or users in establishes that in cases where the enforcement of a judgment relation to the distribution/transmission of natural gas. (i) is absolutely and definitely impossible, or (ii) causes serious damage to the public interest, there is a legitimate cause for the non- Disputes in the oil and natural gas sector, even when one of the enforcement of that judgment. Additionally, the Civil Procedure parties is a Government authority/regulator, can be subject either to Code establishes that the State’s assets that are used for public arbitration or the judicial authorities. Law no. 7/2014, February 28 utility cannot be attached in the enforcement of a judgment, unless (“Lei sobre o processo administrativo contencioso”), regulates the when the enforcement pursues the rendering of that same asset or judicial procedures between the administration and any individual or the payment of a debt secured by collateral. company. This law includes a chapter on arbitration, stating that an arbitral tribunal may solve any dispute concerning (i) administrative 13.4 Have there been instances in the oil and natural gas contracts, and (ii) non-contractual civil liability of the administration sector when foreign corporations have successfully arising from public management acts. Specifically concerning the oil obtained judgments or awards against Government and natural gas sector, one of the specific legal guarantees attributed authorities or State organs pursuant to litigation to Petroleum Operations right-holders under the Petroleum Law is before domestic courts? the possibility to resort to international arbitration for the resolution of disputes when all alternative resolution means are extinguished. There have been no such instances that we are aware of. The Law establishes that when a dispute arising from a concession contract is not solved by negotiation, it can either be subject to the local courts or to arbitration, according to the terms and conditions agreed in the concession contract.

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Mozambican Government has been focused on improving its 14 Updates capability of providing the necessary assistance to those operating in this sector and carrying out the also important supervision, reviewing 14.1 Please provide, in no more than 300 words, a the powers granted to the public institutions and approving the summary of any new cases, trends and developments Draft of the Oil Prospection and Exploration Agreement that shall in Oil and Gas Regulation Law in your jurisdiction. be entered into between the Government and the concessionaires. In terms of legislation, the Petroleum Law Regulation has recently Four years have passed since the approval of the legislation that been amended to include changes relating to the Stock Exchange currently regulates the oil and gas sector and since then the and the public bids to be carried out by the concessionaires. Mozambique

Paula Duarte Rocha Tiago Arouca Mendes HRA Advogados HRA Advogados Avenida Marginal, 141 Avenida Marginal, 141 Torres Rani,Torre de Escritónios Torres Rani, Torre de Escritónios 8º Piso, Maputo 8º Piso, Maputo Mozambique Mozambique

Tel: +258 213 440 00 Tel: +258 213 440 00 Email: [email protected] Email: [email protected] URL: www.hrlegalcircle.com URL: www.hrlegalcircle.com

Paula Duarte Rocha is a partner with Henriques, Rocha & Associados, Tiago Arouca Mendes joined Henriques, Rocha & Associados, Sociedade de Advogados, Lda. (HRA Advogados) (member of Sociedade de Advogados, Lda. (HRA Advogados) in 2014. He MLGTS Legal Circle as Mozambique Legal Circle). Paula Duarte has been advising clients, mainly foreign, on mergers, demergers, Rocha is highly experienced in the Mozambican market, having acquisition of interests in Mozambique or financing local operations. intervened in all areas of practice, advising both national and foreign In that scope, Tiago has been counselling clients from foreign investors, as well as national and foreign private companies. Paula investment project structuring to corporate and exchange control, has notable experience and a track record in banking and project labour and tenancy law, including the regulatory framework applicable finance transactions. Experienced in cross-border transactions to each specific sector and ancillary areas (such as banking, energy, and regulatory issues, Paula has developed know-how in advising mining, insurance, real estate, retail, construction, environment, economic operators and contracting authorities in public procurement amongst others). Tiago Arouca Mendes was admitted in 2016 to and public-private partnerships. the Mozambique Bar Association and in 2017 to the Portuguese Bar Association. Paula Duarte Rocha is a registered arbitrator with the Mozambican Centre for Arbitration, Conciliation and Mediation (since 2002), and was the IBA Tax Reporter for Mozambique (2012–2014). In January 2014, Paula started her collaboration with Morais Leitão, Galvão Teles, Soares da Silva, a Portuguese law firm, as a consultant in all matters pertaining to Mozambique. Paula Duarte Rocha is also a member of the National Council of the Bar Association (since 2016).

Henriques, Rocha & Associados Sociedade de Advogados, Lda. (HRA Advogados) was founded by a group of lawyers of Mozambican nationality, and is a leading law firm in Mozambique due to its dynamism, innovative capacity and the quality of service it provides. Building a legal practice capable of meeting our clients’ needs in the Mozambican market and contributing to the growth and development of the legal market in Mozambique are the main goals of the HRA Advogados team. Our firm was created in the context of an association with Morais Leitão, Galvão Teles, Soares da Silva & Associados (MLGTS), a top-ranking Portuguese law firm. We work in close connection with the firm’s Africa Team; always with respect for, and in strict compliance with, the cultural norms applicable in Mozambique. We are also members of the MLGTS Legal Circle, an international network created by MLGTS for a select set of jurisdictions, including Angola, Mozambique and Macau (China). The firm works very closely with the other member firms of the MLGTS Legal Circle, which enables us to maximise inherent synergies.

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Nigeria Dr. Jennifer Douglas-Abubakar

Miyetti Law Fatimah Dattijo Muhammad

two unintegrated pipeline networks totalling approximately 1,100 1 Overview of Natural Gas Sector km: the Alakiri-Obigbo-Ikot Abasi Pipeline, (the Eastern Network); the 560 km Escravos-Lagos Pipeline System (ELPS), (the Western 1.1 A brief outline of your jurisdiction’s natural gas Network); dedicated pipeline infrastructure owned by the NLNG; sector, including a general description of: natural and the NNPC/SPDC/Total Joint Venture. Also, the WAGP which gas reserves; natural gas production including connects from Lagos to Benin and Ghana. There are also local the extent to which production is associated or distribution companies such as Gaslink Limited and Shell Nigeria non-associated natural gas; import and export of Gas, which distribute natural gas to major industrial areas in the natural gas, including liquefied natural gas (LNG) western and eastern parts of Nigeria. liquefaction and export facilities, and/or receiving and re-gasification facilities (“LNG facilities”); natural gas The National Gas Policy (NGP) was passed in June 2017. The NGP pipeline transportation and distribution/transmission focuses on attracting investors into the gas industry and prioritising network; natural gas storage; and commodity sales local gas demand requirements. It prescribes gas infrastructure and trading. ownership, operation and trading.

Nigeria has the world’s ninth largest, and Africa’s largest, natural gas reserve, with a current reserve estimated at over 180 trillion 1.2 To what extent are your jurisdiction’s energy requirements met using natural gas (including LNG)? cubic feet (TCF) of associated and non-associated gas. Nigeria’s natural gas reserves are largely unexploited. 2,905.59 billion cubic feet (BCF) of natural gas was produced between the months of The types of energy used in Nigeria are oil, natural gas, coal and August 2016 and August 2017. The Government has also been able lignite, tar sands, biomass, hydropower, solar and wind. There to curb gas flaring from 65% to 25%. are no official public statistics showing the percentage of energy required to meet Nigeria’s needs. The gas sector is made up of the upstream sector, comprising exploration, drilling and production of natural gas, a midstream It is estimated that 34% of the country’s energy requirements are sector comprising transportation, and refinery of gas, as well as met with natural gas mostly for industrial use. Other demands on a downstream sector comprising the importation, storage and the use of Nigeria’s gas are for domestic power generation, domestic distribution of gas products. utilities, fertiliser and petrochemical industries, as well as export. The main type of gas exported in Nigeria is liquefied natural gas According to the NNPC, 57.8% of the average daily gas produced (LNG). The Nigeria Liquefied Natural Gas Limited (NLNG) was commercialised while 42.17% was for domestic use, such as (Nigeria’s only operating LNG company) has six trains and is upstream fuel gas. building the seventh. NLNG also has four LNG storage tanks, each with a capacity of 84,200 cubic metres, four LPG refrigerated 1.3 To what extent are your jurisdiction’s natural gas storage tanks, each with a capacity of 65,000 cubic metres (two each requirements met through domestic natural gas for propane and butane). production? Other major LNG projects in different stages of development include the $20 billion Brass LNG and the $7 billion OKLNG project which All of Nigeria’s natural gas requirements are met through domestic are both facing challenges at the moment. production. According to the NNPC, 2,905.59 BCF of natural gas amounting to an average of 7,338.35 million standard cubic feet Apart from the export of LNG, pipeline gas is being exported per day (MMSCFD) were produced between the months of August through the West African Gas Pipeline (WAGP) to countries in West 2016 to August 2017. In March 2017, a total of 101.07 BCF of Africa such as Togo, Benin Republic and Ghana. gas was exported, while 34.38 BCF was supplied to the nation’s The Nigerian Gas Company (NGC), a subsidiary of the Nigerian power sector, industries and households. The gas market has grown National Petroleum Corporation (NNPC), is responsible for gas at a rate of 3.1% yearly and just about keeps up with the national transmission in Nigeria through an unintegrated gas pipeline population growth of 2.8% according to the World Bank. Therefore, network. Current pipeline infrastructure comprises basically of Nigeria does not import natural gas.

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1.4 To what extent is your jurisdiction’s natural gas 3 Development of Oil and Natural Gas production exported (pipeline or LNG)?

3.1 Outline broadly the legal/statutory and organisational A large fraction of Nigeria’s LNG output is exported. Its major framework for the exploration and production export partners include Spain, Japan, India, France, Portugal, and (“development”) of oil and natural gas reserves Brazil, amongst many other countries. including: principal legislation; in whom the State’s Gas is also exported through the WAGP which supplies gas from mineral rights to oil and natural gas are vested; Government authority or authorities responsible for the Escravos region in the South-South region of Nigeria to the regulation of oil and natural gas development; and neighbouring West African States. The Trans-Saharan Pipeline is an

Nigeria current major initiatives or policies of the Government ongoing project with an estimated length of 4,400 km. The project (if any) in relation to oil and natural gas development. is expected to span 1,037 km in Nigeria, 853 km in Niger and 2,310 km in Algeria. The project is the brainchild of the Nigerian and The primary piece of legislation governing the exploration and Algerian Governments with a view to connecting Nigerian gas production of oil and natural gas is the Petroleum Act (Laws of the supply with the Algerian market, and possibly onwards towards Federal Republic of Nigeria (LFN)) 2004. The Act governs and broader Europe. regulates the exploration, production and distribution of petroleum and petroleum products in Nigeria. Under the Act, the entire 2 Overview of Oil Sector ownership and control of all petroleum in Nigeria, under Nigeria’s territorial waters or in lands that form part of Nigeria’s continental shelf or part of Nigeria’s Exclusive Economic Zones, is vested in the 2.1 Please provide a brief outline of your jurisdiction’s oil State. sector. The act also gives the Minister of Petroleum Resources broad powers to: The Nigerian petroleum industry is the largest in Africa. The oil 1. Grant the necessary licences required for oil exploration, oil sector is vested in the Federal Government of Nigeria by virtue of prospecting and oil mining activities. the Constitution. The Nigerian National Petroleum Corporation Act 2. Grant licences for petroleum refining, importation, storage and empowers the NNPC to engage in all commercial activities relating sale services. to the petroleum sector and to enforce all regulatory measures. 3. Exercise the right of pre-emption of all petroleum and petroleum Over 94% of the country’s crude oil production is derived from joint products in the event of a state of national emergency or war. ventures between NNPC and multinational companies. 4. Fix the prices at which petroleum products may be sold in The oil sector consists of: upstream ventures which encompass Nigeria. exploration, oil production, and crude oil marketing; midstream Other extant legislation includes: ventures which encompasses refining of crude oil, transportation and 1. Deep Offshore and Inland Basin Production Sharing Contracts importation; and a downstream venture which encompasses retail Act. services, distribution, research and development and investment opportunities. 2. Nigerian Oil and Gas Industry Content Development Act 2010. 3. Petroleum Profits Tax Act. 2.2 To what extent are your jurisdiction’s energy 4. Associated Gas Re-Injection Act. requirements met using oil? The relevant authorities that regulate and govern the sector are: There is no official public record showing the percentage of oil used 1. The Federal Ministry of Petroleum Resources. to meet the country’s energy requirements. According to the NNPC, 2. Nigerian National Petroleum Resources (NNPC). an estimated 477.41 million litres of various petroleum products 3. Department of Petroleum Resources (DPR). was distributed to the Nigerian market in May 2016. 4. Petroleum Products Pricing Regulatory Agency (PPPRA). 5. Federal Ministry of Environment (FMoE). 2.3 To what extent are your jurisdiction’s oil requirements 6. Nigerian Content Development and Monitoring Board met through domestic oil production? (NCDMB). The National Gas Policy (NGP) was passed on 28 June 2017 by Crude oil is not imported into Nigeria. However, a small percentage the Federal Executive Council (FEC). The policy was a response of production can only be refined domestically as refining capacity to a number of shortcomings documented in the 2008 Gas Master is very low and barely enough to meet local demand. As such, Plan (GMP). The new policy seeks to address these identified Nigeria relies heavily on refined fuel importation. shortcomings and build on its successes in attracting the needed private-sector investment and involvement in building infrastructure 2.4 To what extent is your jurisdiction’s oil production and developing a robust and complete gas market. exported? The NGP articulates the vision, goals and strategies of the Federal Government of Nigeria and spells out an implementation plan for According to the most recent data supplied by the NNPC, the the introduction of an appropriate institutional, legal, regulatory and Government’s participatory vehicle in oil and gas activity, Nigeria commercial framework for the gas sector. It is aimed at removing exported approx. 645,435,248 barrels of crude oil in 2016. Major the barriers trifling investment and the development of the sector. buyers of Nigeria’s crude oil (as at 2016) include India, the United The NGP also details the Government’s commitment to abide by the States, Spain, France, Indonesia and many others. policy’s provisions unless and until reviewed or replaced by a formal restatement of policy.

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Recent initiatives also include commitment and effort from the Government in overhauling older oil and gas policies. The 3.4 To what extent, if any, does the State have an Government has recently publicly commented on a current policy, ownership interest, or seek to participate, in the development of oil and natural gas reserves (whether already drafted by the FEC, looking at creating a market-driven oil as a matter of law or policy)? and gas industry and maximising the production and processing of hydrocarbons. The Federal Executive Council of Nigeria, in July The Petroleum Act vests ownership interests in oil reserves with 2017, approved a National Petroleum Policy. This policy ‘articulates the Federal Government and it participates in industry-wide activity a vision for the petroleum (specifically oil) sector and sets policy through the NNPC, a state-owned business entity. The Minister of goals, strategies and implementation plans for the introduction Petroleum Resources usually grants concession rights via OPLs and of an appropriate institutional, legal, regulatory and commercial OMLs to oil companies who negotiate and enter into PSCs with the Nigeria framework to resolve the barriers currently affecting investment in NNPC. PSCs are convenient for the Government because they offer the sector’. There is also the ‘7 Big Wins’ initiative developed by a revenue-stream while removing the burden of cash calls. The the Ministry of Petroleum Resources and the National Economic Government is usually entitled, via contract, to production minus Recovery & Growth Plan (ERGP 2017–2020). cost and profit quantified in the production to the holder of the OPL and the OML in the form of crude oil with no additional cost to the 3.2 How are the State’s mineral rights to develop oil Government. and natural gas reserves transferred to investors or companies (“participants”) (e.g. licence, concession, service contract, contractual rights under Production 3.5 How does the State derive value from oil and natural Sharing Agreement?) and what is the legal status of gas development (e.g. royalty, share of production, those rights or interests under domestic law? taxes)?

The State’s mineral rights to develop oil and gas reserves are The Federal Government derives value from oil and natural gas transferred through the statutory instruments of Oil Exploration development through its receipt of taxes, royalties, depot fees and its Licences (OELs), Oil Prospecting Licences (OPLs), and Oil Mining share (as an exploration and production partner in PSCs) in eventual Licences (OMLs) by the Minister of Petroleum Resources through profits. The Government also earns revenue from penalties charged the DPR. Under statutory provisions, OEL holders do not have for gas flaring. any exclusive rights over the area of the granted licence. Equally Royalty rates are typically set as a percentage of value of the oil important to note is that the grant of an OEL over a particular area produced and the size of the licensed area of production. Royalty does not preclude the grant of another OEL or an OPL or an OML rates for oil production range from 0% in deep offshore areas to over the same area. 20% in offshore areas. Royalty rates for gas production range from The aforementioned licences are held by companies under the 5% for operations in offshore areas to 7% for operations in onshore agreement and operating structure of a Production Sharing areas. Contract (PSCs) with the NNPC. PSCs were introduced in 1993 The relevant range of tax rates for exploration and production as a response to the ineffective Joint Venture Agreement (JVA) companies is 65.75% to 85%. regime which was fraught with poor funding and the inability of the Chargeable rents on the different licences are: Nigerian Government party to meet its cash call obligations. The 1. $10 per square mile for OPL holders. PSCs are governed under the provisions of the Deep Offshore and Basin Production Sharing Contracts Act. Beyond the contracts, the 2. $20 per square km for OML holders for the first 10 years. act also spells out provisions for the determination of profits tax, 3. $15 per square km after the first 10 years of an OML licence. investment tax credits and tax allowances. Oil and gas companies alike are subject to a development levy set at 3% of their annual budgets. This tax is payable to the Niger-Delta 3.3 If different authorisations are issued in respect of Development Commission. different stages of development (e.g., exploration An Education Tax of 2% is also levied on the assessable profits of appraisal or production arrangements), please specify oil and gas companies. those authorisations and briefly summarise the most important (standard) terms (such as term/duration, scope of rights, expenditure obligations). 3.6 Are there any restrictions on the export of production? An OEL is usually granted to oil companies to explore for petroleum over a specified area spelt out in the licence. The licence does not Gas-producing companies in Nigeria are mandated by the Domestic confer any exclusive rights over the licensed area and does not Supply Obligation (DSO) regime, under the National Domestic Gas preclude the grant of another oil exploration or mining licence over Supply and Pricing Regulations (2008), to fulfil a domestic supply the same area. The licence terminates on 31 December following quota before exporting the remainder of their production output. the date the licence was granted but has the option of renewal for an There are no known restrictions on the exportation of crude oil. extra year regardless. However, exporters require a petroleum products export clearance An OPL is equally granted to the holder for a period not exceeding permit pursuant to certain guidelines and laid down procedures. five years. Upon successful prospecting, an OML may be granted to a holder who has satisfied all the conditions imposed on the licence 3.7 Are there any currency exchange restrictions, or and discovered oil in commercial quantities. The OML is valid for restrictions on the transfer of funds derived from a period not exceeding 20 years but can be renewed upon expiration. production out of the jurisdiction? However, OPLs and OMLs for exploration and production activities in Deep Offshore Areas and Inland Basins have a duration between The Pre-Shipment of Inspection of Exports Act and The Foreign five and 10 years. Exchange (Monitoring and Miscellaneous Provisions) Act mandates

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all exporters, including petroleum producers, to open, maintain and Environmental Impact Assessment report that details the project’s operate a foreign currency domiciliary account in Nigeria where potential environmental impact and the company’s plan for export proceeds from sold crude oil will be paid into. prevention and mitigation. These reports are usually sent to and The Nigerian Oil and Gas Industry Content Development Act approved by the FMoE. equally mandates oil exploration and production companies to Oil companies are also required by the Environmental Guidelines maintain a domiciliary account in Nigeria where at least 10% of and Standards for the Petroleum Industry in Nigeria to produce their income from their Nigerian operations will be retained. Environmental Impact Assessment reports for the approval and A bill seeking to repeal the current Foreign Exchange Act has passed authorisation of the DPR. second reading in Nigeria’s House of Representatives. If passed Production and exploration activities also require permits for all point

Nigeria into the law, it will require oil companies to repatriate the proceeds sources (existing and new) of effluent discharges (air, water and solid). of their exports within a specified period of time and under spelt-out conditions as determined by the Central Bank of Nigeria (CBN). 3.12 Is there any legislation or framework relating to the abandonment or decommissioning of physical 3.8 What restrictions (if any) apply to the transfer or structures used in oil and natural gas development? If disposal of oil and natural gas development rights or so, what are the principal features/requirements of the interests? legislation?

Without the prior consent of the Minister of Petroleum Resources, The Petroleum Act and the Oil Pipelines Act make provisions for the no holder of an OPL or OML can transfer or assign their licence to abandonment and decommissioning of existing wells. a new holder. The decommissioning of oil and gas facilities and pipelines is Also, a licensee cannot transfer OPL or OML to a foreign company, regulated by the following: the company has to be incorporated in Nigeria or have Nigerians as ■ The Petroleum (Drilling & Production) Regulations. majority shareholders and also seek consent of the Minister. ■ The Oil and Gas Pipelines Regulations. ■ Individual PSCs. 3.9 Are participants obliged to provide any security Abandonment is regulated by the Petroleum (Drilling & Production) or guarantees in relation to oil and natural gas Regulations. The plugging or abandonment of a well may only be development? done with the written permission of the Director of the DPR. The Director of the DPR may direct that no borehole or well may be Oil companies looking to explore and develop in Nigerian fields plugged, or no work may be executed, except in the presence of an are usually required to provide evidence of their financial status and officer of the Minister of Mines, Power and Steel. An abandoned technical competence. They are also required to provide evidence borehole or well may only be re-drilled with the written permission of their ability to market any petroleum produced and details of their of the Director of the DPR. annual expenditure which they are prepared to make on the licensed The holder of the OPL or OML is primarily responsible for all areas. decommissioning costs. Under PSCs, the PSC contractor is required to provide a letter of credit or bank guarantee as security 3.10 Can rights to develop oil and natural gas reserves for pre-estimated decommissioning costs. Alternatively, the PSC granted to a participant be pledged for security, or contractor may be required to set aside a decommissioning fund in booked for accounting purposes under domestic law? an interest-bearing escrow account.

The pledging of OMLs and OPLs as security for a loan would 3.13 Is there any legislation or framework relating to traditionally fall under the definition of transactions that may gas storage? If so, what are the principal features/ require consent from the Minister of Petroleum Resources. There requirements of the legislation? are no accounting or financial reporting restrictions in booking these licences. The Petroleum Act, the Oil Pipelines Act and the Environmental Impact Assessment Act are the key pieces of legislation that govern 3.11 In addition to those rights/authorisations required gas storage activities in Nigeria. The provisions of these laws are to explore for and produce oil and natural gas, what administered by the Federal Ministry of Petroleum Resources, the other principal Government authorisations are DPR, and the FMoE. required to develop oil and natural gas reserves (e.g. environmental, occupational health and safety) and The DPR provides licensing for the construction and operation of from whom are these authorisations to be obtained? natural gas storage facilities. In addition to an application for a storage permit, an Environmental Impact Assessment would have to The Nigerian Oil and Gas Industry Content Development Act 2010 be carried out and the FMoE has to issue an Environmental Impact (the Local Content Act) require companies bidding for licences to Assessment report. submit a Nigerian Content Plan for their Nigerian operations. This plan is mandated by law to make a number of spelt-out provisions 3.14 Are there any laws or regulations that deal specifically that ensure first consideration will be provided to goods and services with the exploration and production of unconventional provided by Nigerian companies and Nigerian talent will be given oil and gas resources? If so, what are their key first consideration for training and employment by the oil company features? in question. The plan is usually approved and authorised by the Nigerian Content Development and Monitoring Board (NCDMB). The Petroleum (Drilling and Production) Regulations require The Environmental Impact Assessment Act requires companies operators to use approved methods and practices acceptable to involved in projects that might impact the environment to draft an the DPR. However, the regulations only make provision for

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conventional drilling via the oil-well method. As such, there are no laws/regulations bespoke to unconventional methods and 6 Transportation resources. In practice, there has been no reported activity in shale oil exploration. 6.1 Outline broadly the ownership, organisational and regulatory framework in relation to transportation pipelines and associated infrastructure (such as 4 Import / Export of Natural Gas (including natural gas processing and storage facilities). LNG) The pipelines, infrastructure and gas processing facilities are owned by the NGC, the NNPC and other individuals in the upstream

4.1 Outline any regulatory requirements, or specific Nigeria sectors. terms, limitations or rules applying in respect of cross-border sales or deliveries of natural gas The flexible deployment of gas to domestic and export markets (including LNG). is strictly overseen by the Nigerian NGP. The NGP is currently discussing a new National Gas Infrastructure Blueprint proposed to Under the National Gas Supply and Pricing Regulations, gas cover the new gas transportation links, alternative gas transportation producers are required to submit a gas production and supply plan to options and infrastructure. The updated blueprint, when made the Department of Gas Resources, a unit under the Federal Ministry available to the public, will identify resources, resource clusters, of Petroleum Resources. This requirement is covered under their critical infrastructures, prioritise developments and demarcate the Domestic Gas Supply Obligation tasking them with dedicating a layout for transportation by road, rail and barge. specific volume of gas towards the domestic market (as spelt out In terms of the regulatory framework on natural gas transportation, by the Domestic Gas Demand Requirement). Gas companies the Oil Pipelines Act regulates the construction, operation and could be stopped from exporting gas in the event of refusal or non- maintenance of gas pipelines and associated infrastructure and the compliance. Petroleum Act. These laws are implemented by the DPR. Beyond the aforementioned requirements, there are no specific laws for cross-border sales or deliveries of natural gas. As such, buyer- 6.2 What governmental authorisations (including seller transactions are usually governed by contracts just like any any applicable environmental authorisations) are other international commercial transaction. required to construct and operate oil and natural gas transportation pipelines and associated infrastructure? 5 Import / Export of Oil The Governmental authorisation required for the construction and 5.1 Outline any regulatory requirements, or specific operation of oil and natural gas transportation is the acquisition terms, limitations or rules applying in respect of a permit survey issued by the DPR for a proposed gas pipeline of cross-border sales or deliveries of oil and oil and an OPL. This requirement is enshrined in S.3 of the Pipelines products. Act (2004). The oil pipeline licence gives the holder the right to construct, maintain and operate a gas pipeline. It also entitles The Oil Terminal Dues Act provides for the levying and payment the owner the right to construct, maintain, operate and manage of terminal dues on ships evacuating crude oil from terminals. It installations that are ancillary to the construction, maintenance and also provides restrictions against the installation and operation of oil operation of said pipeline, i.e. pumping stations, storage tanks and terminals without a licence and the express approval of the Minister loading terminal. of Petroleum Resources. Further to the above, S.3 of the Petroleum Act stipulates that before The Oil in Navigable Waters Act is the legislation implementing the any individual or company can operate gas-processing facilities, International Convention for the Prevention of Pollution of the Sea they must have acquired a licence to construct and operate a refinery by Oil in Nigeria’s navigable waters. It provides for prevention and from the DPR. compliance and outlines penalties for non-compliance. Key aspects Equally required is the acquisition of an approved Environmental include equipment in ships to prevent oil pollution, record keeping Impact Assessment by the FMoE for the construction and operation of matters related to oil and restrictions on the transfer of oil from of any natural gas transportation and storage facilities. vessels.

Oil exporters are also required to have an export permit issued by 6.3 In general, how does an entity obtain the necessary the Federal Ministry of Petroleum Resources, through the DPR and land (or other) rights to construct oil and natural gas the Federal Ministry of Trade and Investment. transportation pipelines or associated infrastructure? The Pre-Shipment Inspection of Exports Act requires goods to be Do Government authorities have any powers of compulsory acquisition to facilitate land access? inspected and a Clean Certificate of Inspection issued to the overseas buyer of the goods before they can be exported. Under the provisions of S.21 of the Petroleum Act, the right to use Oil exporters will also require export permits issued by the land for the purpose of a gas pipeline is included in the grant of an NNPC, through the DPR and the Federal Ministry of Trade and OPL. This licence confers on the holder the right to enter upon Investment. the land, take possession of, or use a strip of land of such width as specified in the licence upon the route specified in the licence.

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In relation to the Government’s right to acquire land, S.28 of the points. However, the NGC has fixed the tariff for the transportation Land Use Act dictates the utilisation of any identified land for of gas to boost the power sector and domestic utilisation of gas. the construction of gas pipelines as an act which overrides public interest for which the Government may compulsorily acquire the same subject to the payment of compensation to the owner or 7 Gas Transmission / Distribution occupier of the land. 7.1 Outline broadly the ownership, organisational and 6.4 How is access to oil and natural gas transportation regulatory framework in relation to the natural gas pipelines and associated infrastructure organised? transmission/distribution network. Nigeria Under the Oil Pipelines Act (2004), access to oil and natural gas The NGC operates and owns the main gas pipelines transmission in transportation pipelines and their associated infrastructure is made Nigeria. This includes the Escraavos-Lagos pipeline system (ELPS) by an application to the Minister of Petroleum Resources. The also known as the Western network and the Alikiri-obigbo-Ikot Minister is charged with considering and deliberating with other Abasi Pipeline also known as the Eastern Network. The NGC has applicants and interested parties before granting the application. granted distribution licences to local distribution companies such as The Minister only grants this application after ascertaining that the Gasoline Nigeria Limited. The NGC also exports natural gas to the pipeline would conveniently transport and convey the substance West African region through the WAGP. dictated by the applicant. The interested parties equally reach an In 2016, the NGC was split into two for effective participation in agreement as to the obligations of each party in relation to the access the emerging gas market. They are, the Nigerian Gas Processing to be granted. and Transmission Company (NGPTC), which is responsible for the construction and enlargment in the capacity of the Escravos- Lagos pipeline, the construction of the Obiafu-obrikom-oben (OB3) 6.5 To what degree are oil and natural gas transportation pipelines integrated or interconnected, and how is co- gas pipeline and the investment decision regarding the Ajaokuta- operation between different transportation systems Kano-Kaduna gas pipeline project. The Nigerian Gas Marketing established and regulated? Company (NGMC) is responsible for marketing gas molecules. The NLNG owns the other transmission pipelines. There is currently no integration or interconnection between the The Nigerian Government, on 28 June 2017, approved the National different systems of oil and natural gas transportation in Nigeria. Gas Policy. The NGP is a fundamental review of the policy stance However, it is presumed that after the implementation of the of the Government for over a decade in respect of Nigeria’s gas gas infrastructure blueprint, the transportation pipelines will be resources. It particularly addresses the defect of the 2008 GMP in interconnected. For now, the internal pipelines transportation attracting private sector investment for building and developing a systems are keenly regulated by the DPR and the Federal Ministry mature domestic gas market by the target year of 2015, coupled with of Industry, Trade and Investment. the Government’s resolves of achieving its policy goals for the gas sector under the Minister of Petroleum Resources. 6.6 Outline any third-party access regime/rights in respect of oil and natural gas transportation and 7.2 What governmental authorisations (including any associated infrastructure. For example, can the applicable environmental authorisations) are required regulator or a new customer wishing to transport to operate a distribution network? oil or natural gas compel or require the operator/ owner of an oil or natural gas transportation pipeline or associated infrastructure to grant capacity or The Minister of Petroleum Resources acting through the DPR is expand its facilities in order to accommodate the new responsible for determining the policies governing the production, customer? If so, how are the costs (including costs distribution, transmission and supply of natural gas. The Department of interconnection, capacity reservation or facility of Gas (created by the Minister of Petroleum Resources) regulates expansions) allocated? the supply of gas to the domestic market while the FMoE has environmental responsibility over the production, transmission, S.18 of the Oil Pipelines Act provides for the grant of third-party distribution and supply of natural gas. access rights subject to the approval of the Petroleum Minister. The party seeking said access has to make an application to the Minister 7.3 How is access to the natural gas distribution network in respect to the licence granted to another person. The Minister organised? is required to consider the application and consult with the parties before approving the application. S.18 of the Oil Pipelines Act stipulates how to obtain access to The parties are meant to agree to terms and conditions for the natural gas distribution network by making an application to the effective usage of the pipelines failing which the Minister would Minister of Petroleum Resources for a right to access the distribution determine same. network constructed, maintained or owned by another person. The Minister considers both applications before granting an approval. 6.7 Are parties free to agree the terms upon which oil or natural gas is to be transported or are the terms 7.4 Can the regulator require a distributor to grant (including costs/tariffs which may be charged) capacity or expand its system in order to regulated? accommodate new customers?

Parties are free to determine the terms upon which natural gas is There is no legal or regulatory framework that gives the regulator a to be transported. Parties usually enter into a Gas Transportation right to compel a distributor to grant capacity or expand its system Agreement (GTA). The GTA may include tariffs, terms, and delivery in order to accommodate new customers. The Minister can only

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grant access according to the terms and conditions determined by the parties. 9 Liquefied Natural Gas

7.5 What fees are charged for accessing the distribution 9.1 Outline broadly the ownership, organisational and network, and are these fees regulated? regulatory framework in relation to LNG facilities.

The fees charged for accessing the distribution network are based on The NLNG is the only company that produces LNG in Nigeria. It is the terms and conditions of the agreement between the parties. The owned jointly by the NNPC, Shell Gas, Total Liquefied Natural Gas Minister may determine the fees if the parties fail to reach an agreement and Eni International in the following proportions – 49%, 25.6%, 15% and 10.4% respectively. subject to the overall taxation regulation of the oil and gas sector. Nigeria It owns a dedicated gas transmission system and liquefaction facility and a fleet of LNG vessels through a subsidiary company. Other 7.6 Are there any restrictions or limitations in relation to acquiring an interest in a gas utility, or the transfer proposed LNG projects include the Brass LNG and the Olokola of assets forming part of the distribution network LNG projects. (whether directly or indirectly)? The NLNG’s activities are regulated under the Petroleum Act and its subsidiary regulations, which include petroleum refining regulations. There are no restrictions or limitations directly or indirectly affecting LNG export is regulated by the Nigerian Ports Authority Act, Oil the acquisition of interest in gas utility or the transfer of assets that Terminals Act, Foreign Exchange (Monitoring & Miscellaneous form part of a distribution network. The consent of the Minister is Provisions) Act, Customs and Excise Act and Foreign Exchange only needed where there is a change of ownership or control or the Manual. interests relate to acquisition. The approval of the Securities and Exchange Commission (SEC) may be required depending on the 9.2 What governmental authorisations are required to value of the transaction. construct and operate LNG facilities?

8 Natural Gas Trading Environmental Impact Assessment is compulsory for the construction and operation of LNG facilities. This is issued by the FMoE. 8.1 Outline broadly the ownership, organisational and The licence to construct and operate an LNG plant is issued by regulatory framework in relation to natural gas trading. Please include details of current major the Minister upon recommendation by the DPR. Approval for initiatives or policies of the Government or regulator plant design specifications, purpose and location is granted by the (if any) relating to natural gas trading. Minister upon recommendation by the DPR. Equally, a licence to store LNG on site ought to be obtained from the Minister. The natural gas trading framework is run by the NGC due to its The DPR issues a permit/licence to survey gas and construct and ownership of the transmission infrastructure. It acts as a gas operate pipeline routes under the Oil Pipelines Act. However, a merchant in Nigeria. The NGC formed distribution zones and licence to establish an oil terminal site is issued by the Minister of grants franchises to private companies for the distribution of gas Petroleum Resources. Industrial waste discharge/disposal permits within the local distribution zones. are also issued by the DPR. In accordance with the National Domestic Gas Supply and Upon completion, the applicant shall submit an application and fees Pricing Regulation, local supply of gas is coordinated by the Gas for the application to the DPR informing the Minister of Mechanical Aggregation Company of Nigeria Limited. The Department of Gas Completion and requesting an inspection. An inspection of the allots a domestic gas supply commitment to persons licensed to completed plant will be conducted by a team of DPR officials. produce petroleum and directs them to make an explicit volume of gas available to the Nigerian Domestic Market. 9.3 Is there any regulation of the price or terms of service A purchaser is required to apply to the strategic appreciator for the in the LNG sector? purchase of gas. The strategic aggregator is required to conduct due diligence on the purchaser and if satisfied, will issue a Gas Purchase There is no regulation of price and terms of service in the sector. Order (GPO) to the purchaser. The GPO will specify to the supplier They are subject to contractual terms and international market the required gas, quantity, price, delivery schedule and revenue due forces. to the gas supplier.

9.4 Outline any third-party access regime/rights in 8.2 What range of natural gas commodities can be respect of LNG facilities. traded? For example, can only “bundled” products (i.e., the natural gas commodity and the distribution S.18 of the Oil Pipelines Act provides that any third party seeking thereof) be traded? access to an oil and natural gas transportation and other associated infrastructure must make an application to the Minister in respect of Natural gas commodities are mostly sold to customers as bundled the licence granted to another party. The Minister is equally expected products. However, the NGP has a framework for the unbundling of to discuss with both parties and if satisfied that the substance which natural gas trade. The NGP states that regulations will be issued to the third party intends to transport can be conveniently transported, separate supply, transmission, distribution, pipeline ownership and the application will then be granted. network operation activities.

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10 Downstream Oil 11.2 To what criteria does the regulator have regard in determining whether conduct is anti-competitive?

10.1 Outline broadly the regulatory framework in relation to the downstream oil sector. Subject to the FCC bill being passed, S.60 and 109 deal with criteria that will amount to anti-competitive conduct. The most applicable to oil and gas sector is that any agreement among undertakings or Petroleum is imported into Nigeria through prescribed ports a decision of an association of undertakings that has the purpose upon obtaining a waiver from the Director of Customs. Under of actual or likely effect of preventing, restricting or distorting the provisions of the Petroleum Act and Downstream Petroleum competition in any market shall be unlawful. Regulations, an application must be made to the Director of Nigeria Customs stipulating the quantity and kind of petroleum to be imported before a waiver is granted. Equally, the transportation of 11.3 What power or authority does the regulator have to petroleum products within Nigeria is regulated by the Petroleum Act preclude or take action in relation to anti-competitive and Regulations which prohibit the transportation of bulk petroleum practices? without a licence. Additionally, the DPR regulates the importation of refined Subject to the passing of the FCC bill, the Competition and Consumer petroleum products through its Guidelines for the Importation of Protection Commission will be created and will have the power to Petroleum Products into Nigeria, which makes it mandatory for prohibit the making or carrying out of an agreement and declare anyone wishing to engage in the business of importation of refined any business practice as abuse of a dominant position of market petroleum products to obtain an import permit. Further, all facilities power and prohibits the dominance of market. Any grievance will for the storage of imported petroleum products must be inspected by be resolved at the Competition and Consumer Protection Tribunal. the DPR prior to licensing. The facilities must meet the specification for the storage of classes of petroleum products. 11.4 Does the regulator (or any other Government The PPPRA is responsible for determining the prices at which authority) have the power to approve/disapprove petroleum products would be sold. In setting the prices of mergers or other changes in control over businesses in the oil and natural gas sector, or proposed petroleum products, the PPPRA adopts a products pricing template acquisitions of development assets, transportation or (daily and monthly) which is a pricing information sheet detailing associated infrastructure or distribution assets? If so, the components used in deriving the PPPRA daily/monthly guiding what criteria and procedures are applied? How long products prices. The key components considered by the PPPRA does it typically take to obtain a decision approving or include the import parity principle, landing cost of petroleum disapproving the transaction? products, the margins for the marketers, dealers, and transporters, jetty-depot through-put and other charges and taxes. S.118 of the ISA gives the SEC the responsibility of regulating, reviewing and approving mergers and acquisitions. The SEC has specific guidelines and rules to be followed to ensure that the 10.2 Outline broadly the ownership, organisation and regulatory framework in relation to oil trading. public and national economy are protected against monopolies. These guidelines apply to every sector including the natural gas sector. However, if the merger is a small merger (defined as N500 The JVA or the Profit Sharing Agreement (PSA) entered into by million and below) then the SEC does not need prior notification the operators is what determines the oil trading framework. These before the merger takes place, but SEC requires notification after agreements specify the valuation, lifting, allocation and marketing the completion of the merger within six months of completion. of crude oil produced from a licensed area. The NNPC crude oil Mergers larger than a small merger threshold require the approval entitlement involves bids for crude oil sale and purchase term of the SEC. The SEC is to approve or disprove the merger within contracts by consumers. 20 working days or can extend the period for consideration of the merger by an extra 40 days. 11 Competition In addition, the approval of the Minister will be required where any mergers or changes in control result in the direct or indirect assignment of an OPL or OML and such approval may take a period 11.1 Which governmental authority or authorities are of two weeks to six months. responsible for the regulation of competition aspects, or anti-competitive practices, in the oil and natural gas sector? 12 Foreign Investment and International Obligations There is no specific competition law for the oil and gas industry. Nigeria is yet to have a general law on competition due to monopolisation of certain commercial industries such as electricity, 12.1 Are there any special requirements or limitations on petroleum, etc. by the Government. However, recent privatisation of acquisitions of interests in the natural gas sector these industries has prompted the Federal Competition Commission (whether development, transportation or associated Bill (FCC) which is pending before the Senate. infrastructure, distribution or other) by foreign companies? Presently, the SEC is empowered by the Investment and Securities Act (ISA) to regulate mergers & acquisitions and takeovers to curtail Foreign companies who wish to acquire interests in the natural proposed transactions which might prevent or lessen competition in gas sector must incorporate a subsidiary company in Nigeria. the market. In addition, companies with foreign participation must have a minimum authorised share capital of N10 million Naira and must obtain a Certificate of Capital Importation of $300,000 in cash or

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money’s worth. The investment must be approved by the Minister of Petroleum Resources if it relates to upstream assets. If the 13.3 Is there any special difficulty (whether as a matter acquisition or investment would be quoted on the Stock Exchange, of law or practice) in litigating, or seeking to enforce judgments or awards, against Government authorities it must have prior approval by SEC. or State organs (including any immunity)?

12.2 To what extent is regulatory policy in respect of the POPA prohibits the institution of any court action against a public oil and natural gas sector influenced or affected officer or department after a period of three months of the act or by international treaties or other multinational omission complained of. However, there are some exemptions arrangements? which include continuance of damage or injury, cases of recovery

of land, breaches of contract, claims for works and labour done and Nigeria Regulatory policies in Nigeria are only influenced or affected by where the officer acted outside his statutory powers or duties. international treaties or multinational arrangements if they are The Nigeria National Petroleum Corporation Act requires a pre- passed and adopted into law in Nigeria by the National Assembly. action notice of at least one month before commencing a suit. All suits must be instituted within 12 months of the default, neglect or 13 Dispute Resolution act complained of. Also, no execution or attachment or judgment can be executed against the property of the corporation but money judgments can be awarded against the corporation. 13.1 Provide a brief overview of compulsory dispute resolution procedures (statutory or otherwise) applying to the oil and natural gas sector (if any), 13.4 Have there been instances in the oil and natural gas including procedures applying in the context of sector when foreign corporations have successfully disputes between the applicable Government obtained judgments or awards against Government authority/regulator and: participants in relation to oil authorities or State organs pursuant to litigation and natural gas development; transportation pipeline before domestic courts? and associated infrastructure owners or users in relation to the transportation, processing or storage In the case of Niger Delta Development Commission (NDDC) v of natural gas; downstream oil infrastructure owners Nigeria Liquefied Natural Gas Limited (NLNG (which 51% is or users; and distribution network owners or users in relation to the distribution/transmission of natural gas. owned by foreign companies)) (2010), the NDDC held that NLNG, as a gas-producing company operating in the Niger Delta Area, is liable to contribute 3% of its annual budget to the NDDC statutory According to the Nigerian Constitution and the Public Officers fund. The trial court found that the Niger Delta Development Protection Act (POPA), any claim against a public officer or Commission Act and the Nigeria Liquefied Natural Gas Act were in department can only be instituted within three months of the act or conflict but they are private special acts giving special interests and omission complained of; therefore, any suit against the Minister of cannot be enforced against each other. The Court of Appeal also Petroleum or any related gas and oil Government officer must be held in favour of NLNG. instituted within three months. In a similar case between the Nigeria Liquefied Natural Gas S.11 of the Petroleum Act stipulates that all disputes or questions Limited (NLNG) v Nigerian Maritime Administration and Safety that may arise in connection with licences or lease between the Agency (NIMASA), NIMASA held that NLNG had to pay 3% gross Minister and Licensee or lessee including payments of fees, rents freight for all of their international inbound and outbound cargo or royalty are to be resolved in accordance with the applicable goods and other levies related to shipment of goods. However, the arbitration laws. The applicable arbitration law is the Arbitration Federal High Court held that NLNG was not liable to any of the and Conciliation Act, therefore all matters are to be resolved using fees and told NIMASA to refund any payments made by NLNG. the Arbitration and Conciliation Act except for disputes which are excluded from arbitration. Disputes arising from a domestic gas sale and purchase transaction 14 Updates are to be referred to the Department of Gas for resolution.

14.1 Please provide, in no more than 300 words, a 13.2 Is your jurisdiction a signatory to, and has it duly summary of any new cases, trends and developments ratified into domestic legislation: the New York in Oil and Gas Regulation Law in your jurisdiction. Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and/or the Convention on The Petroleum Industry Bill (PIB) was introduced to reform the oil the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID”)? and gas industry; however, after several failed attempts over the last decade to pass the PIB due to political interests, the PIB was The New York Convention on the Recognition and Enforcement of redrafted and split into several parts; these are: Foreign Arbitral Awards was ratified by Nigeria on 17 March 1970 1. The Petroleum Industry Governance Bill which deals with and was adopted into the Second Schedule of the Arbitration and the governance and institutional framework of the Nigerian petroleum industry. The National Petroleum Regulatory Conciliation Act of Nigeria. Commission (NPRC) (which replaces the current DPR, the Nigeria became a signatory to the ICSID Convention on 13 June Petroleum Inspectorate and the PPPRA) shall be responsible 1965 and has adopted the Convention in the International Centre for for regulating the entire industry. Its regulatory functions, Settlement of Investment Disputes (Enforcement of Awards) Act 2004. which cut across the downstream, midstream and upstream sectors. The Nigerian Petroleum Company (NPC) shall be incorporated as a company limited by shares within six months from the date of passage of the Bill into an Act.

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The NPC shall be responsible for all assets currently being communities, in terms of economic benefits, restitution managed by the NNPC other than those under PSCs and the for environmental and social costs of resource extraction back-in-right provisions. activities and to improve peaceful co-existence of host 2. The Petroleum Fiscal Framework Bill 2018 regulates the communities and investors in the petroleum production. imposition and collection and taxes, royalties and rent in the oil and gas industry. Acknowledgment 3. The Petroleum Industry Administration Bill 2018 administers the issuance and revocation of licences, permits The authors would like to thank other people that worked on this for exploration, production and operations in the upstream, contribution: Oluwasimisola Salau; Abia Essien; and Khadija midstream and downstream oil and gas industry. Bala. Nigeria 4. The Petroleum Host Impacted Communities Bill 2018 aims to establish the rights and opportunities for host

Dr. Jennifer Douglas-Abubakar Fatimah Dattijo Muhammad Miyetti Law Miyetti Law 1 Nwaora Close, Off Gana Street 1 Nwaora Close, Off Gana Street Maitama, FCT Abuja Maitama, FCT Abuja Nigeria Nigeria

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Jennifer Douglas-Abubakar is the Managing Partner at Miyetti Law Fatimah Dattijo Muhammad leads the Core and Transactions team in Nigeria. Her practice focuses on corporate financing transactions at Miyetti Law. She is a versatile lawyer with areas of expertise in and transnational asset recovery. Jennifer provides strategic counsel corporate transactions, Government relations, asset tracing and debt and general advisory to Governments and domestic and international recovery. She has a keen interest in alternative dispute resolution, corporations navigating the regulatory environment in Nigeria. Jennifer international humanitarian law and energy law practice. is also the Editor-in-Chief of the Miyetti Quarterly Law Review.

Miyetti Law is a boutique law firm providing representation to individuals and organisations worldwide. With over a decade of collective experience, our lawyers provide representation to foreign and local business organisations in corporate, energy, financial and other related sectors. Our team of lawyers and legal specialists approach complex legal problems using expert knowledge of the current domestic legal environment and international resources. At Miyetti Law, our lawyers have real-world business experience and are ready to work with individuals and organisations to ensure that the legal advisory provided helps clients meet their short-term objectives and long-term goals. Miyetti Law adopts an inventive approach to handling different clients’ issues via a multi-disciplinary approach to legal advisory, this approach incorporates solutions from the legal field and public policy, business sector and expert partnerships to mention a few. We provide customised solutions in the areas of corporate services and complex corporate litigation, international law, private client and government relations.

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Norway Bjørn-Erik Leerberg

Advokatfirmaet Simonsen Vogt Wiig AS Frode Vareberg

reservoir pressure and reduce emissions. Natural gas not sold or 1 Overview of Natural Gas Sector used for production purposes is reinjected. All natural gas is sold by the Licensees on an individual basis. Joint 1.1 A brief outline of your jurisdiction’s natural gas sales of volumes by the operator on behalf of Licensees is quite sector, including a general description of: natural uncommon. Equinor ASA (former Statoil ASA) markets and sells gas reserves; natural gas production including the State’s direct financial interest (SDFI) production. In aggregate, the extent to which production is associated or Equinor markets and sells about 80% of the total NCS production. non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) Natural gas offtake is almost entirely routed through the NCS liquefaction and export facilities, and/or receiving and pipeline system known as Gassled and exported. The total capacity re-gasification facilities (“LNG facilities”); natural gas of Gassled is about 120 Bcm per year. Three intermediate processing pipeline transportation and distribution/transmission terminals onshore in Norway are part of the upstream offtake system network; natural gas storage; and commodity sales for natural gas: Nyhamna, Sture and Kårstø. Six ultimate receiving and trading. terminals, also an integral part of the Norwegian production system that includes Gassled, are located onshore in Germany, Belgium, Norway has abundant natural gas resources located in the seabed of France and the UK. the Norwegian continental shelf (NCS). All resources discovered to date and expected to be discovered, are located on the NCS. The Norway has only one large-scale LNG production project, Snøhvit Norwegian Petroleum Directorate’s (NPD) base estimate for total located onshore at Melkøya in Northern Norway. Liquefaction is proven and unproven petroleum resources is about 15.6 billion still limited to a single train, exporting some 3.8 million tons (6.1 standard cubic metres (Bcm) of oil equivalents. Of the total, 7.1 Bcm) of LNG annually. In addition, there are some small-scale billion standard cubic metres (Bcm) oil equivalent (o.e.), or 45%, LNG facilities located in the south west of the country serving the have been produced and sold. The remaining petroleum resources local market. are expected to total 8.5 Bcm o.e. Except for some minor LNG storage, there are no onshore natural Remaining recoverable natural gas reserves are estimated by the gas storage facilities in Norway. Natural gas is regularly reinjected NPD to be 4.209 bcm o.e. Norway is among the world’s largest in the production field reservoirs for pressure maintenance and natural gas exporters and ships most of the natural gas produced temporary storage. Such reinjection forms a core component of the through export pipelines to the European market. Norwegian resource management philosophy and central part of systematic IOR/EOR activities. A total of 236.1 million standard cubic metres (Mcm) o.e. of marketable petroleum was produced (see the NPD webpage: www. norskpetroleum.no/en/calculator/about-energy-calculator/). Total 1.2 To what extent are your jurisdiction’s energy natural gas production in 2017 was 122 Mcm o.e. requirements met using natural gas (including LNG)? Norwegian natural gas maintained its European market share in 2017. Norwegian natural gas supply represents approx. 25% of the Around 1.5% of annual NCS natural gas production is delivered for EU’s natural gas demand (including LNG). The ability to maintain domestic market use. and even increase production rates, and a readily available and Traditionally, oil and natural gas is consumed for offshore efficient gas transportation system combined with a predictable production. Considerable political pressure has mounted to supply long-term Government petroleum policy have all contributed to the new offshore developments with electricity generated from onshore continued attractiveness of Norwegian natural gas. hydro power plants and lately from windfarms. Remaining undiscovered natural gas reserves are expected to be Norway has abundant hydropower resources, and has substantial located in virgin areas of the NCS with limited or no infrastructure electricity generating, transmission and distribution capacity. in place, particularly in the Norwegian Sea or in the Barents Sea. Hydropower continues to meet most of Norway’s energy needs, Major new discoveries have to be made if additional natural gas particularly in sectors other than transportation. export facilities are to be established in these areas. Natural gas (LNG) is increasingly used for urban area mass Norway produces both associated and non-associated natural gas communication, coastal shipping and offshore supply. and has a very strict flaring/venting policy in order to maintain

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there has been a slight yearly production increase. The value of 1.3 To what extent are your jurisdiction’s natural gas Norwegian oil exports peaked in 2006 at 442 billion NOK. Since requirements met through domestic natural gas then, it has fluctuated and in 2017 it was 229 billion NOK. The NPD production? reports that about 73 Mcm (an average of 1.25 Mb/d o.e. per day) of crude oil was exported directly in 2017. A total of 19 Mcm (an All of Norway’s natural gas requirements may be met by NCS average of 0.3 million b/d o.e.) was delivered to Norwegian onshore natural gas production. intermediate facilities, predominantly for further export.

1.4 To what extent is your jurisdiction’s natural gas production exported (pipeline or LNG)? 3 Development of Oil and Natural Gas Norway

In 2017, 121.9 Bcm of NCS natural gas production was exported 3.1 Outline broadly the legal/statutory and organisational (comparable with 113.5 Bcm in 2016). Most natural gas volumes framework for the exploration and production were delivered to the European market. The largest volumes (“development”) of oil and natural gas reserves continued to be delivered to Germany, the UK, Belgium and France. including: principal legislation; in whom the State’s Norwegian natural gas volumes account for about 25% of total mineral rights to oil and natural gas are vested; European natural gas consumption. Government authority or authorities responsible for the regulation of oil and natural gas development; and The main volumes of NCS natural gas exported (first landed) in current major initiatives or policies of the Government 2017 were: Germany (47.5 Bcm); United Kingdom (35 Bcm); (if any) in relation to oil and natural gas development. France (17.8 Bcm); Belgium (15.5 Bcm); and Denmark (0.4 Bcm). LNG accounts for 5.5 Bcm of natural gas exports. The rights to petroleum resources in the ground are vested in the State. 2 Overview of Oil Sector The upstream sector is thoroughly regulated. The Government extends exclusive and regulated rights to commercial entities by way of administrative law-based decisions and not through contracts. 2.1 Please provide a brief outline of your jurisdiction’s oil Only the State may conduct petroleum activities without a specific sector. Licence and the appropriate appurtenant permits, approvals and consents pursuant to applicable law. Petroleum activities conducted For years, Norway has been a major European oil producer and by the State are nevertheless subject to all other mandatory exporter, with Western Europe’s largest estimated reserves. Remaining regulatory requirements. The petroleum policy and legal framework recoverable reserves were estimated by the NPD at the end of 2017 to is focused on optimal resource management, rendering long-term be 4.175 Bcm o.e. (3.869 bcm is crude oil). Remaining virgin areas on benefits for society as a whole, avoiding, limiting and mitigating the NCS are believed to contain predominantly natural gas. negative effects to persons, property and the environment while Total liquid production (crude oil, NGL and condensates) in 2017 was ensuring that the resource rent remains with the resource owner. 114.3 Mcm o.e. The legal framework is founded on the Petroleum Act of 1996 and the petroleum activities and safety regulations issued thereunder. Mainland Norway is predominantly base rock. Oil produced offshore Total Government Take is predominantly secured by corporate is directly offshore loaded from installations and shipped to market. income taxes, petroleum special tax and State direct participation Some volumes are landed to intermediate onshore terminals processing (through SDFI) in the individual Production Licences and indirect in Norway or the UK for final processing before being sold on the State participation (majority shareholding in Equinor ASA). international market. Legislation and the concessionary framework establishes the Norway has limited refining capacity with only one refinery in licensing system governing all upstream activities (exploration, operation. Domestic consumption of petroleum products is limited development, production, transportation and decommissioning) and thus most upstream production of liquids is exported. arising out of resources and facilities subject to Norwegian jurisdiction. 2.2 To what extent are your jurisdiction’s energy The main authorities responsible for sector regulation are the NPD, requirements met using oil? the Ministry of Petroleum and Energy (MPE), the Ministry of Labour and Social Affairs and the Petroleum Safety Authority (PSA). The Domestic production represents less than the equivalent of 20% of Ministry of Environment and the Norwegian Environment Agency production. Almost all is used for road transport (minor volumes also have important roles to play. utilised for coastal shipping and offshore supply). A special tax regime for upstream activities was established by the Petroleum Tax Act in 1975. Under this regime, “petroleum activities 2.3 To what extent are your jurisdiction’s oil requirements and related activities” are subject to a marginal tax rate of 78%, met through domestic oil production? consisting of ordinary corporate income tax at a rate of 23%, and the special petroleum tax rate of 55%. The Petroleum Tax regime All of Norway’s oil consumption requirements may be satisfied by strives to be tax neutral in the sense that projects and activities that NCS production. are profitable before tax remain profitable after tax, while projects or activities that are not profitable before tax should not become profitable after tax. 2.4 To what extent is your jurisdiction’s oil production exported? The main fiscal authorities involved are the Ministry of Finance (MFIN) and the Oil Taxation Office (OTO). Since production peaked in 2001 at 3.4 million barrels per day Over the years, the NCS petroleum industry has been facing low (b/d), total production steadily declined until 2013. From 2014, commodity prices and a challenging high-cost environment, but

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very few fiscal regime amendments have been necessitated since 1975. The system is profit-based and progressive. No regressive 3.3 If different authorisations are issued in respect of elements are any longer applied. The State also shares with different stages of development (e.g., exploration appraisal or production arrangements), please specify Licensees substantial project and price risk through direct and those authorisations and briefly summarise the most indirect participation without economic privileges, carry or special important (standard) terms (such as term/duration, rights. scope of rights, expenditure obligations).

3.2 How are the State’s mineral rights to develop oil In addition to Production Licences, a “Reconnaissance Licences” and natural gas reserves transferred to investors or may be issued by the NPD for non-exclusive exploration, such as companies (“participants”) (e.g. licence, concession, seismic, EM studies and shallow drilling. The Reconnaissance Norway service contract, contractual rights under Production Licence does not authorise drilling wells for the purpose of striking Sharing Agreement?) and what is the legal status of petroleum bearing strata. Reconnaissance Licences are mainly those rights or interests under domestic law? issued to seismic companies for multi-client data collection. A Reconnaissance Licence does not give the Licensee any preferential Petroleum resources and upstream-related activities are governed by rights, a Production Licence or any other petroleum rights. All data a specific Petroleum Law and not the minerals regime. Downstream acquired, produced, or arising out of any reconnaissance, shall be natural gas is regulated by the Natural Gas Act (NGA) consistent submitted to the NPD. Depending on the nature of reconnaissance, with EU/EEA internal market rules. Exclusive Production Licences data is kept confidential for a number of years as stipulated by for exploration drilling and production are awarded by the King in regulation. After the expiry of this period, data is made available by Council (cabinet meeting decision formally headed by the King). the NPD to any interested party. The system is an administrative law-based concessionary system. For Production Licensees, several additional authorisations are Licensees are awarded exclusive rights to explore for and produce required for a number of petroleum activities, including seismic petroleum within a defined geographical area (stratigraphic acquisition, drilling of wells, development, construction, placement delineation is possible) subject to applicable law and conditions of and use of facilities, production, emissions and discharges, cessation the Production Licence. of production and decommissioning of facilities. Conditions are Production Licences are awarded under two separate systems: the commonly imposed for most licences, permits, approvals and regular licensing rounds (biannual awards in less mature areas) consents. and the Awards in Predefined Areas (APA) rounds (annual awards The main Government authorisations required (other than the in matured areas). The obligatory work programmes for APA and approval by Stortinget (the National Assembly) required for major regular licensing rounds are different, with an emphasis in the developments) for the life cycle of a successful production project APA rounds on scheduled, fast-track exploration and development are MPE: obligations regularly based on a “do or drop” approach. ■ approval of the Plan for Development and Operation (PDO) A pre-qualification system is in place. Production Licences will only in order to commence development; be awarded to pre-qualified applicants. The pre-qualification process ■ approval of a Plan for the Placement and Operations of is not regulated in the Petroleum Act, but established as a practical Facilities (PIO) for submarine landing pipelines or inter- administrative process for licensing consistent with applicable law. connecting pipelines or facilities serving several facilities or Successful pre-qualification does not give any actual or automatic projects; and rights to be awarded licences. It establishes that the applicant ■ approval of the Decommissioning Plan required in order to meets minimum requirements. Different qualifications apply to terminate production or cease the use and dispose of facilities. the licensee and operator. The MPE is assisted by the NPD and PSA to assess whether applicants, if awarded a Licence, would have sufficient technical and financial capacity and capability to perform 3.4 To what extent, if any, does the State have an ownership interest, or seek to participate, in the petroleum activities and fulfil related obligations as Licensees (or development of oil and natural gas reserves (whether operator). Every Production Licence contains a mandatory work as a matter of law or policy)? programme and stipulates deadlines for its completion. Production Licences are normally awarded to groups of companies The Petroleum Act Section 3-6 allows the State an option, (in line (Licensees). with established policy,) to participate directly in any Production All Licensees must also enter into the standard non-negotiable Licence (separate provisions for a stand-alone Facilities Licence). Agreement Concerning Petroleum Activities (“the Petroleum Direct State participation is exercised through the State Direct Agreement”). The Petroleum Agreement consists of a main part and Financial Interest (SDFI), whereby the State holds a proportionate two enclosures: Enclosure A – the Joint Operating Agreement (JOA); participating interest in a Production Licence (or Facilities Licence) and Enclosure B – the Accounting Agreement. By concluding the like any other Licensee. Petoro AS, a wholly State-owned limited Petroleum Agreement (and the JOA/ACC), the Licensees establish liability company, is, by law, appointed to manage the SDFI an unincorporated joint venture where all Licensees are parties (the portfolio. Petoro AS’ management of SDFI is regulated in the operator being one of the Licensees). The Petroleum Agreement Petroleum Act Chapter 11. cannot be amended without MPE approval. All Licensees shall Petoro AS acts as Licensee, with some exceptions. Petoro AS have an undivided participating interest identical to their Production cannot be operator. Under EU/EEA internal market rules applicable Licence share. to Norway, Petoro may not gain access to certain information or One of the Licensees in each Production Licence is appointed participate in certain procurement decisions. Neither SDFI nor operator by the Government. This also applies to Facilities Licences Petoro AS applies for a participating interest in any petroleum (awarded pursuant to Section 4-3 of the Petroleum Act), except for licence. The State’s share is stipulated as part of the Licence award. Gassled where Gassco AS, by law is designated System Operator. The State normally only reserves a participating interest Licences of strategic interest or in areas expected to be the most prospective.

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Equinor has to apply for petroleum licences like any other company. Partly State-owned Equinor is not extended any special rights or 3.6 Are there any restrictions on the export of privileges compared to other applicants. State participation carry production? was abolished years ago. There are no restrictions on the export of petroleum (oil or natural The State through SDFI/Petoro has a pre-emptive right pursuant to gas). Restrictions will only likely apply pursuant to an embargo the Petroleum Agreement to any transfer of a participating interest established by the UN or EU/EEA. in a Production Licence. To our knowledge, this pre-emption has not been exercised to date. The State pre-emption right does not MPE may, subject to law under certain circumstances, instruct include transfers of ownership interest in Licensees or other indirect Production Licensees to deliver petroleum produced for national transfers of rights pursuant to the Licence. (emergency) needs, but this is not likely with the current export/ Norway local consumption ratio.

3.5 How does the State derive value from oil and natural gas development (e.g. royalty, share of production, 3.7 Are there any currency exchange restrictions, or taxes)? restrictions on the transfer of funds derived from production out of the jurisdiction? The State collects revenue directly from petroleum activities (indirect taxes and charges generally do not apply beyond the No restrictions apply. mainland territory) predominantly in the following ways: 1. Petroleum special tax (55% special tax on petroleum 3.8 What restrictions (if any) apply to the transfer or production for 2018). disposal of oil and natural gas development rights or 2. Corporate income tax from petroleum-producing companies interests? (23% in 2018). 3. SDFI. Direct or indirect transfer of a participating interest or any part of 4. Dividends from Statoil ASA (the State holds 67% of the participating interest in a Production Licence or Facilities Licence publicly listed company shares). is subject to MPE approval and MFIN consent. “Indirect transfer” means any direct or indirect transfer of interest in the Production Royalty on oil production was reduced in the 1990s and finally Licence other than transfer of a participating interest, such as abolished entirely in early 2000. Royalties on natural gas was assignment of shareholdings and other ownership shares, when the abolished in the early 1990s. transfer may provide decisive control of a Licensee. The NPD and A progressive Area Fee applies for Production Licence acreage PSA are consulted on transfers. Approvals and consents may be once the awarded initial exploration period expires. It incentivises conditional. Licensees to actively explore and develop, or relinquish acreage. Change of operator is subject to a separate MPE approval, but Total revenue from Area Fees was approx. 1 billion NOK in 2018. requires no MFIN consent. Approval of a transfer of participating An additional deduction applies to the tax base calculation on which interests in a Production Licence where the transferee is also the special tax is imposed (uplift) to enable a normalised return on operator does not entail approval of operatorship. Change of investments subject to the special tax regime. The 30% uplift on operator is additionally governed by separate JV process rules investments is spread over four years calculated from the year the included in every Petroleum Agreement – Enclosure A – JOA, an investment was made (7.5% per annum for four years). The uplift integral part of a Production Licence. was reduced to 22% (5.5% per annum for four years) for investments The MPE only approves transfers to pre-qualified entities (see made after 5 May 2013. Companies not in a tax position may carry question 3.2 above). The MPE evaluates transferee’s potential forward with interest, their losses and the uplift. contribution to the Production Licence and whether the transferee Exploration costs comprise all direct and indirect costs for petroleum has sufficient financial strength and technical capabilities to exploration. Exploration costs may be deducted on a current basis by actively participate in petroleum activities going forward. Hence, companies in a tax position. Companies that are not in a tax position requirements will be different for early-phase exploration compared may on an annual basis request a cash refund of the tax value (78%) to complex development or production projects. The MPE may also of exploration costs incurred or carry costs forward with interest. A consider the transferee’s previous performance and other objective complaint by an NGO was in August 2017 submitted to the EFTA and relevant criteria, such as national security, public order, public Surveillance Authority (ESA) claiming that the exploration cash health, transportation security, environmental protection, etc. refund and loss carry forward systems are in breach of EEA/EU The MFIN will assess the tax effects of the proposed transfer. The State Aid Rules. The matter is presently being considered by ESA, MFIN has established through regulations, a simplified system for but no formal case has been opened yet (September 2018). a number of standardised transactions whereby consent, without Carbon dioxide (CO2) tax and the tax on nitrogen oxide (NOX) written confirmation, is obtained upon submission of a notification. emissions are applicable to petroleum activities. Petroleum For those cases not encompassed by the notification procedure, an activities are also subject to quota obligations. application must be submitted. The MFIN consent is in both cases

The CO2 tax is paid per standard cubic metre (Scm) of gas burned or obtained, provided the parties are able to confirm that the transaction released directly and per litre of petroleum burned. The tax is NOK meets certain tax and regulatory requirements. 1.06 for 2018 per litre of petroleum or per Scm natural gas burned/ A transfer of participating interest is also subject to the remaining flared. The tax is for 2018 NOK 7.30 per Scm natural gas released. Licensees’ approval until the mandatory work obligation stipulated The NOX tax is NOK 21.94 per kilogram. in the Production Licence has been completed. Please see the answer to question 3.4 regarding State pre-emption rights.

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also includes a specific and comprehensive environmental impact 3.9 Are participants obliged to provide any security assessment (EIA) addressing, inter alia, HSE-relevant components. or guarantees in relation to oil and natural gas The EIA is subject to public circulation and comment prior to development? approval of the Decommissioning Plan. The transferor of a participating interest in a Licence remains According to section 10-7 of the Petroleum Act, the MPE may demand jointly liable with the transferee for relevant decommissioning costs financial security in favour of the State. For group-held companies, (Petroleum Act section 5-3 third paragraph). This liability is normally an unlimited parent company guarantee (PCG) is a condition for the mitigated by means of a Decommissioning Security Agreement Production Licence award, and will be required when the company between the transferor and the transferee. A similar obligation of becomes Licensee. subsidiary liability for future decommissioning cost was introduced Norway The PGG must be submitted in the Norwegian standard form prepared from 2016 for transfers of controlling ownership interest in Licensees by the MPE and is non-negotiable. The PCG is an unlimited, or companies controlling such Licensee companies. unconditional and irrevocable on-demand guarantee. The guarantee covers both the Licensee’s obligations towards the State arising out of petroleum activities as defined in the Petroleum Act, and the 3.13 Is there any legislation or framework relating to Licensee’s liability under Norwegian law towards any third party for gas storage? If so, what are the principal features/ requirements of the legislation? pollution damage and for personal injury arising out of activities. For Licensees not part of a group, the MPE may require a bank There is no specific legal framework for large-scale natural gas storage, guarantee or similar security. Where there is no ultimate group parent which otherwise would be regulated by the Petroleum Act or the NGA. company or the ultimate parent company is legally barred from presenting an unlimited guarantee (this applies for certain State-owned oil companies) the MPE may accept alternative guarantees. 3.14 Are there any laws or regulations that deal specifically with the exploration and production of unconventional oil and gas resources? If so, what are their key 3.10 Can rights to develop oil and natural gas reserves features? granted to a participant be pledged for security, or booked for accounting purposes under domestic law? No particular legislation is developed for unconventional petroleum resources. No petroleum activity may be undertaken in relation to Participating interests in Production Licences or Facilities Licences resources on the NCS or onshore the mainland without authorisation may be pledged as security pursuant to law and subject to MPE from the Government. The 1996 Petroleum Act applies to all approval. Security rights may only be registered in the Norwegian petroleum resources not encompassed by the 1973 Land Petroleum Petroleum Register. This registry is publicly available online. Act. The 1973 Land Petroleum Act applies to all onshore-located petroleum resources, as well as those resources located within 3.11 In addition to those rights/authorisations required the territorial sea where the seabed is subject to private property to explore for and produce oil and natural gas, what ownership. A special minerals regime, including petroleum applies other principal Government authorisations are to natural resources at Svalbard. required to develop oil and natural gas reserves (e.g. environmental, occupational health and safety) and from whom are these authorisations to be obtained? 4 Import / Export of Natural Gas (including LNG) For a Production Licence, additional authorisations are required for a number of activities, including seismic collection, drilling of wells, construction, placement or use of facilities, production of 4.1 Outline any regulatory requirements, or specific petroleum, discharge and emissions, cessation of production and terms, limitations or rules applying in respect of cross-border sales or deliveries of natural gas decommissioning, including removal of facilities. It is common (including LNG). for most licences, permits, approvals and consents issued, that authorities regularly stipulate conditions. Key petroleum regulatory No particular regulatory limitations apply. authorities, including offshore and maritime operations, are the MPE, the NPD, the PSA, the Environmental Directorate and the Natural gas sales are concluded by Production Licensees individually. Coastal Waters and Harbour Authority. There is a movement from long-term sales pegged to the oil price, towards shorter-term sales traded over European hubs. A considerable number of sales are intra-group sales. Transfer pricing principles are 3.12 Is there any legislation or framework relating to applied to the tax assessments of natural gas sales. the abandonment or decommissioning of physical structures used in oil and natural gas development? If so, what are the principal features/requirements of the legislation? 5 Import / Export of Oil

Cessation of use of facilities or petroleum activities and the 5.1 Outline any regulatory requirements, or specific decommissioning or removal of facilities may, only be undertaken terms, limitations or rules applying in respect pursuant to the Petroleum Act and subject to an approved of cross-border sales or deliveries of oil and oil Decommissioning Plan. Applicable law incorporates OSPAR products. Convention rules, to which Norway is a party. The MPE, supported by the NPD and the PSA, are the key authorities. No particular limitations apply. A regulated norm price system, A Decommissioning Plan is a comprehensive study that addresses and principally applied for tax assessment purposes, is applied to crude evaluates alternative decommissioning options, including removal. It oil sales.

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6 Transportation 6.3 In general, how does an entity obtain the necessary land (or other) rights to construct oil and natural gas transportation pipelines or associated infrastructure? 6.1 Outline broadly the ownership, organisational and Do Government authorities have any powers of regulatory framework in relation to transportation compulsory acquisition to facilitate land access? pipelines and associated infrastructure (such as natural gas processing and storage facilities). Onshore processing plants form an integral part of production, including those projects requiring large diameter submarine The NCS natural gas pipeline system is the world’s largest offshore pipelines for export of natural gas to Europe. Land use onshore for natural gas transportation system. It includes several large diameter pipelines or terminals is limited. Acquisition of land or land rights Norway submarine pipelines, onshore terminals and processing facilities in is agreed with landowners. If no agreement is reached, compulsory Norway, Belgium, France, Germany, and the UK. acquisition of land (expropriation) pursuant to mandatory applicable Production facilities including most landing pipelines, intermediate law is available. terminals and final onshore terminals, are owned by Production Licensees. No petroleum may be produced without a natural gas offtake solution in place. Most Production Licensees become owners of the 6.4 How is access to oil and natural gas transportation pipelines and associated infrastructure organised? transportation facilities to fulfil their obligation to ensure a natural gas offtake solution. The natural gas system is predominantly owned by Gassled an unincorporated joint venture. Gassled is operated by Please see the general comments under question 6.1 above. Gassco AS, a wholly State-owned limited liability company. Gassco Shipping through Gassled and reservation of capacity is regulated is appointed Gassled System Operator. and booked through Gassco AS, as the System Operator. After 2011, purely financial investors have been permitted to acquire Second-hand trade in capacity in pipelines (and terminals) is participating interests in Gassled. permitted under a regulated system and may be acquired from According to law, all shippers with a duly substantiated need for shippers with available spare capacity. capacity shall have access to Gassled on objective, non-discriminatory, Access to transportation systems for liquids is subject to the rules of and transparent terms and conditions. Gassco manages capacity the Third Party Access Regulation, and is negotiated directly with bookings and capacity allocation. MPE has issued regulations the facilities owners based on regulated terms. stipulating conditions for access to the system and tariffs to be paid for Gassled transportation. Tariffs are calculated on the basis of booked 6.5 To what degree are oil and natural gas transportation capacity, not throughput. pipelines integrated or interconnected, and how is co- The MPE amended the Tariff Regulation in June 2013 reducing the operation between different transportation systems transportation tariff by 90%, for volumes to be transported after 1 established and regulated? October 2016, citing the need for readjustment to reflect investors’ rights to a utility rate of return, as initial investments in facilities had The natural gas landing system is highly integrated at several points been recovered. Financial investors, having acquired their interests with production facilities directly. When allowing natural gas from in Gassled in later years, initiated litigation against the State. The a new project into a pipeline landing system, a thorough analysis of Supreme Court appeals decision of 28 June 2018, finally ruled in capacity is required. Natural gas specifications and other technical favour of the State. aspects are carefully evaluated to ensure system integrity and that input and output from the system remains according to delivery Norway has several transportation pipelines carrying liquids to specifications. processing facilities onshore in Norway, including at Sture, Mongstad and Kårstø. There is also an oil export pipeline to the Shetlands, in Cooperation between facility owners is handled by the Gassled the UK. Pipelines carrying liquids to shore are not part of the Gassled JV agreement and among the shippers. Between shippers and the system, and are all owned by Production Licensees (or their affiliates). System Operator, it is managed through the Gassco booking and shipping manuals. Manuals are developed on the basis of principles and requirements stipulated by legislation. 6.2 What governmental authorisations (including any applicable environmental authorisations) are Liquids pipelines are not integrated in the same way. Any required to construct and operate oil and natural cooperation required is handled by the respective facilities’ owners gas transportation pipelines and associated directly with shippers subject to applicable law, with conditions infrastructure? for the approval of the PIO and the agreements containing terms, conditions and tariffs approved by the authorities. The construction, placement and operation of transportation pipelines may only be carried out pursuant to an approved PDO (see question 6.6 Outline any third-party access regime/rights in 3.3 above), or alternatively pursuant to a separate or subsequent Plan respect of oil and natural gas transportation and for Installation and Operation of Facilities (PIO). MPE approves such associated infrastructure. For example, can the plans, supported by the NPD, PSA and the Environment Directorate. regulator or a new customer wishing to transport Projects of a certain magnitude or strategic importance may require oil or natural gas compel or require the operator/ approval from Stortinget. Projects that require amendments to owner of an oil or natural gas transportation pipeline legislation will be submitted to Stortinget for approval. Treaties may or associated infrastructure to grant capacity or be required for (export) landing pipelines or inter-connecting pipelines. expand its facilities in order to accommodate the new customer? If so, how are the costs (including costs Treaties are subject to constitutional ratification requirements. of interconnection, capacity reservation or facility expansions) allocated?

Third-party access to Gassled is governed by regulations to the

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Petroleum Act. Gassled is open to all qualified shippers of natural Resources and Energy Directorate. The Directorate determines gas on an objective, non-discriminatory, transparent and regulated pursuant to law whether natural gas facilities concession is required. basis. Land rights must be agreed with landowners or in certain cases Access to all other facilities than Gassled, is governed by the obtained through fully compensated expropriation. Construction Third Party Access Regulation. The regulation sets out the main and environmental permits, including approval of EIAs, are obtained principles for access, tariffs and other terms or conditions for from other competent authorities. use. Cost allocation for modifications required to allow access for additional volumes shall be agreed between parties. Transportation 7.3 How is access to the natural gas distribution network facilities shall not yield profit beyond a utility rate of return on the organised? capital invested in the facilities and operational costs incurred. Norway When tie-in to existing facilities adds value to the host facility, Access to natural gas networks is subject to negotiation with then host facility owners must be prepared to pay a relative share of the owner and system operator often the same entity. Operator associated costs. TPA agreements require MPE and NPD approval qualification and appointment is not subject to stringent requirements if not otherwise stipulated. If parties cannot agree on an access tariff such as applied to upstream pipeline operators. Access is subject or other components of a transportation agreement, the matter may to applicable law on objective and non-discriminatory terms and be submitted to the MPE for final decision. conditions consistent with EU/EEA rules. The Government is considering regulating access to distribution systems. Please see 6.7 Are parties free to agree the terms upon which oil the answer to question 7.1 above. or natural gas is to be transported or are the terms (including costs/tariffs which may be charged) 7.4 Can the regulator require a distributor to grant regulated? capacity or expand its system in order to accommodate new customers? Gassco/Gassled terms and tariffs are stipulated in accordance with regulations. The NGA and regulations thereto are consistent with EEA obligations For facilities that are not part of Gassled, the parties are free to arising out of Directive 2003/55/EC. EU Regulation No 1775/2003 negotiate, within the limitations set out in the TPA regulations, does not apply to Norwegian distribution. Stortinget has passed and any specific PDO or PIO conditions for approval, and other legislation not yet in force, implementing Directive 2009/73/EC and agreements in place (e.g. the Oseberg Transportation System). authorised secondary legislation to implement EU Regulation No 715/2009. The new Regulation does not apply to distribution. The Government is considering regulating capacity expansion. Please 7 Gas Transmission / Distribution see the answer to question 7.1 above.

7.1 Outline broadly the ownership, organisational and 7.5 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 have to be objective and non-discriminatory, only allowing Domestic consumption of natural gas is minimal and limited to the system owner a modest rate of return on investments made minor locally operated onshore natural gas distribution networks. in facilities and operational costs incurred (referred to as a utility Transmission, distribution, storage of natural gas and LNG rate of return), but are otherwise subject to negotiations with the regasification is subject to the NGA and a secondary regulatory operator (or owner). Under amended rules not in force (see answer regime systematically compliant with EU internal energy market to question 7.1 above), tariffs or methods to determine tariffs, will rules (applicable to Norway as an EEA member). EEA obligations be subject to Government stipulation or approval decisions. primarily follow from the EEA Agreement and Directive 2003/55/ EC. EU Regulation No 1775/2005 is applicable to transmission systems. There is currently no transmission system in operation and 7.6 Are there any restrictions or limitations in relation to only a limited number of minor distribution systems. Stortinget has acquiring an interest in a gas utility, or the transfer of assets forming part of the distribution network passed legislation (not yet in force) to implement Directive 2009/73/ (whether directly or indirectly)? EC and Regulation No 715/2009. The amendments to NGA authorise secondary legislation. Regulation No 715/2009 applies In principle, any company or legal person, (not only Production to transmission, not to Norwegian distribution. The Government is Licensees) may apply for and receive a concession to construct, considering implementing downstream sector secondary legislation own or operate a natural gas utility. The requirements in the in addition to, but outside the scope of, EEA obligations. Petroleum Regulations Art. 8 will apply as appropriate in relation There are currently no Government initiatives aimed at expanding to,competence and financial capacity, for example. Further, natural gas transmission, distribution or use. Norway’s domestic requirements or limitations may be stipulated in each concession. energy consumption is almost entirely supplied by indigenous Secondary legislation will complement NGA amendments and hydropower. rules implementing Directive 2009/73/EC will impose corporate and functional unbundling for vertically integrated activities, 7.2 What governmental authorisations (including any specifically any interests in distribution facilities system operators applicable environmental authorisations) are required or in storage facilities operators. If a natural gas utility also holds to operate a distribution network? a participating interest in Production Licences, then acquisition of an interest that provides change of control in the utility will trigger By delegation from the MPE, a concession for the establishment of the requirement for MPE approval pursuant to the Petroleum Act downstream networks must be obtained from the Norwegian Water section 10-12.

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Resources and Energy Directorate. The Directorate determines 8 Natural Gas Trading pursuant to law whether a natural gas facilities concession is required or not. The regulations to NGA determine the lower 8.1 Outline broadly the ownership, organisational and capacity threshold triggering the need for a specific downstream regulatory framework in relation to natural gas concession. Other Norwegian law applies and permits from land trading. Please include details of current major use and environmental authorities are also required. Please see the initiatives or policies of the Government or regulator answers to questions 7.1 and 7.2 above. (if any) relating to natural gas trading.

All natural gas produced from NCS resources is sold by Production 9.3 Is there any regulation of the price or terms of service in the LNG sector? Norway Licensees individually, under negotiated gas sales agreements.

Most volumes are delivered over European hubs through the The only LNG production facility connected to Snøhvit production upstream pipeline network to European customers under long-term is an upstream project subject to the upstream petroleum legal take-or-pay contracts. Volumes are increasingly traded on shorter- regime founded on the Petroleum Act. term contracts. Volumes in the Norwegian market are negligible. Trade in natural gas is subject to generally applicable EU/EEA and Norway currently has no specific regulations of the price, terms or national completion law. The number of customers in distribution conditions for services in the downstream LNG sector. systems does not exceed thresholds making EU/EEA energy specific rules applicable. 9.4 Outline any third-party access regime/rights in respect of LNG facilities.

8.2 What range of natural gas commodities can be traded? For example, can only “bundled” products LNG facilities forming an integral part of upstream petroleum (i.e., the natural gas commodity and the distribution production are subject to the Third Party Access Regulation as thereof) be traded? addressed above. Downstream LNG facilities are not subject to these provisions of There are currently no legal restrictions on trading volumes of the Petroleum Act and its appurtenant regulations. Any third-party natural gas, apart from the limitation imposed on State-owned access will have to be negotiated. See above for the downstream entities. Bundling of goods and services in the energy sectors is natural gas regime regulated by the NGA and appurtenant subject to Norwegian law consistent with EU/EEA internal market downstream regulations. rules.

10 Downstream Oil 9 Liquefied Natural Gas

10.1 Outline broadly the regulatory framework in relation 9.1 Outline broadly the ownership, organisational and to the downstream oil sector. regulatory framework in relation to LNG facilities. The Norwegian downstream oil sector (petroleum products) is The main Norwegian LNG production facility at Melkøya in not subject to the Petroleum Act, the NGA or any other petroleum Finnmark forms an integral part of the Snøhvit production project sector specific legislation. Save for limited regulation for national and is owned by the Production Licensees. This LNG production is emergency purposes, the sector regulation is market-based, and is considered an integral part of upstream petroleum activities subject not heavily regulated. There has been a steady reduction of refineries to the Petroleum Act, the Production Licence and the conditions in Norway. Petroleum products are predominantly imported, not for PDO approval (see comments under question 3.3 above), from produced in Norway. deposit until LNG is loaded onto LNG tankers. Safety and environmental regulations that apply to refining and LNG regasification plants are regulated as downstream activities distribution are of key importance. EU rules concerning safety and governed by the NGA. The NGA is consistent with EU/EEA internal product marking have been implemented in Norwegian law. Certain energy market rules applicable to Norway. Please see the answer provisions still in place apply with regard to emergency supply and to question 7.1 above. The Government is considering regulating stock in case of national emergencies. These requirements have, access to spare capacity in LNG regasification plants beyond what however, been dramatically reduced. follows from EEA obligations.

10.2 Outline broadly the ownership, organisation and 9.2 What governmental authorisations are required to regulatory framework in relation to oil trading. construct and operate LNG facilities? Oil trading is liberalised and is left to the producers, shippers or LNG facilities which form an integral part of the upstream traders. Many smaller producers elect to have their oil sold by production are subject to Petroleum Law PDO requirements (may companies trading larger volumes. Large NCS operators, like be combined with a PIO) and further authorisations for construction, Equinor, sell oil on behalf of other Production Licensees, in addition operation and decommissioning as described above in the comments to their own production volumes. Equinor also markets and sells the at question 3.2. oil of the SDFI. The SDFI, the participating interest, and petroleum By delegation from the MPE, a concession for the establishment of activities related are otherwise managed by Petoro AS. This makes downstream networks must be obtained from the Norwegian Water Equinor by far the largest seller of NCS oil.

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11 Competition 12 Foreign Investment and International Obligations 11.1 Which governmental authority or authorities are responsible for the regulation of competition aspects, 12.1 Are there any special requirements or limitations on or anti-competitive practices, in the oil and natural acquisitions of interests in the natural gas sector gas sector? (whether development, transportation or associated infrastructure, distribution or other) by foreign The Norwegian Competition Authority (NCA) is the competent companies? national competition authority for the oil and gas sector also. In addition, Norway and NCS Licensees are subject to the EU internal No specific limitations on acquisitions of interests in the Norway energy market rules by way of Norway’s EEA membership and downstream natural gas sector apply. Control with acquisitions thus, in the case of competition, the jurisdiction of the European in the upstream sector is exercised pursuant to the Petroleum Act Commission or the ESA and related community courts, as applicable section 10-12. The approval procedure is based on Government according to treaty obligations. administrative law discretionary power, and on factual, objective and non-discriminatory criteria such as financial strength and technical competence. Recent case law indicates that a reciprocity 11.2 To what criteria does the regulator have regard in determining whether conduct is anti-competitive? principle may be applied with regard to acquisition of participating interest in or control over an entity that holds a participating interest in Production Licences. Recent amendments to the Petroleum Norwegian competition law largely reflects EU competition law and Regulations regarding rules on assessment of applicants during applies the same concepts and criteria prohibiting anti-competitive licensing rounds and transfer or participating interests in Licences practices. indicate that the MPE may apply stricter requirements than before, highlighting national security and applicant track record as key 11.3 What power or authority does the regulator have to items in the assessment. No comparable sector specific system preclude or take action in relation to anti-competitive applies for the downstream sector. practices?

The NCA has powers in Norway comparable to those of the 12.2 To what extent is regulatory policy in respect of the European Commission/ESA under EU/EEA competition law, oil and natural gas sector influenced or affected by international treaties or other multinational including the authority to issue cease-and-desist orders, the arrangements? imposition of fines and blocking of mergers. The regulatory environment is substantially influenced by 11.4 Does the regulator (or any other Government multinational conventions such as UNCLOS, EEA, the OSPAR authority) have the power to approve/disapprove Convention, and several bilateral treaties such as the transboundary mergers or other changes in control over businesses fields or submarine pipelines treaties. in the oil and natural gas sector, or proposed acquisitions of development assets, transportation or Norwegian legislation is substantially affected by EU developments associated infrastructure or distribution assets? If so, implemented through EEA. In a number of areas, Norwegian what criteria and procedures are applied? How long law is more developed than international rules and in most cases does it typically take to obtain a decision approving or functionally structured rather than being prescriptive. disapproving the transaction?

The NCA exercises control with Norwegian oil and gas mergers that 13 Dispute Resolution do not have an EU/EEA dimension.

Norwegian merger control is based on a notification system and 13.1 Provide a brief overview of compulsory dispute subject to economic thresholds similar to those applied within resolution procedures (statutory or otherwise) the EU, with set deadlines for the authorities to initiate extended applying to the oil and natural gas sector (if any), investigations (15 working days from notification) or intervene including procedures applying in the context of (100 working days from notification). Deals that do not exceed the disputes between the applicable Government thresholds of the European Merger Regulation will be subject to authority/regulator and: participants in relation to oil and natural gas development; transportation pipeline national merger control and approval is required when the national and associated infrastructure owners or users in thresholds are exceeded. relation to the transportation, processing or storage NCA merger control decisions may be appealed to the Ministry of natural gas; downstream oil infrastructure owners of Trade, Industry and Fisheries. Any administrative law-based or users; and distribution network owners or users in decision in Norway may be subject to limited judicial review by relation to the distribution/transmission of natural gas. the courts. There are no compulsory oil and natural gas-specific dispute resolution mechanisms for investor-state or inter-Licensee relationships in Norway. All administrative acts or decisions (upstream or downstream) are governed by Norwegian law and subject to the jurisdiction of the ordinary Norwegian courts, unless otherwise approved by the Government. All contracts related to or arising out of a Production Licence or Facilities Licence shall be according to concessionary terms, and subject to Norwegian law. For

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the downstream sector no mandatory governing law or obligatory plaintiffs amounted to a constitutionally illegal retroactive venue for dispute resolution-related contracts has been introduced, effect of law or administrative decisions. Alternatively, they save for contracts for the supply of products to consumers being claimed the amendment was a breach of contract, as tariffs subject to mandatory Norwegian consumer protection law. had been agreed between the Government and Gassled’s owners in 2002. Finally, an amendment of this nature was, Save for in consumer relationships, it is quite common for in their view, in breach of Norway’s obligation under the construction or in contracts for the provision of goods and European Convention of Human Rights Protocol 1 to protect services, including oil and gas (commodities) contracts, to agree private property. The investors also claimed that even if the to arbitration. For upstream sector-related contracts it has, until court found legal grounds for an amendment to be present the now, been quite common to select arbitration in Stavanger, Norway, conduct of the MPE was negligent in its implementation and with the Norwegian Arbitration Act (UNCITRAL Model Law) as on all of these grounds investors claimed compensation for Norway applicable procedural rules. their future economic losses. The District Court ruled against the investors, as did the Court of Appeal. The Norwegian Supreme Court published its ruling on 13.2 Is your jurisdiction a signatory to, and has it duly ratified into domestic legislation: the New York 28 June 2018. The appeal from investors was entirely rejected Convention on the Recognition and Enforcement of after thorough deliberation by the Supreme Court, including their Foreign Arbitral Awards; and/or the Convention on claim that amendment to the Tariff Regulation was in breach of the Settlement of Investment Disputes between States obligations pursuant to the European Convention on Human Rights. and Nationals of Other States (“ICSID”)? The District Court found the investors (plaintiffs) had reason to raise a case due to lack of legal and procedural clarity, and for this Norway has ratified both conventions. reason did not award the defendant (the State) legal costs. The Court of Appeal did not share this view and awarded legal cost to the Government. The Supreme Court also ruled in favour of the 13.3 Is there any special difficulty (whether as a matter of law or practice) in litigating, or seeking to enforce Government with regard to legal costs. judgments or awards, against Government authorities or State organs (including any immunity)? 14 Updates For disputes submitted to the ordinary Norwegian courts, there are no particular difficulties in this regard, even when the Government 14.1 Please provide, in no more than 300 words, a is the opposite party in the case. summary of any new cases, trends and developments in Oil and Gas Regulation Law in your jurisdiction.

13.4 Have there been instances in the oil and natural gas sector when foreign corporations have successfully Norway has a mature oil and gas regulatory environment. Norway’s obtained judgments or awards against Government upstream and downstream regulatory regime has evolved stepwise authorities or State organs pursuant to litigation over time. It has to date been considered highly stable and is still before domestic courts? considered predictable even with regard to tax and fiscal terms. It is a matter of Government policy to keep the regime relatively stable Major disputes between upstream Petroleum Licences and the State and at all times predictable. have been, almost without exception, submitted to the ordinary A few years back, a sudden change of Petroleum Tax regime with courts of Norway. Foreign corporations and Production Licensees regard to a reduction in the uplift deductible before petroleum have raised over the years several cases against the Norwegian special tax caused a stir in the petroleum community. Such a petroleum regulatory and petroleum taxation authorities; several change was highly unexpected and one of the first times since the were lost, but in some cases the courts ruled in favour of investors special petroleum tax was introduced in 1975 that amendments or Licensees: to the tax law were not entirely balanced or definitely in favour 1. The Ekofisk Royalty Case: Production Licensees successfully of Licensees. Also, increased public pressure for less polluting challenged the application of amended royalty terms petroleum production has resulted in requirements imposed in introduced in 1972 against the State (MPE) before the PDOs for mandatory hydroelectric power supply for some new Norwegian Supreme Court. offshore installations. Against the Government’s recommendations, 2. Tax cases: A significant number of income tax cases have Stortinget decided that new offshore installations to be constructed been successfully fought against the Government (MFIN/ and placed at “Utsira High” shall be run on hydro power generated OTO). However, the Licensees have also lost in several onshore. The upstream industry viewed it as an expensive solution cases. with questionable environmental effects. 3. The Gassled Case: Several assignments of participating interests in Gassled from upstream NCS Production Despite political calls for a “green redirection” away from the Licensees to investors without Production Licence interests petroleum-based economy, all major political parties seem to were approved from 2011 and onwards. The Ministry of appreciate the value of a predictable and stable regulatory and fiscal Petroleum passed in 2014 a Decree amending the Gassled system maintained to attract investments in the NCS and secure the Tariff Regulation of 2002 reducing the capital element of resource rent for the State. Parts of the NCS, which appear to offer the transportation tariff for future bookings in the Gassled less attractive prospects or higher risks or costs have been balanced system by close 90%. Following this, the new investors in out by, inter alia, exploration risk mitigation through, i.e. the Gassled initiated court proceedings against the Government exploration costs cash-back system and the substantial sharing of claiming that the amendments were illegal and unjust. risk associated with direct State participation in Production Licences Plaintiffs claimed that the amendments lacked proper legal without carry or other specific economic privileges for the State. basis. Further, if the court ruled that a legal basis for changes to rules was present, then amended rules in the view of

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Bjørn-Erik Leerberg Frode Vareberg Advokatfirmaet Simonsen Vogt Wiig AS Advokatfirmaet Simonsen Vogt Wiig AS Filipstad Brygge 1 Filipstad Brygge 1 0125 Oslo 0125 Oslo Norway Norway

Tel: +47 934 906 83 Tel: +47 994 976 73 Email: [email protected] Email: [email protected] URL: www.svw.no URL: www.svw.no Norway Mr. Leerberg’s comprehensive oil & gas experience extends over Mr. Vareberg specialises in petroleum and energy law issues. He more than 25 years and comprises private practice, several senior civil assists clients in the Norwegian oil & gas sector and internationally servant positions and positions as a writer and lecturer. Since joining both on regulatory and contractual issues in relation to energy and Simonsen Vogt Wiig in 2003, he has been building the NCS upstream petroleum activities offshore and onshore. He has more than 17 years and international energy team. His practice focuses on oil & gas of working experience with petroleum law and has in-depth knowledge transactions, governance, administration and negotiation of petroleum of the Norwegian petroleum policy, legislation and practice. Mr. rights, cross-border and multi-jurisdictional projects, business and Vareberg has worked as a Senior Advisor in the Norwegian Ministry public administrative law, and public international law. of Petroleum and Energy and as Head Negotiator in the Norwegian Shipowners’ Association. He has assisted clients in the petroleum and Clients with activities on four continents, include several upstream energy business as a lawyer at SVW for more than seven years. petroleum and energy companies, as well as Government and international organisations. He regularly assists on introducing and He assists a number of Norwegian and international oil companies in establishing upstream players’ presence and activities in the NCS Norway, in areas such as: entering strategy; pre-qualification process; industry. licence applications; joint-venture issues; transfer of production licences; corporate transactions and assignments; petroleum law He has extensive experience with host nation governance of natural and licence issues; and negotiations with partners and Government resources, development of legal and contractual regimes and legal relations. He assists several Norwegian Government entities, such aspects related to the establishment and management of NCS as Gassco AS (the Norwegian natural gas transportation network Licensees, facilities and related petroleum activities. He advises operator), the Norwegian Petroleum Directorate and the Norwegian several commercial companies active on the NCS and internationally. Safety Authority. He regularly holds presentations on petroleum law He also advises several Norwegian authorities and foreign energy issues, and is an examiner in petroleum law at the University of Oslo. administrations, national oil companies and international organisations. Mr. Vareberg has extensive experience with international oil & Mr. Leerberg has been a guest lecturer at University of Trondheim gas projects, consulting authorities and national oil companies in (1994–98), lectures at the International Programme for Petroleum Europe, Africa and the Middle East on petroleum policy, organisation, Management and Administration (PETRAD) (1994–2017), and with development of petroleum legislation, negotiations and management the Norwegian School of Business Executive Masters in Energy of licence agreements, concession contracts, production sharing Administration programme (2007–), including its international agreements, joint operating agreements, accounting agreements and collaboration programmes. related contracts. Mr. Vareberg has been involved in the development of petroleum law, regulation and contractual regimes in Lebanon, Montenegro, Uganda, Timor-Leste, Sudan and Mozambique. In Mozambique Mr. Vareberg was part of the core legal team preparing the revised petroleum law and regulations, and negotiating the regulatory and contractual legal framework for the Rovuma Basin. He has worked on the development and operation of some of the largest wind power projects in Norway. Further, he is presently a key advisor to Gassnova SF (the Norwegian Government entity with

responsibility within CO2) in the current Norwegian pilot project of establishing a full-scale CCS-chain (capture, transport and storage of

CO2) on the NCS.

Simonsen Vogt Wiig is a leading business law firm with offices in Norway’s largest cities, as well as in Singapore. Our 180+ lawyers provide assistance within all major business sectors, building lasting relationships with clients by combining thorough business understanding with top legal expertise. We have one of Norway’s most extensive and internationally oriented oil & gas practice groups. Having been involved in the Norwegian oil sector from its inception through today’s industry turmoil, SVW offers one of the most respected consulting environments, particularly through our offices in Oslo, Stavanger, Bergen and Kristiansand. Our team background ranges from in-house legal positions with international operators, to civil servants with the Ministry of Petroleum and Energy. Our team’s diverse experience and profound expertise is invaluable in the provision of legal and consulting services to our clients, ranging from international and national oil and service companies to Governments on all continents, and inter-governmental organisations.

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Portugal Tomás Vaz Pinto

Morais Leitão, Galvão Teles, Soares da Silva & Associados Claudia Santos Cruz

oversees the LNG market, as well as activities such as regasification 1 Overview of Natural Gas Sector and underground storage; and (ii) the General Directorate for Geology and Energy (Direcção-Geral da Geologia e Energia – 1.1 A brief outline of your jurisdiction’s natural gas hereinafter “DGEG”), which monitors the safety of supplying sector, including a general description of: natural activities, licensing infrastructure and LNG networks, pipelines and gas reserves; natural gas production including other storage or regasification facilities. the extent to which production is associated or non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) 1.2 To what extent are your jurisdiction’s energy liquefaction and export facilities, and/or receiving and requirements met using natural gas (including LNG)? re-gasification facilities (“LNG facilities”); natural gas pipeline transportation and distribution/transmission Natural gas accounted for 19.9% of the primary energy supply in network; natural gas storage; and commodity sales 2016. and trading.

Portugal does not have any natural gas reserves. All the natural gas 1.3 To what extent are your jurisdiction’s natural gas consumed in the country is imported, mainly from Algeria, Qatar requirements met through domestic natural gas and Nigeria. Nonetheless, natural gas plays an important role in production? the country’s energy mix, having accounted for 18% of the primary energy use during the year 2015. Portugal does not produce any natural gas. Natural gas is imported into the country either by pipeline (connected to Spain), which in 2016 received two-thirds of the natural gas 1.4 To what extent is your jurisdiction’s natural gas consumed in the country, or through the Sines LNG Terminal, the production exported (pipeline or LNG)? entry point of the remaining third. The Terminal is equipped to carry out reception, storage and re-gasification of hydrocarbons, and Portugal does not export natural gas. is also connected to the national gas network. The Terminal was constructed in 2004 and its capacity was increased in 2009. 2 Overview of Oil Sector The importation of natural gas into the country has systematically and gradually decreased since 2011. However, 2016 witnessed a contrary development as natural gas imports increased, unlike 2.1 Please provide a brief outline of your jurisdiction’s oil the importation of oil and coal which continued their downward sector. trend. Concerning the present year, provisional data shows that the importation of natural gas continued to increase and, similarly, Despite exploration activities being conducted in Portugal since the importation of oil and coal continued to decrease. During the 1940s, no commercially viable deposits of oil have been found. 2017, natural gas was heavily relied upon for energy generation, Nevertheless, exploration activities in the country’s EEZ continue, compensating not only for a decrease in the consumption of oil motivated by: (i) Portugal’s proximity to North Africa which is and coal but also for a drop in energy produced from renewable known to have significant oil reserves; (ii) the extension of the sources in general, particularly attributable to the significant decline nation’s offshore territory; and (iii) the quality of the infrastructure, in hydroelectric generation. in particular the Sines Terminal. Most of the current exploration The principal legal instruments for the natural gas sector are Decree- activity is around the Lusitânica Basin in the centre of the country. Law no. 30/2006 of 15 February 2006 (hereinafter “DL 30/2006”) But there is also some activity in the south, around the coast of and Decree-Law no. 140/2006 of 26 July 2006 (hereinafter “DL Algarve, led by companies such as Partex, Repsol and ENI. 140/2006”), which establish and regulate the Natural Gas National During the year of 2017, similar to what had happened in 2016, most System (Sistema Nacional de Gás Natural) as well as the activities of the crude oil imported to the country came from Asia, contrary of transport, storage, distribution and trading. to what had been the tendency in previous years when the majority From a regulatory standpoint, the major agents in the LNG industry of imported oil came from Africa. During 2017, oil imported from are: (i) the Energy Services Regulatory Authority (Entidade Russia, Saudi Arabia, Azerbaijan and Kazakhstan accounted for Reguladora dos Serviços Energéticos – hereinafter “ERSE”), which 59% of the total imports. Crude oil imported from Angola, which

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in 2016 accounted for about one quarter of crude oil imports to the For activities conducted offshore, the competent local government country, significantly decreased to about 5% of the imports. Such is the one located in the corresponding coastline. decrease in imports from Angola was the main factor behind the Concessions are granted by the government, through the Ministry of shift to the Asian markets. Energy (s. 6.1 DL 109/94), and are preceded by a public tender but From a regulatory standpoint, the main agents are DGEG and may also, in special circumstances, be sole sourced. the National Authority for the Fuel Market (“Entidade Nacional The statute also provides for the possibility of applying for a Previous para o Mercado de Combustíves” – hereinafter “ENMC”) with Assessment Licence (“Licença de avaliação prévia” – hereinafter competence over the constitution, management and maintenance “PAL”), a preliminary procedure which may be executed before the of crude oil reserves and petroleum products. ENMC was created concession is granted. Under the PAL, licensees may process and by Decree-Law no. 165/2013 of 16 December 2013 (hereinafter evaluate information available in ENMC’s archive as well as collect Portugal “DL 165/2013”) which transposed the European Council Directive surface samples and conduct surveying activities in order to assess 2009/119/CE. the potential of the licensed areas. The PAL is awarded by ENMC The most important single player in the oil sector is Galp, having (ss. 5.2 and 23.1 of DL 109/94). originated from the merger of Petrogal, which refined and distributed petroleum products, with Gás de Portugal, which was an importer 3.2 How are the State’s mineral rights to develop oil and distributor of natural gas. and natural gas reserves transferred to investors or Currently, Galp is a fully integrated oil company, with significant companies (“participants”) (e.g. licence, concession, upstream, midstream and downstream activities, from production service contract, contractual rights under Production and exploration, to refining and distribution. Galp’s upstream Sharing Agreement?) and what is the legal status of those rights or interests under domestic law? activities are predominantly located in Brazil, Angola and Mozambique; regarding midstream and downstream, Galp operates the only two refineries in the country and distributes petroleum The State’s mineral rights are transferred to investors or companies products in Portugal, Spain and some African nations. through a concession agreement. The general terms of the concession are enshrined in DL 109/94 and in Ordinance no. 790/1994 of 5 September 1994 (art. 18 DL 109/94). In accordance 2.2 To what extent are your jurisdiction’s energy with DL 109/94, the concession contract is of an administrative requirements met using oil? nature (s. 18).

Oil accounted for 42.7% of the primary energy supply in 2016. 3.3 If different authorisations are issued in respect of different stages of development (e.g., exploration 2.3 To what extent are your jurisdiction’s oil requirements appraisal or production arrangements), please specify met through domestic oil production? those authorisations and briefly summarise the most important (standard) terms (such as term/duration, Portugal does not produce any oil. scope of rights, expenditure obligations).

Further to the PAL, the concession agreement encompasses both 2.4 To what extent is your jurisdiction’s oil production exploration and production activities, as follows: exported? 1. Exploration (prospecção e pesquisa): Any laboratory or field activity conducted for the purposes of finding or assessing This is not applicable in our jurisdiction. petroleum deposits are deemed to be exploration activities (s. 30 DL 109/94). The exploration phase is to last for eight years (s. 35.1 DL 109/94), although this period may be extended 3 Development of Oil and Natural Gas for two consecutive one-year periods, if the concessionaire does not complete the work programme during the first eight years due to a legitimate reason. The concessionaire 3.1 Outline broadly the legal/statutory and organisational is bound to regularly survey the area under the concession, framework for the exploration and production in accordance with the annual work programmes which are (“development”) of oil and natural gas reserves part of the agreement. Such work programmes will bind the including: principal legislation; in whom the State’s concessionaire to carry out surveying activities in at least one mineral rights to oil and natural gas are vested; block per year, from the third year of concession onwards Government authority or authorities responsible for the regulation of oil and natural gas development; and (s. 35.2 DL 109/94). During the exploration period, the current major initiatives or policies of the Government concessionaire is also subject to a relinquishment obligation (if any) in relation to oil and natural gas development. which will apply at the end of the first five years of concession, according to which the concessionaire shall relinquish at least 50% of the initial area (s. 36.1 DL 109/94). If, by the end Exploration and production of petroleum is regulated by Decree- of the first eight years, the concessionaire wishes to extend Law no. 109/94 of 26 April 1994 (hereinafter “DL 109/94”). The the exploration period, in order to do so, 50% of the area aforementioned statute establishes that petroleum deposits are part still under the concession has to be relinquished (s. 36.2 DL of the public domain of the State. Exploration and production 109/94). activities may be exercised by any entity with the required technical 2. Development: If, during the exploration phase, a concessionaire and financial capabilities and upon the grant of a concession (s. 5.1 discovers an economically feasible petroleum deposit, DL 109/94). DL 109/94 was recently amended, by Law no. 82/2017 the subsequent phase is development. In this phase the of 18 August 2017, which established a mandatory requirement for concessionaire will prepare a general work programme for the prior consultation of the local governments in the administrative the development and production of such deposit (s. 37.1 DL proceedings which precede exploration and production activities. 109/94). The general programme will have to be submitted and approved by the ENMC and shall include, inter alia,

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the following information: (i) technical description of the petroleum to be produced; (ii) blueprint of the location of the 3.8 What restrictions (if any) apply to the transfer or petroleum as well as the infrastructure to be installed; (iii) disposal of oil and natural gas development rights or investment programme; and (iv) forecast of the date on which interests? commercial production is expected to begin as well as the progress of production levels in the field (s. 38 DL 109/94). Assignment of the concessionaire’s contractual position is subject 3. Production: Commercial production may begin as soon to the approval of the Energy Minister, and a transfer of more as the respective programme is approved. The production than 50% of the share capital of the concessionaire is also subject phase will initially last for 25 years, although it may be to the aforementioned Minister’s approval (s. 77 DL 109/94). An extended one or more times up to a maximum period of 15 assignment fee will also be payable (s. 54.1(c) DL 109/94). years (ss. 23.3 and 23.5 DL 109/94). The concessionaire is Portugal bound to measure and register all the petroleum extracted and recovered on a daily basis (s. 43 DL 109/94). The 3.9 Are participants obliged to provide any security construction or installation of any pipelines, storage facilities or guarantees in relation to oil and natural gas and other related infrastructure is subject to the approval of development? the Ministry of Energy (s. 45.1 DL 109/94). Yes. In the terms of DL 109/94, one of the requirements of any 3.4 To what extent, if any, does the State have an interested party to participate in a public tender will be to provide a ownership interest, or seek to participate, in the guarantee (s. 11.4(c) DL 109/94); such guarantee is provisional, i.e. development of oil and natural gas reserves (whether it is not meant to last for more than one year and is merely intended as a matter of law or policy)? to secure the proposal submitted in the public tender (ss. 74.1 and 74.2 DL 109/94). The State does not have any ownership interest or seek to participate Besides the aforementioned interim guarantee, concessionaires are in the activities of concessionaires per se. However, as mentioned, also required to provide another guarantee covering the performance petroleum deposits are deemed to be public domain (s. 4 DL 109/94). of the obligations arising out of the licence or the concession agreement, as well as damage caused to the State or to third parties 3.5 How does the State derive value from oil and natural (s. 74.4 DL 109/94). Such guarantee shall amount to 50% of the gas development (e.g. royalty, share of production, programmed works and shall last throughout the period of the taxes)? concession and 60 days thereafter (s. 74.5 DL 109/94).

The State obtains revenue from petroleum operations from taxes and 3.10 Can rights to develop oil and natural gas reserves other fees payable by concessionaires. Oil and gas operators in the granted to a participant be pledged for security, or country are subject to the general tax regime and also to a petroleum booked for accounting purposes under domestic law? income tax. We summarise below the main taxes and fees applicable: 1. Royalty: A progressive tax based indexed to factors such as The possibility to pledge or otherwise encumber rights acquired location (onshore/offshore) and annual production (s. 51.1 under a concession agreement of this type is not expressly regulated DL 109/94). by DL 109/94. However, according to art. 688.1(d) of the Portuguese 2. Income tax: Tax on the profits generated by the concessionaire. Civil Code, rights arising out of concessions of the public domain 3. Surface fee: Fee calculated in accordance with the value may be subject to a mortgage, although the legal rules on the transfer attributed to each square kilometre of the land under the of such rights have to be observed. concession. The fee is paid annually (ss. 52 and 53.1 DL 109/94). 3.11 In addition to those rights/authorisations required DL 109/94 also sets out licence issuance fees, agreement signature to explore for and produce oil and natural gas, what fees and assignment of contractual position fees (s. 54.1 DL 109/94 other principal Government authorisations are and Order (Despacho) no. 82/94 of 24 August 1994). required to develop oil and natural gas reserves (e.g. environmental, occupational health and safety) and from whom are these authorisations to be obtained? 3.6 Are there any restrictions on the export of production? Additional permits may be necessary in addition to the concession. Depending on the permit sought, different authorities will have to There are no legal restrictions on the exportation of production nor be consulted. any obligation to supply the domestic market. The general rule under DL 109/94 is that the concessionaire may freely dispose of the hydrocarbons produced as it wishes, subject to the caveat that 3.12 Is there any legislation or framework relating to the State may, upon a resolution of the Council of Ministers, request the abandonment or decommissioning of physical structures used in oil and natural gas development? If that part or all the petroleum produced is used to supply the domestic so, what are the principal features/requirements of the market, in the event of war or other emergency, and in accordance legislation? with the strategic needs of the country (ss. 78 and 72 DL 109/94). There is no particular legal instrument pertaining to decommissioning; 3.7 Are there any currency exchange restrictions, or nevertheless, DL 109/94 regulates, in very general and brief terms, restrictions on the transfer of funds derived from decommissioning activities. production out of the jurisdiction? Concessionaires may relinquish any part of the concession on grounds of lack of financial or technical feasibility (s. 48.1 DL The European Union principle of the free movement of capital 109/94). applies in Portugal – there are no restrictions of this sort.

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3.13 Is there any legislation or framework relating to 5 Import / Export of Oil gas storage? If so, what are the principal features/ requirements of the legislation? 5.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect Yes. The two most important statutes concerning gas storage are DL of cross-border sales or deliveries of oil and oil 30/2006 and DL 140/2006. Gas storage is one of the components products. of the National Transport, Infrastructure, Storage and LNG Terminal Network (Rede Nacional de Transporte, Infraestrutura de The sale of oil and oil products is not subject to any independent Armazenamento e Terminais GNL – hereinafter “RNTIAT”). licensing procedure, although ENMC will have to certify both the

In accordance with DL 30/2006, which established the general facilities and the market operator (s. 19 of Decree-Law no. 31/2006 Portugal principles on the organisation and functioning of the National of 15 February 2006 as amended by Decree-Law no. 244/2015 of System of Natural Gas, gas storage (including both underground 19 October 2015 – hereinafter “DL 244/2015”). Sale of oil and storage and LNG terminal storage) is operated under a concession oil products to EU Member States, both at the wholesale and retail regime (s. 15.1 DL 30/2006); such concession follows either a levels, is permitted as long as the tax and customs obligations public tender or a restricted tender with a pre-qualification stage (s. are complied with (s. 21 of DL 31/2006 of 15 February 2006 as 15.2 DL 30/2006). Operators (concessionaires) of an underground amended by DL 244/2015). storage facility or an LNG terminal are legally independent from all other entities which, directly or indirectly, carry out other activities in the natural gas value chain. Such operators are also statutorily 6 Transportation barred from holding stakes, directly or through a subsidiary, in companies which produce or sell natural gas (ss. 20-A.1, 20-A.2 6.1 Outline broadly the ownership, organisational and and 20-A.3(e) DL 30/2006). Operators of an underground storage regulatory framework in relation to transportation facility cannot purchase gas for resale (s. 19.4 DL 30/2006). pipelines and associated infrastructure (such as DL 140/2006 describes the underground storage of natural gas as an natural gas processing and storage facilities). activity which includes inter alia: acceptance, storage, extraction, treatment and delivery of natural gas, both for the constitution of Natural gas comes into the country through a pipeline at the border reserves and for operational and commercial purposes; and the with Spain. The pipelines which make up the National Natural construction, maintenance and operation of all infrastructure related Gas Transport Network transport the hydrocarbons to the smaller thereto (s. 16.2 DL 140/2006). Similarly, LNG terminal storage networks operated by the different distribution companies. Natural includes: acceptance, storage, treatment and regasification of LNG; gas is stored underground inside saline aquifers. loading (onto tanker trucks or LNG vessels); and the construction, Alternatively, the other point of entry for LNG is the Sines Terminal, maintenance and operation of related infrastructure (s. 18.2 DL which receives and stores the LNG up to the point of regasification; 140/2006). after regasification, the hydrocarbons are directly pumped into the pipelines which connect the Sines Terminal to the National Network. 3.14 Are there any laws or regulations that deal specifically with the exploration and production of unconventional 6.2 What governmental authorisations (including oil and gas resources? If so, what are their key any applicable environmental authorisations) are features? required to construct and operate oil and natural gas transportation pipelines and associated There is no specific regime relating to exploration and production of infrastructure? unconventional reserves. As briefly described in question 3.13 above, any activity which integrates the RNTIAT may be carried out through a concession 4 Import / Export of Natural Gas (including (s. 15.1 DL 30/2006). The notion of transportation of natural gas LNG) includes acceptance, transport and delivery through high-pressure networks, and the construction, maintenance and operation of all related infrastructure (s. 14.3 DL 140/2006). 4.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect of cross-border sales or deliveries of natural gas 6.3 In general, how does an entity obtain the necessary (including LNG). land (or other) rights to construct oil and natural gas transportation pipelines or associated infrastructure? Entities which sell natural gas are subject to registration (s. 33 DL Do Government authorities have any powers of 140/2006); however, such entities have the right to trade natural compulsory acquisition to facilitate land access? gas either through bilateral agreements or on organised markets and, most importantly, the right to freely negotiate the terms and Concessionaires have the right to request servitudes and even the conditions of such sales with their clients (s. 35.1 DL 140/2006). expropriation of immovable property necessary for the construction of infrastructure deemed to be necessary to the concession (s. 8.1(b) DL 140/2006). However, such concessionaires are also bound to pay any due compensation which may arise (s. 8.3(e) DL 140/2006).

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Conversely, concerning access to public natural gas infrastructure, 6.4 How is access to oil and natural gas transportation the Regulation on the Access to Networks, Infrastructure and pipelines and associated infrastructure organised? Interconnections of the Natural Gas Sector (hereinafter “RANI”) establishes that the fee payable for accessing such infrastructure is Access to the public networks of natural gas distribution is granted regulated by ERSE in the Tariff Regulation (s. 15 RANI). by a concession or licence. Further, RNTIAT operators are bound inter alia to ensure the access of third parties to the network in a non- discriminatory and transparent manner (s. 13.5(e) DL 140/2006). 7 Gas Transmission / Distribution

6.5 To what degree are oil and natural gas transportation 7.1 Outline broadly the ownership, organisational and Portugal pipelines integrated or interconnected, and how is co- regulatory framework in relation to the natural gas operation between different transportation systems transmission/distribution network. established and regulated? For the purposes of DL 140/2006, distribution encompasses: (i) Oil pipelines are not integrated, while natural gas pipelines are, as the receipt and delivery of natural gas to final customers through referred to above, interconnected. medium- and low-pressure networks; (ii) the receipt, storage and regasification of LNG, its transportation and delivery to final 6.6 Outline any third-party access regime/rights in customers; and (iii) the construction, maintenance and operation of respect of oil and natural gas transportation and all infrastructure related thereto (s. 20.2 DL 140/2006). associated infrastructure. For example, can the Distribution may thus be carried out through a regional distribution regulator or a new customer wishing to transport concession or a local distribution licence. The latter will be oil or natural gas compel or require the operator/ owner of an oil or natural gas transportation pipeline issued in territorial areas which are not covered by the regional or associated infrastructure to grant capacity or concessions (s. 22.1 DL 140/2006) and cover the distribution of expand its facilities in order to accommodate the new natural gas and the receipt, storage and regasification in autonomous customer? If so, how are the costs (including costs units connected to the licensee’s respective network (s. 23.2 DL of interconnection, capacity reservation or facility 140/2006). Concessions are awarded for a maximum period of 40 expansions) allocated? years, while licences may only be awarded for a maximum of 20 years (ss. 9 and 26 DL 140/2006). One of the statutory duties of RNTIAT operators is to adequately plan and ensure the expansion and technical management of the national distribution network in order to ensure third-party access. 7.2 What governmental authorisations (including any applicable environmental authorisations) are required This general rule of granting third parties access to infrastructure to operate a distribution network? applies not only in distribution, but also to other storage and transport facilities. The authorisations are either the concessions or the licences. However, this general principle does not apply to closed networks (defined as a distribution network which distributes natural gas within an industrial or commercial location, or within a 7.3 How is access to the natural gas distribution network geographically limited location excluded from the concessions and organised? licences granted for natural gas distribution), whereby the owners and operators freely agree on the rates (s. 29-A.6 DL 140/2006); The RANI establishes that access to the natural gas distribution however, if the third party does not agree with the rates or practices network is obtained through a contract entered into between the of a closed network, a complaint may be made to ERSE which will interested party and the operator of the network. The general terms establish a fair rate to be applied (s. 29-A.7 DL 140/2006). of such contract are subject to regulation by ERSE (s. 10.1 RANI) and are entered into for a maximum period of one year, between 05:00 on 1 October and 05:00 of 1 October of the following year. 6.7 Are parties free to agree the terms upon which oil These agreements are automatically renewable for successive one- or natural gas is to be transported or are the terms year periods (ss. 11.1 and 11.2 RANI). (including costs/tariffs which may be charged) regulated? 7.4 Can the regulator require a distributor to grant The regime differs between natural gas and oil. capacity or expand its system in order to accommodate new customers? Third-party access to oil storage and transport infrastructure is regulated by DL 31/2006 (as amended), according to which the In principle, yes, the law provides that the granting authority may owners of pipelines or storage facilities which are in the public require the concessionaire to expand the network on the grounds interest have to allow third-party access to them, through an of safety, frequency and quality of supply, if such expansion is agreement, negotiated in a non-discriminatory and transparent consistent with the concession (DL 140/2006). manner (s. 24.1 of DL 31/2006 as amended by DL 244/2015). In this context, owners of this sort of infrastructure are statutorily bound to: (i) inform ENMC of the prices agreed upon within 30 7.5 What fees are charged for accessing the distribution days; (ii) submit an annual price rate plan on the price method to network, and are these fees regulated? be applied the following year; and (iii) regularly publish and update the capacity of their infrastructure (s. 24.2 DL 31/2006 as amended Yes. Please see question 6.7 above. by DL 244/2015).

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7.6 Are there any restrictions or limitations in relation to 9.2 What governmental authorisations are required to acquiring an interest in a gas utility, or the transfer construct and operate LNG facilities? of assets forming part of the distribution network (whether directly or indirectly)? Please see question 9.1 above.

The transfer or assignment of a concession without the previous authorisation of the granting authority is void. For these purposes, 9.3 Is there any regulation of the price or terms of service in the LNG sector? the assignment of shares which results in a change of control is considered equivalent to the transfer of concession, and therefore also requires authorisation. On the same terms, the transfer of a Access to the LNG Terminal is granted through an agreement entered Portugal local distribution licence is also conditional on the authorisation of into between the Terminal operator and the interested party. The the competent Minister (s. 27.1 DL 140/2006). operator will charge a fee for the use of the relevant infrastructure under the terms of the RANI.

8 Natural Gas Trading 9.4 Outline any third-party access regime/rights in respect of LNG facilities. 8.1 Outline broadly the ownership, organisational and regulatory framework in relation to natural gas As mentioned, third-party access to LNG facilities is formalised trading. Please include details of current major by an agreement to that effect. The general terms of such initiatives or policies of the Government or regulator agreement have to be approved by ERSE, and are entered into for (if any) relating to natural gas trading. a maximum period of one year, between 00:00 on 1 October and 24:00 of 30 September of the following year. These agreements are Natural gas trading may be carried out under one of the following automatically renewable for successive one-year periods (ss. 11.1 regimes: (i) free trading; and (ii) last resort trading. and 11.2 RANI). Operating under the free trading regime is subject to registration with DGEG (ss. 33 and 34 of DL 140/2006). An operator under this regime has the right to trade natural gas through bilateral 10 Downstream Oil agreements with other agents or in organised markets, access necessary infrastructure, and freely agree on the sale of natural gas 10.1 Outline broadly the regulatory framework in relation with its customers (s. 35.1 DL 140/2006). On the other hand, such to the downstream oil sector. operators are also bound to the regular provision of information to the regulator and their customers concerning, inter alia, consumption The National Oil System (Sistema Petrolífero Nacional – hereinafter levels, prices and tariffs (s. 35.2 DL 140/2006). “SPN”) is made up of the following activities: (i) refining of crude On the other hand, the last resort trading regime is deemed to be a oil and petroleum products; (ii) storage of crude oil and petroleum public service, whereby operators supply natural gas to economically products; (iii) transport of crude oil and petroleum products; (iv) vulnerable customers (s. 40.3 DL 140/2006) – both at the wholesale distribution of petroleum products; and (v) sale of crude oil and and retail levels (s. 40.1 DL 140/2006). These operators benefit petroleum products (ss. 12.1 and 12.2 of DL 31/2006 as amended by from a tariff which aims to guarantee the economic and financial DL 244/2015). The exercise of these activities falls under a regime viability of the activity (s. 41.2 DL 140/2006). of free competition, without prejudice to the observance of the public interest (s. 4.3 of DL 31/2006 as amended by DL 244/2015) – meaning, in other words, operators have to comply with public 8.2 What range of natural gas commodities can be traded? For example, can only “bundled” products interest principles such as safety, frequency and quality of supply, (i.e., the natural gas commodity and the distribution consumer protection and the promotion of energy efficiency. thereof) be traded? The same entity can carry out more than one activity which composes the SPN (s. 12.2 of DL 31/2006 as amended by DL 244/2015). Legal entities which carry out natural gas trading have to be independent and autonomous from other legal entities which provide 10.2 Outline broadly the ownership, organisation and other services in the natural gas value chain (i.e. transportation, regulatory framework in relation to oil trading. storage, etc.). As mentioned, oil trading is one of the activities which integrates the 9 Liquefied Natural Gas SPN; as such, it is subject to certification. In particular, oil trading does not require any autonomous licence, despite the licensing of the facilities and the certification of the operator by the ENMC 9.1 Outline broadly the ownership, organisational and being required (s. 19.1 of DL 31/2006 as amended by DL 244/2015). regulatory framework in relation to LNG facilities. Traders may be retailers or wholesalers, and different rights and obligations apply to each type of agent (s. 20.1 of DL 31/2006 as LNG storage and regasification terminals are operated by amended by DL 244/2015). concessionaires (s. 18 DL 140/2006). The award of the concession follows a public tender or a tender restricted by a pre-qualification phase, and culminates with the signature of a concession agreement between the concessionaire and the granting authority.

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purposes if the common company incorporated carries out activities 11 Competition as an economically autonomous entity (s. 36.2).

11.1 Which governmental authority or authorities are responsible for the regulation of competition aspects, 12 Foreign Investment and International or anti-competitive practices, in the oil and natural Obligations gas sector?

12.1 Are there any special requirements or limitations on The competent governmental authority in this regard is the acquisitions of interests in the natural gas sector Competition Authority (Autoridade da Concorrência – hereinafter (whether development, transportation or associated Portugal “AdC”), although in the domains of oil and gas the AdC may be infrastructure, distribution or other) by foreign complemented by the powers and competences of ERSE and ENMC. companies?

11.2 To what criteria does the regulator have regard in No further restrictions apply to foreign companies. determining whether conduct is anti-competitive? 12.2 To what extent is regulatory policy in respect of the The Portuguese Competition Law establishes, inter alia, the oil and natural gas sector influenced or affected following practices as anti-competitive: (i) fixing prices; (ii) limiting by international treaties or other multinational or controlling production, distribution, technical development or arrangements? investment; (iii) dividing the market or supply sources; and (iv) applying different conditions to commercial partners supplying Besides EU laws and regulations applicable to the oil and natural an equivalent good or service (s. 9 of the Competition Law gas sector, Portugal is also a signatory to the Energy Charter Treaty approved by Law no. 19/2012 of 8 May 2012 – hereinafter “Law and a member of the International Energy Agency. no. 19/2012”). The aforementioned statute also includes abuse of dominant position and abuse of economic dependence (ss. 11 and 12 Law no. 19/2012). 13 Dispute Resolution

11.3 What power or authority does the regulator have to 13.1 Provide a brief overview of compulsory dispute preclude or take action in relation to anti-competitive resolution procedures (statutory or otherwise) practices? applying to the oil and natural gas sector (if any), including procedures applying in the context of disputes between the applicable Government The AdC may investigate particular transactions or market practices authority/regulator and: participants in relation to oil if it suspects anti-competitive practices. Complaints may also be and natural gas development; transportation pipeline filed with the AdC regarding the same. and associated infrastructure owners or users in relation to the transportation, processing or storage of natural gas; downstream oil infrastructure owners 11.4 Does the regulator (or any other Government or users; and distribution network owners or users in authority) have the power to approve/disapprove relation to the distribution/transmission of natural gas. mergers or other changes in control over businesses in the oil and natural gas sector, or proposed acquisitions of development assets, transportation or DL 109/94 elects arbitration as the resolution mechanism for any associated infrastructure or distribution assets? If so, disputes arising out of the interpretation of legal and contractual what criteria and procedures are applied? How long provisions between the State and the concessionaires. The seat of does it typically take to obtain a decision approving or such arbitration is Lisbon, and Portuguese arbitration law will apply disapproving the transaction? (s. 80 DL 109/94).

Company mergers are subject to a procedure of previous notification if: 13.2 Is your jurisdiction a signatory to, and has it duly ratified into domestic legislation: the New York ■ as a consequence of the merger, the national market share Convention on the Recognition and Enforcement of acquired, created or re-enforced, becomes equal to or Foreign Arbitral Awards; and/or the Convention on surpasses 50% (s. 37.1(a) Law no. 19/2012); the Settlement of Investment Disputes between States ■ the national market share acquired, created or re-enforced, and Nationals of Other States (“ICSID”)? corresponds to 30%–50%, as long as the individual annual turnover obtained in Portugal for at least two members of the In 1994, Portugal acceded to the New York Convention on the merger is over EUR 5 million (s. 37.1(b) Law no. 19/2012); or Recognition and Enforcement of Foreign Arbitral Awards, subject ■ the group of relevant companies obtained, in Portugal, a to the reservation of reciprocity. turnover of over EUR 100 million, as long as the individual annual turnover of at least two of the members was over EUR 5 million (s. 37.1(c) Law no. 19/2012). 13.3 Is there any special difficulty (whether as a matter of law or practice) in litigating, or seeking to enforce For the purposes of the Competition Law, a merger is any operation judgments or awards, against Government authorities where there is a long-lasting change of control on all or part or State organs (including any immunity)? of one or more companies (s. 36.1), be it via the merger of two previously independent companies or parts of companies, or the No specific difficulties will apply in a suit brought against the State direct or indirect acquisition of control of at least one company. The or a public authority. incorporation of a common company qualifies as a merger for these

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Sines LNG Terminal, due to its geographic location, as a centrepiece 13.4 Have there been instances in the oil and natural gas in the supply of the European LNG market; which would, in sector when foreign corporations have successfully principle, provide an alternative entry point for hydrocarbons into obtained judgments or awards against Government Europe, avoiding the politically more contentious routes through authorities or State organs pursuant to litigation before domestic courts? Algeria and Russia. On this point, the Portuguese Ministry for the Sea and the United To our knowledge, there are no such judgments or awards. States Bureau of Energy Resources have signed an agreement for the promotion of LNG, in which both countries recognise the increased role of the Sines Terminal as the LNG hub of the Atlantic Ocean. 14 Updates Portugal

14.1 Please provide, in no more than 300 words, a summary of any new cases, trends and developments in Oil and Gas Regulation Law in your jurisdiction.

The upcoming developments in the oil and gas sector in Portugal will probably be motivated by the government’s efforts to promote the

Tomás Vaz Pinto Claudia Santos Cruz Morais Leitão, Galvão Teles, Morais Leitão, Galvão Teles, Soares da Silva & Associados Soares da Silva & Associados Rua Castilho, 165 Rua Castilho, 165 1070-050 1070-050 Lisbon Lisbon Portugal Portugal

Tel: +351 213 817 439 Tel: +351 213 817 430 Email: [email protected] Email: [email protected] URL: www.mlgts.pt URL: www.mlgts.pt

Tomás Vaz Pinto joined the firm in 1994 and became a partner in 2006. Claudia Santos Cruz joined the firm as a consultant in 2015 assisting He coordinates one of the corporate and commercial teams. clients on the international and cross-border aspects of their investments in Portugal, Angola and Mozambique. Tomás is highly experienced in the areas of M&A and Corporate and has been involved in several high-level transactions, both at a Claudia has close ties to both Africa and England. She was born in domestic and international level. He is an expert in privatisation cases. Mozambique, grew up in South Africa and holds dual Portuguese and He is also an expert on private equity and assists various clients in this Mozambican nationality. sector and is head of the Oil & Gas team at MLGTS. She trained and practised as an English solicitor from 1994 to 2005 at He was one of the winners of the 2009 “40 under Forty Award” DLA Piper and Watson Farley & Williams in the City of London. From organised by Iberian Lawyer magazine which distinguishes the best 2005 to date Claudia has been based in Lisbon and is registered with 40 lawyers under the age of 40 in Iberia. the Portuguese Bar Association. She is ranked as a leading lawyer by the most prestigious international Directories. She specialises in areas such as Energy and Natural Resources (Oil & Gas/Mining), international aspects of foreign investment into Angola and Mozambique, and in Shipping. Claudia Santos Cruz would like to thank Lourenço Limão Oliveira, a junior associate at MLGTS, for his support and contribution in the preparation of this chapter.

Rooted in prestigious law firms founded in the 1930s and 1960s, today MLGTS is one of the leading law firms in Portugal. Independent and internationally recognised, MLGTS’s reputation is based on the excellence of our legal services, the promptness of our response time, the professionalism of our team and the innovative solutions we provide. We offer specialised services in the main areas of law, having been involved in many of the largest and most important operations in Portugal, as well as in high-value cross-border transactions and disputes. We also provide multilingual representation to large companies around the world. Since 2001, MLGTS has been the exclusive member firm in Portugal of Lex Mundi. Working with other Lex Mundi firms, MLGTS is able to handle its clients’ most challenging cross-border transactions and disputes worldwide.

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Russia Rustam Kurmaev

Rustam Kurmaev and Partners Vasily Malinin

Russia’s energy sector consists of the following key subsectors: 1 Overview of Natural Gas Sector (1) Oil industry. (2) Gas industry. 1.1 A brief outline of your jurisdiction’s natural gas (3) Coal industry. sector, including a general description of: natural gas reserves; natural gas production including (4) Electric-power industry (atomic power, hydropower). the extent to which production is associated or As one of the world’s dominant suppliers of energy resources, Russia non-associated natural gas; import and export of occupies a confident place on the international energy market. BP natural gas, including liquefied natural gas (LNG) analysts think that over the next 20 years, Russia will continue liquefaction and export facilities, and/or receiving and to be one of the largest energy exporters in the world, satisfying re-gasification facilities (“LNG facilities”); natural gas pipeline transportation and distribution/transmission more than 5% of global demand for primary energy resources by network; natural gas storage; and commodity sales 2040. Russia is also predicted to remain one of the world’s leading and trading. producers of fossil fuels, accounting for 14% of global oil and gas production. For example, by 2040, Russian oil production will grow The gas industry is the largest element of the Russian economy and by 2 million bpd (to 13 million bpd), while Russian gas production the global energy supply system. Russia ranks first in the world in will climb by 29% (to 72 billion SCFD) by 2040 against a backdrop terms of gas production, reserves and resources, providing over 21% of growing demand on the global markets. of world production and about 25% of all international supplies. Russia’s total energy resources can be broken down according to the In the first eight months of 2018, gas production in Russia grew by consumption level of primary energy resources in 2016: oil (22%); 5.6% year on year (YoY) and amounted to 473.785 billion m3. gas (52%); coal (8%); atomic power (7%); hydropower (6%); and renewable resources (2%). BP analysts forecast only a slight change The data on the production of Gazprom CDU TEK is traditionally in the aforementioned breakdown in the period through 2040. not separately distinguished, including such in the production volumes of other subsoil users. In the first eight months of 2018, gas production from this category 1.3 To what extent are your jurisdiction’s natural gas of companies amounted to 360.330 billion m3, including 40.772 requirements met through domestic natural gas production? billion m3 in August. For independent and vertically integrated oil companies, the Gas covers about 52% of all energy needs of the country. See statistics for the first eight months of 2018 are as follows: question 1.2. ■ Rosneft – 30.072 billion m3 (in August – 3.670 billion m3). ■ NOVATEK – 29.514 billion m3 (in August – 3.589 billion m3). 1.4 To what extent is your jurisdiction’s natural gas production exported (pipeline or LNG)? ■ LUKOIL – 14.049 billion m3 (in August – 1.725 billion m3). 3 ■ Gazprom Neft – 11.271 billion m (in August – 1.616 billion Gazprom is actively preparing to enter the Chinese market. Over the 3 m ). past several years, China has been pursuing a policy of improving 3 ■ Surgutneftegaz – 6.492 billion m (in August – 0.815 billion air quality and replacing coal with gas in virtually all of its industrial 3 m ). sectors, prompting Russia’s serious intentions to conquer the ■ PSA operators – 18.182 billion m3 (in August – 1.916 billion Chinese gas market. m3). In May 2014, Gazprom and China’s CNPC signed an agreement on supplies of Russian gas to China along the Eastern route. The 1.2 To what extent are your jurisdiction’s energy agreement was concluded for a term of 30 years and envisions an requirements met using natural gas (including LNG)? annual supply of 38 billion m3 of Russian gas to China via the Power of Siberia pipeline. Deliveries are slated to start on 20.12.2019. Russia’s energy sector is strategic for the country, insofar as energy The pipeline will span a total length of roughly 4,000 km, and its is the driver of Russian economic growth and the main source for operation will be supported by eight compressor stations with a total replenishing the State budget. capacity of 1,331 MW.

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As of September 2018, Gazprom reports that it has built 93% of In general, from January to August 2018, oil and gas condensate the Power of Siberia. The announcement indicates that “2,010 production in Russia grew by 0.3% YoY, amounting to 366.006 km of pipe have been welded and laid on the Power of Siberia million tons. pipeline section running from Yakutia to the Russian-Chinese For vertically integrated and large independent oil companies, the border, accounting for 93% of its total length”. Consequently, in statistics for the first eight months of 2018 are as follows: 2018–2019, the Power of Siberia gas-construction project will be ■ Rosneft – 127.685 million tons (in August – 16.613 million completed and deliveries of Russian gas to China will commence tons). by year-end 2019. ■ LUKOIL – 54.34 million tons (in August – 7.041 million Nor is Russia sparing any effort to conquer the European gas tons). market. Another Russian project, Power of Siberia-2, has already ■ Surgutneftegaz – 40.269 million tons (in August – 5.306 Russia secured a full set of permits for construction and operation of the million tons). gas pipeline in Germany, Finland and Sweden. On 07.06.2018, the ■ Gazprom Neft – 26.428 million tons (in August – 3.584 RF Ministry of Construction, Housing and Public Utilities issued a million tons). construction permit for the Russian section of the pipeline. Yet to ■ Tatneft – 19.327 million tons (in August – 2.532 million be obtained in Russia is a permit for the construction of submerged tons). pipeline sections in Russian territorial waters. ■ Bashneft – 12.623 million tons (in August – 1.614 million The Nord Stream 2 gas pipeline will run through the Baltic Sea, tons). connecting suppliers in Russia with consumers in Europe and ■ Slavneft – 9.091 million tons (in August – 1.195 million spanning a total length of more than 1,200 km. Throughput capacity tons). will amount to 55 billion m3 of gas per year. Construction of this ■ NOVATEK – 4.902 million tons (in August – 609 thousand pipeline is critical to ensuring uninterrupted supplies of gas to tons). Europe, insofar as transit supplies through Ukraine could come to ■ RussNeft – 4.717 million tons (in August – 609 thousand an end in just a couple of years and Russia needs to have alternate tons). supply routes in place by that time. ■ Neftegasholding (formerly NOC) – 1,292 thousand tons (in Finally, Russia is successfully moving forward with the development August – 166.1 thousand tons). of supplies through the Eastern European region. On 07.05.2017, ■ Operators of PSA – 11.946 million tons (in August – 1.381 construction of the TurkStream gas pipeline commenced in the million tons). Black Sea, with the work starting off on the Russian coast. The ■ Other subsoil users – 53.388 million tons (in August – 6.761 TurkStream project envisions a gas pipeline running from Russia million tons). to Turkey through the Black Sea and terminating at the Turkish border with neighbouring countries. The first string of the pipeline In total, oil production in Russia reached a multi-year maximum. is intended for the Turkish market, the second for the countries In the summer, the production volume of “black gold” exceeded 47 of Southern and Southeastern Europe. The throughput capacity million tons per month. Over the past five years, these figures were of each string is expected to be 15.75 billion m3 of gas per year. recorded only in the fall of 2016. Since oil quotes are above $77 per Construction of the pipeline’s marine section will be handled by barrel of Brent, and the ruble is weak, the Russian budget receives South Stream Transport B.V. The company management has the maximum income from oil exports. been tasked with actively continuing work on implementation of According to ВР analysts, by 2040, Russian oil production will grow the TurkStream project in 2018 in order to ensure that it can be by 2 million bpd (to 13 million bpd). In terms of the production of commissioned according to schedule – by year-end 2019. liquid hydrocarbons, Russia will lag behind only the USA and Saudi The above-described development thrusts should be enough to Arabia. ensure growing volumes of Russian gas production. For example, according to ВР analysts, Russian output is expected to increase by 2.2 To what extent are your jurisdiction’s energy 29% (to 72 billion SCFD) by 2040. requirements met using oil?

Oil covers about 22% of all the energy needs of the country. See 2 Overview of Oil Sector question 1.2.

2.1 Please provide a brief outline of your jurisdiction’s oil 2.3 To what extent are your jurisdiction’s oil requirements sector. met through domestic oil production?

In 2018, Russia’s position on the oil market saw a marked Russia’s demand for oil is almost completely covered by domestic improvement. The main factor driving such an upturn is almost companies. certainly the deal to cut oil production struck between OPEC members and other petroleum-producing countries. In January 2018, the Joint Technical Committee (JTC) of OPEC countries and 2.4 To what extent is your jurisdiction’s oil production exported? non-Member States noted that the goal of reducing oil production by all member countries reached a rate of conformity of 107%. Consequently, as a result of the collective actions taken by OPEC An important export trend in 2018 was the reallocation of export members and a number of other countries, oil supply on the global flows of Russian oil, including the Urals brand, in favour of APR market was restricted, which had a favourable impact on growing consumers. This was made possible thanks to the OPEC+ deal. oil prices. That said, the countries pledged to OPEC to keep 2018’s Prolongation of the OPEC+ deal until year-end 2018 would likely oil production. cause increased Russian oil production for 2018.

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Finally, it is worth mentioning that, in 2018, oil shipments to the Federation, as well as on the continental shelf and (or) within East ticked up thanks to the effective start in January 2018 of a five- the exclusive economic zone of the Russian Federation on year agreement between Rosneft and CEFC China Energy for a total production sharing agreement (PSA) terms. volume of 60.8 million tons of oil. (7) RF Federal Law No. 116-FZ dated 21.07.1997 “On the However, in general, the volume of oil exports in the first half of Industrial Safety of Hazardous Production Facilities” determines the legal, economic and social foundations of 2018 decreased by 1% compared with January–June 2017 and ensuring the safe operation of hazardous production facilities amounted to 126.3 million tons, including data on mutual trade with and is aimed at preventing accidents at such facilities and EEU countries. This was confirmed by Rosstat data published on ensuring the preparedness of legal entities and individual 27.08.2018. entrepreneurs operating hazardous production facilities

Russia (hereinafter also referred to as “hazardous production facility operators”) for the localisation and liquidation of the 3 Development of Oil and Natural Gas aftermath of such accidents. The above list is not exhaustive but reflects the basic foundation of 3.1 Outline broadly the legal/statutory and organisational Federal law in this area. At the same time, despite the rather serious framework for the exploration and production regulatory framework that governs the sector, it would not be (“development”) of oil and natural gas reserves accurate to say that the current system of laws regulating the oil and including: principal legislation; in whom the State’s gas sector is ideal or sufficient to allow its administrators, including mineral rights to oil and natural gas are vested; judges, to effectively apply the proper laws and sub-statutes in the Government authority or authorities responsible for course of their professional activity. the regulation of oil and natural gas development; and current major initiatives or policies of the Government An important place in the sphere of legal regulation of mining (if any) in relation to oil and natural gas development. privity is occupied by the Regulation on the Licensing of Subsoil Use Licensing approved by the Decree of the Supreme Council Oil and gas legislation in the Russian Federation is represented by of the Russian Federation dated 15.07.1992, and approved by the the following list of regulatory acts that carry both general legal and Decree of the Government of the Russian Federation No. 39 dated special significance: 02.02.2010 of the State Supervision Regulation for the safe conduct (1) Civil Code of the Russian Federation (Part II), governing of work related to the use of subsoil and other legal acts. relations among subjects of law with respect to oil and gas agreements (para. 6, Chapter 30). 3.2 How are the State’s mineral rights to develop oil (2) RF Federal Law No. 69-FZ dated 31.03.1999 “On Gas Supply and natural gas reserves transferred to investors or in the Russian Federation” determines the legal, economic companies (“participants”) (e.g. licence, concession, and organisational foundations of relations in the area of gas service contract, contractual rights under Production supply in the Russian Federation and is aimed at ensuring Sharing Agreement?) and what is the legal status of satisfaction of the State’s need for strategic energy resources. those rights or interests under domestic law? (3) RF Federal Law No. 147-FZ dated 17.08.1995 “On Natural Monopolies” determines the legal foundations of Federal The subsoil within the borders of the territory of the Russian policy with respect to natural monopolies in the Russian Federation, including underground space and minerals, energy and Federation and is aimed at achieving a balance of interests other resources contained in the subsoil, are State property. Subsoil among consumers and natural-monopoly entities ensuring plots may not be the subject of purchase, sale, donation, inheritance, the affordability of the goods sold by the latter to consumers contribution, pledge or be alienated in any other form. Minerals and as well as the efficient operation of the natural-monopoly other resources extracted from the subsoil can be in Federal State entities themselves. ownership, the property of the constituent entities of the Russian (4) RF Federal Law No. 135-FZ dated 26.07.2006 “On the Federation, municipal, private and in other forms of ownership. Protection of Competition” determines the organisational and legal foundations for the protection of competition for Thus, the subsoil areas that are the source of oil and gas can only the purposes of ensuring the unity of the economic space, the be in the State’s ownership. These sites cannot be transferred to a free movement of goods, the freedom of economic activity private owner. Meanwhile, legal entities and individuals who have in the Russian Federation, the protection of competition and obtained from the State the right to explore and extract mineral the creation of conditions for the efficient functioning of the resources receive ownership of oil and gas. commodity markets. Subsoil plots are provided for use by legal entities and individuals. (5) RF Law No. 2395-1 dated 21.02.1992 “On Subsoil” governs The site is issued in the form of a mining allotment. A mining relations arising in the area of the geological exploration, use allotment is granted on the basis of a licence that determines the and conservation of subsoil resources, the use of the waste generated in the extraction of mineral deposits and related scope of rights of the holder. refining operations, specific mineral resources (the brine of A subsoil user who has received a mining allotment has the exclusive estuaries and lakes, peat, sapropel and others), underground right to use subsoil within its boundaries in accordance with the waters, including associated waters (waters extracted from licence granted. Any activity related to the use of subsoil within the the subsoil together with raw hydrocarbon deposits) and boundaries of the mining allotment can be carried out only with the waters used by subsoil users for their own production and consent of the subsoil user to whom it is granted. technological needs. The main features of the relationship of subsoil use on the terms (6) RF Federal Law No. 225-FZ dated 30.12.1995 “On Production Sharing Agreements”, adopted in the furtherance of production sharing are established by the Federal Law “On of Russian Federation legislation in the area of subsoil use Production Sharing Agreements”. and investment activity, establishes the legal foundations A production sharing agreement (hereinafter – the agreement) is a of relations arising in the process of the making of Russian contract whereby the Russian Federation grants a business entity and foreign investments in the surveying, exploration and (hereinafter – the investor), on a reimbursable basis and for a certain extraction of raw minerals in the territory of the Russian period, exclusive rights to research, exploration, and extraction of

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mineral raw materials in the subsoil area specified in agreement, (9) conditions for meeting the requirements for the rational and the maintenance of related work, and the investor undertakes use and protection of the subsoil, the safe conduct of work to carry out the implementation of these works at his own expense related to the use of the subsoil, and the protection of the and at his own risk. environment; The lists of subsoil areas, which under Federal Law can be used in (10) conditions for reducing the content of explosive gases in the mine, coal seams and mined-out space to the established accordance with the terms of production sharing, shall be established allowable standards for the extraction (processing) of coal by other Federal laws. (combustible shale); and (11) the procedure and deadlines for the preparation of projects 3.3 If different authorisations are issued in respect of for the elimination or conservation of mine workings and different stages of development (e.g., exploration land remediation. Russia appraisal or production arrangements), please specify those authorisations and briefly summarise the most important (standard) terms (such as term/duration, 3.4 To what extent, if any, does the State have an scope of rights, expenditure obligations). ownership interest, or seek to participate, in the development of oil and natural gas reserves (whether as a matter of law or policy)? In the Russian Federation, the right to mining is granted in two forms: 1) a licence; and 2) a production sharing agreement. The Subsoil plots that are the source of oil and gas can only be in State difference is as follows: licences are standard forms that the State ownership. These sites cannot be transferred to private ownership. uses to transfer the right to use subsoils to private entities. A Meanwhile, legal entities and individuals who have received production sharing agreement is an exclusive form that the State the right to explore and extract mineral resources from the State uses in relation to investors. At the same time, the conclusion of a receive ownership of oil and gas. Part of the extracted minerals may production sharing agreement assumes that a licence will be issued become the property of the State under the terms of the production on the basis of this agreement. sharing agreement. At the same time, a licence to use the subsoil plot, which certifies the The rights of the State to subsoil areas are enshrined in the Federal right to use the subsoil plot specified in the agreement, is issued to Law “On Subsoil”, and the rights to receive a part of the extracted the investor in the manner established by the Federal legislation on minerals in the Federal Law “On Production Sharing Agreements”. subsoil and within 30 days from the date of signing the agreement. The specified licence is issued for the term of the agreement and is subject to renewal or re-issuance or expiration in accordance with 3.5 How does the State derive value from oil and natural the terms of the agreement. gas development (e.g. royalty, share of production, taxes)? The signing of the agreement by the State is carried out by the Government of the Russian Federation. The agreement may be concluded with the winner of the auction, which was held in the When using subsoil, the following payments are made: manner prescribed by the legislation of the Russian Federation. The (1) flat charge for the use of subsoil upon the occurrence of auction winner is the bidder who offered the highest price for the certain events specified in the licence, including one-time right to enter into an agreement. payments made upon a change in the boundaries of the subsoil areas provided for use; As for licences, they can be issued by Federal, regional or municipal (2) regular payments for subsoil use; and authorities. The licence and its integral parts must contain: (3) fee for participation in the competition (auction) for the right (1) information about the user of the subsoil who has obtained to obtain a licence. the licence and the bodies that granted the licence, as well as the basis for granting the licence; In addition, subsoil users pay other taxes and fees established in (2) data on the purpose of work related to the use of subsoil; accordance with the legislation of the Russian Federation on taxes and fees (mineral extraction tax). (3) indication of the boundaries of the subsoil plot provided for use; The most important change in the legal regulation may affect the tax (4) an indication of the boundaries of the territory, land or water sphere, which introduces a new tax on added income (TAI). Under area allocated for the conduct of work related to the use of the plan, the TAI will be extended to four groups of deposits: subsoil resources; ■ The first group includes new deposits in Eastern Siberia with (5) the licence validity period and the start date of the work (the a depletion of less than 5%. preparation of the technical project, the output of the design ■ The second group includes fields that enjoy the export duty capacity, the submission of geological information to the exemption. State expertise); ■ The third group consists of operating fields in Western Siberia (6) conditions related to payments collected when using the with a depletion of 10% and a total production volume of no subsoil, land plots, water areas; more than 15 million tons per year as of 01.01.2017. (7) the agreed level of extraction of minerals, as well as associated ■ The fourth group includes new deposits in Western Siberia minerals (if available), an indication of the owner of the with a depletion of less than 5% with aggregate reserves of extracted minerals, as well as associated mineral resources (if no more than 50 million tons per year. available); The tax base will be determined as the estimated cash flow from (8) the deadlines for submission of geological information about operating and investment activities for the exploration and the subsurface in accordance with Article 27 of this Law to production of hydrocarbons in the subsoil plot. The TAI will be the Federal fund of geological information and its territorial deducted from the income tax base; in all other cases the current funds, as well as to the funds of geological information of the procedure for calculating the income tax will remain. constituent entities of the Russian Federation (in relation to licences for the use of local subsurface resources);

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The implementation of the TAI will additionally involve up to body specified in the announcement of the auction and makes 5 billion tons of oil in development by 2025 to maintain the a payment of the deposit amount for the details specified in the production levels achieved, increase the oil recovery factor and procedure and conditions of the auction subsoil use. increase industry tax revenues. Applicants who have not paid the fee for participation in the competition or have not paid the deposit and the fee for participation 3.6 Are there any restrictions on the export of in the auction in time are not allowed to participate. production? There are no other forms of security of obligations.

There are no any significant limitations. However, such restrictions 3.10 Can rights to develop oil and natural gas reserves Russia are planned to be introduced. granted to a participant be pledged for security, or Deputy Prime Minister Dmitry Kozak instructed for a ban to be booked for accounting purposes under domestic law? implemented on the export of oil and oil products from the country for companies that are not producers of raw materials. This is The general rule contains the Law of the Federal Law “On Subsoil”, stated in the minutes of the meeting with the Deputy Prime Minister which states that the right to use a plot or subsoil plots acquired by reports RIA Novosti with reference to the document, which states a legal entity in the prescribed manner cannot be transferred to third as follows: parties, including by way of assignment of rights. A licence to use “The Ministry of Energy, the Ministry of Economic subsoil plots acquired by a legal entity in the prescribed manner Development, the Federal Anti-Monopoly Service, the cannot be transferred to third parties, including for enjoyment. Ministry of Finance ... until November 12, 2018 should Exceptions to this rule are established by the Federal Law “On further elaborate on alternative mechanisms for filling the Production Sharing Agreements”. domestic market of oil products, including linking the right to export oil and oil products with the obligations of oil and In accordance with the Federal Law “On Production Sharing oil refining companies to ensure the necessary volumes of Agreements”, an investor has the right to transfer fully or partially supplies to the domestic market ... as well as a ban on the his rights and obligations by agreement to any legal entity or any export of oil and oil products for companies that are not citizen (individual) only with the consent of the State, provided producers (the first owners).” that these persons have sufficient financial and technical resources It is reported that within the framework of this instruction, to avoid and management experience necessary to perform work on the the ban, oil companies must supply light oil products in the amount agreement. of not less than 17.5% for processing to Russia with the subsequent The transfer of rights and obligations under the agreement is made sale on the domestic market of produced oil. in writing by drawing up a special deed, which is an integral part of Previously, Dmitry Medvedev, Prime Minister of the Russian the agreement, in the manner and within the time specified in the Federation, made a similar proposal, and Rosneft kept the innovation. agreement and is accompanied by a corresponding reissuance of the licence to use the subsoil within 30 days from the date of signing the above-stated deed. 3.7 Are there any currency exchange restrictions, or restrictions on the transfer of funds derived from With the consent of the State, an investor may use his property and production out of the jurisdiction? property rights as collateral to secure his obligations under contracts concluded in connection with the execution of the agreement, while There are no such restrictions. respecting the requirements of the civil legislation of the Russian Federation.

3.8 What restrictions (if any) apply to the transfer or In addition, a licence may be transferred in the order of universal disposal of oil and natural gas development rights or succession (reorganisation of a legal entity), as well as in the order interests? of transfer of a licence between the parent and subsidiary companies.

There are no such restrictions. 3.11 In addition to those rights/authorisations required to explore for and produce oil and natural gas, what 3.9 Are participants obliged to provide any security other principal Government authorisations are or guarantees in relation to oil and natural gas required to develop oil and natural gas reserves (e.g. development? environmental, occupational health and safety) and from whom are these authorisations to be obtained?

In accordance with Russian law, the deposit is a means of securing Oil, gas, and products of their processing have a serious negative liabilities. The Federal Law “On Subsoil” provides for a deposit impact on the environment. About 42% of the total polluted by any person who wishes to obtain a licence under the terms of a wastewater is accounted for by enterprises in the chemical, tender or auction. petrochemical and oil refining industries. Land pollution by oil and Each participant in a tender or auction for the right to obtain a oil products is becoming one of the main environmental problems licence for exploration and mining of minerals must make a cash of the Russian Federation; this problem is particularly acute in the deposit, ensuring the interests of the State. Tender documentation West Siberian, North Caucasus region, the Middle and Lower Volga or documentation about the auction should contain information regions, the Komi Republic, Bashkortostan and Tatarstan. These about the size, term and procedure for making a deposit, a fee for and other reasons led to the inclusion in RF Federal Law No. 7-FZ participating in a tender or auction for the right to use subsoil, and dated 10.01.2002 “On Environmental Protection” of the new article the form of the deposit agreement. 46. When holding an auction for the right to use subsoil prior to filing This article, namely clause 2 of the article, provides that effective an application for participation in an auction, the applicant signs a measures should be provided for the placement, design, construction, deposit agreement with Federal Subsoil Use Agency or its territorial

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reconstruction, commissioning and operation of oil and gas sources of increased environmental impact and may adversely production facilities, processing, transportation, storage and sale of affect the environment, as well as the population, due to chemical oil, gas and their products, cleaning and disposal of waste production exposure. and collection of oil, (associated) gas and saline water, reclamation of disturbed and polluted land, reducing the negative impact on the 3.12 Is there any legislation or framework relating to environment, as well as to compensate for environmental damage the abandonment or decommissioning of physical caused in the process of construction and operation of oil and gas structures used in oil and natural gas development? If production, processing, transmission, storage and distribution of oil, so, what are the principal features/requirements of the gas and refined products. legislation?

Clause 3 of the aforementioned article states that the construction Russia and operation of oil and gas production facilities, facilities for Mineral mining enterprises and underground structures that are processing, transportation, storage and sale of oil, gas and their not associated with mining operations are subject to liquidation or products is allowed only if there are projects for the restoration of preservation upon expiration of the licence or upon early termination polluted lands in temporary and/or permanent land acquisition zones, of subsoil enjoyment. there have been positive conclusions of the State environmental With the complete or partial elimination or preservation of the impact assessment and other State expert examinations established enterprise or underground structures, the mine workings and by the legislation and financial guarantees for such projects. These boreholes must be brought into a state that ensures the safety of life requirements apply not only to stationary objects but also to mobile and health of the population, protects the environment, buildings transport objects, in particular, oil and other vessels. This rule can and structures, and during conservation also preserves the field, also be found in Article 14 of the Code of Inland Water Transport mine workings and boreholes for the whole period of conservation. of the Russian Federation dated 07.03.2001 (No. 24-FZ), which The liquidation and preservation of a mining company or an provides that, among the ship’s documents on the vessel, must underground structure not related to mining is considered complete be a certificate on prevention of pollution from the vessel by oil, after the signing of the deed of liquidation or conservation by the sewage and rubbish, ensuring environmental safety in the operation licensing authorities and the State mining authority. of vessels, the prevention of pollution from vessels by household, waste and oil-containing waters, oil and other substances harmful to human health and aquatic biological resources, and stating that these 3.13 Is there any legislation or framework relating to are the responsibility of shipowners. Also, Article 39 of this Code gas storage? If so, what are the principal features/ requirements of the legislation? provides that the requirements for ensuring environmental safety in the operation of ships in relation to shipowners are established by the rules for the prevention of pollution from ships with sewage Yes. See question 3.11. and oil-containing waters of inland waterways. When granting a mining allotment to a subsoil user for developing oil and gas fields, 3.14 Are there any laws or regulations that deal specifically the environmental and natural resource legislation provides for with the exploration and production of unconventional certain environmental requirements to ensure the rational use and oil and gas resources? If so, what are their key protection of subsoil in field development, to ensure safety during features? operations, and to protect the interests of the subsoil user and the State. No. In this case, the same regulations as described above apply. The regulation of environmental protection in the sphere of extraction, storage and transportation of oil and gas in the Russian 4 Import / Export of Natural Gas (including Federation is also implemented by RF Federal Law No. 116-FZ LNG) dated 21.07.1997 “On the Industrial Safety of Hazardous Production Facilities”, in which, more precisely, in Appendix No. 1 to this law, it is indicated that the objects on which mining is carried out, the work 4.1 Outline any regulatory requirements, or specific on mineral processing, as well as work in underground conditions, terms, limitations or rules applying in respect of are classified as hazardous production facilities. Because of this, the cross-border sales or deliveries of natural gas classification of oil and gas production as a hazardous production (including LNG). facility leads to a whole series of processes that this organisation must follow. Some оf these processes are considered below. The movement of energy carriers, including natural gas, is carried out by pipeline transport along power lines. Such movements may The activities of facilities where mining is carried out, work on the be of an export nature. enrichment of mineral resources, as well as work in underground conditions is carried out on the basis of a licence, which is issued by Since 01.01.2015, the activities of the Eurasian Economic a special and authorised body, and in the prescribed manner. Community (EurAsEC) ceased, and the legal regulation of most of the issues previously established by decisions of the EurAsEC Also, it is necessary to undergo special expert examinations in the bodies is now enshrined in the Treaty on the Eurasian Economic field of environmental protection. The State Environmental Impact Union. Assessment requires pre-project and project documentation for construction, reconstruction, expansion and technical re-equipment In addition to the Treaty on the Eurasian Economic Union, the main of economic and other facilities associated with the development of rules of international regulation include the Customs Code of the oil and gas fields. In addition, the construction project documentation Customs Union. is subject to industrial safety expertise checks. At the level of national legislation, special attention is paid to Also, a sanitary protection zone is established around oil and gas the legal regulation of relations arising in connection with the facilities, which is mandatory for these facilities, since they are transportation of oil and gas. Separate norms regulating the activities of pipeline transportation are contained in the RF Federal Law No.

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311-FZ dated 27.11.2010 “On Customs Regulation in the Russian Federation” and RF Federal Law No. 117-FZ dated 18.08.2006 “On 6 Transportation Gas Exports”. The fundamentals of the State regulation of gas exports are laid 6.1 Outline broadly the ownership, organisational and down in the Law on Gas Exports, which considers the need to regulatory framework in relation to transportation protect the economic interests of the Russian Federation. pipelines and associated infrastructure (such as natural gas processing and storage facilities). In order to exercise customs control over the export of energy carriers, the customs authorities should establish four defining The concept of the main pipeline is given in para. 2 of the Rules for points: 1) who the exporter is and whether he has admittances the connection of oil refineries to the main oil pipelines and/or oil Russia and privileges; 2) whether the product (energy) corresponds to the product pipelines and accounting for oil refineries in the Russian quality characteristics that determine the amount of payment of Federation, according to which the main pipeline is understood export customs duties; 3) how much energy is exported; and 4) how as a set of technologically interconnected facilities that provide the environmental safety of energy transportation is ensured. transportation of oil and oil products that meet the requirements of In determining the legal status of the exporter, in some cases, the legislation of the Russian Federation, from the place of reception regulatory acts restricting the number of exporters should be taken to the places of delivery or transhipment to other types of transport. into account; for example, the Resolution of the Government of the A similar definition of the main oil pipeline (only without reference Russian Federation No. 1277-p dated 14.08.2014 “On approving the to the transportation of oil products) is contained in the Rules for list of organizations granted the exclusive right to export natural connecting oil production facilities to main oil pipelines in the gas in a liquefied state”. The status of the exporter and the lawful Russian Federation and accounting for business entities engaged in behaviour of the exporter may determine the requirements of the oil production. customs authorities for the provision of security for the payment of The concept of the main pipeline is also given at the level of customs duties. construction legislation and regulations – so in Building Regulations 2.05.06-85 “Trunk pipelines” it is indicated that these standards 5 Import / Export of Oil apply to the design of new and reconstructed main pipelines and branch pipes with a nominal diameter of up to 1,400 mm inclusively with excess pressures of more than 1.2 mPa to 10 mPa for the 5.1 Outline any regulatory requirements, or specific transportation of oil, petroleum products, natural petroleum and terms, limitations or rules applying in respect artificial hydrocarbon gases from the areas of their production of cross-border sales or deliveries of oil and oil (from oil fields), production or storage to places of consumption products. (depots, terminal stations, loading points, distribution stations, some industrial and agricultural enterprises and ports). There is no regulatory definition of crude oil for export purposes in In addition to the linear part of the pipeline, the main pipeline includes customs law. Different approaches to the concept of crude oil and its interrelated parts, such as: the installation of electromechanical petroleum products as exported goods are related to the fact that protection of the pipeline against corrosion, lines and facilities there is no clear standardisation of indicators of oil and some types of technological communication; means of telemechanics of of liquid fuels. It is rather difficult to identify and bring crude oil pipelines; transmission lines for servicing pipelines and power and oil products to a common denominator since crude oil produced supply devices and remote control of valves and electrochemical at various fields is heterogeneous in composition and properties, protection installation pipelines; fire protection, anti-erosion and similar to certain oil fractions with a shallow degree of refining. protective structures of pipelines; tanks for storage and degassing Therefore, for the purposes of customs control, the definition of of condensate; earth barns for emergency release of oil, petroleum oil and oil products as a commodity contains general formulations. products, condensate and liquefied hydrocarbons; buildings and Currently, this problem is being solved at the interstate level: the structures of the linear pipeline operation service; permanent roads work is under way to formulate common markets for oil and oil and helipads located along the pipeline route, and access roads to products, which includes the unification of norms and standards for them; identification and warning signs of the location of pipelines; oil and oil products. head and intermediate pumping stations, tank farms, oil and oil Various approaches are also available in determining the amount products heating points; and pointers and warning signs. and procedure for payment of customs duties. General rules for the A pipeline intended for the carriage of gas or oil is a complex thing payment of customs duties are established at the level of Russian and refers to real estate objects by the direct indication of the law and international law. However, some privileges are established by that qualifies the pipeline as a single property complex. Itmay the bylaws (delegated legislation acts) of the Russian Federation. be defined as a unified immovable complex – a set of buildings, Thus, Resolution of the Government of the Russian Federation No. structures and other things united by a single purpose, inextricably 545 dated 13.07.2014 stipulates that exemption from payment of connected physically or technologically, including linear objects export customs duties is granted when exporting hydrocarbon raw (railways, power lines, pipelines and others), or located on the materials from Russia outside the single customs territory of the same land plot – if in the unified state register rights to immovable Customs Union, provided that the extraction of raw materials at the property registered ownership of the totality of these objects is new offshore field is confirmed by the Russian Ministry of Energy defined as one real estate. Rules for immovable things are applied and the Federal Agency for Subsoil Use. The rates of export customs to single real estate complexes. duties on crude oil and certain categories of goods produced from oil are set by the Government of the Russian Federation. However, The ownership of gas pipelines and oil pipelines may belong both to in customs practice, there are cases of unreliable declaration of the State and to private individuals. oil and oil products, when crude oil is exported under the guise of liquid fuels, in particular, fuel oil, at a rate set for the products of its processing.

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(6) a copy of the certificate of accreditation of the legal entity 6.2 What governmental authorisations (including that issued a positive opinion of the non-State examination of any applicable environmental authorisations) are the project documentation if the conclusion of the non-State required to construct and operate oil and natural examination of the project documentation is submitted. gas transportation pipelines and associated infrastructure? 6.3 In general, how does an entity obtain the necessary Russian legislation provides for several specific requirements for land (or other) rights to construct oil and natural gas transportation pipelines or associated infrastructure? the construction of oil and gas pipelines. Do Government authorities have any powers of First, it is necessary to prepare project documentation for the compulsory acquisition to facilitate land access? construction of a linear object (pipeline). To this end, the interested Russia party must submit the following documents to the designer: Construction is allowed on a formed land plot. That is, in order to ■ a project of territory planning and project of land surveying; obtain a land plot for construction, it is necessary to form a land plot. ■ results of engineering surveys; and Most often, the construction of pipelines is carried out on the ■ technical conditions. land related to the lands for transport use category. However, it Project documentation must meet the following specific is possible to carry out construction on other lands. Land plots requirements. allocated for construction, reconstruction, and overhaul of pipeline transportation facilities from other lands are not transferable to Article 48.1 of the Town Planning Code of the Russian Federation land transportation categories and are provided for the period of establishes a list of hazardous and technically complex facilities, construction, reconstruction, and overhaul of such facilities. which include energy facilities, which are hazardous production facilities, where hazardous substances are transported in quantities Even though the land legislation focuses on the construction of exceeding the limit according to Annexes 1 and 2 to Federal Law pipelines on land transport, the question of classifying pipelines No. 116-FZ dated 21.07.1997 “On industrial safety of hazardous as a means of transport is controversial. Moreover, the courts are production facilities”. inclined to believe that pipeline owners should not be considered as transport organisations. According to Part 14 of Article 48 of the Town Planning Code of the Russian Federation, the project documentation of hazardous Regarding the categorisation of land allocation, the Presidium of production facilities should contain a list of civil defence measures, the Supreme Arbitration Court of the Russian Federation indicated measures to prevent natural and industrial emergencies and counter- that the Land Code of the Russian Federation does not contain terrorism measures. Accordingly, before the construction of the an exhaustive list of transport organisations, and if the relevant pipeline, it is necessary to prepare project documentation containing provisions of special laws are applied, namely, to compare para. 5, 9 this specific section. of Article 1 of the Federal Law “On Transport Security” and clauses 7, 9, 13 of Article 2 of the Federal Law “On the security of fuel and Then, in accordance with Federal Law No. 116-FZ dated 21.08.1997 energy complex”, it can be concluded that the owners of pipelines “On the industrial safety of hazardous production facilities” 196 for oil, gas and oil products belong to the organisations of the fuel hazardous production facilities are subject to registration in the State and energy complex, and not to transport organisations. Therefore, register of hazardous production facilities. The definition of the land on which there are pipelines is not subject to subpara. 7, para. 5 production facility as being hazardous is that the main pipeline leads of Article 27 of the Land Code of the Russian Federation, nor to any to the need to establish a security zone in accordance with Article 90 restrictions in use. The court also indicated that from the provisions of the Land Code of the Russian Federation. With respect to this, of Article 90 of the Land Code of the Russian Federation, it does not a declaration of industrial safety must be developed and approved follow that the owner of any pipeline transportation facility should (Article 14 of the Law on Industrial Safety of Hazardous Production be considered a transport organisation. Facilities). The industrial safety declaration is developed as part of the project documentation for the construction or reconstruction of Accordingly, land located under pipelines does not have the status a hazardous production facility, as well as documentation for the of restricted land. technical re-equipment, conservation or liquidation of a hazardous production facility. 6.4 How is access to oil and natural gas transportation Secondly, after the preparation of project documentation containing pipelines and associated infrastructure organised? the above requirements, one should contact the State agency for obtaining permission to build the pipeline. Construction work According to Article 2 of Federal Law No. 69-FZ dated 31.03.1999 is permitted to begin after obtaining such a permit. To obtain a “On gas supply in the Russian Federation”, relations for the provision building permit, the following documents should be submitted to of gas transportation services arise between the gas transmission the competent authority: organisation, the supplier – the gas supplying organisation (by (1) documents of title to a land plot, including an agreement which is meant the owner of the gas or its authorised person that on the establishment of an easement, and the decision to delivers gas to consumers under contracts) and a consumer of gas (a establish a public easement; person purchasing gas for their own domestic needs, as well as their (2) details of the project of planning the territory and the project own production or other economic needs). of land surveying; At the level of this Federal law, the process of gas transportation is (3) materials contained in the project documentation; called the provision of gas transportation services through pipelines (4) the positive conclusion of the examination of the project (Article 21 of the Law on Gas Supply), and the contract formalising documentation of the capital construction object; the process is an agreement on the provision of gas transportation services (Article 25 of the Law on Gas Supply). (5) permission to deviate from the limiting parameters of the permitted construction and reconstruction (if the developer Federal Law No. 147-FZ dated 17.08.1995 “On Natural was granted such permission in accordance with Article 40 of Monopolies” stipulates that the consumer (within the meaning the Town Planning Code of the Russian Federation); and of the Law on Natural Monopolies) cannot be prevented from

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concluding an agreement on the provision of gas transportation supply of gas, and is owned by the organisation established under services by pipelines with the physical ability to provide them, the civil legislation. The legal form and procedure for obtaining while the Presidium of the Supreme Arbitration Court of the the objects of the specified complex for ownership in the process Russian Federation indicated that the conclusion of a contract for of privatisation, or creating or acquiring them on other grounds is the provision of gas transportation services by pipelines may be provided by the legislation of the Russian Federation. denied to an individual or legal entity who is not a consumer of The Unified Gas Supply System is the main gas supply system in the gas by means of Federal Law No. 69-FZ dated 31.03.1999 “On gas Russian Federation, and its activities are regulated by the State in supply in the Russian Federation”. These two provisions contradict the manner prescribed by the legislation of the Russian Federation. each other. Currently, the judicial practice has changed. The courts uniformly qualify this contract as public, which means that it must Russia be entered into by the owner of the pipeline. 6.6 Outline any third-party access regime/rights in respect of oil and natural gas transportation and By virtue of subparas. 2 and 3, para. 1 of Article 1, para. 1 of associated infrastructure. For example, can the Article 8 of Federal Law No. 147-FZ dated 17.08.1995 “On Natural regulator or a new customer wishing to transport Monopolies” and para. 1 of Article 426 of the Civil Code of the oil or natural gas compel or require the operator/ Russian Federation, the contract for the provision of services for the owner of an oil or natural gas transportation pipeline transportation of oil (petroleum products) through main pipelines is or associated infrastructure to grant capacity or expand its facilities in order to accommodate the new a public contract. And by virtue of para. 5 of Article 426 of the Civil customer? If so, how are the costs (including costs Code of the Russian Federation in cases provided for by law, the of interconnection, capacity reservation or facility Government of the Russian Federation may issue binding rules for expansions) allocated? entering into a public contract. The cases stipulated by the law and authorising the Government of the Russian Federation to regulate See question 6.4 above. the conclusion of an agreement on the provision of services for the transportation of oil (petroleum products) are for pipelines regulated by subparas. 6 and 8, para. 3 of Article 10 of Federal Law No. 135- 6.7 Are parties free to agree the terms upon which oil FZ dated 07.26.2006 “On Protection of Competition”. Within or natural gas is to be transported or are the terms (including costs/tariffs which may be charged) the framework of these powers, the Government of the Russian regulated? Federation issued the Rules for ensuring non-discriminatory access to the services of natural monopolies entities for the transportation of The parties to a contractual relationship in this industry do not have oil (oil products) through main pipelines in the Russian Federation. absolute freedom in agreeing on conditions, as well as in pricing. These Rules establish a special procedure for concluding a contract as compared with the general procedure for concluding contracts in For example, in relation to contracts for the transportation of oil at the Civil Code of the Russian Federation. the legislative level, conditions are provided that must be agreed by the parties. Without the agreement of these terms and conditions, The process of concluding an agreement with the pipeline the contract will be considered as non-concluded and will not entail organisation for the transfer of oil is as follows. To conclude an legal consequences. agreement with the pipeline organisation before 15 August of the year preceding the year of transportation, the applicant shall submit Services for the transportation of oil (oil products) are provided to the pipeline organisation, in writing, an application for receiving by the operator on the basis of an agreement for the provision of services for the transportation of oil (oil products) through main services for the transportation of oil (oil products) through the main pipelines. pipelines (hereinafter referred to as “the agreement”), concluded by the operator and the consumer in accordance with the legislation The pipeline organisation reviews the received applications, makes of the Russian Federation and containing the following essential decisions on the applications and sends the applicants a notice of the conditions: decisions made by 20 November of the year preceding the year of transportation. ■ the procedure for receiving, transporting and delivering oil (oil products); In the absence of the possibility of satisfying the application in ■ the quantity and quality of oil (oil products) to be transported; full due to the insufficient capacity of the main pipeline, which allows transportation of the declared amount of oil (oil products) ■ points of departure and destinations; through the stated points of departure and destinations, the pipeline ■ procedure for payment of services for the transportation of oil organisation may decide to satisfy the application partially. (oil products) by the consumer; These Rules for ensuring non-discriminatory access apply to every ■ rights and obligations of the parties to the contract; natural monopoly entity that provides services for the transportation ■ a dispute resolution procedure; of oil (petroleum products) through trunk pipelines. ■ force majeure circumstances (force majeure); ■ the responsibility of the parties for non-performance or improper performance of the terms of the contract; and 6.5 To what degree are oil and natural gas transportation pipelines integrated or interconnected, and how is co- ■ the procedure for adjusting the quantity and quality of oil operation between different transportation systems (oil products) to be transported, the dates of commencement established and regulated? and termination of deliveries of oil (oil products), points of departure and destinations, as well as the procedure for All gas pipelines in the country form a single gas supply system. The monitoring the status and use of oil metering units (oil products). unified gas supply system is a property production complex, which consists of technologically, organisationally and economically With regard to the transfer of gas, the Federal authorities established interconnected and centrally controlled production and other the mandatory principles of pricing gas and tariffs for services for facilities intended for the production, transportation, storage and its transportation through gas transmission and gas distribution networks, as well as the procedure for compensation for losses

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incurred by gas distribution organisations in supplying gas to the ■ name of the organisation – producer of gas, quality and population in accordance with the privileges provided for by the parameters of the gas supplied (presented in the case of legislation of the Russian Federation. transportation of gas from local producers); ■ the place of connection to the local gas distribution network of the inlet gas pipeline; 7 Gas Transmission / Distribution ■ the place of gas extraction or transmission for its further transportation through the networks of other organisations; and 7.1 Outline broadly the ownership, organisational and regulatory framework in relation to the natural gas ■ confirmation of customers and gas distribution organisations of readiness to receive gas in the specified volume for the transmission/distribution network. Russia period of transportation. The gas distribution system is a property production complex If there is not enough free capacity in the local gas distribution consisting of organisationally and economically interconnected network to satisfy all submitted applications, the applications of facilities intended for the transportation and supply of gas directly organisations providing the household needs of the population to its consumers. living in the location of the gas distribution network are satisfied as The owner of the gas distribution system is a specialised organisation a matter of priority. that operates and develops gas supply networks and their facilities in When supplying gas for other purposes, priority is given to their respective territories, as well as provides services related to the applications of organisations claiming to conclude an agreement supply of gas to consumers and their maintenance. Gas distribution with the longest period of gas transportation. Under equal systems are controlled in the manner prescribed by the legislation of conditions, access of organisations to the local gas distribution the Russian Federation. network is carried out in proportion to the declared volumes of gas transportation.

7.2 What governmental authorisations (including any applicable environmental authorisations) are required 7.4 Can the regulator require a distributor to grant to operate a distribution network? capacity or expand its system in order to accommodate new customers? Information not available at time of print. Gas distribution organisations are required to provide, upon request from the Federal Energy Commission of the Russian Federation, gas 7.3 How is access to the natural gas distribution network suppliers and buyers, information on available capacity in the local organised? gas distribution network at certain periods of time and on certain sections of the network, as well as information on accepted gas Any organisation in the Russian Federation has the right to non- transmission requests for these sections. discriminatory access to local gas distribution networks for transporting gas to customers. In the presence of free capacity, the gas distribution organisation does not have the right to refuse to connect a new supplier or consumer, Transportation of gas through local gas distribution networks is and it can be obligated to connect and enter into a contract. carried out on the basis of an agreement between the gas distribution organisation and the supplier or purchaser of gas, concluded in accordance with the legislation of the Russian Federation. 7.5 What fees are charged for accessing the distribution network, and are these fees regulated? Access to the local gas distribution networks is provided by the presence of: Payment for gas transportation services by independent organisations ■ free capacity in local gas distribution networks (from the is made at rates approved by the Federal Energy Commission of point of connection to the point of gas extraction) for the declared period of gas transportation; the Russian Federation. The Federal Tariff Service approved Order No. 411-e/7 dated 15.12.2009 “On the approval of guidelines for ■ supplying gas pipelines and branch pipelines to gas buyers the regulation of tariffs for gas transportation services through gas with gas metering and quality control points prepared for the start of gas supply; and distribution networks”. In accordance with these instructions, gas distribution organisations form prices for their services. ■ compliance of the quality and parameters of the gas supplied with the requirements of the current regulatory and technical Gas suppliers and buyers have the right to connect gas laterals documentation. and gas supply pipelines to the local gas distribution network in To conclude a gas transportation agreement with a gas distribution the presence of free capacity at its respective sections. The costs organisation, a supplier or buyer shall submit a copy of the gas associated with connecting the supplier and buyer of gas to the local supply agreement and the application, which must contain the gas distribution networks are usually incurred at their expense. following information: ■ details of the supplier and buyer of gas; 7.6 Are there any restrictions or limitations in relation to ■ volumes and conditions of gas transportation (including the acquiring an interest in a gas utility, or the transfer mode and frequency), as well as the proposed procedure for of assets forming part of the distribution network (whether directly or indirectly)? payments; ■ dates of commencement and termination of gas transportation; When buying and selling shares of owners of regional gas supply ■ the volume of gas transportation by months for the first year systems and owners of gas distribution systems, conducting other of transportation, and for the subsequent term – broken down transactions or operations involving changes in the owners of these by years; shares, the share of foreign citizens or foreign organisations should

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not exceed 20% of the total number of ordinary shares of the owners butane and their mixtures in different proportions depending on the of these systems. direction and conditions of their use (further referred to as liquefied gas). 8 Natural Gas Trading The liquefied gas in the Russian Federation is produced in petrochemical, petroleum-refining and gas-refining factories. The dominant position in the liquefied gas manufacturing market 8.1 Outline broadly the ownership, organisational and in Russia is taken by OJSC Gazprom and OJSC SIBUR. They regulatory framework in relation to natural gas represent 50–60% of the total amount of liquefied gas manufacturing trading. Please include details of current major in the Russian Federation in recent years. initiatives or policies of the Government or regulator Russia (if any) relating to natural gas trading. Transportation of liquefied gas in Russia from the manufacturing plants to the wholesale consumers (petrochemical plants, hubs, LPG The gas is supplied on the basis of the agreement between the dispensing stations and for export purposes) is performed primarily supplier and the purchaser made according to the requirements of the by railway in specifically equipped tankers or directly via the Russian Federation Civil Code, the Federal laws, the Guidelines and pipelines (petroleum products pipeline). The petroleum products other regulatory acts. pipelines with little extension usually connect several plants, unified by the single technology or the plant and bulk railroad overpasses. The agreement on the gas supply shall comply with the requirements of para. 3 of Section 30 of the Russian Federation Civil Code. A network of cluster hubs (a total of 14) and LPG dispensing stations (a total of 179), which are designed for receipt, storage and To make the agreement on the gas supply (excluding agreements on allocation of liquefied gas, is maintained to supply liquefied gas to gas supply made in organised auctions), the applicant, intending to consumers. become the purchaser under such an agreement, is entitled to apply for the purchase of the gas to the supplier. The major transportation carrier of liquefied gas in specialised railroad tankers is the Federal State unitary enterprise SG-trans. It The priority right to make agreements on the gas supply belongs to represents 70% of the total railroad transportation of liquefied gas the purchasers of the gas for State needs, domestic household needs in Russia. and for the population as well as to the purchasers who made the agreements on the gas supply beforehand if such agreements prolong Other large owners of railroad tankers for the transportation of the existing ones. liquefied gas include the companies in the structures ofOJSC Gazprom and OJSC Lukoil OC. The supply of gas (withdrawal) without any agreement is prohibited. Such gas withdrawal is considered as self-willed (unauthorised). Liquefied gas is supplied to domestic households, including the population, pressure vessels (individual houses and suburban The supplier is obliged to supply and the purchaser is obliged to buildings) and group reservoir units (for gas supply to multi-storey withdraw the gas in the volume specified in the agreement on the houses, domestic household, industrial and agricultural facilities). gas supply. The main volume of liquefied gas in the domestic household sector The agreement on the gas supply specifies the monthly, quarterly is supplied to rural areas and urban settlements with populations not and yearly volumes of the gas supply and/or the procedure for their exceeding 80,000 people. approval as well as the procedure for modification of the gas supply The wholesale purchase and retail sale of liquefied gas to consumers volumes specified in the agreement. in the domestic household sector, including for domestic household In case of gas overconsumption by the purchaser, the supplier is needs according to the balance assignments, are mainly performed entitled to limit its supply to the specified daily volume of gas 24 hours by regional and local gas distributing organisations, which from the moment when the purchaser and the Russian Federation simultaneously perform transportation and realisation of the pipeline State executive authorities were notified of the overconsumption. (natural) gas. Recently, some independent wholesale purchasers Failure to withdraw the gas does not allow the purchaser to demand and retail sellers of liquefied gas have appeared. any increase in the gas supply above the agreed daily volume in the The main purposes of the development of the liquefied gas market future. In case a purchaser who does not consume more than 10,000 in the Russian Federation are related to implementation of the mcm of the gas per year fails to withdraw the gas according to the “Concept of the liquefied gas market’s development for domestic agreement on the gas supply, the volume of the non-withdrawn gas household needs” and are as follows: is not payable and there are no sanctions envisaged for such failure ■ firm and regular supply of liquefied gas for domestic to withdraw the gas. household needs to the population; ■ the creation of mechanisms to place a limitation on price 8.2 What range of natural gas commodities can be increases for liquefied gas for domestic household needs and traded? For example, can only “bundled” products providing social protection to the population; and (i.e., the natural gas commodity and the distribution ■ the creation of economic conditions to stimulate the thereof) be traded? manufacturing of liquefied gas and to develop the internal liquefied gas market (for various purposes, but first of all for Information not available at time of going to print. domestic household needs).

9 Liquefied Natural Gas 9.2 What governmental authorisations are required to construct and operate LNG facilities?

9.1 Outline broadly the ownership, organisational and The Federal Service for Environmental, Technological and Nuclear regulatory framework in relation to LNG facilities. Oversight of Russia (Rostekhnadzor) plans to finish development of the Federal rules and regulations in the area of industrial safety, “The Liquefied petroleum gas means light hydrocarbons, such as propane, safety regulations for the liquefied natural gas objects” (FRR LNG),

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by the end of 2018. To prepare the document draft, Rostekhnadzor discovery of high-gravity oil reserves. Almost all increases in established a working group, including representatives from the discovered reserves have been low-gravity viscous sulphur crude oil. leading oil and gas companies, as well as scientific and expert Oil reserves that are easy for extraction and refining are dwindling organisations. The FRR LNG are supposed to come into effect from at an accelerated pace. At the same time, according to the experts’ the beginning of 2019. data, world reserves of low-gravity oil are more than 810 billion Previously, Russian regulation has not covered all the industrial tons. safety issues of large-capacity plants manufacturing liquefied natural Geological reserves of high-viscosity and low-gravity oil reached gas, transshipment and LNG regasification terminals as well as other 6–7 billion tons; however, their application and extraction requires similar objects in a comprehensive and integral manner. Generally, specific and expensive technologies. the basic rules of town-planning legislation and industrial safety Russia In 2018, the equipment of Samara plants group’s petroleum refineries legislation (please see above the information on their application) and petrochemical enterprises are being modernised to increase have been applied to regulate this area. the efficiency of manufacturing (to increase the refinery yield). In particular, the launch of a vacuum gas oil hydrotreater is planned 9.3 Is there any regulation of the price or terms of service at the Kuybyshevsk Refinery, and the bringing into operation of a in the LNG sector? hydrocracking unit is planned at the Novokuybyshevsk Refinery. Phased installation of new capacities is still ongoing at the According to the Russian Federation Government Resolutions No. TANECO Refinery in the Republic of Tatarstan, which will result in 239 dated 07.03.1995 and No. 332 dated 15.04.1995, the price of an increase in its oil refining volumes from 8.5 million tons per year liquefied gas for domestic household needs is regulated by the State. to 14 million tons per year. A heavy residues advanced refining unit The wholesale prices of liquefied gas for domestic household needs is being prepared to be brought into operation at the Taif-NK PSC are established by the Federal Antimonopoly Service. The Federal Refinery in Nizhnekamsk (the Republic of Tatarstan). Antimonopoly Service is entitled to issue regulatory and procedural However, there are several problems in the area of advanced documents on regulation of the specified prices. petroleum refining, namely: The retail prices of liquefied gas supplied to the population as well as ■ federal companies intend to export their refined products, to housing management organisations, multiple-occupancy building which is connected with a drastic decrease in the quality of management organisations, housing associations and condominium home-manufactured oil products as well as lack of demand associations for the domestic household needs of the population on other external markets. Most of the Russian companies suffer from the fact that the products of their refining do not (except for gas for non-residential premises lessees and gas for the comply with the EU standards in full; refilling of vehicles) are established by the respective State executive authority of the Russian Federation. ■ there is a predominance of native vertically integrated oil companies in the general structure of oil refined products and The retail prices of liquefied gas supplied to the population for domestic oil products export at low prices (for example, naphta, naphta household needs are calculated according to the methodological residue), and there is a complete absence of refined products instructive regulations established by the Federal Tariffs Service. with a high percentage of added value; ■ there is an absolutely irrational and unfavourable scattering 9.4 Outline any third-party access regime/rights in of oil refineries across the territorial and economic area respect of LNG facilities. of the Russian Federation, which is inherited from the USSR period, when oil hubs and plants were located in the hinterland regions and oil extraction was performed far from The main consumers of liquefied natural gas (LNG) globally are these places, which has caused deep problems in the export the states of the Asia-Pacific Region (APR). Russia is the main of refined products; exporter of this fuel. LNG is only manufactured in Russia within ■ there is a huge amount of small oil refineries that perform the Sakhalin-2 project, whose operator, Sakhalin Energy, is 51% unqualified primary processing of oil stock in small volumes owned by Russian gas monopoly OJSC Gazprom. However and cause general environmental problems for the regions the gas companies are working on the implementation of more where they are located; prospective LNG projects. The most large-scale among them are ■ there is no balance between demand and supply of oil the liquefaction gas enterprise from the Stockman field project, products, which is explained by the fact that most of the whose main participant is OJSC Gazprom, as well as the Yamal- companies in this sector have their plants located in the LNG project, which is implemented by OJSC NOVATEK and the region of the West Ural and partly in the Volga region, with a French company Total. In the Russian Federation, the right to export small number of plants located in Siberia and in the Centre of gas, including liquefied gas, belongs to the State company OJSC the Russian Federation. In the Southern and Far East regions Gazprom. To supply gas abroad, all other companies must enter into of the State, where the external trade is the most developed, agent agreements with the monopoly. The major independent gas there are almost no such plants. One more important point is that decisions on the commencement of refinery construction manufacturer, NOVATEK, suggests that the Russian government in other regions of the Russian Federation were made more should change this rule and allow private companies to export than 50 years ago, without taking into consideration the LNG. demand in these regions, hence manufacturing and refining utilisation is different in every region; and 10 Downstream Oil ■ production facilities and plants constructed in West Siberia have been overworn long ago (for 20 from 27); their construction was arranged during the period when the largest 10.1 Outline broadly the regulatory framework in relation oil fields were discovered in Russia. to the downstream oil sector.

Currently, the general trend in the oil industry is a decrease in the

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directly envisaged by the Federal laws, regulations of the 10.2 Outline broadly the ownership, organisation and Russian Federation President, regulations of the Russian regulatory framework in relation to oil trading. Federation Government, regulations of the authorised Federal executive bodies or court rulings; Information not available at time of going to print. (5) economically or technologically unjustified refusal or avoidance of entry into the agreement with specific purchasers (customers) in case the manufacture or supply of 11 Competition the specific goods is possible as well as in case such refusal or avoidance is not directly envisaged by the Federal laws, regulations of the Russian Federation President, regulations

Russia 11.1 Which governmental authority or authorities are of the Russian Federation Government, regulations of the responsible for the regulation of competition aspects, authorised Federal executive bodies or court rulings; or anti-competitive practices, in the oil and natural (6) economically, technologically or otherwise unjustified gas sector? establishment of different prices (tariffs) for the same goods unless otherwise is envisaged by the Federal law; The main antimonopoly regulation rules for the extraction of oil (7) establishment by the financial organisation of an unjustifiably and gas, manufacturing, transportation and realisation relations are high or unjustifiably low price for the financial service; set in Federal Law No. 135-FZ dated 26.07.2006 “On protection of (8) discrimination; Competition” and in Federal Law No.147-FZ dated 17.08.1995 “On Natural Monopolies”. (9) obstructing access to the goods market or exit from the goods market for other business entities; The authorised regulatory body in this area is the Federal (10) violation of the pricing procedure envisaged by the Antimonopoly Service. regulations; and The Federal Antimonopoly Service (FAS of Russia) is an authorised (11) price manipulation on the wholesale and/or retail of electric Federal executive State body which: oversees the adoption of power (capacity). regulations; controls the observance of the antimonopoly legislation and legislation in the area of natural monopolies regarding business; oversees State regulation of prices (tariffs) for goods (services) 11.3 What power or authority does the regulator have to and advertising; has control over foreign investments in business preclude or take action in relation to anti-competitive practices? enterprises which are of strategic importance for national defence and State security; controls (supervises) State defence orders; oversees The antimonopoly authority performs the following powers: the procurement of goods, works, and services for governmental and municipal needs; oversees the procurement of goods, works, (1) Initiates and considers proceedings on antitrust violations. and services by certain types of legal entities; and oversees the (2) Issues to economic entities compulsory instructions: approval of closed methods applications for the determination of (a) on the termination of agreements limiting competition suppliers (contractors, subcontractors). and/or coordinated actions of economic entities and commission of such actions aimed at limiting the competition; 11.2 To what criteria does the regulator have regard in determining whether conduct is anti-competitive? (b) on the termination of abuse of an economic entity with a dominant position and commission of the actions aimed at providing the competition; The Federal Antimonopoly Service is entitled to prohibit actions (or (c) on the termination of abuse of regulations of non- omissions to act) of the business entity with a dominant position discriminatory access to goods; which results or can result in non-admission, limitation, elimination (d) on the termination of unfair competition; of competition and/or infringement of other individuals’ (legal entities’) interests in the area of business activities or of an indefinite (e) on the prevention of actions which can be an obstacle range of consumers, including the following actions (or omissions for the emergence of competition and/or can lead to restriction or elimination of the competition and antitrust to act): violations; (1) establishment and support of a monopolistically high or (f) on the elimination of consequences of antitrust violations; monopolistically low price for the goods; (g) on the termination of other antitrust violations; (2) recall of goods, if it results in an increase in the goods’ price; (h) on a recovery of the provision existing to the antitrust (3) imposition of agreement conditions to the counterparty violation; that are unfavourable or are not related to the subject of the agreement (unjustified economically or technologically and/ (i) on signing of contracts, changes to the conditions of or not specified directly by the Federal laws, regulations of agreements or on the cancellation of agreements in case the Russian Federation President, regulations of the Russian of the consideration by the antimonopoly authority of an Federation Government, regulations of the authorised antitrust violation by persons whose rights are violated or Federal executive bodies or court rulings on transfer of can be broken, claimed in a corresponding petition, or in funds, other property, including proprietary rights as well as case of implementation by the antimonopoly authority of consent to enter into the agreement under the condition of State control of an economic concentration; including therein the provisions regarding the goods which (j) on transfer of income in the Federal budget gained owing the counterparty has no interest in, and other requirements); to the antitrust violation; (4) economically or technologically unjustified decrease in or (k) on change or restriction of the use of a trade name in case termination of the goods’ manufacture if there is a demand of consideration by the antimonopoly authority of an for such goods, or orders for such goods’ supply are placed antitrust violation by persons whose rights are violated or in case the viable manufacture is possible as well as if such can be violated if such persons claimed the corresponding decrease in or termination of the goods manufacture is not

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petition, or in case of implementation by the antimonopoly (9) Maintains a register of persons held administratively liable for authority of State control of an economic concentration; violation of antitrust laws. (l) on the accomplishment of economic, engineering, information and other requirements about the elimination 11.4 Does the regulator (or any other Government of discriminatory conditions and for the prevention of authority) have the power to approve/disapprove their creation; and mergers or other changes in control over businesses (m) on the performance of actions aimed at ensuring in the oil and natural gas sector, or proposed competition, including the provision of access to acquisitions of development assets, transportation or production facilities or information in accordance associated infrastructure or distribution assets? If so, with the procedure established by Federal law or other what criteria and procedures are applied? How long regulatory legal acts, and the provision of rights to does it typically take to obtain a decision approving or Russia industrial protection objects established by Federal law disapproving the transaction? or other regulatory legal acts on the transfer of rights to property or on the prohibition of the transfer of rights to Transactions are made with the prior consent of the antimonopoly property, having previously informed the antimonopoly service if the total value of assets on the latest balances of the entity authority of the intention to discreet injunction actions to acquiring the shares, rights and/or property, its group of entities, the sell a certain amount of product on the stock exchange, entities which are the object of economic concentration and their with preliminary approval from the antimonopoly body group of entities exceeds 7 billion rubles or if their total revenue of the characteristics of the formation of the starting price for the products when it is sold on the stock exchange in from the sale of goods for the last calendar year exceeds 10 billion the manner prescribed by the Government of the Russian rubles, and the total value of assets, according to the last balance Federation. of the entity which is the object of economic concentration, and its (3) Issues to the Federal executive bodies, executive bodies group of entities, exceeds 400 million rubles. of the constituent entities of the Russian Federation, local governments, other bodies or organisations performing the functions of these bodies, as well as State extrabudgetary 12 Foreign Investment and International funds, and their officials, which are binding: Obligations (a) on the repeal or amendment of acts that violate antitrust laws; 12.1 Are there any special requirements or limitations on (b) on the termination or amendment of agreements that acquisitions of interests in the natural gas sector violate antitrust laws; (whether development, transportation or associated (c) on the termination of other violations of antimonopoly infrastructure, distribution or other) by foreign legislation, including the adoption of measures to return companies? property and other objects of civil rights transferred as State or municipal preferences; and The Federal Law “On Strategic Companies” lists activities of (d) on the performance of actions aimed at ensuring strategic importance in Russia. In the context of the subject matter competition. of the article, we note that they include a geological study of the (4) Issues warnings of cessation of actions (or inaction) that subsoil, exploration and mining of mineral resources in subsoil contain signs of violation of antitrust laws. areas of Federal significance (see para. 39 of Article 6 of the Federal (5) Sends in writing, signed by the head or deputy head of the Law “On Strategic Companies”). antimonopoly authority, warnings about the inadmissibility The Federal Law “On Strategic Companies” establishes restrictions of violating antimonopoly legislation to officials of business on the acquisition of control over strategic legal entities. According entities, Federal executive authorities, State authorities of to para. 1 of Article 4 of this law, the execution of transactions and the constituent entities of the Russian Federation, local other actions that entail the establishment of control by a foreign governments, organisations involved in providing State or municipal services, State extrabudgetary funds, publicly investor or a group of persons over business entities of strategic announcing the planned behaviour research in the commodity importance is allowed if there is a decision on prior approval of such market, if such behaviour may lead to a violation of antitrust transactions executed by the Federal Antitrust Service of Russia, laws. which have a specific period of validity. (6) Considers complaints about violations of the procedure of A foreign investor who intends to make such a transaction submits bidding and sale of State or municipal property in accordance to the Federal Antitrust Service of Russia an application for with the legislation of the Russian Federation. preliminary approval of the transaction, which includes a package of (7) Prosecutes violations of antimonopoly legislation by documents (see para. 2 of Article 8 of the Federal Law “On Strategic commercial organisations and non-profit organisations, their Companies”). Within 14 days, the Federal Antitrust Service of officials, officials of Federal executive bodies, executive Russia registers the petition, checks the presence of the necessary bodies of constituent entities of the Russian Federation, documents in the petition, and determines whether the applicant has bodies of local government, other entities which perform the established control over the strategic society (see para. 1 of Article 9 functions of governmental bodies or organisations, officials of the Federal Law “On Strategic Companies”). of State extrabudgetary funds, and individuals, including sole proprietorships, in cases and in the manner prescribed by the Then the Federal Antitrust Service of Russia sends to the Ministry of Russian Federation legislation. Defense of the Russian Federation and the Federal Security Service (8) Brings the claim of challenge of the normative legal acts of of Russia requests for information about the threat to the country’s the Federal executive bodies, State bodies of the constituent defence, State security, or the absence of such a threat as a result entities of the Russian Federation, local governments, other of the relevant transaction. After sending inquiries, the Federal bodies of executive power, or organisations, as well as State Antitrust Service of Russia checks the compliance of a strategic extrabudgetary funds, and the Central Bank of the Russian company with a number of signs; namely, it checks for the presence Federation, which contradict the anti-monopoly legislation. of licences for certain types of activities, and the presence of this

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business entity in the register of natural monopolies, etc. (see para. 1 of Article 10 of the Federal Law “On Strategic Companies”). 13 Dispute Resolution After the end of the audit carried out by the Federal Antitrust Service of Russia and the receipt of the report of the Ministry of Defense of 13.1 Provide a brief overview of compulsory dispute the Russian Federation and the Federal Security Service of Russia, resolution procedures (statutory or otherwise) the Federal Antitrust Service of Russia sends specified reports, applying to the oil and natural gas sector (if any), including procedures applying in the context of petitions and materials obtained as a result of the inspections, as disputes between the applicable Government well as their proposals to the Government Commission on Control authority/regulator and: participants in relation to oil over the Implementation of Foreign Investments in the Russian and natural gas development; transportation pipeline

Russia Federation for preliminary approval of the transaction or the and associated infrastructure owners or users in approval of the establishment of control or the decision to refuse the relation to the transportation, processing or storage prior approval of the transaction or the approval of the establishment of natural gas; downstream oil infrastructure owners of control (see para. 6 of Article 10 of the Federal Law “On Strategic or users; and distribution network owners or users in relation to the distribution/transmission of natural gas. Companies”). The decision of the Government Commission on Control over the Market participants in the production, transportation and supply Implementation of Foreign Investments in the Russian Federation of oil and gas can protect their interests in the State courts of the to refuse to preliminarily approve the transaction or approve the Russian Federation. Basically, disputes with these entities in the establishment of control may be challenged in the Supreme Court of industry under consideration are resolved by arbitration courts, the Russian Federation (see para. 7 of Article 11 of the Federal Law which constitute the following system: “On Strategic Companies”). ■ arbitration courts of the constituent entities of the Russian For example, in 2016, the Federal Antitrust Service of Russia Federation (first instance); reported that over eight years of application of the Federal Law ■ arbitration courts of appeal (appellate instance); “On Strategic Companies”, 395 applications were filed with the ■ district arbitration courts (cassation instance); and Federal Antitrust Service of Russia, of which 195 applications were considered by the Government Commission, and in 12 cases ■ the Supreme Court of the Russian Federation. approval of the transaction was refused. 13.2 Is your jurisdiction a signatory to, and has it duly ratified into domestic legislation: the New York 12.2 To what extent is regulatory policy in respect of the Convention on the Recognition and Enforcement of oil and natural gas sector influenced or affected Foreign Arbitral Awards; and/or the Convention on by international treaties or other multinational the Settlement of Investment Disputes between States arrangements? and Nationals of Other States (“ICSID”)?

In this section, it is worth noting the following important interstate The Russian Federation is a party to the New York Convention on transactions for Russia. the Recognition and Enforcement of Foreign Arbitral Awards. In 2017–2018, Russia’s position on the oil market has seen a Russia is not a party to the Convention on the Settlement of marked improvement. The main factor driving such an upturn is Investment Disputes between States and Nationals of Other States almost certainly the deal to cut oil production struck between OPEC (the so-called Washington Convention). members and other petroleum-producing countries. In January 2018, the Joint Technical Committee (JTC) of OPEC countries and non-member states noted that the goal of reducing oil production 13.3 Is there any special difficulty (whether as a matter by all member countries reached a level of conformity of 107%. of law or practice) in litigating, or seeking to enforce Consequently, as a result of the collective actions taken by OPEC judgments or awards, against Government authorities or State organs (including any immunity)? members and a number of other countries, the oil supply on the global market was restricted, which had a favourable impact on growing oil prices. That said, the countries pledged to OPEC to In accordance with the law, the State bodies of the Russian keep 2018 oil production at 2017 levels. For this reason, it should Federation enjoy the same scope of rights as individuals, if we talk be expected that one of the key drivers of increasing supply on the about civil law relations. The law also provides for an effective 2017 global oil market will disappear sometime in 2018. system of remedies against unlawful actions (or inactions) and decisions of State bodies. An important export trend in 2017 was the reallocation of export flows of Russian oil, including the Urals brand, in favour of APR However, in practice, the courts often unreasonably take the side of consumers. This was made possible thanks to the OPEC+ deal. the State bodies, both in private and in public disputes, upholding Prolongation of the OPEC+ deal until year-end 2018 would likely State interests. cause Russian oil production for 2018 to drop to 2017 levels. 13.4 Have there been instances in the oil and 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 do not have any such examples.

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The parties to the agreement will be Rosneft, Gazprom Neft, 14 Updates Lukoil, Surgutneftegaz, Tatneft, Russneft, Neftegazholding and other vertically integrated oil companies. If at least one of them 14.1 Please provide, in no more than 300 words, a evades agreements or violates them, then the responsibility will summary of any new cases, trends and developments fall on the entire industry. The Ministry of Energy and the Federal in Oil and Gas Regulation Law in your jurisdiction. Antimonopoly Service plans to make proposals on “systemic measures to stabilise the domestic market of petroleum products”. The authorities and oilmen plan to make a deal to regulate the price The antitrust and tax authorities will ensure that independent gas of gasoline. This is an important event in 2018–2019 since it will stations do not raise prices.

significantly affect the price of gasoline in the national market. The second important event is the introduction of a mineral Russia Oil companies undertake to sell gasoline and diesel fuel on the extraction tax (MET). wholesale market at a level that is not more expensive than that In early August 2018, two laws were proposed, one of which amends negotiated at the meeting. Average wholesale prices for petroleum the procedure for calculating MET and excise taxes for companies products will be valid for each Federal district and region. In Russia producing hydrocarbons, the second changes the procedure for as a whole, the average price of a RON 92 should not exceed 53,501 calculating export duties. These laws complete the cycle of tax law rubles per ton until January, RON 5 – 56,649 rubles, and diesel fuel – changes in the oil and gas sector. 51,201 rubles (39.86, 42.77 and 43.11 rubles per litre respectively). New types of excisable goods were introduced, a special deduction In January 2019, prices can rise by no more than 1.7%, which is procedure was established for several operations, and excise rates associated with an increase in the VAT to 20%. Further, fuel can go were indexed for 2021. up only within the forecasted inflation (4.3%). Oilmen promise to From 2019, it is proposed to gradually reduce the rate of export fully meet the demand of independent gas stations for fuel, as well customs duty on oil over six years. as supply to the domestic market at least 17.5% of the oil produced.

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Rustam Kurmaev Vasily Malinin Rustam Kurmaev and Partners Rustam Kurmaev and Partners Capital City Complex Capital City Complex Moscow-City Business Centre Moscow-City Business Centre North Block, 8 bld. 1, Presnenskaya nab. North Block, 8 bld. 1, Presnenskaya nab. Moscow, 123100 Moscow, 123100 Russia Russia

Tel: +7 964 725 5383 Tel: +7 925 710 1150 Email: [email protected] Email: [email protected] URL: www.rkplaw.ru/en URL: www.rkplaw.ru/en Russia Rustam Kurmaev is the Managing Partner of Rustam Kurmaev and Vasily Malinin heads the commercial disputes practice at Rustam Partners, an independent dispute resolution law firm with a focus Kurmaev and Partners. He boasts significant experience representing on commercial litigation, corporate conflict, white-collar crime, domestic and international companies in arbitrazh (commercial) courts disputes with regulators and State authorities, and criminal defence and courts of general jurisdiction. His industry expertise spans energy of businesses in Russia. The team also has significant background and natural resources, real estate and construction, with a particular in representing clients in bankruptcy proceedings, complex insurance focus on proprietary and contractual disputes related to large-scale disputes, and high-value construction disputes. Rustam is one of the investment projects. toughest lawyers on the market. He is known for his professionalism in the criminal defence of business and legal support for companies in disputes with governmental authorities, including law enforcement agencies, and is a highly regarded expert on compliance issues. Rustam is recognised by all major domestic and international legal rankings including The Legal 500 EMEA, Chambers & Partners, and Best Lawyers.

Rustam Kurmaev and Partners is an independent dispute resolution firm with a particular focus on commercial litigation, bankruptcy and restructuring, corporate conflict, white-collar crime, and disputes with regulators and State authorities. Established in October 2017 as a spinoff of the Russian practice of a major global law firm, Rustam Kurmaev and Partners offers its clients a tailored approach to solving the most complex legal issues they are facing while maintaining competitive rates and boasting a high level of partner involvement.

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Serbia Miloš Laković

Moravčević, Vojnović and Partners in cooperation with Schoenherr Aleksandra Petrović

located within them. The length of the said transmission grid is 1 Overview of Natural Gas Sector ca. 2,400 km in total. Medium-pressure gas grids and low-pressure local distribution grids are operated by Yugorosgaz and 31 other 1.1 A brief outline of your jurisdiction’s natural gas local DSOs. sector, including a general description of: natural Srbijagas and Yugorosgaz are not yet functionally unbundled to gas reserves; natural gas production including the state of compliance (even) with the Second Energy Package. the extent to which production is associated or Srbijagas continues to act as TSO and as the supplier of natural gas non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) in Serbia. Despite incorporating the subsidiary “Distribucijagas liquefaction and export facilities, and/or receiving and Srbija” d.o.o. (a DSO) in 2015, Srbijagas still acts as the DSO in re-gasification facilities (“LNG facilities”); natural gas practice. Likewise, legal and functional unbundling of transport pipeline transportation and distribution/transmission activities of Srbijagas was not successfully implemented in practice. network; natural gas storage; and commodity sales The wholly-owned subsidiary of Yugorosgaz-Yugorosgaz-Transport and trading. d.o.o., is the second licensed gas TSO in Serbia. NIS owns “Elemir” gas refinery, whose prevailing business Pursuant to the last available data, in 2016, final consumption activity is the preparation of domestic natural gas for transport of natural gas in Serbia amounted to 16,750 Bcm (EC 2018 and production of liquefied gas and oil. According to the Licence Implementation Report). The biggest exploration areas (e.g. Register run by the Serbian Energy Agency (AERS), there are: 32 Banatski Dvor) are located in the Serbian Autonomous province of licensed public suppliers of natural gas, most of which also hold a Vojvodina. The only natural gas producer is a public joint stock licence for unregulated supply; 63 licensed suppliers of natural gas; company “Naftna Industrija Srbije” a.d. Novi Sad (NIS), majority- and 32 licensed DSOs. owned by Russian company Gazprom Neft. In the retail gas supply market, Srbijagas is the dominant market The key market players in Serbia are wholly state-owned company player, accounting for ca. 80% of the total natural gas sales in 2017 JP “Srbijagas” Novi Sad (Srbijagas), transportation system operator (remaining gas suppliers have a market share of 3% and below). (TSO) and owner of the grid, a vertically integrated joint stock company “Yugorosgaz” a.d. (Yugorosgaz) (in the ownership of The only underground storage of natural gas has been developed by Gazprom o.a.o. Moscow (Gazprom) (50%), Srbijagas (25%) and the company “Banatski Dvor” d.o.o. (Banatski Dvor) founded by Centrex Europe Energy & Gas AG (25%)), licensed public supplier Srbijagas and “Gazprom Germania” GmbH, which still continues and distribution system operator (DSO). to be the only licensed operator of underground storage of natural gas. Banataski Dvor operates on a surface area of 54 square m at a Serbia imports the natural gas from Russia, via the long-term gas depth of 1,000 m to 1,200 m. Pursuant to the AERS 2017 Report, in supply agreement between Serbia and the Russian Federation, 2017 the maximum daily injected quantity was 2.4 million cubic m, pursuant to which Russian Gazprom is nominated as the exclusive whereas the maximum daily withdrawn quantities were 5.1 million natural gas supplier to Serbia until 2021. The aggregate import cubic m. The prices for access to the natural gas storage at Banatski flows in 2016 amounted to 18,040 Bcm (EC 2018 Implementation Dvor are regulated under the Energy Act (EA) [Zakon o energetici, Report). (Official Gazette of RS no. 145/2014)]. The “destination clause” identified by the European Commission in Currently, there are no LNG facilities in Serbia. However, the the inter-governmental gas supply agreement between Serbia and authorities have demonstrated awareness that construction of such Russia was recognised as limiting the natural gas supplies only to terminal would significantly decrease the Serbian dependency the Serbian market and infringing the antitrust rules considering the on import of gas from Russia and that it would substitute the consequential limitation of the territory to which the gas’ buyers anticipated quantities of the South Stream (a major CEE gas in Serbia could further sell the gas. The “destination clause” was pipeline project cancelled by the European Commission in 2014). finally removed on 27 September 2018 by the approval ofthe Serbia has received the offer from Romania to be involved in the Serbian Government. project “AGRI” (Azerbaijan-Georgia-Romania Interconnector), The right to freely choose a supplier in the market is guaranteed the first LNG terminal in the Black Sea, designed to enable to all customers as of 1 January 2015. The transportation grid transportation of natural gas from the Caspian region to Europe. is comprised of a high-pressure gas pipelines grid, which in turn The AGRI transportation system should have an annual capacity of comprises main gas and distribution pipelines, and the facilities 5–8 Bcm and it envisages a gas pipeline running from Azerbaijan to

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Georgia, where gas would be turned into LNG and then transported network). Transnafta is engaged in oil transport by oil pipelines to Romanian terminals for further distribution to European within the entire territory of Serbia. countries, including Serbia. Currently, pipeline transport is only performed through the oil At the end of 2016, the Serbian Government adopted the Decree pipeline in Sotine, at the border with Croatia, to Novi Sad and regulating the spatial plan of the special purpose area for the Pancevo, Serbia, where the two refineries are located. The Sotine- infrastructural corridor of the main gas pipeline Niš-Dimitrovgrad, Novi Sad section is 63.3 km long, whereas the Novi Sad-Pančevo with detailed regulation [Uredba o utvrđivanju Prostornog plana section is 91 km long. This oil pipeline is part of the main Adriatic područja posebne namene infrastrukturnog koridora magistralnog oil pipeline (Jadranski naftovod, “JANAF”), which has operated gasovoda Niš-Dimitrovgrad, sa elementima detaljne regulacije since 1979.

Serbia (Official Gazette of RS no. 102/2016)]. With 109 km of length and As of October 2018, AERS has issued: (i) 22 licences for storage 400 m of width, the Niš-Dimitrovgrad gas pipeline is intended to of oil, oil derivatives and biofuels; (ii) 50 licences for wholesale of provide additional gas quantities to Serbia from Bulgaria and connect oil and oil derivatives, biofuels and compressed gas; (iii) 460 retail the Serbian gas market with that of Bulgaria. The Niš-Dimitrovgrad licences; and (iv) one transport licence. gas pipeline is part of the main pipeline extending to the capital of The oil retail network in Serbia is done through the wide network of Bulgaria, Sofia. The estimated value of the project was ca. EUR 60 ca. 1,450 retail facilities, dominated by “NIS Petrol”, “OMV Srbija” million, which the Serbian Government intended to procure through and “Lukoil”. EU resources. Construction of the pipeline is still pending. The initial deadline for completion of the project was the end of 2018, but Production of crude oil is done domestically and in Angola (at no official extensions have been announced to date. The contract for drill holes owned by NIS). The predicted supply of oil and oil the exploration works and provision of project documentation was derivatives in 2018 was expected to reach 23% from domestic awarded to a group of local companies through a tender procedure production – 0.870 million tonnes – and 77% from imports – 2.839 in April 2018. Srbijagas, as the leader of this project before Serbia, million tonnes. has been also engaged in procuring necessary land rights for the pipeline. The project is to be implemented in conjunction with the 2.2 To what extent are your jurisdiction’s energy TAP and TANAP gas pipelines that secure gas supplies from Turkey requirements met using oil? and Azerbaijan instead of Gazprom’s South Stream. Liquid fuels (including oil) account for 32% of Serbian energy 1.2 To what extent are your jurisdiction’s energy requirements, i.e. final consumption. requirements met using natural gas (including LNG)? 2.3 To what extent are your jurisdiction’s oil requirements Pursuant to the Energy Balance of Republic of Serbia for 2018, met through domestic oil production? natural gas (excluding LNG) accounts for 10% of the final energy consumption in 2018. The estimated consumption of natural gas in Around 20% of Serbia’s oil requirements are met through domestic 2018 is 17% smaller than it was in 2017. oil production.

1.3 To what extent are your jurisdiction’s natural gas 2.4 To what extent is your jurisdiction’s oil production requirements met through domestic natural gas exported? production? The planned export quantity of oil derivatives for 2017 was estimated Only 18% of Serbia’s natural gas requirements in 2018 are met at 0.8 million tonnes (0.6 million tonnes in 2016, which is ca. 50% through domestic production. higher than in 2015). The only market to which Serbia exports crude oil is the one of Bosnia and Herzegovina, while by-products 1.4 To what extent is your jurisdiction’s natural gas are mostly exported to Kosovo and Metohia (petroleum and diesel), production exported (pipeline or LNG)? Bulgaria (euro diesel B-7), Romania and Hungary (aviation fuel).

Serbia does not export natural gas. 3 Development of Oil and Natural Gas

2 Overview of Oil Sector 3.1 Outline broadly the legal/statutory and organisational framework for the exploration and production 2.1 Please provide a brief outline of your jurisdiction’s oil (“development”) of oil and natural gas reserves sector. including: principal legislation; in whom the State’s mineral rights to oil and natural gas are vested; Government authority or authorities responsible for The production of oil in Serbia is done on 63 oilfields with 666 drill the regulation of oil and natural gas development; and holes. NIS is the only company in Serbia licensed for the exploration current major initiatives or policies of the Government and production of oil. Refining is done at two major refineries (if any) in relation to oil and natural gas development. operated by NIS: Pancevo and Novi Sad, having the aggregate annual refinement capacity of 7.3 million tonnes of crude oil. Exploration, extraction of natural gas, production, processing and The transport of oil derivatives in Serbia is done by rail, river and refining of oil, as well as construction of mining facilities and road. The only company engaged in oil pipeline transportation is JP mining works, are governed by EA and the new 2015 Mining “Transnafta”, a wholly state-owned entity, which operates on non- and Geological Exploration Act (MGEA) [Zakon o rudarstvu i discriminatory principles under regulated prices (for access to the geološkim istraživanjima, (Official Gazette of RS no. 101/2015)].

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The MGEA’s secondary legislation also governs specific areas different legal acts, by stating that its provisions shall apply to the of exploration and extraction of natural gas and oil. Oil and gas procedure on granting the right to perform them, whereas other legal are considered mineral resources of strategic importance for acts may govern other significant matters pertaining to performance Serbia under the MGEA, which, inter alia, ensures entitlement to of such activities. Considering that the two acts (the MGEA and expropriation. the PPP Act) contain conflicting provisions as to the procedure that The Serbian Ministry of Mining and Energy (Ministry) [Ministarstvo needs to be applied and that there is no settled practice or authorities rudarstva i energetike Republike Srbije] is the competent authority on this matter, it cannot be determined with full certainty which for implementation of the EA and the MGEA – i.e. the competent procedure would be applicable. The PPP Act seems to prevail over authority for giving consent to the extraction of hydrocarbons and the MGEA as it explicitly excludes application of any other act in the construction of mining plants. In the event that a project is terms of the applicable procedure. Serbia conducted on the territory of an autonomous province, provincial authorities will be competent for implementation of MGEA 3.3 If different authorisations are issued in respect of provisions. The MGEA stipulates that hydrocarbons are considered different stages of development (e.g., exploration natural resources owned by the Republic of Serbia and may be appraisal or production arrangements), please specify used under the conditions set out in the MGEA. Further, the Public those authorisations and briefly summarise the most Property Act [Zakon o javnoj svojini, (Official Gazette of RS nos. important (standard) terms (such as term/duration, scope of rights, expenditure obligations). 72/2011, 88/2013 and 105/2014)] stipulates that natural resources, such as hydrocarbons, are public property. As noted, the exploitation licence can only be issued to a legal entity holding the exploration licence, obtained through the competitive 3.2 How are the State’s mineral rights to develop oil procedure. The Government’s Decree regulating the particularities and natural gas reserves transferred to investors or for implementation of such public tender for exploration of mineral companies (“participants”) (e.g. licence, concession, resources has not been enacted. Under the PPP Act, a public service contract, contractual rights under Production Sharing Agreement?) and what is the legal status of tender procedure for concession is initiated upon the proposal of those rights or interests under domestic law? either the authority or the investor. Given that the said activities are considered public interest activities, the concession forms an The extraction of natural gas may only be conducted based on an integral part of the relevant licences for their performance. The extraction licence. The licence may be issued to a legal entity or concession agreement can be concluded for at least five years or a entrepreneur holding an exploration licence. In order to acquire maximum period of 50 years, depending on the potential effects on such licence, the applicant is required to prove the rights it holds the competition and the reasonable period for the amortisation of a over the pertaining land on which the extraction facilities are to be private partner’s investment and return of the invested capital. The constructed (ownership, lease or easement). Under the MGEA, for exploration licence is issued for an initial period of three years and oil and gas exploration and performance of mining works related can be extended twice; for an additional three, then two years. thereto, a lease or easement right must be valid for up to 10 years. With regards to the terms of the exploitation licence, the MGEA For exploitation of oil and natural gas, as mineral resources of only sets the term of two years for completion of the preparation strategic importance for Republic of Serbia, a special act of the works, whereas the term of the exploitation, i.e. use of the mineral Government on determining the public interest shall be issued, in resources, will be determined pursuant to production dynamics order to allow a five-year exploitation period for the applicant. determined in the feasibility study and quantities of the relevant The MGEA allows foreign legal entities to perform activities mineral resources’ stocks. The exploitation also requires prior of geological exploration and exploitation, under the terms and obtainment of the approvals for mining works and, ultimately, conditions prescribed under the MGEA, limitations as to use a use permit for the mining plant. Exploration, mining works, of public interest goods by foreigners and state defence and construction and the use of mining plants and other facilities are confidentiality restrictions. The new MGEA reduced the number licensed by the Ministry and the provincial authority, depending on of documents required for the issuance of various approvals to carry the location of the exploitation area. out geological exploration and exploitation of minerals, thus easing In principle, the investor bears the risk related to the commercial use the process for private investors. (exploitation) of the mineral resource. However, the distribution of Further, the licence for exploration of oil and natural gas is given risk between the public and private partner may be further regulated on the basis of a “public tender” procedure, initiated and conducted under the concession/public agreement. by the Ministry, in line with MGEA provisions. The licence for exploitation of mineral resources is issued by the Ministry, upon the 3.4 To what extent, if any, does the State have an duly submitted request of an applicant, i.e. by the competent authority ownership interest, or seek to participate, in the of the autonomous province, if exploitation is to be conducted on its development of oil and natural gas reserves (whether territory. On the other hand, the Public-Private Partnerships and as a matter of law or policy)? Concessions Act (PPP Act) [Zakon o javno privatnom partnerstvu i koncesijama, (Official Gazette of RS nos. 88/2011, 15/2016 and Oil and natural gas reserves are considered public property and are in 104/2016)] specifically recognises exploration and exploitation the state ownership, as a matter of law (please see question 3.1 above). of mineral resources and other geological resources as general interest activities, that may only be performed subject to concession 3.5 How does the State derive value from oil and natural arrangements regulated thereunder. Beneficiary of the results from gas development (e.g. royalty, share of production, previously implemented geological exploration may, in principle, taxes)? acquire consent for exploitation and/or exploitation fields based on confirmation on such exploration results. The investor is required to pay the following fees when engaged in Further, the PPP Act excludes the application of any other procedure mineral resources development: for granting the right to perform these activities regulated under

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(i) exploration fee – the MGEA sets the fee in the amount of ca. be transferred to third parties (save to a substitute nominated by the EUR 80 per square km of approved exploration area, with a financiers of the concessionaire, pursuant to the step-in agreement surface over 0.5 square km, i.e. ca. EUR 40 for exploitation concluded with the public authority). areas smaller than 0.5 square km; (ii) exploitation fee –for oil and gas exploitation, the exploitation fee amounts to 7% of the revenue achieved from their sale 3.9 Are participants obliged to provide any security and use; and or guarantees in relation to oil and natural gas development? (iii) concession fee – proposed by the investor when submitting the bid and determined in the concession agreement on the basis of the type of the mineral resource, type of activity, term In its proposal for granting a concession, a public partner may request Serbia of the concession agreement, commercial risk and expected a performance guarantee or other type of security from the investor revenue, fit-out and the surface of the exploitation area under the concession agreement. Besides this, the public partner (quantity of the mineral resource), including the exploitation is obliged under the PPP Act to acquire from the selected partner a fee payable by the investor. guarantee for payment of the concession fee. The amounts of these The ore rent, i.e. the exploitation fee payable by NIS, amounts to guarantees are determined on a case-by-case basis, considering the 3% of the revenue achieved from the sale and use of the oil and gas terms of the concession agreement. A standard seriousness-of-the (which was the fee applicable under the old MGEA). Such alleged bid guarantee in the maximum amount of 5% of the total estimated beneficial rent was part of an inter-governmental agreement between value of the concession shall also be provided by the investor within Serbia and the Russian Federation (which is not publicly available). the competitive procedure. Pursuant to Art. 103 MGEA, an interested party applying for approval for the construction of mining facilities and/or for conducting mining 3.6 Are there any restrictions on the export of production? works is obliged to submit a bill of exchange (promissory note) or proof of bank guarantee or corporate guarantee for conducting the activities of remediation and reclamation of degraded land due to the The EA and MGEA do not provide for any specific restrictions to exploitation in favour of the Republic of Serbia. Either of the said the export of mineral resources (oil and natural gas). However, securities shall be issued in the amount of 30% of the total value of pursuant to the EA, potential restrictions may be imposed on the the project determined under the main mining project and shall be export of mineral resources in case of crises and a general lack of valid for the period of three years. Every subsequent security must be mineral resources to meet domestic requirements. valid for two years and issued in the amount of 30% of the remaining value of the works. Final security must be valid for an additional 60 3.7 Are there any currency exchange restrictions, or days as of the estimated date for completion of the works. restrictions on the transfer of funds derived from production out of the jurisdiction? 3.10 Can rights to develop oil and natural gas reserves granted to a participant be pledged for security, or Pursuant to the Serbian Foreign Exchange Act (FX Act) [Zakon booked for accounting purposes under domestic law? o deviznom poslovanju, (Official Gazette of RS nos. 62/2006, 31/2011, 119/2012, 139/2014 and 30/2018)], as of 1 October 2015, The PPP Act envisages that, with the previous consent of a public foreign payment transactions may be executed in both foreign and partner, security (in the form of a mortgage, pledge or otherwise) local (RSD) currency, through the banks. may be set up in order to secure the financing of the project. It Additionally, the FX Act states that the import and export of goods, further depends on the specific right whether it is eligible for agreed either in foreign or local (RSD) currency, can be considered a encumbering and whether such encumbrance would be enforceable, commercial credit and loan arrangement, if (i) the payment was not subject to the mandatory provisions of the Serbian law. settled for more than one year, as of the moment of the completed import or export, and (ii) the goods were not imported/exported, i.e. imported for more than one year as of the day the payment in foreign 3.11 In addition to those rights/authorisations required or local (RSD) currency was settled. The commercial credit and to explore for and produce oil and natural gas, what other principal Government authorisations are loan arrangement must be notified to the National Bank of Serbia, required to develop oil and natural gas reserves (e.g. as well as any change made in relation to such agreement. However, environmental, occupational health and safety) and in practice, no transfers can be achieved without the official stamp from whom are these authorisations to be obtained? of the National Bank of Serbia confirming that it has been notified. Cross-border loans cannot be repaid before the expiration of one Apart from the principle licences determined under the MGEA, year from the drawdown date, pursuant to a separate decision of the the exploration and extraction of natural gas may also trigger National Bank of Serbia. other approvals and/or licences, mainly in construction and spatial planning, environmental protection, occupational health and 3.8 What restrictions (if any) apply to the transfer or safety, water management and waste management. The competent disposal of oil and natural gas development rights or authority for issuing required approvals in the construction and interests? spatial planning field, as well as in the field of environmental protection, is either the relevant Ministry or the local or provincial There are no specific restrictions on transferring oil and natural authorities, depending on the capacity and the location of the gas development rights and interests. The transfer of the licences contemplated project. for exploration and exploitation is permitted upon completion of For example, the construction and spatial planning approvals and certain typical requirements set out under Art. 9 MGEA and the permits are issued by the authority competent for the exploration/ requirements to be prescribed under secondary legislation which was extraction area at hand (i.e. Ministry of Construction, Traffic and not adopted to date. However, the concession rights for exploration Infrastructure, local municipality or the autonomous province). and exploitation of oil and natural gas reserves, in principle, cannot Also, the competent authority depends on the type and the size of the

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project. Pursuant to the Spatial Planning and Construction Act (SPC gas storage system operator (SSO) is obliged to comply with the Act) [Zakon o planiranju i izgradnji, (Official Gazette of RS nos. principles of objectivity, transparency and non-discrimination, with 72/2009, 81/2009, 64/2010, 24/2011, 121/2012, 42/2013, 50/2013, regard to access to the storage system, under regulated prices. An 54/2013, 98/2013, 132/2014, 145/2014 and 83/2018)], the Ministry SSO must operate under the terms of the storage licence issued, of Construction, Traffic and Infrastructure is, inter alia, competent pursuant to the EA. The SSO may reject third-party access to the for issuing a construction permit for: (i) plants for the processing of system in certain justified cases such as a lack of system capacity fuel (oil) and gas (rac) that are constructed outside of the exploitation (please see question 6.6). area; and (ii) gas pipelines with a normal working pressure of over Further, in order to access the system, the third party is obliged to: 16 bars, if it passes through territories of two or more municipalities. ■ register with the SSO in order to participate in the allocation

An autonomous province shall issue a construction permit for the of the gas capacity; and Serbia same plants if they are to be constructed completely on its territory. ■ submit a request for access to the system, in which it defines Lastly, the local municipality is competent for issuing construction whether it is applying for an entry or exit point, the intended permits for all other plants/infrastructure that are not within the duration of the transport and the relevant type of capacity (i.e. competencies of the above authorities, as specifically listed under permanent or temporary). Art. 133 SPC Act (e.g. residential buildings). After the SSO allocates gas capacities based on the request of the With regard to the environmental protection approvals, natural third party (and minimum gas quantity expected), it notifies the third gas and oil extraction are considered activities subject to the party thereof. Such notification is considered as the acceptance of environmental impact assessment study (EIA), pursuant to the the third party’s request/offer. Decree on the determination of the list of projects for which an After the third party receives a signed copy of the agreement by EIA is required, and the list of projects for which an EIA may be the SSO and has settled the advance payment (or provides a bank requested [Uredba o utvrđivanju Liste projekata za koje je obavezna guarantee as a security for fulfilment of its payment obligations procena uticaja i Liste projekata za koje se može zahtevati procena undertaken by the agreement), the SSO and the third party officially uticaja na životnu sredinu, (Official Gazette of RS no. 114 ⁄2008)]. become parties to the access agreement. Additionally, pursuant to the Protocol on the strategic environmental impact assessment [Zakon o potvrđivanju Protokola o strateškoj As stated above, currently there is only one licensed SSO – the proceni uticaja na životnu sredinu uz Konvenciju o proceni underground gas storage “Banatski Dvor”. However, the relevant uticaja na životnu sredinu u prekograničnom kontekstu, (Official storage code has not yet been enacted. Therefore, inter alia, specific Gazette of the RS no. 1/2010)], a strategic environmental impact conditions and procedure for access to the storage grid, tariffs in line assessment study (SEA) may be requested for major mining, on- with methodology adopted by AERS, as well as the allocation of site extraction and processing of metal ores or coal and for surface storage capacities, are not currently regulated. industrial plants for the extraction of coal, petroleum, natural gas and ores, as well as of bituminous shale. EIA and SEA approvals 3.14 Are there any laws or regulations that deal specifically must be issued before obtaining the construction permits. Finally, with the exploration and production of unconventional gas and mineral oil refineries are subject to the IPPC – Integrated oil and gas resources? If so, what are their key Pollution Prevention and Control – permit [Zakon o integrisanom features? sprečavanju i kontroli zagađivanja životne sredine (Official Gazette of RS nos. 135/2004 and 25/2015)]. Potentially, Seveso II approval No such legislation has been enacted in Serbia to date. for prevention and control of the major accidents resulting from the handling of dangerous and combustible substances (such as oil and gas) may have to be obtained. The competent authority for EIA/ 4 Import / Export of Natural Gas (including SEA approvals, an IPPC permit, as well as for Seveso II approval, LNG) is either the Ministry of Agriculture and Environmental Protection or the municipal authority or provincial authority competent 4.1 Outline any regulatory requirements, or specific for environmental protection, i.e. the same authority that was terms, limitations or rules applying in respect of determined as competent under the SPC Act (as mentioned above). cross-border sales or deliveries of natural gas (including LNG). 3.12 Is there any legislation or framework relating to the abandonment or decommissioning of physical Cross-border sales or deliveries of natural gas are accomplished by structures used in oil and natural gas development? If the bilateral agreement between a supplier and a producer. There are so, what are the principal features/requirements of the no specific restrictions or rules pertaining to the cross-border sales or legislation? deliveries of natural gas, except in case of crisis (as described under question 3.6 above) and foreign exchange notification requirements, Pursuant to the MGEA, the exploitation area must be rehabilitated if applicable (as described under question 3.7 above). and reclaimed after the works on exploitation have been completed, at the latest after one year of such completion. This must be done in accordance with the reclamation plan and obligatory measures for the 5 Import / Export of Oil exploitation area’s recovery and protection of the environment, water, land and public health and safety, as determined within the process. 5.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect 3.13 Is there any legislation or framework relating to of cross-border sales or deliveries of oil and oil gas storage? If so, what are the principal features/ products. requirements of the legislation? Cross-border sales or deliveries of oil are accomplished by a The storage of natural gas is regulated under the EA. A natural bilateral agreement between a supplier and a producer.

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Additionally, the Serbian Government adopted the Decree on As of 1 January 2015, the wholesalers are obliged to submit the marking of oil derivatives [Uredba o obeležavanju (markiranju) reports on storage and transport of the oil, along with the delivery of derivata nafte, (Official Gazette of RS nos. 51/2015 and 5/2017)] the oil and oil derivatives. (Marking Decree), which has obliged all energy companies engaged in the production and trade of oil and oil derivatives to comply with 6.2 What governmental authorisations (including the specific marking regime. The marking regime requires that all any applicable environmental authorisations) are oils imported to or traded within the Serbian market are marked in required to construct and operate oil and natural accordance with Marking Decree and the guidelines rendered for its gas transportation pipelines and associated implementation (Guideline) by the exclusive provider of marking infrastructure?

Serbia service – “SGS Beograd” d.o.o. According to the SPC Act, a location permit and a building permit must be acquired for construction of, inter alia: (i) oil pipelines; (ii) 6 Transportation gas pipelines; and (iii) product pipelines (produktovod). Pursuant to the Pipelines Transportation Act, the company licensed for transport, 6.1 Outline broadly the ownership, organisational and i.e. distribution through pipelines, must implement the measures regulatory framework in relation to transportation for occupational health and safety, environmental protection, and pipelines and associated infrastructure (such as fire and explosions in accordance with separate legal and technical natural gas processing and storage facilities). acts (please see question 3.11). The use/occupation permit may be acquired upon obtaining said environmental permits, as well In principle, the applicable regulatory requirements are stipulated as upon determining the fulfilment of the conditions set under the in the EA, the MGEA, the Act on the Pipeline Transportation of construction permit. Gaseous and Liquid Hydrocarbons and Distribution of Gaseous Hydrocarbons [Zakon o cevovodnom transportu gasovitih i tečnih 6.3 In general, how does an entity obtain the necessary ugljovodnika i distribuciji gasovitih ugljovodonika, (Official land (or other) rights to construct oil and natural gas Gazette of RS no. 104/2009)] (Pipelines Transportation Act), and transportation pipelines or associated infrastructure? other relevant gas and oil-related regulations. Do Government authorities have any powers of Pursuant to the EA, oil and oil derivatives pipeline grids must be compulsory acquisition to facilitate land access? in public ownership and in the ownership of the transport operator established by the state for performance of transport activities. The According to the EA, the energy companies are entitled to use natural gas pipelines may also be in private ownership. However, the (lease, easement, etc.) the land owned by third parties for the EA failed to regulate requirements and restrictions regarding private purposes of construction, reconstruction or maintenance of energy ownership of the natural gas grid. The basic principle nevertheless facilities. Private land may also be expropriated provided that the remains that the grid or parts of the grids that are constructed by the Government has established the public interest in such a project private entity acting as a system operator, or acquired by it in a legal and mineral resource (facilities in the area of energy infrastructure transaction, shall remain in its possession. The storage facilities are are considered objects of the public interest in general under the owned by the only licensed SSO – Banatski Dvor. expropriation regulations, whereas the SPC Act considers pipelines as the facilities for public purposes). Srbijagas and Yugorosgaz operate pursuant to the rules set under the EA and their grid codes, approved by the AERS (Codes). The In principle, the construction of the new pipeline infrastructure must wholesale price of gas sold to the public supplier was regulated be determined in the spatial plan of the special purposes area, and until September 2013, and thereon, the gas price is set according to the detailed plan of the regulation of the project area. Additionally, the cost-reflective formula set in the tendering procedure whereby pursuant to the MGEA, oil and gas pipeline construction may be Srbijagas was appointed as the supplier of public suppliers. Public subject to the prior approval of the Ministry, in case the pipelines are suppliers’ prices are previously approved by AERS. The Codes designated to pass through the exploitation areas. regulate third-party access to the grid, injection into the gas grid and upstream pipelines, allocation of capacities, balancing, congestion 6.4 How is access to oil and natural gas transportation management and other terms of the transmission services. TSOs pipelines and associated infrastructure organised? must operate transparently and they must ensure third-party access on non-discriminatory grounds. Third-party access may only Third-party access to the transportation system is regulated by the be rejected in certain cases, such as lack of capacity (please see EA and it secures access on a non-discriminatory basis. As stated in question 6.6). The Codes also provide for a model access agreement the answer to question 6.1 above, TSOs have mandatorily provided to the transportation grid. However, the Codes do not allow for a model connection agreement within their Codes. capacity rights transfer on a monthly and daily basis, only annually. The minimum assignable quantity is 2,000 cubic m. 6.5 To what degree are oil and natural gas transportation Pursuant to EA, AERS has also approved the oil transmission grid pipelines integrated or interconnected, and how is co- code rendered by Transnafta (Transnafta’s Code). Transnafta’s operation between different transportation systems Code regulates the technical requirements for operation of the established and regulated? system, rules on the use of the system, transport models measuring terms, third-party access agreement, etc. Third-party access may The TSO is obliged to cooperate with the other system operators and only be rejected in a number of instances such as the lack of to provide support and all necessary information to the independent capacity and inappropriate quality of the fuel (please see question system operator. In its 10-year plan for the transportation system’s 6.6). Transnafta’s Code regulates the terms of the access agreement, development, the TSO must define and achieve its aims towards which must specify, inter alia, the quality and the quantity of the the procurement of the new interconnections with the neighbouring fuel, term, payment dynamics, contractual penalties, etc. countries.

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are considered as public interest activities. Srbijagas was partially 6.6 Outline any third-party access regime/rights in unbundled in June 2015, as analysed in question 1.1. According respect of oil and natural gas transportation and to the licence registry of AERS, currently there are 33 companies associated infrastructure. For example, can the (including Srbijagas and Yugorosgaz) licensed as DSOs. Pursuant regulator or a new customer wishing to transport oil or natural gas compel or require the operator/ to the last available information published by AERS in its Annual owner of an oil or natural gas transportation pipeline Progress Report for 2017 [www.aers.rs/Files/Izvestaji/Godisnji/ or associated infrastructure to grant capacity or Izvestaj%20Agencije%202017.pdf], the licensed DSOs are not expand its facilities in order to accommodate the new subject to the unbundling requirements and they can be also engaged customer? If so, how are the costs (including costs in supply activities, either on the regulated or market terms, given of interconnection, capacity reservation or facility

that they have less than 100,000 customers. Serbia expansions) allocated? Transmission and distribution networks are subject to regulated third-party access (please see questions 6.1 and 6.6). The EA allows As stated above, the TSO must enable third-party non-discriminatory for the private ownership of the distribution and transmission access to the grid. The Codes and EA provide the instances in which networks, but it fails to regulate it specifically enough. The EA has the TSO may reject third-party access to the system in certain justified established ownership of Srbijagas over the existing distribution and cases, such as: (i) a lack of system capacity; (ii) if such access would transportation networks in the market. prevent the successful execution of the obligations for the security of supply; and (iii) in case of serious economic and financial hurdles incurred due to the “take or pay” obligations. The TSO is obliged to 7.2 What governmental authorisations (including any offer all available quantities up to a level which does not jeopardise the applicable environmental authorisations) are required operation of the system. Although obliged by the EA, the Codes do not to operate a distribution network? provide the obligatory offering of the unused capacities on the primary market at least on a day-ahead and interruptible capacity basis. The Pursuant to the EA, distribution networks may, in principle, be either Codes and EA do not regulate the mandatory expansion of the system in the public ownership, in the ownership of a DSO incorporated and capacities in case it is required by a third party seeking access. by the state, a company which is the subsidiary of a state-owned The third-party access to the oil transmission grid, operated by company, or in private ownership. As stated, Srbijagas is the owner Transnafta, is subject to the same principles of transparency and non- of the distribution and transportation network that used to be in state discrimination. Besides a lack of capacity, Transnafta may reject ownership before the adoption of the EA in December 2014, and such the third-party access due to the following reasons: (i) operational ownership right cannot be alienated. Distribution of natural gas and disturbances or if the system is overloaded; (ii) endangered security operation of distribution networks is considered a general interest of the system; (iii) inappropriate quality of the oil and oil derivatives activity under the EA. A distribution network may thus be operated of the third party seeking access; and (iv) other reasons determined in through a concession agreement granted pursuant to the PPP Act. Transnafta’s Code (the Code does not provide any specific grounds for TSOs, i.e. DSOs, may acquire ownership over the transport rejection, and it is based on the non-discriminatory principle as well). network, i.e. the distribution network may acquire ownership over Due to the failure of SSO Banatski Dvor to adopt its storage code, the facilities of the gas network that it has constructed with its own third-party access is currently unregulated, which is against the EA. funds, or acquired with a business transaction, incorporation or Despite this, Banatski Dvor would have to uphold the basic principles capital increase. of third-party access to the grid prescribed by the EA (e.g. principle of non-discrimination). 7.3 How is access to the natural gas distribution network organised?

6.7 Are parties free to agree the terms upon which oil or natural gas is to be transported or are the terms As is the case with the third-party access to the transportation and (including costs/tariffs which may be charged) storage networks, access to the distribution network is secured by regulated? the EA on the basis of non-discrimination, as further regulated by the relevant operators’ codes (please see questions 3.13 and 6.6). Under Serbian law, natural gas transportation and the pipeline transportation of oil are public interest activities. The access 7.4 Can the regulator require a distributor to grant tariff, i.e. entry-exit tariff, is determined by the TSO, based on the capacity or expand its system in order to methodology rendered by AERS. The same applies for access to accommodate new customers? the oil transportation system, i.e. the final tariff is established by the TSO Transnafta in accordance with the AERS’ methodology. Access to the distribution system may be rejected on the grounds Other terms may be regulated by the access agreement between the specified under the EA, such as a lack of capacity (please see relevant TSO and the party seeking the connection, provided that question 6.6). Rejection on any other grounds may be disputed, they comply with the principles under the Codes (i.e. the Codes and upon which, presumably, AERS may order the DSO to grant the Transnafta’s Code), EA or other applicable decisions of AERS. capacities, provided that all requirements are satisfied. The EA does not regulate instances of expansion of the distributor’s capacities in order to accommodate new customers. 7 Gas Transmission / Distribution

7.5 What fees are charged for accessing the distribution 7.1 Outline broadly the ownership, organisational and network, and are these fees regulated? regulatory framework in relation to the natural gas transmission/distribution network. Yes, the fees for access to the distribution system are regulated under the EA. Pursuant to the methodology adopted by AERS, the Gas transmission and distribution are regulated energy activities and prices are determined by the DSOs and finally approved by AERS.

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7.6 Are there any restrictions or limitations in relation to 10 Downstream Oil acquiring an interest in a gas utility, or the transfer of assets forming part of the distribution network (whether directly or indirectly)? 10.1 Outline broadly the regulatory framework in relation to the downstream oil sector. Pursuant to the EA, the distribution of natural gas may be performed by a private entity. However, the EA has established the ownership The downstream oil sector falls within the competencies of the right of Srbijagas over the existing distribution and the transportation Ministry, although there is no specific legal framework for oil networks. trading at the downstream level. Oil trading is carried out pursuant

Serbia to the market terms. The major oil market player is NIS, who also owns and operates the two biggest oil refineries in Serbia. 8 Natural Gas Trading 10.2 Outline broadly the ownership, organisation and regulatory framework in relation to oil trading. 8.1 Outline broadly the ownership, organisational and regulatory framework in relation to natural gas trading. Please include details of current major Oil trading is not a regulated energy activity under the EA, nor is it a initiatives or policies of the Government or regulator public interest activity that is subject to a concession procedure under (if any) relating to natural gas trading. the PPP Act. Other than prices for access to the pipeline and product pipeline transport networks, oil prices, i.e. oil trading prices, are not Serbia has implemented the entry-exit tariff model as of 1 January regulated. Therefore, oil trading is performed on a contractual basis. 2015. Currently, there is no commodity exchange or any gas hubs. The Directorate for Energy Reserves, as an administrative body under the Ministry, was partially established in 2015. Pursuant to 8.2 What range of natural gas commodities can be the Marking Decree, all oils and oils’ derivatives produced within traded? For example, can only “bundled” products or imported to Serbia must be marked, in accordance with the (i.e., the natural gas commodity and the distribution procedure and requirements set therein and the relevant Guideline, thereof) be traded? before being placed on the market.

We are not aware of any restrictions to the types of commodities that can be traded with. 11 Competition

9 Liquefied Natural Gas 11.1 Which governmental authority or authorities are responsible for the regulation of competition aspects, or anti-competitive practices, in the oil and natural gas sector? 9.1 Outline broadly the ownership, organisational and regulatory framework in relation to LNG facilities. On the administrative level, AERS is the competent authority Currently, no LNG facilities exist in Serbia. With regards to the for monitoring and control of all energy activities. However, the planned construction of LNG facilities, please refer to question 1.1. competencies of the Commission for Protection of Competition (CC) remain unaffected with regards to the antitrust practices in the market. 9.2 What governmental authorisations are required to construct and operate LNG facilities? 11.2 To what criteria does the regulator have regard in determining whether conduct is anti-competitive? The LNG facilities’ construction would be subject to a standard construction procedure set out under the SPC Act – acquiring of the location conditions, building permit and use permit. Additionally, The regulator must take into consideration the Serbian Act on certain LNG-related facilities (e.g. liquefaction and regasification Protection of Competition [Zakon o zaštiti konkurencije, (Official plants) may be subject to the special environmental protection Gazette of RS nos. 51/2009 and 95/2013)] and the EA, as well as licences (EIA, SEA, IPPC permit and potentially a Seveso II other applicable energy-related regulations. approval). 11.3 What power or authority does the regulator have to preclude or take action in relation to anti-competitive 9.3 Is there any regulation of the price or terms of service practices? in the LNG sector?

CC can initiate the investigation upon receipt of a complaint or Under the current legal framework, there are no defined prices or ex officio. It is entitled to receive any information and documents terms of services in the LNG sector. required for investigation, from market players, state authorities and organisations, who are obliged to cooperate. 9.4 Outline any third-party access regime/rights in Upon completion of the proceedings, the CC may order behavioural respect of LNG facilities. or structural measures, conditionally approve an investigated agreement or practice, preclude it or prohibit the abuse of a dominant Third-party access related to LNG facilities is not regulated under power position. CC may impose a fine in the amount of 10% of the current legal framework. the total annual turnover of the relevant parties achieved within the territory of Serbia in the preceding year.

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11.4 Does the regulator (or any other Government 12.2 To what extent is regulatory policy in respect of the authority) have the power to approve/disapprove oil and natural gas sector influenced or affected mergers or other changes in control over businesses by international treaties or other multinational in the oil and natural gas sector, or proposed arrangements? acquisitions of development assets, transportation or associated infrastructure or distribution assets? If so, The regulatory policy in respect of the oil and natural gas sectors what criteria and procedures are applied? How long in Serbia is particularly influenced by the Treaty on Establishing does it typically take to obtain a decision approving or disapproving the transaction? the Energy Community 2005 (ratified by Serbia in July 2006) (EC Treaty). The EC Treaty sets the obligations and targets to parties in Serbia The Serbian merger control regime regulates and monitors the order of compliance with the acquis communautaire and creation of concentration in the form of merger of the independent undertakings, the integrated energy market, allowing for cross-border trades and acquisition of control and formation of a full-functioning joint integration with EU markets. venture. Also, Serbian regulatory policy is led by the Treaty on Stabilisation A transaction has to be notified if either of the following thresholds and Association to the EU (TSA), which entered into force on 1 is met: September 2013. One of the main obligations undertaken by Serbia under the TSA is the transposition of the EU legislative and (i) the aggregate worldwide turnover of all the undertakings regulatory framework into domestic law. concerned in the year preceding the concentration is above EUR 100 million, provided that at least one of the Pursuant to the EC Treaty and TSA, Serbia has harmonised its undertakings concerned achieved a turnover in Serbia of oil and natural gas legislation with, inter alia, the oil-related EU above EUR 10 million; or directives and the Third Energy Package. Also, the respective (ii) the aggregate turnover in Serbia of at least two undertakings regulatory policy is governed by the inter-governmental treaties concerned is above EUR 20 million in the year preceding the entered into by the Serbian Government (e.g. the abovementioned concentration, and each of at least two of the undertakings agreements with the Russian Federation). concerned achieved a turnover in Serbia above EUR 1 million in the same period. The CC is obliged to decide within one month from the receipt 13 Dispute Resolution of a complete merger notification whether to clear the transaction in summary proceedings or to initiate investigation proceedings. 13.1 Provide a brief overview of compulsory dispute Should the CC decide to open investigation proceedings, it has to resolution procedures (statutory or otherwise) ultimately decide whether to (unconditionally or conditionally) applying to the oil and natural gas sector (if any), clear or prohibit the transaction within four months from the date of including procedures applying in the context of initiating investigative proceedings. disputes between the applicable Government authority/regulator and: participants in relation to oil In certain cases, CC may allow for remedies proposed by the and natural gas development; transportation pipeline undertakings within the proceedings if it is of the view that such and associated infrastructure owners or users in measures are sufficient, and as a result of such, the concentration relation to the transportation, processing or storage will not restrict, distort or prevent competition. of natural gas; downstream oil infrastructure owners or users; and distribution network owners or users in relation to the distribution/transmission of natural gas. 12 Foreign Investment and International Obligations There are no compulsory dispute resolution procedures prescribed by the applicable legal acts. The parties are, in principle, entitled to negotiate and agree on the dispute resolution mechanisms 12.1 Are there any special requirements or limitations on under their agreements. Notably, the model agreements under the acquisitions of interests in the natural gas sector Codes provide for dispute resolution before the competent local (whether development, transportation or associated infrastructure, distribution or other) by foreign court. Presumably, the foreign investor may request arbitration, companies? as the dispute resolution forum, under their agreements with the system operators. Pursuant to the PPP Act, the parties may agree As stated in the answer to question 7.2 above, the distribution and on domestic or foreign arbitration in the concession agreement, transportation network of natural gas may be in private ownership, whereby the foreign arbitration may be contractually agreed only but existing networks are in the ownership of Srbijagas and such if a private partner, or its direct or indirect shareholder, is a foreign ownership right cannot be alienated, pursuant to the EA. The legal entity or individual, i.e. in case of consortium, if at least one system operator (regardless of whether it is domestic or foreign), member of a consortium or its direct or indirect shareholder is a in principle, may acquire the ownership rights over the facilities of foreign legal entity or individual. the gas network that it has constructed from its own funds, acquired in the business transaction or by incorporation or capital increase. 13.2 Is your jurisdiction a signatory to, and has it duly Pursuant to the Serbian Act on the Investments, the foreign investor ratified into domestic legislation: the New York is entitled to exactly the same regime, rights and obligations as those Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and/or the Convention on applicable to the domestic investors. The MGEA explicitly provides the Settlement of Investment Disputes between States that geological explorations can be conducted by the foreign legal and Nationals of Other States (“ICSID”)? entities in line with that Act and the Serbian Act on Investments and in accordance with the laws governing the area of defence and Yes, both the New York Convention on the Recognition and confidentiality principles. Enforcement of Foreign Arbitral Awards and the Convention on the

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Settlement of Investment Disputes between States and Nationals of The inter-governmental agreement concluded in 2012 between Other States have been duly ratified into Serbian legislation on 12 Serbia and Russia for natural gas supply contained a controversial March 2001 and on 9 May 2007, respectively. “destination clause”, which limited natural gas supplies to the Serbian market only and restricted further export, based on which the agreement was subject to an infringement procedure by EC and 13.3 Is there any special difficulty (whether as a matter of law or practice) in litigating, or seeking to enforce a process initiated against Gazprom by the European Commission judgments or awards, against Government authorities for the infringement of competition rules. Consequentially, based or State organs (including any immunity)? on the Protocol on amendments signed by the end of 2017 between Serbia and Russia, the “destination clause” has been annulled.

Serbia Generally, there is no special difficulty in litigating or seeking to In January 2018, AERS has notified CC on numerous complaints enforce judgments or awards against Government authorities. received by the gas suppliers, alleging that Srbijagas has acted However, due to the general administrative hurdles in Serbian contrary to EA and restricted access to the transport system of judicial practice and rather lengthy processes, the companies often Srbijagas at the access point “Horgoš”. This access point is located try to resolve the dispute amicably and without seeking judicial at the border between Serbia and Hungary and is the only access remedy. point for natural gas import to Serbia. To date, CC has not initiated relevant investigation. 13.4 Have there been instances in the oil and natural gas The EC 2018 Implementation Report concludes that Serbia sector when foreign corporations have successfully is “clearly the most advanced Contracting Party” in terms of obtained judgments or awards against Government transposition and implementation of the oil acquis. No significant authorities or State organs pursuant to litigation developments in the oil market have occurred in the past term. before domestic courts?

We are aware of numerous successful commercial litigation and administrative dispute cases resolved in favour of energy companies before the local courts.

14 Updates

14.1 Please provide, in no more than 300 words, a summary of any new cases, trends and developments in Oil and Gas Regulation Law in your jurisdiction.

Full legal and functional unbundling of Srbijagas remains the key issue and drawback in Serbia’s progress and alignment with its international and national obligations. The EC 2018 Implementation Report has concluded a “total lack of progress” in Serbian gas market reforms and it has also confirmed low-level of enforcement of national gas legislation.

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Miloš Laković Aleksandra Petrović Moravčević, Vojnović and Partners Moravčević, Vojnović and Partners in cooperation with Schoenherr in cooperation with Schoenherr Dobračina 15 Dobračina 15 11 000 Belgrade 11 000 Belgrade Serbia Serbia

Tel: +381 1 1320 2600 Tel: +381 1 1320 2600 Fax: +381 1 1320 2610 Fax: +381 1 1320 2610 Email: [email protected] Email: [email protected] URL: www.schoenherr.rs URL: www.schoenherr.rs Serbia Miloš Laković is a partner with Moravčević, Vojnović and Partners in Aleksandra Petrović is an associate with Moravčević, Vojnović and cooperation with Schoenherr. He focuses on energy and corporate/ Partners in cooperation with Schoenherr, where she is a member of M&A projects in Serbia and in the region, has extensive experience in regulatory practice group. She advises national and international energy transactions, and has advised a number of foreign investors clients on legal issues arising on major energy and industrial projects, in the energy sector (including RWE, Seci Energia, Enemalta from wind and solar parks to hydro and thermal power plants. and Gazprom), public utilities (EPS – national power utility) and Aleksandra’s recent assignments include advising Pure Energy on governments in the region (Government of Montenegro). Miloš has the development of three micro HPPs, Hydropol, an international been with the firm since 2007. In 2012, he worked (on secondment) hydropower development company, on restructuring their portfolio of for Debrauw Blackstone Westbroek BV (the law firm of the year in the seven small HPPs in Serbia, Montenegrin power utility (EPCG) and Netherlands in 2012). From 2010 to 2014 he authored the Serbian and the Government of Montenegro on developing the second block of Montenegrin chapters of the European Energy Handbook published TPP “Pljevlja” in Pljevlja, Montenegro, the European Commission on by Herbert Smith Freehills. the national regulatory framework for the production and transport of LNG in Serbia and KfW IPEX Bank relating to financing of the two wastewater treatment plants developed in a public-private partnership between the Municipality of Budva and German WTE. Aleksandra regularly contributes to several industry and legal guides on the legal developments in energy sector.

Moravčević, Vojnović and Partners in cooperation with Schoenherr has been active in the Serbian market since 2002. The firm’s practice is client- orientated, with specialised practice groups that provide industry-focused services to meet the demands of a competitive, developing and rapidly changing marketplace. The firm’s client list includes leading companies, financial institutions, organisations and governments. With 40 lawyers Moravčević Vojnović and Partners in cooperation with Schoenherr has the capacity to provide legal advice across practices and industries. In addition to the Serbian practice, Moravčević Vojnović and Partners in cooperation with Schoenherr is frequently engaged in high-profile transactions in Bosnia and Herzegovina, Montenegro and Macedonia. Schoenherr is a leading full-service law firm in Central and Eastern Europe. More than 300 professionals service national and international clients from our offices in Austria, Belgium/EU, and throughout the entire CEE region. As one of the first international law firms to move into CEE, we have grown to be one of the largest law firms in the region.

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Turkey Levent Çelepçi

Türkoğlu & Çelepçi in cooperation with Schoenherr Murat Kutluğ

In 2017, 354.15 million Sm3 of natural gas was offered for sale by 1 Overview of Natural Gas Sector a total of 10 companies with a wholesale licence. The amount of domestic production decreased by 3.58% compared to 2016. 1.1 A brief outline of your jurisdiction’s natural gas sector, including a general description of: natural 1.4 To what extent is your jurisdiction’s natural gas gas reserves; natural gas production including production exported (pipeline or LNG)? the extent to which production is associated or non-associated natural gas; import and export of As a natural consequence of the fact that Turkish natural gas natural gas, including liquefied natural gas (LNG) liquefaction and export facilities, and/or receiving and production is very limited and the internal consumption requirement re-gasification facilities (“LNG facilities”); natural gas can only be met through imported natural gas, Turkey exports a pipeline transportation and distribution/transmission relatively small quantity to Greece. network; natural gas storage; and commodity sales In 2017, only BOTAŞ was active among the eight licensed export and trading. companies and 630.67 million Sm3 of natural gas was exported by BOTAŞ to Greece. The amount of exported natural gas decreased Usage of natural gas started in the 1970s, and its utilisation rate and by 6.52 % from 2016. area have increased in parallel with the rise of energy demand and the advantages of natural gas. Imports became compulsory because of limited reserves and domestic production amounts in comparison 2 Overview of Oil Sector with existing and potential demand. Increasing natural gas demand in Turkey and limited reserve and 2.1 Please provide a brief outline of your jurisdiction’s oil production to meet this demand necessitated natural gas import in sector. 2017 as in previous years. 0.64 % of the total natural gas supply was domestic and the balance (i.e. 99.36%) was met from different Domestic oil consumption in 2017 was 28,460.979 tonnes, which foreign sources. marked an increase from the previous year, and is expected to Turkey is dependent on imports, mainly for gas from Russia. further increase in upcoming years. Given the very limited amount The main market player in the gas market is the state-owned of oil produced, such demand is being met by imported oil to a great BOTAŞ, who accounted for 82.51% of the total imported quantity extent. (pipeline gas and LNG in total) in 2017. It is expected that demand for oil will grow in alignment with GDP growth. 1.2 To what extent are your jurisdiction’s energy requirements met using natural gas (including LNG)? Currently, the Turkish Petroleum Company (“TPAO”) is a major player in the oil exploration process. The liberalisation of the Although declining, natural gas still plays an important role in petroleum sector was evidenced by the Petroleum Law dated 11 June terms of Turkey’s energy requirements. 38% of total electricity 2013 (“Petroleum Law”), which introduced several incentives for production was based on natural gas in 2017, while hydroelectric oil exploration. The new law is set to liberalise upstream activities accounted for 20%, coal 33% and wind power 6%. by limiting the dominant market position of TPAO.

1.3 To what extent are your jurisdiction’s natural gas 2.2 To what extent are your jurisdiction’s energy requirements met through domestic natural gas requirements met using oil? production? The percentage of domestic energy needs met by oil (including LPG) Domestic gas production in Turkey is quite limited, covering less is 28%. It is foreseen that the share of oil will remain relatively than 1% of total consumption. Turkey’s gas requirements are stable until at least 2023, when the share of oil is predicted to be mainly met through imported gas. The main countries from which around 26%. gas was imported into Turkey were the Russian Federation (53%), Iran (16%), Azerbaijan (12%), Algeria (8%) and Nigeria (4%) in 2017.

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2.3 To what extent are your jurisdiction’s oil requirements 3.2 How are the State’s mineral rights to develop oil met through domestic oil production? and natural gas reserves transferred to investors or companies (“participants”) (e.g. licence, concession, Domestic production covers 7% of internal demand. In the event service contract, contractual rights under Production Sharing Agreement?) and what is the legal status of that no new discoveries are made, and based on current production/ those rights or interests under domestic law? consumption statistics, the existing domestic crude oil reserves will be exhausted in 17 years. All oil and natural gas resources in Turkey are owned by the State. Although Turkey’s production of liquid fuels has increased since Through a licensing system managed by GDPA, specific licences 2004, it is much less than what the country consumes each year.

are granted to applicant companies. Please refer to the responses Turkey TPAO is the dominant exploration and production entity in Turkey. under question 3.3 below for further explanations on different types Production in 2017 compared to 2016 was as follows: total refinery of licences. Such licences are subject to administrative laws and petroleum products production increased by 0.72% to 28,937.102 regulations. The Council of State has jurisdiction, as a court of tonnes; diesel types production increased by 8.48% to 10,395.069 first instance, in respect to challenges brought against decisions of tonnes; gasoline production increased by 5.06% to 5,360.216 tonnes; the Ministry of Energy and Natural Resources (“MENR”), which aviation fuels production increased by 7.81% to 4,837.246 tonnes; reviews objections and disputes with respect of the issuance of such marine fuels production decreased by 8.21% to 2,154.285 tonnes; licences or their implementations. and other production decreased by 16.64% to 6,258.144 tonnes. 3.3 If different authorisations are issued in respect of 2.4 To what extent is your jurisdiction’s oil production different stages of development (e.g., exploration exported? appraisal or production arrangements), please specify those authorisations and briefly summarise the most In 2017, TPAO exported 5,768,134.996 tonnes of oil, accounting for important (standard) terms (such as term/duration, 57% of the total oil exported from Turkey. scope of rights, expenditure obligations). The amount of petroleum products exported reached 10,081,991.497 The Petroleum Law sets forth that a research permit shall be issued tonnes in 2017, marking an increase of 4.06% from 2016. by GDPA, which would entitle its holder to carry out certain Exports in 2017 compared to 2016 were as follows total exports research activities. The exploration and/or operation licences issued of petroleum products increased by 4.06% to 10,081.991 tonnes; for a part of the area for which a research permit is requested do not exports of gasoline types increased by 9.67% to 3,167.398 tonnes; constitute an obstacle for research permit issuance. Apart from the exports of diesel types increased by 226.39% to 233,060 tonnes; and research permit, there are two main types of licences required for exports of aviation fuels increased by 6.64% to 3,762.885 tonnes. exploration and operation activities. Exploration Licences 3 Development of Oil and Natural Gas For exploration licences, the first application made for an area shall be announced in the Official Gazette. Following this announcement, additional applications can be made before GDPA. 3.1 Outline broadly the legal/statutory and organisational The business and investment plans of the applicants (including the framework for the exploration and production first applicant) must be submitted to GDPA within 90 days following (“development”) of oil and natural gas reserves including: principal legislation; in whom the State’s the announcement. The applications shall be assessed by GDPA mineral rights to oil and natural gas are vested; in accordance with the criteria provided under the implementation Government authority or authorities responsible for regulation. The exploration licence shall be announced in the the regulation of oil and natural gas development; and Official Gazette, and within 30 days following this announcement, current major initiatives or policies of the Government the exploration licence holder shall deposit another guarantee, (if any) in relation to oil and natural gas development. namely an investment guarantee. Exploration licences shall be initially issued for a period of five Oil and gas exploration and exploitation activities, which constitute years for onshore exploration activities and eight years for offshore, upstream activities, are generally regulated under the Petroleum with a possibility of extension up to nine years for onshore and 14 Law. It should always be noted that Turkey is a contracting party to years for offshore. many conventions and international agreements with regards to the international oil and gas market. In this respect, certain international Operation Licences agreements to which Turkey is a party, such as the International In order to obtain an operation licence, an application must be made Convention on Readiness, Response and Cooperation With Regards to GDPA. If the application is accepted, the applicant shall further To Oil Pollution and Its Annexes, dated 27 November 1992 deposit a guarantee in the amount of 0.5% of the operation licence (London), and the International Agreement on Establishment of an charge per hectare to GDPA within 15 business days following International Fund Regarding the Indemnification of the Damages notification of the decision. If the said amount is not deposited Caused by Oil Pollution, dated 27 November 1992 (London). in due time, the applicant will be deemed to have withdrawn its The General Directorate of Petroleum Affairs (“GDPA”) is the application. relevant authority in respect to upstream activities, including Exploration and operation licences can also be issued by an auction exploration and exploitation-permitting processes. by GDPA. The relinquished areas can also be licensed with the auction method upon the consent of MENR.

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financial commitment in the business plan as submitted in 3.4 To what extent, if any, does the State have an the licence application. For offshore exploration, where the ownership interest, or seek to participate, in the financial investment would be higher, the rate is reduced to development of oil and natural gas reserves (whether 1% of the total investment amount. as a matter of law or policy)? ■ Collateral for Loss and Damages: the payment of an additional collateral before obtaining a petroleum right in According to the Turkish Constitution, natural resources belong to order to cover any potential loss and damages that may occur the State, along with the right to explore and exploit these resources during the petroleum activities is compulsory. The rate for (Article 168, Turkish Constitution). The State can delegate these search permits is 0.0005% of the search charge, 0.0001% of rights to persons or corporate bodies for a certain period of time. the exploration licence charge for exploration licences, and

Turkey 0.005% of the operation licence charge for operation licences.

3.5 How does the State derive value from oil and natural gas development (e.g. royalty, share of production, 3.10 Can rights to develop oil and natural gas reserves taxes)? granted to a participant be pledged for security, or booked for accounting purposes under domestic law? Exploration and/or exploitation licence holders must pay as royalty to the Turkish State 12.5% of the value of the petroleum they have Yes, rights to develop oil and natural gas reserves granted to a produced. The royalty amount shall be calculated once the expenses participant can be pledged for security subject to prior approval by (i.e. income tax, corporate tax, other applicable taxes and charges, GDPA. The pledges would need to be registered in the Petroleum etc.) are deducted from the market price of the produced petroleum. Register kept by GDPA. Furthermore, the total taxation of a company engaged in exploitation, together with taxes withheld on behalf of its shareholders, cannot 3.11 In addition to those rights/authorisations required exceed 55%. to explore for and produce oil and natural gas, what other principal Government authorisations are required to develop oil and natural gas reserves (e.g. 3.6 Are there any restrictions on the export of environmental, occupational health and safety) and production? from whom are these authorisations to be obtained?

Petroleum right holders are entitled to export a certain amount of the Entities active in the energy sector must obtain an environment petroleum and natural gas (35% for onshore and 45% for offshore) licence and environment permit from the Ministry of Environment that they produce in fields discovered after 1 January 1980. The and Urban Planning (Article 7, Environmental Permit and Licence remaining part, and the whole petroleum and natural gas produced Regulation published in the Official Gazette dated 10 September in the fields discovered before 1 January 1980, shall be reserved 2014, No. 29115). Requirements for environment licences are for domestic use. The Council of Ministers has the authority to determined by considering the activity of a given business. regulate the procedures and principles on the redetermination and Collectively, these permits and licences contemplate: implementation of these ratios. ■ Emissions. ■ Discharges. 3.7 Are there any currency exchange restrictions, or ■ Dangerous material discharges. restrictions on the transfer of funds derived from production out of the jurisdiction? ■ Waste collection. ■ Recycling matters. GDPA approval is required for right holders to transfer funds These environment permits and licences must be obtained before derived from their production. Prior to the transfer, right holders operations begin. They are different to the EIA reports and related shall deduct taxes, fees and royalties that are yet to be accrued. positive or negative decisions from the Ministry of Environment and Urban Planning. 3.8 What restrictions (if any) apply to the transfer or disposal of oil and natural gas development rights or 3.12 Is there any legislation or framework relating to interests? the abandonment or decommissioning of physical structures used in oil and natural gas development? If To transfer an upstream oil or gas licence, the licence holder so, what are the principal features/requirements of the (transferor) and transferee must jointly apply to GDPA. The rights legislation? covered by upstream licences are recorded in the oil registry, which is maintained by GDPA. Both of the parties must provide detailed There are no specific provisions in Turkish legislation addressing documents, maps and information about the proposed transfer to decommissioning requirements, although upstream licence holders GDPA for its consideration. are required to return the land to its former condition (Article 22(3), Petroleum Law). While legislation is silent on the decommissioning requirements, the obligation to comply with environmental rules 3.9 Are participants obliged to provide any security remains, along with the obligation to avoid endangering society and or guarantees in relation to oil and natural gas the environment. When an entity operating in the upstream market development? wishes to decommission its facilities, the entity must arrange for its rights to be deregistered from GDPA’s petroleum registry (Article There are two types of collaterals that are required under the 21, Petroleum Law). Petroleum Law: If a licensee ceases its activities, it must notify the relevant authority ■ Collateral for Investment: the Law requires an applicant for an exploration licence to provide a bond equal to 2% of the three months before its suspension (Article 18, Environmental Permit and License Regulation).

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Since decommissioning generally involves closing a place of business, the employer must also notify the relevant tax office of 5 Import / Export of Oil the decommissioning, as well as other institutions, such as the social security and district labour offices. 5.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect of cross-border sales or deliveries of oil and oil 3.13 Is there any legislation or framework relating to products. gas storage? If so, what are the principal features/ requirements of the legislation? The Petroleum Law provides that there are no further additional licence requirements needed in respect of the cross-border sales or

Natural Gas Law No. 4646 (“Natural Gas Law”) regulates the Turkey natural gas market in terms of import, transmission, distribution, deliveries of oil and products for holders of oil refinery licences, oil storage, marketing, trade and the export of natural gas, as well as the distribution licences or bunker delivery licences. rights and obligations of all real and legal persons relating to these activities. It is the principal legislation in Turkey. 6 Transportation

3.14 Are there any laws or regulations that deal specifically with the exploration and production of unconventional 6.1 Outline broadly the ownership, organisational and oil and gas resources? If so, what are their key regulatory framework in relation to transportation features? pipelines and associated infrastructure (such as natural gas processing and storage facilities).

Unconventional oil and gas resources are generally gas/oil which is The Petroleum Law provides that there are no further additional found in reservoir/source rock, shales, etc. Currently, there are no licence requirements needed in respect of the cross-border sales or laws or regulations on this subject. deliveries of oil and products for holders of oil refinery licences, oil distribution licences or bunker delivery licences. 4 Import / Export of Natural Gas (including LNG) 6.2 What governmental authorisations (including any applicable environmental authorisations) are required to construct and operate oil and natural 4.1 Outline any regulatory requirements, or specific gas transportation pipelines and associated terms, limitations or rules applying in respect of infrastructure? cross-border sales or deliveries of natural gas (including LNG). Please refer to question 6.1 for the government authorisations required to construct and operate oil and natural gas transportation Cross-border sales or deliveries of natural gas can be performed pipelines and the associated infrastructure. either by importing natural gas into Turkey or exporting natural gas from Turkey. 6.3 In general, how does an entity obtain the necessary There are certain important limitations in terms of importing pipeline land (or other) rights to construct oil and natural gas gas into Turkey. As a matter of fact, the Natural Gas Law prohibits transportation pipelines or associated infrastructure? companies, other than BOTAŞ, from importing pipeline gas from Do Government authorities have any powers of those countries with which BOTAŞ has an existing supply contract. compulsory acquisition to facilitate land access? New import contracts from such countries will only become possible when BOTAŞ contracts expire. By private agreement, expropriation or by obtaining leasehold The Natural Gas Law foresees a reduction of BOTAŞ’ market share rights from the Government, either through easements or land to below 20% of the total internal consumption of natural gas. In allocation permits. If the applicant has an exploitation licence, the view of reaching this goal, BOTAŞ launches tenders from time to authority to request the expropriation is GDPA; if the applicant has time for assigning part of its existing supply contracts. As a pre- a transmission licence, the authority is EMRA. At the end of the requisite to participate in such tenders, applicants are required to hold expropriation process, the expropriated land is registered in the an import licence and also to obtain the preliminary consent of the name of the Treasury and an easement agreement is granted to the selling entity. Despite the objective determined in the Natural Gas applicant. Law, in 2014, 79.77% of imports (pipeline gas and LNG combined) have been imported by BOTAŞ. 6.4 How is access to oil and natural gas transportation Legal entities that wish to export the natural gas imported or generated pipelines and associated infrastructure organised? within the country abroad must also obtain an export licence from the Energy Market Regulatory Authority (“EMRA”). The company Please see question 6.6. asking for a licence should prove that it has the required technical and economical capability, and state which country and by which 6.5 To what degree are oil and natural gas transportation transportation vehicles it shall export the natural gas; this provides pipelines integrated or interconnected, and how is co- a guarantee to the effect that the export process will not intervene in operation between different transportation systems the operation of the system nor satisfaction of the natural gas demand established and regulated? of the country and towards the recovery of any loss or damage which may occur if the system security is violated by the company, and to With respect to natural gas, the network and distribution system is provide insurance coverage as is compulsory for loss and damage. regulated by the Network Code.

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6.6 Outline any third-party access regime/rights in 7.3 How is access to the natural gas distribution network respect of oil and natural gas transportation and organised? associated infrastructure. For example, can the regulator or a new customer wishing to transport Access to the natural gas distribution network is organised by the oil or natural gas compel or require the operator/ Natural Gas Distribution and Customer Relations Regulations. owner of an oil or natural gas transportation pipeline or associated infrastructure to grant capacity or expand its facilities in order to accommodate the new 7.4 Can the regulator require a distributor to grant customer? If so, how are the costs (including costs capacity or expand its system in order to of interconnection, capacity reservation or facility accommodate new customers? Turkey expansions) allocated?

Urban development must be considered when expanding the system BOTAŞ has long held a monopoly role in Turkey, and it was not to accommodate new customers. EMRA may intervene to enforce until 2007 that a party besides BOTAŞ could access the BOTAŞ expansion requirements. transmission network. The Natural Gas Market Law provides that connection and transmission tariffs are set by EMRA, rather than by third parties 7.5 What fees are charged for accessing the distribution network, and are these fees regulated? negotiating with the company owning the transmission network (Article 11(1) and 11(2), Natural Gas Market Law). Third parties can apply to EMRA if a dispute arises with BOTAŞ regarding access Connection fees must not exceed 514 Turkish Liras (“TRL”) to the transmission network (Article 16, Transmission Network (approximately EUR 83). A security deposit is charged, equal to Operation Principles, published in the Official Gazette No. 25561, TRL 406 (approximately EUR 66). Such fees are regulated in the dated 22 August 2004). sense that the regulator announces applicable maximum fees on a yearly basis. Fees mentioned herein are the fees applicable for 2018. Parties wishing to use the BOTAŞ transmission network must first apply for a capacity allocation at an entry and exit point. Entities wishing to transport gas through a transmission or distribution 7.6 Are there any restrictions or limitations in relation to pipeline owned by another licensee must enter a standard acquiring an interest in a gas utility, or the transfer transportation contract with the licensee (Transmission Network of assets forming part of the distribution network (whether directly or indirectly)? Operation Regulation, published in the Official Gazette No. 24918, 26 October 2002; BOTAS Transmission Network Operation Yes, the transfer of shares of a distribution company which exceeds Principles, published in the Official Gazette, 1 September 2004). 10% of the share capital of such distribution company needs to be approved by EMRA. 6.7 Are parties free to agree the terms upon which oil or natural gas is to be transported or are the terms (including costs/tariffs which may be charged) 8 Natural Gas Trading regulated?

A standard transportation contract needs to be entered into with 8.1 Outline broadly the ownership, organisational and BOTAŞ. regulatory framework in relation to natural gas trading. Please include details of current major initiatives or policies of the Government or regulator 7 Gas Transmission / Distribution (if any) relating to natural gas trading.

Natural gas trading is regulated under the Natural Gas Market 7.1 Outline broadly the ownership, organisational and Licensing Regulation. In order to trade natural gas in gaseous regulatory framework in relation to the natural gas and liquid form, a wholesale licence is required from EMRA; a transmission/distribution network. compressed natural gas licence is needed from EMRA for trading compressed natural gas. With respect to transmission, the transmission network is owned and operated by BOTAŞ. 8.2 What range of natural gas commodities can be With respect to distribution, tenders are launched either by the traded? For example, can only “bundled” products relevant municipalities or by the Privatization Administration in (i.e., the natural gas commodity and the distribution respect of each province. Currently, 78 provinces in the country out thereof) be traded? of a total of 81 have access to natural gas. Currently, all distribution activities are carried out by privately-held companies. Natural gas can be traded in gaseous, liquid and compressed form.

7.2 What governmental authorisations (including any 9 Liquefied Natural Gas applicable environmental authorisations) are required to operate a distribution network? 9.1 Outline broadly the ownership, organisational and Please see the response to question 7.1. regulatory framework in relation to LNG facilities.

LNG import has been regulated as a market activity by the Natural Gas Market License Regulation and Natural Gas Market Law.

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Accordingly, the import, storage and trade of LNG are subject to specific licences and permits. Pursuant to the Natural Gas 11.2 To what criteria does the regulator have regard in Market Law, these market activities may be done by private sector determining whether conduct is anti-competitive? companies within the scope of opening the natural gas market to competition. Licence application processes have been set forth by Competition law prohibits concerted practices and the abuse of the Natural Gas Market Licence Regulation. dominant position. Turkey imports LNG based on long-term contracts from Nigeria and Algeria; and on spot basis mainly from Qatar. 11.3 What power or authority does the regulator have to Despite the fact that the natural gas market has been opened to preclude or take action in relation to anti-competitive practices? competition, LNG import activities have been carried out by Turkey BOTAŞ to a large extent. Competition law prohibits concerted practices and the abuse of dominant position. Those engaging in anti-competitive practices 9.2 What governmental authorisations are required to are subject to monetary fines, determined in reference to the annual construct and operate LNG facilities? turnover of such undertakings.

A storage licence is required to be obtained from EMRA. In addition, the following authorisations are required: 11.4 Does the regulator (or any other Government authority) have the power to approve/disapprove ■ An EIA report. mergers or other changes in control over businesses ■ An environmental permit. in the oil and natural gas sector, or proposed ■ A workplace and operating licence. acquisitions of development assets, transportation or associated infrastructure or distribution assets? If so, what criteria and procedures are applied? How long 9.3 Is there any regulation of the price or terms of service does it typically take to obtain a decision approving or in the LNG sector? disapproving the transaction?

The prices and terms of service in the LNG sector are regulated by As per the communiqué of the Turkish Competition Authority that the guidelines of BOTAŞ and Ege Gas LNG Terminals. was published in the Official Gazette on 29 December 2012 and entered into force on 1 February 2013, governing the review process of the merger and acquisition transactions that are subject to the 9.4 Outline any third-party access regime/rights in authorisation of the Turkish Competition Board, the thresholds that respect of LNG facilities. set the boundaries of notification requirements are as follows: (a) total turnovers of the transaction parties in Turkey exceed TRL As per the guidelines, a third party can be granted co-usage rights. 100 million (approximately EUR 16 million), and turnovers of A third party wishing to have co-usage rights must enter into a at least two of the transaction parties in Turkey each exceed TRL standard form terminal utilisation service agreement with BOTAŞ 30 million (approximately EUR 5 million); or (b) in acquisition and Ege Gas LNG Terminals, describing the services required. transactions, for the asset or the operation that is subject to the acquisition and in merger transactions, at least one of the transaction 10 Downstream Oil parties has a turnover in Turkey exceeding TRL 30 million, and a global turnover of at least one of the remaining transaction parties exceeds TRL 500 million (approximately EUR 80 million). The 10.1 Outline broadly the regulatory framework in relation Competition Authority reviews the impact on the affected markets to the downstream oil sector. of such proposed merger or acquisition. The relevant decision of the Competition Authority is rendered within 30 days following the Downstream activities are regulated by the Petroleum Market Law. submission of all requested documents; failing to receive a response within such period shall be deemed as an implicit consent.

10.2 Outline broadly the ownership, organisation and regulatory framework in relation to oil trading. 12 Foreign Investment and International Obligations Distributors/oil companies must obtain distributorship licences, whereas dealers must obtain dealership licences from EMRA, in order to conduct their business. 12.1 Are there any special requirements or limitations on acquisitions of interests in the natural gas sector (whether development, transportation or associated 11 Competition infrastructure, distribution or other) by foreign companies?

11.1 Which governmental authority or authorities are The Petroleum Law, which governs the production of natural responsible for the regulation of competition aspects, gas, expressly permits foreign companies to apply for upstream or anti-competitive practices, in the oil and natural activities, provided that they secure a local presence in Turkey. gas sector?

The Turkish Competition Authority plays an important role in ensuring the oil and natural gas sectors are competitive. EMRA, however, also regulates competition aspects in the oil and natural gas sector.

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12.2 To what extent is regulatory policy in respect of the 13.3 Is there any special difficulty (whether as a matter oil and natural gas sector influenced or affected of law or practice) in litigating, or seeking to enforce by international treaties or other multinational judgments or awards, against Government authorities arrangements? or State organs (including any immunity)?

With respect to downstream activities, regardless of the origin of its No. The Administrative Procedural Law sets forth the rules as to the shareholders, any company established in Turkey is eligible to be lawsuits which may be filed against governmental authorities and/ engaged in such activities. The oil and natural gas sector is fairly or State organs. influenced by international treaties. Turkey is a party to several

Turkey international treaties. 13.4 Have there been instances in the oil and natural gas sector when foreign corporations have successfully obtained judgments or awards against Government 13 Dispute Resolution authorities or State organs pursuant to litigation before domestic courts? 13.1 Provide a brief overview of compulsory dispute resolution procedures (statutory or otherwise) There are no reported cases in Turkey. applying to the oil and natural gas sector (if any), including procedures applying in the context of disputes between the applicable Government 14 Updates authority/regulator and: participants in relation to oil and natural gas development; transportation pipeline and associated infrastructure owners or users in 14.1 Please provide, in no more than 300 words, a relation to the transportation, processing or storage summary of any new cases, trends and developments of natural gas; downstream oil infrastructure owners in Oil and Gas Regulation Law in your jurisdiction. or users; and distribution network owners or users in relation to the distribution/transmission of natural gas. The Turkish authorities are placing a great importance on strategically positioning the country as a regional natural gas EMRA is the authority responsible for resolving disputes between trading hub. Accordingly, the legal framework regarding the new licence holders. Any administrative act is subject to judicial review Organized Wholesale Trading Platform of Natural Gas by which in Turkey, including decisions as well as administrative fines. Once the prices will be determined in the liberal market conditions was they have been notified of the decision, parties with a legitimate accomplished in 2017. interest are allowed 60 days to apply to the authorised administrative With the objective of reaching an internal gas storage capacity equal court. to 20% of annual consumption, capacity increase in Silivri and Salt Actions against decisions made by MENR which affect the rights Lake (Tuz Gölü) is under way. arising from research permits, exploration licences, or operation In line with the Energy policymakers’ strategy of increasing supply licences must be filed before the Council of State as the first instance sources for gas, the second FSRU terminal in Hatay Dörtyol became court. operational in February 2018. The new FSRU plant has the largest For administrative acts of EMRA, parties with a legitimate interest LNG storage capacity in the world, of 263 million m3. can file a suit before the administrative courts within 60 days Turkey’s strategic geographical position is underlined by the following the notification. inauguration of the Trans Anatolian Natural Gas Pipeline Project (“TANAP”) within the summer of 2018, which will transport 13.2 Is your jurisdiction a signatory to, and has it duly Azerbaijan gas into Europe through Turkey. ratified into domestic legislation: the New York A second refinery came into operation in October 2018 in the Izmir Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and/or the Convention on area, developed and owned by a foreign investor in Turkey. The 3 the Settlement of Investment Disputes between States new refinery has a storage capacity of 1.64 million m , with 63 tanks. and Nationals of Other States (“ICSID”)? TPAO has intensified oil and gas exploration activities, mainly through its new vessel, Fatih, which started drilling activities in Yes, Turkey is a signatory to the New York Convention on the autumn 2018 in the Mediterranean. Recognition and Enforcement of Foreign Arbitral Awards and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States.

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Levent Çelepçi Murat Kutluğ Türkoğlu & Çelepçi Türkoğlu & Çelepçi in cooperation with Schoenherr in cooperation with Schoenherr Esentepe Mah. Kore Şehitleri Cad. Esentepe Mah. Kore Şehitleri Cad. No: 16-1 İstanbloom, Kat 11/76, 34394 No: 16-1 İstanbloom, Kat 11/76, 34394 Şişli – İstanbul Şişli – İstanbul Turkey Turkey

Tel: +90 212 230 1700 Tel: +90 212 230 1700 Email: [email protected] Email: [email protected] URL: www.schoenherr.eu URL: www.schoenherr.eu Turkey Levent Çelepçi is partner of Schoenherr and managing partner of the Murat Kutluğ has been working at Schoenherr since 2011. Murat’s Istanbul office. He has a wide-ranging experience in national and main areas of practice include regulatory matter and corporate international energy projects and has been active representing various structurings. After graduating from Istanbul Bahçeşehir Law clients of the firm in the development of power plants, infrastructure Faculty, Murat completed his mandatory legal trainee period in a projects and M&A. He has participated in the privatisation of public reputable law firm in Turkey, dealing mainly with project finance and companies, such as energy production and distribution companies M&A transactions. He also has work experience in well-known law and facilities. His practice also focuses on representing foreign firms located in London. He has been involved in several cross- companies in public bids before the Turkish government and public border transactions and advised clients in major projects including institutions and companies. privatisations and financing of development projects.

Schoenherr is a leading full-service law firm in Central and Eastern Europe. With 13 offices located in Belgrade, Bratislava, Brussels, Budapest, Bucharest, Chisinau, Istanbul, Ljubljana, Prague, Sofia, Vienna, Warsaw and Zagreb, as well as country desks for Albania, Bosnia-Herzegovina, Macedonia and Montenegro, Schoenherr provides its clients with comprehensive coverage of the CEE/SEE region.* More than 300 legal professionals work across borders in both a centralised and de-centralised manner, according to the individual client’s needs and requirements. Quality, flexibility, innovation and practice-oriented solutions for complex assignments in the field of business law are at the core of the Schoenherr philosophy. The energy industry is a complex and highly competitive sector. It is obvious that there is a need for professional advisers who understand the business of companies active in this sector, and who have the experience and capacity to handle complex international energy projects. Schoenherr can assist you with a multi-disciplinary group of lawyers drawn from across the firm’s broad international network who specialise in the specifics of the energy sector. The energy group comprises of lawyers from all practice areas with a detailed understanding of the energy sector and of the needs of international energy clients. Sharing our knowledge and co-operating tightly between our practice groups and between our international offices, our energy group can help you to respond to the changes in the industry and to keep pace with market and regulatory developments. Our lawyers are regularly involved in both international and domestic energy matters including transactions, development projects, mergers and acquisitions, privatisations, public-private partnerships, regulatory matters, public procurement, strategic advice, competition matters and dispute resolution. *Schoenherr is in compliance with the respective local legal standards and conduct rules in all countries; therefore, the local firm name may vary from jurisdiction to jurisdiction.

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United Arab Mhairi Main Garcia Emirates

Dentons Stephanie Hawes

2017), followed by crude oil (just over 41 per cent in 2017), coal 1 Overview of Natural Gas Sector (just over 1 per cent) and renewables (just under 1 per cent). Consumption of natural gas decreased during 2017 by 0.3 per cent 1.1 A brief outline of your jurisdiction’s natural gas compared with 2016. In 2017, the UAE consumed 72.2 billion sector, including a general description of: natural cubic metres of natural gas, amounting to 2 per cent of total world gas reserves; natural gas production including consumption. Increased electricity consumption (accompanied by a the extent to which production is associated or preference for natural gas as the feedstock for power generation and non-associated natural gas; import and export of water desalination plants) and a growing petrochemicals industry natural gas, including liquefied natural gas (LNG) continue to contribute to the increase in demand; it is estimated liquefaction and export facilities, and/or receiving and re-gasification facilities (“LNG facilities”); natural gas that approximately half of the UAE’s natural gas production is used pipeline transportation and distribution/transmission for domestic power generation during the peak summer months. network; natural gas storage; and commodity sales Significant quantities of natural gas are also used in re-injection and trading. operations for oil reservoir pressure maintenance. Domestic gas consumption in the UAE exceeds production. Most The United Arab Emirates (the “UAE”) was established in 1971 as of the UAE’s natural gas production is associated gas or sour gas in a federation of emirates. There are seven emirates, each with its non-associated fields. Production in the associated fields is limited own Ruler: Abu Dhabi; Ajman; Dubai; Fujairah; Ras Al Khaimah by the UAE’s OPEC quotas, since associated gas production is (“RAK”) (which joined the federation in 1972); Sharjah; and Umm determined by oil output. Al Quwain. The Emirate of Abu Dhabi, which holds the majority of The UAE has embarked on a substantial investment programme the UAE’s hydrocarbon resources, is the capital of the UAE. to boost domestic gas production, most notably the sour gas The oil and gas sector currently accounts for approximately 30 per development projects in Abu Dhabi. ADNOC Sour Gas (previously cent of the UAE’s gross domestic product. However, given the drive known as Abu Dhabi Gas Development Company Limited, Al for diversification and the push to establish a base for a post-oil Hosn Gas) was established in 2010 to manage, operate and develop economy, the non-hydrocarbon contribution to GDP is expected to the Shah Gas Field Project. The company is owned by Abu Dhabi increase to over 80 per cent by 2021. National Oil Company (“ADNOC”) and Occidental Petroleum Natural gas plays a key role in the UAE’s energy mix. The UAE (with ADNOC holding a 60 per cent majority share). has the eighth largest proven natural gas reserves in the world (after The Shah Gas Field Project began gas production in January 2015 Russia, Iran, Qatar, Turkmenistan, the United States, Saudi Arabia and involves the development of high sulphur content reservoirs and Venezuela). The UAE’s proven natural gas reserves at the end within the Shah Gas Field, located onshore, southwest of the of 2017 stood at 5.9 trillion cubic metres, representing approximately city of Abu Dhabi. It comprises the development of several gas 3.1 per cent of the world’s total proven reserves. The Emirate of Abu gathering systems and the construction of gas and liquid pipelines Dhabi holds approximately 94 per cent of these reserves, where the and processing trains to process high sulphur content gas. Gas, non-associated Khuff natural gas reservoirs beneath the Umm Shaif condensate and natural gas liquids are transported to other processing and Abu Al Bukhoosh oil fields are amongst the largest in the world. and distribution facilities at Habshan for use as feedstock for gas- The Emirates of Sharjah and Dubai hold approximately 1.5 per cent fired power and desalination plants, industrial development and oil and 4 per cent of the UAE’s reserves respectively; however, the gas field pressure maintenance re-injection operations. ADNOC Sour fields in these emirates have matured and their production rates have Gas is now planning the expansion of the Shah Gas Field Project fallen in recent years. Natural gas production in the UAE increased by 50 per cent. during 2017 by 1.8 per cent compared with 2016. The UAE produced In November 2018, ADNOC granted Total a 40 per cent interest 60.4 billion cubic metres of marketed natural gas in 2017, representing in the Ruwais Diyab unconventional gas concession, with a six to 1.6 per cent of global marketed natural gas production for that year. seven-year exploration and appraisal phase followed by a 40-year production term. Under the terms of the agreement, Total will 1.2 To what extent are your jurisdiction’s energy explore, appraise and develop the concession area’s unconventional requirements met using natural gas (including LNG)? gas resources. Also in November 2018, ENI was awarded a 25 per cent interest in the Ghasha offshore ultra-sour gas concession. Natural gas accounts for the majority of the UAE’s total energy At the time of writing, ADNOC is in discussions with further consumption (representing 57 per cent of consumption during potential partners, for the remaining 15 per cent available in the

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Ghasha concession and potentially allocated to foreign oil and gas metres per annum and its initial contracted capacity is 22 billion companies (ADNOC will retain a 60 per cent interest). cubic metres per annum. In addition, as a means of addressing the shortfall in domestic gas The Dolphin Gas Project is owned by Dolphin Energy, in which Abu supply, the UAE is assessing alternative energy sources, including Dhabi Government-owned Mubadala Investment Company holds nuclear energy and renewables. The world’s largest single nuclear a 51 per cent interest, with Total and Occidental Petroleum each project, Abu Dhabi’s Barakah nuclear project, will have a capacity holding a 24.5 per cent interest. Dolphin Energy has signed long- of 5,600MW; the first of four 1,400MW reactors is scheduled to be term gas supply contracts with Abu Dhabi Water and Electricity operational during 2019, with the remaining three reactors expected Company (“ADWEC”), the Dubai Supply Authority (“DUSUP”), to be operational by 2021. Sharjah Electricity and Water Authority, RAK Gas and Oman Oil Dubai and Abu Dhabi have also pursued ambitious solar energy Company. In 2018, ADNOC and DUSUP entered into a 15-year gas projects as part of their energy diversification, with large utility sales agreement to supply natural gas to Dubai. scale solar photovoltaic (“PV”) and concentrated solar power DUSUP’s floating LNG regasification facility in Dubai supplements (“CSP”) projects. In 2014, Phase II of Dubai’s Mohammed Bin existing supplies of natural gas during summer peak demand. A Rashid Al Maktoum Solar Park was tendered as a 100MW solar floating storage and regasification unit (“FSRU”), chartered by United Arab Emirates PV power project; the project achieved a record-breaking tariff in DUSUP from Golar LNG, is moored offshore within the Jebel the absence of subsidies and doubled its size to 200MW. Phase Ali terminal. Also, in 2016, Abu Dhabi chartered an FSRU from III followed in 2016, a massive 800MW of PV and another record- Excelerate. The FSRU is moored at Ruwais and is the first facility breaking tariff; this was followed in 2017 by Phase IV, a 700MW to allow Abu Dhabi to import LNG to meet growing and immediate CSP project, the largest single-site CSP project in the world. In domestic gas demand. The Sharjah National Oil Corporation/ 2018, the advisory tender for Phase V was announced, a 300MW Uniper JV is looking to develop an LNG import terminal at the solar PV power project. In Abu Dhabi, the Sweihan solar PV power Sajaa gas field, based on an FSRU to be located offshore ofthe project, which was tendered in 2016 and is expected to be complete Hamriyah Harbour. in 2019, also achieved a record tariff and the project being upsized A number of Iranian pipeline gas import proposals have been from the initial 350MW to a colossal 1,177MW. The Sweihan 2 considered, the most developed of which was Crescent Petroleum’s solar PV power project is expected to be tendered during 2019. In project with the National Iranian Oil Company to import natural RAK a feasibility study is ongoing in relation to a solar power plant gas by pipeline from Iran’s Salman field into Sharjah. However, which would have a planned capacity of 40MW. although Crescent Petroleum and the National Iranian Oil Company Coal also forms part of the UAE’s energy mix. Dubai is developing agreed a 25-year contract in 2001 and much of the pipeline and a clean coal-fired power complex at Hassyan, the first phase of associated project infrastructure has already been built, the project which is a USD2.47 billion project with a capacity of 2,400MW, was the subject of protracted litigation. While in 2017 public reports phase 1 of which is expected to be complete in 2020. In 2018, Dubai indicated that both sides were showing a readiness to reignite the commenced the tender process for phase 3 of Hassyan, a 1,200MW project, there is currently no confirmation that the dispute has been clean coal project. Further north, the Federal Electricity and Water resolved and gas will be received. Indeed, while the dispute affected Authority is considering a 1,800MW coal-fired power project, to plans for linking the Iran-UAE pipeline to Oman, there are now be built in RAK; the timeline for this project is not yet known. A plans to build a direct Iran-Oman gas pipeline. separate clean-coal 270MW power plant in Khorkhowir, RAK, was The Sharjah Western Offshore Concession is located off the Sharjah put on hold in 2017. coastline and includes the Zora Gas Field, which straddles Sharjah Finally, Dubai is planning a 250MW hydropower pumped storage and Ajman and is being developed by Dana Gas. Gas from the Zora power station in Hatta, making use of water stored in mountains and Gas Field is being piped to an onshore gas processing facility in which will be able to hold up to 880 million gallons. Sharjah’s Hamriyah free zone. In 2017, Sharjah Petroleum Council signed a 23-year concession agreement with Rex Oil and Gas Limited for oil and gas exploration and drilling in Sharjah’s Eastern 1.3 To what extent are your jurisdiction’s natural gas requirements met through domestic natural gas offshore concession (at Khorfakkan and Kalba). production? Dana Gas is also developing the UAE Gas Project, which will receive gas at a Dana Gas-owned receiving platform offshore The UAE’s natural gas requirements are met through domestic Sharjah and will then transport the gas by an 80-kilometre onshore production and imports from Qatar. In 2017, the UAE imported and offshore pipeline, to the gas processing facilities in Sharjah, 16.4 billion cubic metres of natural gas from Qatar through the which are operated by SajGas (also owned by Dana Gas). The Dolphin Gas Project’s export pipeline. The UAE also exports a gas will be sweetened and processed to produce gas for sale in large amount of gas, notwithstanding its reliance on imports to meet the UAE along with natural gas liquids. Due to ongoing delays in its domestic needs. commissioning of the gas supplier’s facilities, deliveries of gas have In November 2018, Abu Dhabi’s Supreme Petroleum Council yet to commence, although construction of the project is reportedly approved ADNOC’s new integrated gas strategy and plans to complete. increase its oil production capacity to 4 million barrels per day at the end of 2020 and 5 million barrels per day by 2030. The integrated 1.4 To what extent is your jurisdiction’s natural gas gas strategy aims to enable the UAE to become gas self-sufficient production exported (pipeline or LNG)? with the potential to become a net gas exporter. The Dolphin Gas Project involves the production of natural gas from During 2017, the UAE exported 7.7 billion cubic metres of LNG, an Qatar’s North Field, the processing of the natural gas at Ras Laffan increase from 7.4 billion cubic metres in 2016. The LNG exported Industrial City and the transportation of the dry gas by a sub-sea includes 6.4 billion cubic metres to Japan, 0.5 billion cubic metres to export pipeline from Qatar to gas-receiving facilities at Taweelah India, 0.4 billion cubic metres to the European Union and 0.1 billion in Abu Dhabi. The export pipeline has been operational since July cubic metres to Thailand. 2007. It has a design capacity of approximately 35 billion cubic

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There are no pipeline exports of UAE domestic gas production. and one offshore area in Abu Dhabi. In March 2018, Eni was The Dolphin Gas Project does, however, involve the transportation awarded a 10 per cent interest in ADNOC’s Umm Shaif and Nasr of natural gas from Qatar to Oman through pipeline infrastructure concession and a 5 per cent interest in the Lower Zakum concession. located within the UAE. The awards marked the first time an Italian energy company had been granted concession rights in Abu Dhabi’s oil and gas sector. 2 Overview of Oil Sector ADNOC Onshore’s oil and gas output accounts for more than half of the UAE’s total production. The ADNOC Onshore concession expired at the start of 2014 and a new 40-year concession has been 2.1 Please provide a brief outline of your jurisdiction’s oil awarded. ADNOC Onshore remains majority owned by ADNOC sector. (which holds a 60 per cent interest); the remaining interests are held by BP (10 per cent), Total (10 per cent), China National Petroleum The UAE has the eighth largest proven crude oil reserves in the Company (8 per cent), Japan Oil Development Co., Ltd. (“JODCO”), world (after Venezuela, Saudi Arabia, Canada, Iran, Iraq, the Russian a wholly owned subsidiary of Inpex (5 per cent), China Energy United Arab Emirates Federation and Kuwait). The UAE’s proven crude oil reserves at the Company Limited (4 per cent) and GS Energy Corporation (3 per end of 2017 remained unchanged (in comparison with 2016) at 97.8 cent). The concession area continues to cover the integrated asset billion barrels, representing approximately 5.8 per cent of the world’s groups of Bab, Bu Hasa, South East (Sahil, Asab, Shah, Qusahwira, total proven reserves. Mender) and Northeast Bab (Al Dabb’iya, Rumaitha, Shanayel). In The UAE is a member of the Organisation of the Petroleum November 2018, ADNOC announced a USD1.4 billion investment Exporting Countries (“OPEC”). The UAE’s production targets are to upgrade and expand the Bu Hasa field with the aim of increasing set by OPEC. The UAE’s average daily crude oil production in crude oil production capacity to 650,000 barrels per day. 2017 decreased to 2.966 million barrels. In 2017, there were 1,795 ADNOC has awarded interests in its Umm Shaif & Nasr and Lower producing wells in the UAE (down 40 as compared with 2016); 364 Zakum concessions. The interests in Umm Shaif and Nasr are wells were completed in 2017. There were 59 active rigs in 2017 ADNOC 60 per cent, Total 20 per cent, Eni 10 per cent and CNPC (down by 20 compared with 2016). 10 per cent. The interests in Lower Zakum are ADNOC 60 per cent, Oil production is dominated by a handful of large fields, most of ONGC Videsh-led consortium 10 per cent, INPEX Corporation 10 which were discovered in the 1960s and 1970s and which have been per cent, CNPC 10 per cent, Total 5 per cent and Eni 5 per cent. producing for several decades. These fields include the Bu Hasa, The offshore concession was due to expire at the end of 2041; Upper Zakum, Bab, Lower Zakum, Asab and Umm Shaif fields, all however, it was announced in November 2017 that this concession located in Abu Dhabi. Enhanced oil recovery techniques are being has been extended by a decade to 2051. As with the other successfully utilised to increase the extraction rates of mature oil concessions, it is majority owned by ADNOC (which holds a 60 fields. per cent interest); the remaining interests are held by ExxonMobil In the Emirate of Abu Dhabi, the Supreme Petroleum Council has (28 per cent) and JODCO (12 per cent). Going forward, the new overall policy-making responsibility for the petroleum industry, ADMA-OPCO concessions and the existing concession operated by as well as management control over the Abu Dhabi Government- ZADCO will be operated by the combined ADNOC Offshore. owned oil company, ADNOC. ADNOC is responsible for managing OMV has been awarded a 20 per cent stake in ADNOC’s Umm Lulu day-to-day operations and implementing the directives of the and Sate Al Razboot by way of a 40-year concession. The remaining Supreme Petroleum Council. ADNOC’s subsidiary companies interests are held by ADNOC (60 per cent) and Cia Espanola de work in the fields of exploration and production, support services, Petroleos (20 per cent). oil refining and gas processing, chemicals and petrochemicals, In April 2018, as part of Abu Dhabi’s first block licensing strategy, maritime transportation and refined products and distribution. As ADNOC, on behalf of the Supreme Petroleum Council, announced part of ADNOC’s 2030 smart growth strategy, ADNOC is seeking an initial round of six onshore and offshore oil and gas blocks open to increase crude oil production capacity and reduce costs to create a for bidding. This followed a decision at the beginning of 2018 more profitable upstream business. that Abu Dhabi was to launch its first ever competitive exploration Production in the UAE is dominated by ADNOC Onshore and and production bid round. The six blocks open for bidding, two of ADNOC Offshore. ADNOC Onshore (previously known as Abu which are offshore and four are onshore, cover an area of between Dhabi Company for Onshore Oil Operations, ADCO) operates 2,500 and 6,300 square kilometres. Successful bidders will enter the onshore concession originally granted in the 1930s. ADNOC into agreements granting exploration rights and, provided defined Offshore, which has been formed through the consolidation of the targets are achieved in the exploration phase, be granted the Abu Dhabi Marine Operating Company (“ADMA-OPCO”) and opportunity to develop and produce any discoveries with ADNOC, Zakum Development Company (“ZADCO”), operates the offshore under terms that will be set out in the bidding package. ADNOC concessions. ADMA-OPCO operates the offshore concession has received interest from 39 oil and gas companies on these bid originally granted in the 1950s and ZADCO operates the Upper licensing rounds. Zakum offshore field and the Umm Al-Dalkh and Satah offshore Outside of Abu Dhabi, RAK issued a bid licensing round for its fields. In 1974, the equity interests of the original concession holders entire offshore and onshore concessions, with bids due in November were diluted and ADNOC was granted a majority interest. 2018. Further, the Emirate of Sharjah expressed its wish to Opportunities for exploration and production in the UAE have discover and develop new hydrocarbon resources and invited bids been relatively limited and historically there was a narrow pool for concessions in its first onshore licence round. Bids are due in of participants. In 2008, Occidental Petroleum was awarded November 2018. a concession covering two onshore fields in Abu Dhabi, and ConocoPhillips was awarded a contract to develop the Shah Gas Field 2.2 To what extent are your jurisdiction’s energy (ConocoPhillips later withdrew and was replaced by Occidental requirements met using oil? Petroleum in 2011). In 2012, Korea National Oil Corporation and GS Energy were awarded a concession covering two onshore areas Natural gas accounts for the majority of the UAE’s total energy

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consumption (representing 57 per cent of consumption during Dhabi Tax Decree of 1965 (as amended). The Supreme Petroleum 2017), followed by crude oil (just over 41 per cent in 2017), with Council, which was established in 1988, regulates Abu Dhabi’s oil coal and renewables making up the remainder. and natural gas policy. The UAE has one of the world’s highest rates of per capita oil Under the Abu Dhabi Gas Ownership Law, all natural gas discovered consumption. In 2017, the UAE consumed 1,007,000 barrels of oil or to be discovered in the territorial zone of the Emirate of Abu Dhabi per day, amounting to 1 per cent of total world consumption. This is the sole property of the Emirate of Abu Dhabi. The Emirate of represented an increase of 0.4 per cent as compared with 2016. In Abu Dhabi maintains rights over gas at the delivery points and in all 2017, the UAE’s oil consumption by main petroleum products was stages of production. Since 1976, the ADNOC group of companies as follows: 185,000 barrels of gasoline per day; 157,000 barrels of has managed upstream, midstream and downstream oil and gas kerosene per day; 102,000 barrels of distillates per day; 300,000 operations on behalf of the Government of Abu Dhabi: article 4 of barrels of residuals per day; and 45,000 barrels of other petroleum the Abu Dhabi Gas Ownership Law affords ADNOC the right to products per day. exploit and use all gas discovered or to be discovered within Abu Dhabi and to claim all rights derived from agreements concluded by

the Government of Abu Dhabi which are related to gas discovered United Arab Emirates 2.3 To what extent are your jurisdiction’s oil requirements met through domestic oil production? or produced or the facilities of production and extraction of gas. As stated above, ADNOC is owned by the Abu Dhabi Government and the management of ADNOC reports directly to the Supreme The UAE’s oil requirements are met almost entirely through Petroleum Council. domestic production. In Sharjah, the Sharjah Petroleum Council is responsible for regulating policy regarding the development of oil and natural 2.4 To what extent is your jurisdiction’s oil production gas in that emirate. The Sharjah Petroleum Council is responsible exported? for submitting recommendations to the Ruler for concessions and concluding such agreements. It is also the body that represents the In 2017, the UAE exported just under 2.4 million barrels of crude Sharjah Government in companies in which it participates in the oil per day. Of those export quantities 13,400 barrels per day were field of oil and gas investments. exported to North America, 2.35 million barrels per day were In Dubai, operations are carried out through concessions or exported to countries in the Asia Pacific region, 12,400 barrels per contracts concluded between companies and the Government of day were exported to Africa and 7,900 barrels per day were exported Dubai. The Department of Oil Affairs is responsible for approving to other Middle East countries. licences necessary to perform oil-related activities. In addition, the Dubai Supreme Council of Energy is responsible for providing 3 Development of Oil and Natural Gas primary energy resources (defined to include crude oil and natural gas) at a reasonable cost and reducing the negative environmental impacts arising therefrom. The Supreme Council of Energy is 3.1 Outline broadly the legal/statutory and organisational also responsible for promoting the cost-effectiveness and quality framework for the exploration and production of services rendered for energy supply by all available means, (“development”) of oil and natural gas reserves including using incentives and imposing tariffs. including: principal legislation; in whom the State’s mineral rights to oil and natural gas are vested; In RAK, the regulator was only established in 2018 under RAK Law Government authority or authorities responsible for No. 4 of 2018 on the regulation of the petroleum sector in RAK the regulation of oil and natural gas development; and (the “Petroleum Authority Law”). The Petroleum Authority Law current major initiatives or policies of the Government established RAK Petroleum Authority as the competent authority (if any) in relation to oil and natural gas development. for, and the regulator of, the petroleum sector in RAK. The RAK Petroleum Authority is responsible, among other things, for ensuring Each emirate of the UAE has constitutionally entrenched rights the protection, recovery and commercial utilisation of petroleum to the natural resources (including oil and natural gas) within that resources for the benefit of the economy, regulating relations which emirate; such resources are deemed the public property of that arise in conducting petroleum operations and providing a regulatory emirate. As a result, each emirate pursues its own policies regarding system for rational and safe exploration, development, production the development of oil and natural gas, with the Ruler in each and commercial utilisation of petroleum. emirate retaining ultimate control over the development of oil and natural gas reserves in that emirate. The Federal Ministry of Energy has limited powers to set policies and planning at a federal level and is subject to the constitutional The right to explore, develop and produce petroleum is typically rights of the emirates. Approvals are also required from the Federal granted by way of a concession by the applicable emirate. Ministry of Environment and Water in accordance with the UAE Concessions are usually granted to state-controlled companies, Law on the Protection and Development of the Environment with participation by international oil companies being limited to (Federal Law No. 24 of 1999) (the “Federal Environment Law”). minority ownership interests in the project companies which are In practice, federal approvals are overseen by the Ministry of granted the concessions and the provision of technical services to Environment and Water, but it is the local emirate environmental those project companies. departments that are responsible for approvals in that emirate and Abu Dhabi does not have comprehensive petroleum legislation enforcing the requirements of the Federal Environment Law, as well governing the granting of exploration and development concession as the applicable local environmental regulations and laws. rights; however, a number of laws affect the petroleum industry, Regionally, the states of the Gulf Co-operation Council (“GCC”) including the Abu Dhabi Gas Ownership Law (Abu Dhabi Law No. (the six GCC members are the Kingdom of Bahrain, the Kingdom of 4 of 1976), the Abu Dhabi Petroleum Resources Conservation Law Saudi Arabia, the State of Kuwait, Qatar, the Sultanate of Oman and (Abu Dhabi Law No. 8 of 1978), the Abu Dhabi Petroleum Ports the UAE) have agreed to pursue unified policies in the exploitation Law (Abu Dhabi Law No. 12 of 1973, as amended) and the Abu of natural resources. The GCC Economic Agreement (incorporated

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into UAE domestic law by Federal Decree No. 55 of 2002) provides taxation. The taxation of oil and natural gas development activities that the GCC states will adopt integrated policies in all stages of the is regulated by the individual emirates. The taxation of companies oil and gas industries in a manner that facilitates the best exploitation engaged in oil and gas activities is one of the limited cases of of natural resources, taking into account environmental considerations corporate tax being levied in the UAE. and the interests of future generations, and that they will implement In Abu Dhabi, a corporate tax applies to oil and natural gas activities unified policies for oil and gas, adopting a common position towards in accordance with the Abu Dhabi Income Tax Decree of 1965 (as non-Member States and international organisations. amended). Although not a petroleum-specific decree, in practice it applies only to “chargeable persons” which are “dealing in oil”, 3.2 How are the State’s mineral rights to develop oil as well as “chargeable persons” defined to include foreign entities, and natural gas reserves transferred to investors or ADNOC and its subsidiaries, and any other domestic companies companies (“participants”) (e.g. licence, concession, that are “dealing in” petroleum. The tax rate ranges between 55 service contract, contractual rights under Production and 85 per cent depending on the product that generates the taxable Sharing Agreement?) and what is the legal status of income. The Supreme Petroleum Council grants tax incentives to those rights or interests under domestic law? United Arab Emirates businesses that benefit Abu Dhabi in terms of, for example, economic development, investment, technology transfer and training of UAE The granting of oil and natural gas development rights is overseen nationals. The tax incentives may include tax holidays and reduced by the respective regulatory bodies in each emirate. Foreign tax rates. companies or investors are generally not permitted to hold majority At a federal level, the majority of the Federal Government’s income interests in oil or natural gas development activities or enterprises. is contributed by Abu Dhabi. The other emirates do not contribute In the majority of circumstances, the right to explore, develop and to the federal budget and are, to varying degrees, dependent on produce oil and natural gas is granted by way of a concession by federal expenditure for their development and infrastructure. the applicable emirate. Concessions are usually granted to state- controlled companies, with the involvement of international oil companies being limited to minority ownership interests in the 3.6 Are there any restrictions on the export of concession project company. production?

There are currently no restrictions on the export of production, 3.3 If different authorisations are issued in respect of different stages of development (e.g., exploration although standard export controls (through permits) apply on certain appraisal or production arrangements), please specify products for safety, security and environmental reasons, and to those authorisations and briefly summarise the most ensure compliance with international obligations under treaties and important (standard) terms (such as term/duration, conventions to which the UAE is a party. The UAE also restricts scope of rights, expenditure obligations). exports of dual-use goods that may be used as weapons.

The concessions typically embody the principal authorisations 3.7 Are there any currency exchange restrictions, or necessary for the exploration, development and production of oil restrictions on the transfer of funds derived from and natural gas. Concession terms vary, both between the different production out of the jurisdiction? emirates and within the emirates themselves, depending on a number of factors, including the date of the initial grant, the size and The UAE dirham, the official currency of the UAE, is pegged to importance of the development and the level of foreign involvement. the US dollar. The exchange system is generally free of restrictions on international payments and transfers. However, there are 3.4 To what extent, if any, does the State have an certain restrictions under terrorist financing provisions that have ownership interest, or seek to participate, in the been implemented in accordance with the UAE’s international development of oil and natural gas reserves (whether obligations, and in relation to Israeli currency. Under Federal as a matter of law or policy)? Law No. 4 of 2002 (as amended), the UAE introduced anti-money laundering legislation, imposing documentary requirements on Each emirate participates directly in the development of oil and large wire transfers and the import of large currency amounts. All natural gas. In most circumstances, concessions are granted by the suspicious transactions must be reported to the Financial Intelligence emirate to the state-owned petroleum company, or to a concession Unit within the UAE Central Bank. project company in which the emirate or the state-owned petroleum company will hold, directly or indirectly, a majority interest. Given that the majority of the oil and natural gas reserves in the UAE 3.8 What restrictions (if any) apply to the transfer or disposal of oil and natural gas development rights or are located in Abu Dhabi, most oil and natural gas development interests? and production activities are carried out by companies within the ADNOC group of companies. Under article 6 of the Abu Dhabi In accordance with the terms of the individual concession, the Gas Ownership Law, ADNOC has the right to exploit natural gas in approval of the relevant emirate is required prior to the transfer of Abu Dhabi alone or in joint ventures with third parties, provided that oil and natural gas concession rights. For example, in Abu Dhabi, ADNOC’s share does not fall below 51 per cent. the approval of the Supreme Petroleum Council and ADNOC will be required. 3.5 How does the State derive value from oil and natural gas development (e.g. royalty, share of production, taxes)? 3.9 Are participants obliged to provide any security or guarantees in relation to oil and natural gas development? At emirate level, the emirates derive value from oil and natural gas development through equity participation (discussed above) and Depending on the terms of the concession and the status of the

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participant, participants may be obliged to provide a parent ADNOC acts as the environmental regulator of the Abu Dhabi company/corporate guarantee from an acceptable parent company oil and gas industry. ADNOC proactively regulates its group or affiliate. companies and pursues a number of strategic objectives for health, safety and the environment, which are subject to implementation by its subsidiaries including ADNOC Gas Processing, ADNOC 3.10 Can rights to develop oil and natural gas reserves granted to a participant be pledged for security, or LNG, ADNOC Onshore, ADNOC Offshore and ADNOC Refining. booked for accounting purposes under domestic law? ADNOC operates codes of practice and a health, safety and environment management system requiring its group companies to Equity participation under the concession would ordinarily facilitate develop and implement compatible programmes. the booking of reserves. While there has been a practice to pledge interests in rights to 3.12 Is there any legislation or framework relating to develop oil and gas reserves, current practice is that, except when the abandonment or decommissioning of physical approved otherwise, the rights to develop oil and gas reserves may structures used in oil and natural gas development? If

so, what are the principal features/requirements of the United Arab Emirates not be pledged for security, since the exercise of the rights arising legislation? from any such encumbrance (namely a transfer) would require the consent of the relevant emirate. There are only limited laws and regulations that relate to abandonment and decommissioning. In Abu Dhabi, participants 3.11 In addition to those rights/authorisations required must comply with the general requirements relating to pollution and to explore for and produce oil and natural gas, what protection of the environment, which fall under a combination of other principal Government authorisations are the Federal Environment Law, the Abu Dhabi Petroleum Resources required to develop oil and natural gas reserves (e.g. Conservation Law (Law No. 8 of 1978), the Abu Dhabi HSE environmental, occupational health and safety) and from whom are these authorisations to be obtained? Decree, consents required by the Supreme Petroleum Council, the environmental regulations and codes of practice implemented by ADNOC and the terms of the applicable concession. Authorisations are required at both federal level and emirate level. Participants are obliged to comply with the framework of federal The Abu Dhabi Petroleum Resources Conservation Law includes and local environmental, health and safety laws and regulations. limited obligations in relation to abandonment and decommissioning. Environmental protection is regulated at a federal level by the These obligations appear primarily related to ensuring that the Ministry of Environment and Water in accordance with the Federal petroleum resources have been used to their full potential prior Environment Law. Amongst other things, the Federal Environment to abandonment or decommissioning, rather than setting in place Law requires permits to be issued and environmental impact financial obligations and/or security for decommissioning. Consent assessments to be undertaken in respect of oil and natural gas of the Supreme Petroleum Council is required to suspend or abandon development projects. The Federal Environment Law also regulates a producing project, which is subject to the operator specifying the the disposal of waste and hazardous materials, which can potentially reasons for suspension or abandonment and the results achieved impact upon oil and natural gas development operations. until the date of the suspension or abandonment request. Under the Federal Environment Law, parties licensed to prospect, The UAE is a party to the Kuwait Protocol, pursuant to which the extract or exploit onshore or offshore oil and gas fields are prohibited operator of an offshore installation in the case of platforms and other from discharging any polluting substance resulting from drilling, sea-bed apparatus and structures should be required to remove the exploring, testing of wells or production into the water or land installation in whole or in part to ensure safety of navigation and the area in the vicinity of those activities, unless safety measures are interests of fishing. Each contracting state must also take practical adopted. Such safety measures must safeguard against harm to land measures to ensure that the operator has sufficient resources to and water environments, and oblige the parties to treat discharged guarantee that any such requirements can be met. Accordingly, waste and polluting substances in accordance with technical pursuant to the Kuwait Protocol, the UAE is obliged to ensure that systems approved under regional and international conventions and offshore participants have adequate resources in place to deal with protocols. Emissions from the burning of fuels or other substances abandonment and decommissioning. for any commercial purpose must be within the permissible limits and the amounts of pollutants in combustion emissions must be 3.13 Is there any legislation or framework relating to recorded. There are also specific requirements for the transportation gas storage? If so, what are the principal features/ by sea of hazardous substances. A local authority in each of the requirements of the legislation? emirates is the competent authority responsible for implementing the Federal Environment Law. There are a number of health, safety and environmental regulations In addition, there are a number of laws, regulations and guidelines in that set out the specifications for gas storage. The regulations differ place at emirate level that address environmental concerns, including from emirate to emirate and, within the emirates, certain free zones regulations on storage, transportation of hazardous substances, impose standards, regulating, amongst other things, temperature and waste management and record-keeping. In relation to health and pressure requirements. Civil Defence requirements must also be safety, a number of safety regulations have been introduced by the complied with. In addition to the approval of the relevant emirate, Federal Ministry of Human Resources and Emiratisation, local approvals may be required pursuant to the Federal Environment Law. authorities and the Civil Defence (i.e. the fire service). All large industrial enterprises are required to have in place certified 3.14 Are there any laws or regulations that deal specifically occupational safety officers. Health and safety issues are becoming with the exploration and production of unconventional increasingly important in the UAE oil and gas sector, with most oil and gas resources? If so, what are their key companies implementing health and safety measures in line with features? international practice. There are no separate laws or regulations specific to the exploration

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and production of unconventional oil and gas resources; the general paraffinic naphtha, condensates and sulphur. In 2017, ADNOC Gas laws and regulations applicable to oil and gas in each emirate will Processing opened the USD6.85 billion Habshan 5 gas processing apply. plant, which produces natural gas liquids, sales gas, liquid sulphur and condensate. 4 Import / Export of Natural Gas (including ADNOC Gas Processing – through its pipelines division – manages, operates and maintains a 3,000-kilometre gas pipeline network, LNG) which supplies oil fields, power plants and petrochemical facilities, as well as customers throughout the UAE. The infrastructure, 4.1 Outline any regulatory requirements, or specific which spreads throughout Abu Dhabi, is arranged around three terms, limitations or rules applying in respect of gas distribution manifolds at Maqta, Habshan and Bab. From cross-border sales or deliveries of natural gas these manifolds, the pipelines branch off to the industrial centres at (including LNG). Ruwais, Asab, Buhasa, Mirfa, Maqta, Taweelah and Al Ain. ADNOC Refining also operates a 1,900-kilometre pipeline network United Arab Emirates There are no express regulatory requirements that apply in respect of across the Emirate of Abu Dhabi to deliver refined oil products to cross-border sales or deliveries of natural gas. In terms of exports, oil ports for exportation, or to other ADNOC Group companies for standard export controls will apply (see above for further details). further processing. The Abu Dhabi crude oil pipeline, one of the The emirates each have their own local customs departments, newer pipelines, runs 380 kilometres and transports crude oil from which fall under the Federal Customs Authority. The role of the the ADNOC Onshore facilities at Habshan to the export terminal in Federal Customs Authority is to unify, develop and improve Fujairah. customs policies, legislation and regulations, and supervise their The UAE imports gas from Qatar through the Dolphin Gas implementation across the local customs departments. The customs Project’s export pipeline. The export pipeline transports refined procedures are similar throughout the UAE. gas from the Ras Laffan processing plant in Qatar to gas-receiving Since the establishment of the GCC customs union on 1 January facilities at Taweelah in Abu Dhabi. From there, the majority of 2003, the UAE has applied the GCC Common Customs Law, which the gas is supplied to other parts of the UAE, using the Eastern Gas provides for a single port of entry whereby items imported into the Distribution System. The Eastern Gas Distribution System is also UAE (or any other GCC state) that are destined for another GCC used to transport natural gas to Oman, using a connection with an market are subject to customs duty only at the first point of entry Omani pipeline on the Oman border. Dolphin Energy also owns the into the GCC. Customs procedures and the required documentation Al Ain to Fujairah pipeline and the Taweelah to Fujairah pipeline, are the same for all GCC states. both of which are connected to the Dolphin Gas Project and supply power stations and desalination plants in Fujairah. 5 Import / Export of Oil In Abu Dhabi, the Jebel Dhana, Ruwais, Umm Al-Nar, Das Island and Zirku Island terminals handle petroleum exports. They are owned and operated by ADNOC Logistics & Services (previously 5.1 Outline any regulatory requirements, or specific known as the Abu Dhabi Petroleum Ports Operating Company, terms, limitations or rules applying in respect Irshad). The Jebel Ali terminal in Dubai and the Fujairah terminal of cross-border sales or deliveries of oil and oil in Fujairah also handle petroleum exports. The export terminal in products. Fujairah is one of the largest bunkering ports in the world and there are plans to expand its capabilities. There are no express regulatory requirements that apply in respect of cross-border sales or deliveries of oil and oil products. In terms of exports, standard export controls apply (see above for further 6.2 What governmental authorisations (including any applicable environmental authorisations) are details). required to construct and operate oil and natural gas transportation pipelines and associated infrastructure? 6 Transportation The individual emirates regulate the requirements and procedures 6.1 Outline broadly the ownership, organisational and for obtaining permits for transporting oil and natural gas. In regulatory framework in relation to transportation addition, approvals are required at a federal level, with the pipelines and associated infrastructure (such as Ministry of Petroleum and the Ministry of Environment and Water natural gas processing and storage facilities). responsible for preparing guidelines in respect of environmental safety and management of waste resulting from the transportation Each emirate controls its own infrastructure for the transportation of oil and gas. of oil and natural gas. As a result, different government bodies and authorities regulate oil and gas transportation within the different 6.3 In general, how does an entity obtain the necessary emirates, setting various standards and codes of practice. There is land (or other) rights to construct oil and natural gas also regulation at a federal level by the Ministry of Petroleum and transportation pipelines or associated infrastructure? the Ministry of Environment and Water. Do Government authorities have any powers of In Abu Dhabi, ADNOC Gas Processing (previously known as compulsory acquisition to facilitate land access? GASCO) operates gas processing plants located in the Western Region of Abu Dhabi and Ruwais, including one of the largest gas Under the UAE Constitution the natural resources in each emirate processing plants in the world. Processing gas from Abu Dhabi’s are the public property of that emirate. Further, as the Ruler of each onshore and offshore fields, ADNOC Gas Processing produces emirate ultimately owns the land in that emirate, the construction of a range of products, including methane, ethane, propane, butane, oil or natural gas transportation pipelines or associated infrastructure

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requires a grant of rights from the relevant Ruler. The Rulers also possess powers of compulsory acquisition to facilitate land 7 Gas Transmission / Distribution access. Article 121 of the UAE Constitution permits expropriation in the public interest. In the event that foreign private property is 7.1 Outline broadly the ownership, organisational and expropriated or nationalised, a payment of compensation must be regulatory framework in relation to the natural gas made to the affected party. transmission/distribution network.

There is no integrated framework for the ownership, organisation and/ 6.4 How is access to oil and natural gas transportation pipelines and associated infrastructure organised? or regulation of natural gas transmission/distribution infrastructure. Each emirate oversees the ownership, organisation and regulation of Access to oil and natural gas transportation pipelines and associated such infrastructure within its territory. infrastructure is organised at emirate level. The emirate granting the rights to construct, own and operate oil and natural gas 7.2 What governmental authorisations (including any transportation pipelines or associated infrastructure retains inherent applicable environmental authorisations) are required United Arab Emirates rights of access on the basis that the Ruler ultimately owns the land to operate a distribution network? upon which such infrastructure is located. Government authorisations to operate a distribution network are required at emirate level and at a federal level from the Ministry of 6.5 To what degree are oil and natural gas transportation Petroleum and the Ministry of Environment and Water. pipelines integrated or interconnected, and how is co- operation between different transportation systems established and regulated? 7.3 How is access to the natural gas distribution network organised? There is limited integration and interconnection of oil and natural gas transportation pipelines within the UAE. Gas from the Dolphin There are no specific laws organising access to the natural gas Gas Project is transported from Qatar to the Taweelah receiving distribution network. Access is organised at emirate level and is facilities in Abu Dhabi through the export pipeline. From there, linked to the rights granted by the relevant emirate for constructing the gas is fed into the Eastern Gas Distribution System, a network any pipeline or associated infrastructure. of recently developed or renovated pipelines. The Eastern Gas Distribution System, together with the Taweelah to Fujairah and Al Ain to Fujairah pipelines, links Taweelah (on the UAE’s west coast 7.4 Can the regulator require a distributor to grant capacity or expand its system in order to in Abu Dhabi) to Fujairah (on the east coast of the UAE), Taweelah accommodate new customers? to Maqta, Maqta to Jebel Ali (in the Emirate of Dubai), Maqta to Al Ain, Al Ain to Fujairah, and Taweelah to Jebel Ali. The natural gas distribution systems are currently owned and operated by a number of parties under different operational 6.6 Outline any third-party access regime/rights in protocols. respect of oil and natural gas transportation and associated infrastructure. For example, can the regulator or a new customer wishing to transport 7.5 What fees are charged for accessing the distribution oil or natural gas compel or require the operator/ network, and are these fees regulated? owner of an oil or natural gas transportation pipeline or associated infrastructure to grant capacity or Fees charged for accessing the distribution network are a matter of expand its facilities in order to accommodate the new contract between the parties. customer? If so, how are the costs (including costs of interconnection, capacity reservation or facility expansions) allocated? 7.6 Are there any restrictions or limitations in relation to acquiring an interest in a gas utility, or the transfer There are no standard rights for a new customer to compel or require of assets forming part of the distribution network the operator/owner of an oil or natural gas transportation pipeline or (whether directly or indirectly)? associated infrastructure to grant capacity or expand its facilities in order to accommodate new customers. Regulation is governed by There are no specific restrictions or limitations in relation to the emirate concerned, which may include third-party access rights acquiring an interest in a gas utility or the transfer of assets forming or rights to expand capacity/facilities as a matter of contract. part of the distribution network. There is a general requirement under the Commercial Companies Law that all entities must be majority owned by UAE nationals or wholly owned UAE entities. 6.7 Are parties free to agree the terms upon which oil Generally, therefore, entities established in the UAE, except where or natural gas is to be transported or are the terms (including costs/tariffs which may be charged) an entity is established in a specially designated free zone which regulated? permits 100 per cent foreign ownership, must be 51 per cent owned by UAE nationals or an entity wholly owned by UAE nationals. The parties are at liberty to agree the terms upon which the oil or As an exception to the general requirement, pursuant to article natural gas is to be transported. 4, the Commercial Companies Law does not apply, among other things, to companies in which “the Federal Government, the Local Government or any of the establishments, authorities, departments or any companies controlled or held by any of them directly or indirectly, and having at least 25 per cent of the shares of such companies, which operate in oil exploration, drilling, refining,

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manufacturing, marketing and transportation or operating in the streams from both associated and non-associated offshore fields. energy sector of all kinds or in… gas production”, provided a In November 2018 it was announced that ADNOC has agreed, in special provision to this effect is contained in the memorandum of principle, to extend to 2040 a gas supply agreement with ADNOC association or articles of association of such companies. The local LNG. The new gas supply agreement is scheduled to take effect licensing requirements applicable in each emirate must also be from 1 April 2019, replacing the current agreement which will satisfied. expire on 31 March 2019. In 2018, the UAE adopted Law No. 19 of 2018, the federal law During 2017, the UAE exported 7.7 billion cubic metres of LNG, on foreign investment (the “FDI Law”). The FDI Law sets out the 6.4 billion cubic metres of which was delivered to Japan under a framework for the UAE Cabinet to permit foreign shareholders to long-term contract between ADNOC LNG and JERA Co Inc (a own up to 100 per cent of companies in certain designated sectors combination of Tokyo Electric Power Company, TEPCO and Chubu (without the requirement to be established in a specially designated Electric Power Group). The relationship dates back to the 1970s. free zone). Article 6 of the FDI Law provides for the UAE Cabinet In 1994 a new agreement came into effect pursuant to which JERA to form a foreign direct investment committee tasked with proposing and ADNOC LNG agreed to double LNG cargoes for the period

United Arab Emirates a ‘positive list’ to the UAE Cabinet which will set out the economic from 1994 to 2019. In August 2018, a smaller, short-term, deal sectors in which greater levels of foreign direct investment will be was announced for when the long-term contract expires; JERA and permitted. However, higher levels of foreign investment will not be ADNOC LNG signed a memorandum of agreement under which permitted in any sector which appears in the ‘negative list’ set out in JERA will purchase up to eight cargoes of LNG per year for a the FDI Law. The sectors that are currently listed in the negative list period of three years, commencing in April 2019. The full details are pursuant to article 7 of the FDI Law petroleum exploration and of the new agreement are not public at the time of writing; however, production. The UAE Cabinet has the right to add or remove any given the reliance of the UAE on natural gas imports, the continued sectors from this negative list from time to time. increase in domestic demand for natural gas and the surplus of LNG supply globally, this proposed new arrangement may free up LNG for domestic use. 8 Natural Gas Trading

9.2 What governmental authorisations are required to 8.1 Outline broadly the ownership, organisational and construct and operate LNG facilities? regulatory framework in relation to natural gas trading. Please include details of current major Approvals are required from the relevant emirate and, at a federal initiatives or policies of the Government or regulator level, from the Ministry of Environment and Water in accordance (if any) relating to natural gas trading. with the Federal Environment Law. There is no specific framework for the ownership, organisation or regulation of natural gas trading. 9.3 Is there any regulation of the price or terms of service in the LNG sector?

8.2 What range of natural gas commodities can be There is no regulation of the price or terms of service in the LNG traded? For example, can only “bundled” products (i.e., the natural gas commodity and the distribution sector. thereof) be traded? 9.4 Outline any third-party access regime/rights in There is currently no trading of natural gas commodities in the UAE. respect of LNG facilities.

As with natural gas in general, the regulatory regime for LNG is 9 Liquefied Natural Gas within the jurisdiction of the individual emirate and is addressed on an ad hoc basis with no LNG-specific laws. There are no standard 9.1 Outline broadly the ownership, organisational and rights for third-party access in respect of LNG facilities; third-party regulatory framework in relation to LNG facilities. access or third-party rights may be granted as a matter of contract.

LNG is regulated by the respective emirates. There is no regulatory 10 Downstream Oil regime specific to LNG; rather, LNG falls within the various energy, environmental and health and safety laws and regulations applied in each emirate. ADNOC’s new integrated gas strategy aims to sustain 10.1 Outline broadly the regulatory framework in relation LNG production until 2040 and to facilitate incremental LNG and to the downstream oil sector. gas-to-chemicals growth opportunities. Government participation is prevalent through ADNOC LNG There is no regulatory regime specific to the downstream oil sector; (previously known as ADGAS). ADNOC LNG was the first LNG rather downstream oil falls within the various energy, environmental production company in the region; ADNOC holds a 70 per cent and health and safety laws and regulations applied in each emirate. interest in the company, with Mitsui & Co holding 15 per cent, In Abu Dhabi, government participation in the downstream oil BP 10 per cent and Total 5 per cent. ADNOC was the first LNG sector is prevalent through ADNOC Refining (previously known as exporter in the Middle East. Historically, ADNOC has sold the Abu Dhabi Oil Refining Company, Takreer). ADNOC Refining was majority of its LNG to Japanese customers, through ADNOC LNG. established in 1999 and is responsible for all refining operations, ADNOC LNG operates an LNG plant on Abu Dhabi’s Das Island, including refining crude oil and condensate, supplying petroleum which has been operating since 1977. The plant receives gas products in compliance with domestic and international standards, and producing sulphur granulation.

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The UAE had refinery capacity of 710,000 barrels per day in 2013; such issue in whole or in part and the Ministry of Economy approves by 2017, this capacity increased by over 60 per cent to over 1.147 such request. Such exemptions include the oil and gas sectors. As million barrels per day, representing 1.2 per cent of the world total. a result, activities and services that are regulated by the relevant The increase in capacity was achieved by more than doubling emirate’s petroleum regulator should ordinarily be exempt from the the capacity of the Ruwais refinery, making it one of the largest Competition Law. refineries in the world. ADNOC Refining is currently restoring the The UAE Competition Committee (the “Committee”) only became refinery due to a fire outbreak, with an expected completion date of operational in 2018, meeting in March 2018 to discuss the standards February 2019. applying to the competition rules in the UAE. It remains to be In 2017, Abu Dhabi’s petroleum and petrochemicals company, seen what impact the Committee will have but it is expected it will Mubadala Investment Company (created by a merger between actively monitor markets for anti-competitive behaviour. International Petroleum Investment Company, IPIC and Mubadala Development Company), confirmed that a 200,000 barrels per 11.2 To what criteria does the regulator have regard in day refinery will be built at the port of Fujairah. The project had determining whether conduct is anti-competitive? previously been abandoned; however, the merger, coupled with a United Arab Emirates fire at the major Ruwais refinery at the beginning of 2017, as well Please see above: oil and gas activities are exempted from the as regional political developments, has led to a commitment to kick- Competition Law. start this project, although it is still on hold as of 2018. It is hoped that this project will help promote Fujairah, located on the east coast of the UAE and one of the largest bunkering ports in the world, as a 11.3 What power or authority does the regulator have to petroleum trading hub for the Middle East and Asia. preclude or take action in relation to anti-competitive practices?

10.2 Outline broadly the ownership, organisation and Please see above: oil and gas activities are exempted from the regulatory framework in relation to oil trading. Competition Law.

The UAE has local markets trading in crude oil futures and fuel oil futures. The Dubai Mercantile Exchange (“DME”) operates as 11.4 Does the regulator (or any other Government the primary international energy futures and commodities exchange authority) have the power to approve/disapprove mergers or other changes in control over businesses in the Middle East. The DME trades the DME Oman Crude Oil in the oil and natural gas sector, or proposed Futures Contract, the sole benchmark for Oman and Dubai crude oil acquisitions of development assets, transportation or Official Selling Prices, which historically established markers for associated infrastructure or distribution assets? If so, Middle Eastern crude oil exports to Asia. what criteria and procedures are applied? How long does it typically take to obtain a decision approving or disapproving the transaction? 11 Competition Please see above: oil and gas activities are exempted from the Competition Law. Any mergers or changes in control over 11.1 Which governmental authority or authorities are responsible for the regulation of competition aspects, businesses in the oil and natural gas sector, or proposed acquisitions or anti-competitive practices, in the oil and natural of oil and natural gas development assets, transportation pipelines gas sector? or associated infrastructure, require the approval and consent of the relevant emirate and are subject to any change of control provisions As a result of the high level of state participation, there is no in the relevant concession. There are no standard criteria or effective competition in the oil and natural gas sector. procedures that apply in respect of such transactions. UAE Federal Law No. 4 of 2012 on the regulation of competition (the “Competition Law”) entered into force in February 2013. 12 Foreign Investment and International The Competition Law regulates restrictive agreements, abuse of Obligations market power and merger control. Cabinet Decision No. 13 of 2016 established the jurisdictional threshold triggering a mandatory notification requirement: a merger or acquisition must be notified 12.1 Are there any special requirements or limitations on if the overall market share of the involved parties in the relevant acquisitions of interests in the natural gas sector market exceeds 40 per cent and the concentration may affect (whether development, transportation or associated competition. It depends on the definition of the relevant market infrastructure, distribution or other) by foreign companies? whether the relevant threshold is met. Where the threshold is met, a notification is technically required within a specified period. Notifications are suspensory; therefore, following a notification, There is a general requirement under the Commercial Companies the concerned parties must not carry out any action or procedure to Law (Federal Law No. 2 of 2015) that all entities must be majority complete the transaction before the concentration has been formally owned by UAE nationals or wholly owned UAE entities. However, cleared. as stated above, the Commercial Companies Law does not apply to companies which carry on the activities of oil exploration, Under the Competition Law, any agreement, practice or business drilling, refining, manufacturing, marketing, transportation and related to a certain commodity or service where another law or gas production and in which “the Federal Government, the Local regulation grants organisation of its competition rules to sectoral Government or any of the establishments, authorities, departments regulatory bodies, is exempted from the application of the or any companies controlled or held by any of them directly provisions of the Competition Law, except where such sectoral or indirectly” hold at least 25 per cent of the shares of such regulatory bodies request that the Ministry of Economy undertake

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companies, provided a special provision to this effect is contained in the memorandum of association or articles of association of such 13.2 Is your jurisdiction a signatory to, and has it duly companies. ratified into domestic legislation: the New York Convention on the Recognition and Enforcement of In any event, regardless of the potential exemption that exists Foreign Arbitral Awards; and/or the Convention on under the Commercial Companies Law (or that existing under the Settlement of Investment Disputes between States the old commercial companies law), in practice both the Federal and Nationals of Other States (“ICSID”)? Government and the respective emirates regulate the ownership and acquisition by foreign companies of interests in the oil and natural On 21 August 2006, the UAE acceded to the 1958 New York gas sector as a matter of contract. Convention on the Recognition and Enforcement of Arbitral Awards (“New York Convention”). The New York Convention entered into force in the UAE on 19 November 2006. In 2010, the Fujairah 12.2 To what extent is regulatory policy in respect of the oil and natural gas sector influenced or affected Court of First Instance recognised and enforced a foreign arbitral by international treaties or other multinational award pursuant to the New York Convention. This is understood to United Arab Emirates arrangements? be the first enforcement of an award under the New York Convention in the UAE since the UAE’s accession. However, although this The UAE’s environmental regime has developed in accordance with was a landmark case, the enforcement was not contested; further, the UAE’s international obligations. The UAE has ratified a number notwithstanding the judgment, there is no system of binding of important environmental treaties, including the Basel Convention precedent in the UAE. on Hazardous Waste, the Convention on Marine Pollution by The Dubai Courts have since recognised and enforced a number Dumping Wastes and Other Matter, the Convention on Biological of awards under the New York Convention; nonetheless, in 2012, Diversity, the Convention to Combat Desertification, the Kyoto the Dubai Court of First Instance also applied the provisions of the Protocol on Climate Change, the Montreal Protocol on Substances UAE Civil Procedures Code and refused to enforce three ICC/Paris that Deplete the Ozone Layer and the Paris Agreement. awards, a ruling that was upheld by the Dubai Court of Cassation in 2013. More recently, though, in 2014 the Dubai Court of Cassation held that the New York Convention had the force of law in the UAE 13 Dispute Resolution and that the Courts of Dubai should apply the provisions of the New York Convention to the execution of foreign arbitration awards. 13.1 Provide a brief overview of compulsory dispute Significantly, given the key importance of Abu Dhabi in the oil and resolution procedures (statutory or otherwise) natural gas sector, in 2013 the Abu Dhabi Court of Cassation reversed applying to the oil and natural gas sector (if any), a decision of the Abu Dhabi Court of Appeal and enforced an ICC/ including procedures applying in the context of Paris award, establishing a number of key principles consistent with disputes between the applicable Government the New York Convention. This is a positive judgment in relation to authority/regulator and: participants in relation to oil and natural gas development; transportation pipeline the commitment by the Abu Dhabi Courts to recognise and enforce and associated infrastructure owners or users in foreign awards under the New York Convention. relation to the transportation, processing or storage The UAE ratified the ICSID Convention on 23 December 1981 and of natural gas; downstream oil infrastructure owners the ICSID Convention entered into force in the UAE on 22 January or users; and distribution network owners or users in 1982. relation to the distribution/transmission of natural gas.

There are no compulsory dispute resolution procedures that 13.3 Is there any special difficulty (whether as a matter specifically apply to the oil and natural gas sector. Any decisions of law or practice) in litigating, or seeking to enforce or disputes that affect a particular concession are governed in judgments or awards, against Government authorities or State organs (including any immunity)? accordance with the terms of the applicable concession. A new arbitration law entered into force in 2018 which addresses It is not possible to enforce judgments that seek to seize property many of the perceived issues concerning the efficacy of domestic owned by the state. Article 247(1) of the Civil Procedure Code arbitration in the UAE. UAE Federal Law No. 6 of 2018 concerning provides that “public property owned by the state or one of the arbitration (the “Arbitration Law”) entered into force on 16 June emirates” may not be seized for the purposes of enforcement. Public 2018. The law repeals the provisions contained within the arbitration property is defined under the UAE Civil Transactions Code (Federal chapter of the UAE Civil Procedure Code (Federal Law No. 11 Law No. 5 of 1985, as amended) as all real property or movables of 1992, as amended) (the “Civil Procedure Code”) and applies owned by the state or public judicial persons, allocated in fact or in to any arbitration conducted inside the UAE, unless: the parties law for the public benefit. agree to submit the dispute to the provisions of another arbitration law (subject to public policy requirements); it is an international With regard to the enforcement of foreign judgments, whether commercial arbitration conducted abroad where the parties agree to against a government authority, state organ or private entity, submit the arbitration to the provisions of the Arbitration Law; or it is article 235 of the Civil Procedure Code provides that judgments an arbitration arising out of a dispute concerning a legal relationship and orders made in a foreign country may be executed in the UAE of a contractual or non-contractual nature and regulated by the under the same conditions provided for in the law of that country laws in force in the UAE except as expressly excluded otherwise. for the execution of judgments and orders issued in the UAE. The Arbitration Law sets out the requirements for arbitration There is thus a requirement for reciprocal treatment. A number of agreements, the appointment of the arbitral tribunal, arbitral conditions must also be satisfied, in practice affording UAE courts proceedings, arbitral awards and enforcement of arbitral awards. a wide discretion to reject enforcement of a foreign judgment on the It introduced mechanisms aimed at improving the efficiency and basis of conflict or contradiction with previously passed orders or finality of the arbitral process, incorporating general international judgments of UAE courts and/or violation of public policy or public arbitration principles such as the doctrine of separability. order. As a result, in the absence of a treaty between the UAE and

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the country concerned on mutual recognition and enforcement of During 2018, bid rounds have been launched in Abu Dhabi, judgments, in practice there are only limited circumstances when a Sharjah and RAK. In October 2018, ADNOC received interest foreign judgment is enforceable in the UAE. from 39 companies for six onshore and offshore blocks, its first block licensing strategy. Total and Eni entered into concession agreements with ADNOC for unconventional gas at Ruwais Diyab 13.4 Have there been instances in the oil and natural gas sector when foreign corporations have successfully and Ghasha respectively. RAK issued a bid licensing round for its obtained judgments or awards against Government entire offshore and onshore concessions and Sharjah invited bids for authorities or State organs pursuant to litigation concessions in its first onshore licence round. before domestic courts? As part of its broader strategy to manage its assets and increase value derived from across its businesses, ADNOC is also considering We are unaware of any such instances in the oil and natural gas initial public offerings (“IPOs”) of ADNOC Group companies. In sector. December 2017, 10 per cent of the shares in ADNOC Distribution were listed on the Abu Dhabi Stock Exchange, the first IPO on the

exchange in six years; a further listing of an additional 10 per cent United Arab Emirates 14 Updates is being considered. Established in 1973, ADNOC Distribution is ADNOC’s fuel service station business. It currently holds almost 14.1 Please provide, in no more than 300 words, a 70 per cent of the fuel service station market share in the UAE. The summary of any new cases, trends and developments IPO was oversubscribed multiple times and the share price surged in Oil and Gas Regulation Law in your jurisdiction. within minutes of the opening of trading. ADNOC is reportedly considering listing further business units although, at the time of The UAE continues to consume more natural gas than it produces writing, which business units will be involved and the timing for and imports have continued at a steady level. The UAE is such IPOs remain unclear. working towards diversifying its energy supply through its nuclear Sources for data concerning reserves, consumption, production and programme, a number of world-leading renewable energy projects exports: and the addition of coal to its energy mix. It is hoped that these 1. OPEC Annual Statistical Bulletin 2018 (available at www. diversification initiatives will free up natural gas for use bykey opec.org/). industrial sectors, such as petrochemicals. 2. BP Statistical Review of World Energy 2018 (available at www.bp.com/).

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Mhairi Main Garcia Stephanie Hawes Dentons Dentons Level 18, Boulevard Plaza 2 Level 18, Boulevard Plaza 2 Burj Khalifa District Burj Khalifa District PO Box 1756, Dubai PO Box 1756, Dubai United Arab Emirates United Arab Emirates

Tel: +971 4 4020 859 Tel: +971 4 4020 826 Email: [email protected] Email: [email protected] URL: www.dentons.com URL: www.dentons.com

Mhairi is a partner in the energy team of international law firm Dentons Stephanie is an associate in the energy, transport and infrastructure specialising in energy and infrastructure projects. Mhairi advises on practice, based in Dubai. She is a corporate and commercial lawyer project development, M&A and capital markets in the energy and focusing on energy and infrastructure projects, advising sponsors, infrastructure sectors. lenders and contractors and governments. United Arab Emirates Mhairi focuses in particular on upstream oil and gas projects (including acquisitions and disposals, development of upstream oil and gas projects, and sales arrangements) and utilities projects. She has advised on bid rounds, developments and acquisitions in multiple jurisdictions, with a particular emphasis on the Middle East and North Africa. Mhairi’s expertise includes advising on issues of public international law related to oil and gas projects, including constitutional questions, BITs, sanctions and boundary disputes.

Dentons is the world’s largest law firm, delivering quality and value to clients around the globe. Our polycentric approach and world-class talent challenge the status quo to advance client interests in the communities in which we live and work. Dentons offers vast experience across the world’s energy markets. We are a trusted adviser to oil majors, independents, power generators, transportation companies, contractors, governments and financiers. Clients throughout the energy value chain rely on Dentons’ strategic support for legal advice that is commercially astute and delivers innovative solutions. Our market-leading Middle East energy practice dates back to the 1930s, when we advised Total on its original oil and gas interests in Iraq. We opened our first office in Cairo in 1964 and now have nine offices in seven jurisdictions across the Middle East. This is an unrivalled network among international law firms, providing a full international and local law service in every jurisdiction where we operate in the Middle East and offering the depth of experience needed to deliver complex transactions from start to finish. Our Middle East energy practice is supported by one of the largest dedicated legal energy practices in the world.

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United Kingdom Philip Thomson

Ashurst LLP Julia Derrick

While LNG imports are an important source of gas for the UK, LNG 1 Overview of Natural Gas Sector imports have actually declined since 2015. The main reason for this has continued to be the higher demand in Asia, which has led 1.1 A brief outline of your jurisdiction’s natural gas to increased prices and reduced volumes supplied into Europe and sector, including a general description of: natural the UK. gas reserves; natural gas production including At present, the UK has three LNG import facilities: the extent to which production is associated or non-associated natural gas; import and export of ■ Grain LNG – this LNG import and regasification terminal natural gas, including liquefied natural gas (LNG) on the Isle of Grain in Kent was commissioned in 2005 and liquefaction and export facilities, and/or receiving and was the UK’s first LNG import facility. It is owned and re-gasification facilities (“LNG facilities”); natural gas operated by National Grid Grain LNG Limited, a wholly- pipeline transportation and distribution/transmission owned subsidiary of National Grid plc (“National Grid”). network; natural gas storage; and commodity sales ■ South Hook LNG – Qatar Petroleum (67.5 per cent), and trading. ExxonMobil (24.15 per cent) and Total’s (8.35 per cent) 15.6 mtpa LNG import terminal at Milford Haven in Wales is the The United Kingdom (“UK”) produced 41.9 billion cubic metres largest LNG receiving terminal in Europe. The terminal (“bcm”) of natural gas in 2017 or approximately 1.1 per cent of the became operational in 2009. All of the primary capacity world’s total production. Although recent years have seen small at the terminal has been purchased by South Hook Gas increases in production, the North Sea is a mature basin showing Company Ltd (a joint venture between Qatar Petroleum (70 per cent) and ExxonMobil (30 per cent)). a gradual decline in production levels, and the 2017 production levels represent approximately 40 per cent of the peak in 2000. ■ Dragon LNG – Shell (50 per cent) and Petronas’s (50 per cent) LNG import and storage terminal at Milford Haven in Nonetheless, the UK is the second largest producer of natural gas in Wales received its first commissioning cargo in July 2009, Europe after Norway. The UK’s proven reserves of natural gas as of with a start-up capacity of 4.4 mtpa. the end of 2017 stood at 0.2 trillion cubic metres (“tcm”). The vast majority of these reserves are located in the UK sector of the North Teesside GasPort at Teesside, the world’s first dockside floating Sea (UK Continental Shelf (“UKCS”)). regasification terminal, was decommissioned in 2015 as it came to the end of its commercially viable life. However, Singaporean The UK has been a net importer of gas since 2004. The UK imported a trading house Trafigura is seeking to reopen the Teesside LNG total of 46.5 bcm of natural gas in 2017 (via interconnector pipelines import terminal, while Meridian LNG is assessing an agreement and via ships to LNG receiving terminals in the UK) – an increase with US-based suppliers for a floating storage and regasification from 44.6 bcm in 2016. The total gas imports in 2017 came from unit (FSRU) in Morecambe Bay. the following sources: 35.5 bcm from Norway (mainly by pipeline, but a small proportion as LNG); 4.1 bcm from Russia (mainly by There are no LNG exports from the UK (other than reloaded pipeline, but a small proportion as LNG); 6.1 bcm from Qatar (as cargoes), nor any LNG liquefaction plants. LNG); 0.3 bcm from Algeria (as LNG); 0.2bcm from Trinidad and Until recently, the UK had a total of 4.82 bcm of storage capacity, Tobago (as LNG); 0.1 bcm from the US (as LNG); 0.1 bcm from at 10 commercial gas storage facilities. However, in June 2017 Peru (as LNG); and 0.1bcm from Nigeria (as LNG). Centrica, the operator of the Rough gas storage facility, which Natural gas is imported into the UK via the following operational represented more than 70 per cent of the UK’s gas storage capacity, pipelines: the Bacton-Zeebrugge Interconnector; the BBL Pipeline announced its intention to permanently close the facility. between Balgzand in the Netherlands and Bacton in the UK; the The remaining depleted field gas storage facilities are located at Vesterled Pipeline between the Heimdal Riser Platform in the Humbly Grove in Hampshire (Star Energy, 0.3 bcm) and Hatfield North Sea off the west coast of Norway and St Fergus in the UK; Moor in South Yorkshire (Scottish Power, 0.1 bcm), both of which the Tampen Link which links Statfjord in the North Sea off the are medium-range storage facilities. Onshore salt cavity storage west coast of Norway to the Far North Liquids and Associated facilities are located at Holehouse Farm in Cheshire (EDF Trading, Gas (“FLAGS”) pipeline (terminating at St Fergus in the UK); the 0.05 bcm), Hornsea in East Yorkshire (Scottish and Southern Gjøa Pipeline, which links Gjøa/Vega off the coast of Norway to Energy, 0.3 bcm), Aldbrough in East Yorkshire (Statoil UK/Scottish the FLAGS pipeline in the UK; and the Langeled pipeline between and Southern Energy, 0.3 bcm), and Stublach (Storenergy, 0.2 bcm), Nyhamna in Norway and Easington in the UK. Holford (E.ON, 0.2 bcm) and Hill Top Farm (EDF Energy, 0.02 bcm) all in Cheshire (again, all medium-range storage facilities).

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The UK has one small-scale short-range storage facility, Avonmouth There are currently six refineries in the UK, which process a near Bristol, to liquefy natural gas and store it as LNG, owned by significant proportion of the UK’s oil into petroleum products. The LNG Storage, a trading division of National Grid Gas plc (“NGG”), six refineries produced nearly 60 million tonnes of product in 2017, with a capacity of 0.08 bcm. down just 0.3 per cent on 2016. Natural gas is delivered to one of nine reception points in the UK, The refineries are supported by a network of petroleum product either by pipeline (from offshore facilities or pipelines which pipelines, as well as inland and coastal oil storage terminals. Oil is connect the UK to other countries) to beach terminals (the largest transported by pipeline, rail and by sea. being situated at St Fergus in Scotland and Bacton, Easington and The UK was a net importer of petroleum products in 2017 by Teesside in England) or by ship to LNG receiving terminals. After 10.4 million tonnes. Prior to 2013, the UK was consistently a net treatment in the gas importation terminals, the processed natural exporter of petroleum products but has since been a net importer. gas is usually then piped into the National Transmission System (“NTS”), the high-pressure component of the UK’s gas distribution United Kingdom network. The NTS, which is owned and operated by the National 2.2 To what extent are your jurisdiction’s energy requirements met using oil? Grid, transports processed natural gas directly to end-users such as power stations and large-scale industrial users or to other offtake points, for distribution within 13 local distribution zones (which are In 2017, petroleum products represented 47.8 per cent of the fuels grouped into eight regional gas distribution networks (“GDNs”)). It used by final consumers (the other fuels being electricity and gas). is through the GDNs that the majority of the processed natural gas Consumption in 2017 was primarily for road transport fuels and reaches domestic and commercial end users. aviation fuel. The UK continues to export significant volumes of gas by pipeline. In 2017, the UK exported a total of 10.8 bcm of natural gas to: 2.3 To what extent are your jurisdiction’s oil requirements Belgium (7.9 bcm); Ireland (1.8 bcm); and the Netherlands (1.1 met through domestic oil production? bcm). From its peak of 137 million tonnes in 1999, UKCS production has dropped nearly two-thirds to 47 million tonnes, with the UK 1.2 To what extent are your jurisdiction’s energy becoming a net importer in 2005. Going forward, the UK will become requirements met using natural gas (including LNG)? increasingly reliant on crude oil imports. Norway has historically been the main source of UK crude oil imports, representing 48 per In 2017, natural gas provided 40.4 per cent of the electricity cent of all imports in 2017. Imports from OPEC countries accounted generated in the UK. The remainder of the UK’s electricity was for 31 per cent of the UK’s crude oil imports in 2017. generated predominantly by renewables (29.3 per cent), nuclear (20.8 per cent), coal (6.7 per cent) and other fuels (2.9 per cent). Similarly, notwithstanding its considerable refinery capacity, the Natural gas provided approximately 28.6 per cent of the UK’s final UK also relies on petroleum product imports to meet local demand. energy consumption in 2017, with petroleum products accounting Domestic supply and demand is not matched on a product-by-product for 47.8 per cent of fuels used by final consumers and electricity for basis, because UK refineries produce petrol and fuel oil for electricity 17.3 per cent. generation. Therefore the UK is one of the largest importers of jet fuel and road diesel in the OECD and one of the largest exporters of petrol.

1.3 To what extent are your jurisdiction’s natural gas requirements met through domestic natural gas 2.4 To what extent is your jurisdiction’s oil production production? exported?

The UK’s natural gas requirements are not met entirely through The UK is a significant exporter of crude oils as well as an importer. domestic natural gas production. See question 1.1 above for specific Crude oil exports increased in 2017 to reach over 34 million details on imports. tonnes. Crude oil has historically been principally exported to the Netherlands, Germany, France and the US, which together made up 60 per cent of total crude exports in 2017. More recently China 1.4 To what extent is your jurisdiction’s natural gas has become the second largest recipient of UK crude exports (with production exported (pipeline or LNG)? the Netherlands remaining the largest) and South Korea has also become a significant buyer of UK crude oil. Please see question 1.1 above.

3 Development of Oil and Natural Gas 2 Overview of Oil Sector

3.1 Outline broadly the legal/statutory and organisational 2.1 Please provide a brief outline of your jurisdiction’s oil framework for the exploration and production sector. (“development”) of oil and natural gas reserves including: principal legislation; in whom the State’s The UK is a net importer of crude oil, but production levels from the mineral rights to oil and natural gas are vested; UKCS remain significant. The UK’s crude oil production capacity Government authority or authorities responsible for is the largest in the European Union (“EU”), and the second largest the regulation of oil and natural gas development; and current major initiatives or policies of the Government in the EEA after Norway. While production of crude oil and natural (if any) in relation to oil and natural gas development. gas liquids from the UKCS has been in decline since 1999, the rate of decline slowed in 2014 due to the opening of new fields. The The principal legislation governing the development of oil and UK produced 999,000 barrels a day in 2017, showing a 1.3 per cent natural gas reserves is the Petroleum Act 1998 (as amended) (the decrease on 2016.

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“Petroleum Act”). Under the Petroleum Act, all rights to petroleum including the rights to “search for, bore for and get” petroleum 3.2 How are the State’s mineral rights to develop oil are vested in the Crown. Until recently, the Secretary of State and natural gas reserves transferred to investors or companies (“participants”) (e.g. licence, concession, for Energy and Climate Change (the “Secretary of State”) and service contract, contractual rights under Production the Department of Energy and Climate Change (“DECC”) were Sharing Agreement?) and what is the legal status of primarily responsible for the regulation of the development of the those rights or interests under domestic law? UK’s oil and natural gas resources. Following the recommendations of the Wood Review (discussed further below), the Government has Until recently, the Petroleum Act empowered the Secretary of State established a new independent regulator, the Oil and Gas Authority to grant licences to explore for, develop and produce oil and natural (the “OGA”), to take over the licensing and regulatory oversight gas reserves. However, the Petroleum (Transfer of Functions) functions previously performed by DECC (and later the Department Regulations 2016 have now vested the power in the OGA. for Business, Energy and Industrial strategy (“BEIS”)), on behalf of Moreover, new devolution settlements for Scotland and Wales, the Secretary of State. The OGA took over from DECC on 1 April under the Scotland Act 2016 and the Wales Act 2017 respectively, United Kingdom 2015. Initially the OGA was established as an executive agency have vested onshore licensing powers in the Scottish Ministers in of DECC (and later BEIS). However, the Energy Act 2016 has respect of Scotland and the Welsh Ministers in respect of Wales. established the OGA as a fully independent regulator, in the form of Offshore licensing is unaffected by devolution. a Government-owned company, from 1 October 2016. The Energy In awarding licences, regard must be given to the Hydrocarbons Act 2016 has amended the Petroleum Act and associated legislation Licensing Directive Regulations 1995, which implement certain EU to formally vest various functions and powers, previously held directives in relation to hydrocarbon licensing that were passed in by the Secretary of State, in the OGA. The OGA has also been 1994. Licences are usually awarded in licensing rounds where a vested with new powers relating to: the imposition of a wider range large number of blocks are made available. On 10 July 2018, the of sanctions to allow the OGA to enforce the regulatory regime; OGA invited applications for licences in the 31st Seaward Licensing dispute resolution; collection of data and samples; and attendance Round. by the OGA at meetings, such as operational committee meetings. In addition, on 28 July 2014 the 14th Onshore Licensing Round was A Framework Document entered into between BEIS and the OGA launched, for companies seeking licences to explore for onshore oil governs the relationship between the OGA and the Government. In and gas, resulting in a total of 159 blocks being offered to successful particular, the Secretary of State for Business, Energy and Industrial applicants in December 2015. Strategy: ■ continues to be responsible for the overall policy and “Out of round” licences may also be granted in certain legislative framework within which the OGA operates; circumstances. ■ is ultimately responsible to Parliament for the OGA; and Licences take the form of a deed, pursuant to which the licensee is ■ must agree to any extension of the OGA’s remit; any material bound to observe the conditions of the licence. The conditions of deviation from the OGA’s Corporate Plan; any changes to the the licence (referred to as the “Model Clauses”) are published in MER UK Strategy (see below); and any decision to impose secondary legislation. The secondary legislation applying to current financial sanctions in excess of GBP 1 million. licence awards are: BEIS (previously DECC) also retains responsibility for enforcement ■ the Petroleum Licensing (Exploration and Production) of the offshore environmental regime and decommissioning (Seaward and Landward Areas) Regulations 2004 for obligations. The Health and Safety Executive (“HSE”) is responsible exploration, production and exploration and development licences for the 12th and subsequent licensing rounds for for enforcing the health and safety regime. landward areas, and 22nd and subsequent licensing rounds for In recent years it has been recognised that more needs to be done seaward areas; to incentivise investment and ensure that the upstream industry can ■ the Petroleum Licensing (Production) (Seaward Areas) continue to play an important role in the UK’s economy. Therefore, in Regulations 2008 for seaward area production licences for June 2013 the Secretary of State asked Sir Ian Wood to lead a review the 25th and subsequent licensing rounds; and (the “Wood Review”) of the challenges faced by the UK upstream ■ the Petroleum Licensing (Exploration and Production) offshore oil and gas industry. The final report was published in (Landward Areas) Regulations 2014 for landward petroleum February 2014, and made various recommendations, including the exploration and development licences issued in the 14th establishment of a new regulator, as mentioned above. At the heart of and subsequent landward licensing rounds, as well as new the Wood Review and its concluding recommendations is the notion landward exploration licences. that a new approach is required to the management and oversight of The Model Clauses attached to existing licences are not affected by the the UKCS, and that maximising economic recovery (“MER UK”) is issue of subsequent sets of Model Clauses, except through specifically the key principle underlying the new approach. The Infrastructure retrospective measures. While most licences follow a standard format, Act 2015 amended the Petroleum Act to include a new Part 1A, to the OGA may consider adapting licence terms in some circumstances. provide for the development and implementation of the MER UK UK licences are both contractual and regulatory in nature: Strategy. The MER UK Strategy, produced by the Secretary of State contractual, being executed as a deed providing for the contractual in consultation with industry, came into force on 18 March 2016. transfer of rights from the Crown to the licensee to develop The Strategy is binding on: the Secretary of State; the OGA; various petroleum resources in return for a financial reward; and regulatory, industry players, including holders of offshore petroleum licences; because the Model Clauses are embodied in statutory regulations, operators; and owners of relevant offshore installations. The OGA has and the terms upon which a licence is granted may be unilaterally the power to enforce compliance with the Strategy. For the time being amended by Parliament. Licences may be granted to one or more at least, the Strategy only applies to offshore oil and gas operations. licensees; however, legally only one licence exists which is held Government policy has also recently focused on facilitating the collectively by the licensees who are jointly and severally liable development of a shale gas industry. Please see question 3.14 below in respect of obligations arising under, and operations conducted for more information about this. pursuant to, the licence.

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It is important to note the distinction in the UK between the development plan at the end of the appraisal phase. An application of English law and Scottish law in the UKCS (and annual rental payment is payable, which is proportional to to a lesser extent, Northern Irish law in non-North Sea fields). the acreage covered by the licence and which escalates each Although the Model Clauses applying to licence awards in English year after the initial exploration period. and Scottish areas of the UKCS will be substantially the same, ■ Innovate Licence: The “Innovate Licence” is an offshore the jurisdictional distinction is particularly important as different SPL that offers applicants more flexibility in relation to the st arbitration provisions will apply to a licence, depending on lengths of the initial term and the second term. For the 31 whether it is situated in the English or Scottish area of the UKCS offshore licensing round, the maximum duration of the initial term was set at nine years; up to six years for the second (see question 13.1 below). The Isle of Man issues licences for its term and 18 years for the third term (but extendable if still in own onshore area and territorial waters. Similarly, the devolved production). Another key feature of the Innovate Licence is Government in Northern Ireland issues licences for onshore areas that the initial term is divided into three phases: phase A, for in Northern Ireland. studies and reprocessing; phase B, for shooting new seismic; United Kingdom and phase C, for drilling wells. 3.3 If different authorisations are issued in respect of ■ Onshore Exploration Licence: As with an offshore different stages of development (e.g., exploration Exploration Licence, an onshore Exploration Licence grants appraisal or production arrangements), please specify rights to explore only, not to produce; and is non-exclusive. those authorisations and briefly summarise the most ■ Onshore PEDL: The onshore PEDLs are similar in form important (standard) terms (such as term/duration, to the offshore SPL and include Model Clauses and a three- scope of rights, expenditure obligations). phase lifespan. Licensees are granted the exclusive right to explore for, and exploit, petroleum in a specified area. The two types of offshore licences are the Seaward Production The exploratory phase for onshore PEDLs is six years; the Licence (“SPL”) and the Exploration Licence. However, over appraisal phase is five years; and the production phase for the years, the Secretary of State issued various variations on the a PEDL is 20 years, subject to a governmental discretion to SPL to take account of the particular circumstances of the field. extend. Licensees are required to relinquish 50 per cent of the acreage at the end of the exploration phase. However, under These have been “traditional” SPLs, as well as so-called Promote the new model clauses set out pursuant to the Petroleum Licences; Frontier Licences; and licences specifically drafted to Licensing (Exploration and Production) (Landward Areas) cover the redevelopment of a decommissioned field (e.g. Argyll/ Regulations 2014, the usual obligation to relinquish at least Ardmore). Most recently, the OGA has introduced a new variation half of the initial licensed area is now subject to a new power on the SPL – the Innovate Licence. The OGA has said that from the for the OGA to agree with the licensee to the creation of 29th Licensing Round, all new offshore production licences will be so-called Retention Areas and Development Areas. Where Innovate Licences, “offering greater flexibility for each applicant to this is agreed, the licensee may retain the Retention Areas design a work programme around particular circumstances”. The and Development Areas into the second term. During the introduction of the “Innovate Licence” has no impact on licences production period, the OGA may remove acreage that is not already issued. comprised in either a Retention Area or a Development Area. For onshore exploration and production activities, a Petroleum Exploration and Development Licence (“PEDL”) is required. Most 3.4 To what extent, if any, does the State have an recently, the Petroleum Licensing (Exploration and Production) ownership interest, or seek to participate, in the (Landward Areas) Regulations 2014 introduced model clauses to development of oil and natural gas reserves (whether as a matter of law or policy)? allow an onshore Exploration Licence to be granted for a term of three years. As a matter of law under the Petroleum Act, all rights to oil and The different types of licences currently being issued, in more natural gas are vested in the Crown. However, the state does not detail, are as follows: participate directly in oil and natural gas production, other than ■ Offshore Exploration Licence: A non-exclusive offshore having an economic interest in the development of oil and natural Exploration Licence enables the licensee to carry out gas through the imposition of acreage rental and certain taxes (see exploratory seismic surveys over large unlicensed question 3.5 below). The UK no longer has a state petroleum geographical areas of the offshore sector where an SPL company, and oil and natural gas development is carried out entirely would be impractical and prohibitively expensive, in return for a modest annual rental payment. Such licences are by private companies or foreign state-owned companies under typically granted for a three-year term (with the possibility of licences granted by the Secretary of State or the OGA. a further three-year extension if certain terms and conditions have been met). Exploration drilling below certain depths 3.5 How does the State derive value from oil and natural (typically 350 metres) is usually not permitted. gas development (e.g. royalty, share of production, ■ Offshore SPL: A SPL is usually granted in respect of a taxes)? relatively small geographical area (typically, not more than several hundred square kilometres) on the UKCS. It covers The taxation regime that applies to profits derived from oil and the full life of a field from exploration to decommissioning. gas production in the UK and the UKCS is made up of three main It grants the licensee the exclusive right to undertake various components, summarised below. In the past, a royalty regime activities within defined phases, which are: exploration (typically four years); appraisal, during which the licensee applied, but this was abolished from 1 January 2003. In recent times must draw up and submit a field development plan (four the Government has taken steps to reduce the tax payable by oil and years); and production of oil and natural gas (18 years, with gas companies, to encourage further investment and also in response a possibility of extension). The licence will expire at the to the lower oil price. end of each phase unless the licensee has made sufficient ■ Petroleum Revenue Tax (“PRT”): PRT technically applies progress to move to the next phase. Typically, the licensee to net income from oil and gas extraction, but only in respect must surrender 50 per cent of its acreage at the end of the of those fields for which development consent was given exploration phase and all acreage not covered by the field prior to 16 March 1993. Ring Fence Corporation Tax and

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the Supplementary Charge (see below) are also payable in respect of profits from these fields, but PRT is deductible 3.8 What restrictions (if any) apply to the transfer or when calculating these charges. PRT was originally levied disposal of oil and natural gas development rights or at a rate of 50 per cent and was reduced to 35 per cent from 1 interests? January 2016. However, it was announced in the UK Budget in March 2016 that PRT would be effectively abolished and The OGA’s consent is required before any transfer of a licence the rate of PRT would be reduced to zero for all chargeable interest can be made, including a transfer to an affiliate. The transfer periods ending after 31 December 2015. approvals process has in recent years been streamlined in line with ■ Ring Fence Corporation Tax (“RFCT”): RFCT applies the general policy to encourage the transfer of licence interests. to profits from oil and gas extraction activities and rights in For offshore licences, the application for consent to licence the UK and UKCS instead of normal Corporation Tax. It assignment must be made using the OGA’s e-licence administration applies regardless of when development consent was given, system (PEARS: the Petroleum E-Licensing Assignments and and aims to prevent profits from these activities being

Relinquishments System). For onshore licences, currently the United Kingdom reduced for tax purposes by the setting off of losses from other non-oil and gas-related trading activities. The profits process requires the licensee wishing to transfer its licence interest from oil and gas extraction activities and rights are “ring- to advise the OGA by lodging a standard application form, although fenced” and treated for tax purposes as a separate trade, it is intended that in due course the assignment of onshore licences so that only losses derived from these activities can be set will also be processed using the PEARS online administration off against profits from these activities. The current rate of system. The OGA will usually approve the transfer; however, it will RFCT is 30 per cent (versus 19 per cent for “non-ring fence” have particular regard to the technical and financial capability of profits). RFCT liabilities are based on the book profits of the proposed transferee, in particular, where the proposed transferee the company which are then adjusted to arrive at the taxable is likely to have to bear some of the decommissioning costs in profits. Deductions are available for items such as capital respect of the field. The OGA is likely to undertake a more detailed expenditure, plant and machinery allowances, research and assessment if the proposed transferee is a new entrant into the UK development, expenditure on mineral exploration and access, and decommissioning. upstream petroleum industry or if the transfer would result in a change of operatorship. ■ Supplementary Charge: A Supplementary Charge is also imposed on profits arising from any ring-fenced In some circumstances, the OGA may provide an opinion of “no activities. The Charge was first introduced in 2002, at objection in principle” to a proposed transfer, which is to occur at a rate of 10 per cent. In 2011, the Government raised the some point in the future after the transferee and proposed transferee rate of the Supplementary Charge from 20 per cent to 32 have made financial commitments (such as earn-in arrangements). per cent. The Government’s rationale was that the rise in On a change of control of a licensee, the Model Clauses do not oil prices had provided unexpected profits for oil and gas companies. Following a fiscal review launched in 2014 the impose any requirement for the OGA’s approval. However, the Supplementary Charge was reduced to 30 per cent and was OGA has the power to require the licensee to procure a further subsequently further reduced to 20 per cent from 1 January change in control and a failure to comply with such requirement 2015, and has now been further reduced to 10 per cent with is specified as a ground for revoking a licence under the Model effect from 1 January 2016. Clauses. In practice, licensees who are the subject of a change of ■ Field allowances: In order to encourage development of control usually request an assurance from the OGA that this power remaining reserves, a system of “field allowances” was will not be exercised. introduced in 2009, to apply to small or new, technically challenging fields (for example, deep-water gas fields and ultra-heavy oil fields). A field allowance reduces the amount 3.9 Are participants obliged to provide any security of adjusted ring fence profits for the licensee’s accounting or guarantees in relation to oil and natural gas period on which the company’s Supplementary Charge is development? charged. In considering whether to award a licence or approve a licence An annual charge, called a rental, is also payable under each assignment, the OGA will have regard to the financial capacity of licence. Rentals are charged at an escalating rate on each square the proposed licensee. The OGA will not consent to an award or kilometre the licence covers at that date. This method of calculating assignment if the company is not able to demonstrate its ability to the rental provides an incentive to licensees to surrender acreage meet its expected financial commitments, liabilities and obligations they do not want to exploit. The amount of the rental is relatively under the licence or if the company is insolvent or appears likely small. Taxation, discussed above, is the main means by which the to become insolvent. Each licence applicant must demonstrate to Government derives revenue from oil and gas resources. the OGA’s satisfaction that it is financially viable and it is likely to continue business for the foreseeable future; and that it has sufficient 3.6 Are there any restrictions on the export of financial capacity to fund its share of the anticipated work, meeting production? costs within a reasonable timeframe and decommissioning costs. If the company has a parent company with significant financial There are no restrictions on the export of production. Please see capacity, the OGA may require a parent guarantee to support the question 4.1 below for the regulatory regime that applies to gas company’s financial obligations either under the company’s existing interconnectors. licences and any future licences to which the company becomes party, or on a licence-by-licence basis. 3.7 Are there any currency exchange restrictions, or As production licences confer exclusive rights, all the appropriate restrictions on the transfer of funds derived from technical and financial capacity to contribute to the delivery of MER production out of the jurisdiction? UK is an important criterion for the acceptability of a company to be a licensee. In addition, there are other requirements of licensees There are no restrictions on currency exchange or on the transfer of such as the establishment of a tax base, finance, residence and funds derived from production out of the jurisdiction. organisational structure and for offshore licensees, there are safety

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and environmental capability requirements under the Offshore Petroleum Licensing (Offshore Safety Directive) Regulations 2015. 3.11 In addition to those rights/authorisations required to explore for and produce oil and natural gas, what Under the Petroleum Act, the Secretary of State may require a person other principal Government authorisations are to take action where it is not satisfied such person will be capable of required to develop oil and natural gas reserves (e.g. carrying out its decommissioning obligations (which may include environmental, occupational health and safety) and the provision of security, such as a letter of credit) in order to reduce from whom are these authorisations to be obtained? the risk to the UK taxpayer (who would otherwise bear this liability). It also obliges companies to provide adequate financial information While oil and natural gas development is principally regulated (including management accounts and revenue predictions) in order and controlled through the terms of the licence, various statutory to enable the Secretary of State to assess whether decommissioning controls also exist. The main statutory controls relating to offshore security ought to be provided at an earlier stage. Any funds set aside oil and natural gas development in England and Wales (separate in a secure manner (such as a trust or other arrangement which was controls will apply in some cases in relation to Scotland) include, United Kingdom established on or after 1 December 2007) to meet decommissioning under the following broad categorisations and as amended: obligations will not be accessible to creditors under insolvency Environmental legislation. ■ Ozone-Depleting Substances Regulations 2015. The Secretary of State may also require participants to enter into a ■ Environmental Protection Act 1990. Decommissioning Security Agreement (“DSA”), where it is deemed ■ Fluorinated Greenhouse Gases Regulations 2015. that the participants may be unable to pay for decommissioning costs following any request to submit a decommissioning programme ■ Food and Environment Protection Act 1985. (see question 3.12 below) to which the Secretary of State may or ■ Greenhouse Gas Emissions Trading Scheme Regulations may not be a party. The Secretary of State may become a party to a 2012. DSA where there is “substantial unmitigated risk” associated with a ■ Merchant Shipping (Oil Pollution Preparedness, Response particular field (i.e. a risk that there will be a lack of funds to carry and Co-operation Convention) Regulations 1998. out decommissioning), to ensure changes to the DSA cannot be ■ Merchant Shipping (Prevention of Pollution by Sewage and made without the Secretary of State’s consent or to facilitate action Garbage from Ships) Regulations 2008. by the Secretary of State to resolve a default situation. BEIS does ■ Offshore Petroleum Licensing (Offshore Safety Directive) not prescribe a standard form DSA, but the agreement must meet Regulations 2015. certain minimum requirements if the Secretary of State is a party. ■ Offshore Chemicals Regulations 2002. Oil & Gas UK, the industry body for the UK offshore oil and ■ Offshore Combustion Installations (Pollution Prevention and gas industry, published a template DSA in 2006 in response to Control) Regulations 2013. widespread calls and after a lengthy industry-wide consultation ■ Offshore Installations (Emergency Pollution Control) and drafting process. This template DSA functions as a flexible Regulations 2002. stand-alone agreement and is now often negotiated along with the ■ Offshore Petroleum Activities (Conservation of Habitats) joint operating agreement prior to approval by BEIS of the field Regulations 2001. development plan for a new field, or on the next transfer ofan ■ The Conservation of Offshore Marine Habitats and Species interest in the relevant licence for an existing development. Regulations 2017. ■ Offshore Petroleum Activities (Oil Pollution Prevention and 3.10 Can rights to develop oil and natural gas reserves Control) Regulations 2005. granted to a participant be pledged for security, or ■ Offshore Petroleum Production and Pipe-lines (Assessment booked for accounting purposes under domestic law? of Environmental Effects) Regulations 1999. ■ REACH Enforcement Regulations 2008. The creation of charges over licence interests is subject to the ■ Marine and Coastal Access Act 2009. conditions under the Model Clauses attached to each licence, ■ Energy Act 2008. requiring consent from the OGA (previously the Secretary of State). However, in most cases, licensees are not required to Health and Safety apply for individual consent. The Open Permission (Creation of ■ Health and Safety at Work etc. Act 1974. Security Rights Over Licences), granted by the Secretary of State ■ Health and Safety at Work etc. Act 1974 (Application outside on 6 February 2012, still applies and automatically grants consent Great Britain) Order 2013. to the creation of a variety of charges over licences, including fixed ■ Offshore Installations and Pipeline Works (Management and or floating charges and debentures, on the condition that the licensee Administration) Regulations 1995. notifies the OGA within 10 days of the creation of the security of: ■ Offshore Installations and Wells (Design and Construction, ■ the date of creation of the security; etc.) Regulations 1996. ■ the amount of money or other liabilities to be secured by the ■ Offshore Installations (Prevention of Fire and Explosion, and charge; Emergency Response) Regulations 1995. ■ which licences are the subject of the security; and ■ The Offshore Installations (Offshore Safety Directive) ■ the identity of the chargee. (Safety Case etc.) Regulations 2015. The fact that a proposed security interest falls outside the scope ■ Pipelines Safety Regulations 1996. of the Open Permission does not mean that the creation of such a ■ Offshore Installations (Safety Zones) Regulations 1987. security interest will not be approved, rather that it will be subject to The regulators and organisations in England and Wales (these the OGA’s individual approvals process. may be different for operations in Scotland and Northern Ireland), from whom authorisations may need to be obtained or who may need to be consulted, include BEIS, the HSE and the Department for Environment, Food and Rural Affairs, and their relevant

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departmental units, the Joint Nature Conservation Committee or ■ any licensee and parties to joint operating or similar coastal conservation bodies such as Natural England. agreements in relation to a petroleum exploration or extraction licence, regardless of whether such party benefitted or had The Offshore Installations (Offshore Safety Directive) (Safety Case the potential to benefit from the particular installation. etc.) Regulations 2015, the Offshore Petroleum Licensing (Offshore Safety Directive) Regulations 2015, and the Merchant Shipping (Oil Typically, BEIS will utilise this wider class of parties if it is of Pollution Preparedness, Response and Co-operation Convention) the view that the decommissioning arrangements proposed by the (Amendment) Regulations 2015 were enacted in 2015 to implement operator and licensees are unsatisfactory. In addition, and crucially, the requirements of the EU Offshore Safety Directive (2013/30/EU). section 34 of the Petroleum Act extends the right to issue a section The EU adopted the Offshore Safety Directive on 10 June 2013 as 29 notice to anyone who, at any time since the first section 29 notice a direct response to the Deepwater Horizon disaster. The Directive for the installation is issued, was liable to have a section 29 notice required the creation of an offshore Competent Authority. BEIS served on it, i.e. former licensees. and the HSE, working in partnership, have established the Offshore Until such time as the section 29 notice has been withdrawn, the Safety Directive Regulator (“OSDR”) to act as the UK’s Competent licensee remains liable for decommissioning obligations. When an United Kingdom Authority for the purposes of the Directive. The role of the OSDR is asset changes hands, the Secretary of State may release a former to oversee industry compliance with the Directive and to undertake licensee from its section 29 obligations. In most cases, the section related functions such as accepting, assessing, approving and/or 29 notice will be withdrawn, provided that BEIS is satisfied that an inspecting relevant Safety Cases, Oil Pollution Emergency Plans, adequate DSA is in place (see question 2.9 above). However, in Well Notifications and other notifications. some circumstances the Secretary of State may use its “claw-back” power under section 34 to impose liability on a party previously released from its decommissioning obligations. 3.12 Is there any legislation or framework relating to the abandonment or decommissioning of physical A new Decommissioning Relief Deed regime gives the Government structures used in oil and natural gas development? If statutory authority to sign contracts (referred to as Decommissioning so, what are the principal features/requirements of the Relief Deeds) with oil and gas companies to provide them with legislation? certainty about the tax relief they will receive for the cost of decommissioning assets. The decommissioning of offshore installations and pipelines is regulated under Part IV of the Petroleum Act. Responsibility for ensuring compliance rests with the Offshore Petroleum Regulator 3.13 Is there any legislation or framework relating to gas storage? If so, what are the principal features/ for Environment and Decommissioning, which is part of BEIS. In requirements of the legislation? contrast, the decommissioning of onshore installations is partly governed by local planning rules. The main objective of the A different regulatory regime applies to the development of gas decommissioning regime under the Petroleum Act is to ensure that storage projects, depending on whether the project is onshore or the cost of decommissioning is not borne by BEIS and therefore offshore. A third-party access regime also applies. tax payers. The Energy Act 2008 created a new offshore gas storage licensing While responsibility for the offshore decommissioning regime regime, which entered into force on 13 November 2009, in respect remains with BEIS, rather than the OGA, the Energy Act 2016 of gas storage and recovery of stored gas, or unloading of gas to did make some amendments to the decommissioning regime to installations or pipelines within the offshore area, comprising both recognise the OGA’s role and the drive towards cost reduction and the UK territorial sea and the defined “Gas Importation and Storage collaboration. In particular, before the Secretary of State approves Zone” area beyond. For any initial non-intrusive exploration a decommissioning programme (see below), he or she must first activities, a developer of a potential gas storage project will be consult the OGA. granted a standard offshore exploration licence in the same way as Decommissioning obligations arise when the Secretary of State for any other petroleum exploration activities under the Petroleum serves a notice (a “section 29 notice”) to the operator of the field and Act, for a term of up to three years (with a possible extension of a each of the licensees, requiring them to submit a decommissioning further three years). Following this initial phase, a developer will programme (referred to in the legislation as an “abandonment” need to apply for a gas storage licence, which will have separate programme). Once the decommissioning programme is approved, exploration, appraisal and production phases and its duration will be following BEIS’s review of the detail including the cost estimates, determined on a case-by-case basis. The licence will import Model the section 29 notice-holders are legally obliged to carry it out on a Clauses and will also require the developer to submit a gas storage joint and several liability basis. development plan to the OGA for approval. BEIS will usually request the submission of a decommissioning In addition, offshore gas storage facilities also require a contractual programme three or more years before cessation of production, grant of rights (in the form of a lease or authorisation) from, and on although for smaller fields BEIS may require a programme at the the payment of consideration to, the Crown Estate Commissioners, time of approval of the final field development plan. BEIS may also under the Crown Estate Act 1961. serve a section 29 notice on: In respect of onshore gas storage projects, one permitting route is ■ any person having an ownership interest in the installation or under section 4 of the Gas Act 1965, which provides for licensed pipeline; Gas Transporters to obtain a storage authorisation order from the ■ a parent company or associated companies of a licensee; Secretary of State in order to develop or use underground natural ■ any person intending to carry on specified activities in porous strata for the storage of gas. The more usual permitting route relation to the installation or pipeline in the future; for onshore gas storage projects is under the Planning Act 2008. Under ■ any transferor of an interest in an offshore installation or the Planning Act 2008, an onshore underground gas storage project pipeline where such transferor has failed to obtain the must be authorised by a development consent order granted by the consent of the Secretary of State to the transfer; and relevant Secretary of State (following an application to the Planning Inspectorate) if the working capacity of the facility is expected to be

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at least 43 million standard cubic metres, or the maximum flow rate conventional oil and gas. However, in recent years the Government is expected to be at least 4.5 million standard cubic metres per day. has implemented some specific measures aimed at facilitating Facilities which are configured below those thresholds will remain the development of a shale gas industry in the UK, by addressing within the jurisdiction of the local planning authorities. some of the regulatory barriers faced by the industry, while at the Gas storage facilities must also comply with health and safety and same time addressing concerns about the safety and environmental pollution control regulations. Where a depleted gas reservoir is impact of shale gas development. The specific measures include being converted into a gas storage facility, a petroleum licence is the following: also likely to be required. ■ the Petroleum Licensing (Exploration and Production) (Landward Areas) Regulations 2014 provide for some minor, Finally, gas storage facilities are subject to the third-party access but significant, adjustments to the model clauses, directed at regime under the European Gas Directive 2009/73/EC (the “Third addressing the unique features of shale gas development; European Gas Directive”) and the Gas Regulation which also ■ the Infrastructure Act 2015 amended the Petroleum Act to forms party of the EU’s Third Energy Package. The Directive United Kingdom include a number of conditions or “safeguards” that must be allows Member States to choose between negotiated third-party met before the OGA will issue a well consent for carrying out access rights (“nTPA”), where third parties must be able to negotiate fracking operations; rights of access to gas storage facilities on the basis of good faith ■ the Infrastructure Act 2015 also introduced a new land access negotiations leading to a voluntary commercial agreement, and regime to give developers an automatic right to use “deep- regulated third-party access rights (“rTPA”), where third parties level land” to exploit petroleum without the consent of the must be given a right of access to gas storage facilities on the basis land owner; of published tariffs. The UK has implemented the nTPA regime. ■ the Government has proposed the creation of a shale gas Under UK law, third-party access (“TPA”) rights in relation to gas “wealth fund” to allow more money to be paid to local storage, both onshore and offshore, are principally regulated by the communities once shale gas production commences, to Gas Act. Under this legislation, unless it has been granted a TPA overcome any community opposition to shale gas; exemption, the owner of a gas storage facility is required to publish ■ in July 2018 the Government launched a consultation on its main commercial conditions of contract for access to storage further reforms to the planning regime as it applies to shale capacity at least once a year, and must ensure that such conditions gas, including a proposal to designate exploratory drilling for do not discriminate against any potential applicants. If a third party shale gas resources as a new form of permitted development, meaning that planning consent would not be required; and makes an application for access, then the owner of the facility must negotiate in good faith and endeavour to reach an agreement with ■ the Government has also proposed the establishment of a new the applicant for storage capacity. If the parties are unable to reach shale gas environmental regulator. agreement, the party seeking access can apply to the Office of Gas The UK Government is committed to the development of a shale gas and Electricity Markets (“Ofgem”) to consider the application and industry, but no production has taken place yet. for Ofgem to give any appropriate directions to the facility owner to grant access if this would not prejudice the efficient operation of the facility. 4 Import / Export of Natural Gas (including LNG) Exemptions from the application of third-party access rights may be granted where Ofgem is satisfied that use of the facility by other persons is not necessary for the operation of an economically efficient 4.1 Outline any regulatory requirements, or specific gas market (the de minimis exemption), or where the following terms, limitations or rules applying in respect of conditions are met (sometimes referred to as the Article 22 exemption): cross-border sales or deliveries of natural gas ■ the facility (or the significant increase in capacity) will (including LNG). promote security of supply; ■ the level of risk is such that the investment to construct or to In general, any person participating in the operation of a gas modify the facility would not be made without the exemption; interconnector must hold a Gas Interconnector Licence issued ■ the facility will be owned by a person other than the connected by Ofgem under the Gas Act (see question 7.1 below for a more Gas Transporter; detailed discussion of the downstream gas market regulatory regime). “Participating” includes co-ordinating and directing the ■ charges will be levied on the users of the facility or the increase in capacity; conveyance of natural gas into, or through, a gas interconnector, or making a gas interconnector available for the conveyance of natural ■ the exemption will not be detrimental to competition, the gas. The holder of a Gas Interconnector Licence cannot hold a Gas operation of an economically efficient gas market, or the efficient functioning of the connected pipeline system; and Transporter Licence, Gas Shipper Licence or Gas Supplier Licence (see question 7.1 below). ■ the European Commission is or will be content with the exemption. The construction of a gas interconnector will need to comply with the regulatory requirements, applying in respect of the construction The Article 22 exemption derives from Article 22 of the European of offshore pipelines and infrastructure (see question 6.2 below). Gas Directive 2003/55/EC, and is restated in Article 36 of the Third European Gas Directive. Gas interconnectors are subject to the rights of third-party access under the Gas Act 1995 (see question 6.6 below for further details).

3.14 Are there any laws or regulations that deal specifically Each gas interconnector will have an international treaty associated with the exploration and production of unconventional with it. The treaty will apply in addition to UK legal requirements oil and gas resources? If so, what are their key and will usually clarify various legal, technical and safety issues features? relating to the gas interconnector.

The regulatory regime that applies to the development of unconventional oil and gas resources is the same that applies to

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on the licensee. The Model Clauses also set out the process 5 Import / Export of Oil pursuant to which programmes are prepared and submitted by the licensee and either approved or rejected by the OGA (previously the 5.1 Outline any regulatory requirements, or specific Secretary of State). terms, limitations or rules applying in respect To construct an offshore pipeline, a Pipeline Works Authorisation of cross-border sales or deliveries of oil and oil (“PWA”) issued by the OGA (previously the Secretary of State) products. under the Petroleum Act is required. The Energy Act 2008 expanded the definition of offshore pipelines to include “all apparatus, works There are no special regulatory requirements that apply to the and services associated with the operation of such a pipe or system”. cross-border imports or exports of oil or oil products, other than the This includes pipelines used for the conveyance of hydrocarbons, payment of any customs duties or taxes applicable, and compliance water, chemicals, apparatus for the supply of energy for operations, with any of the applicable requirements discussed in question 10.1 hydraulic control lines or umbilicals, as well as services (for below. From time to time, specific limitations may apply, such as example, the provision of fuel or power). The PWA will usually United Kingdom the restrictions on trade with Iran that applied until recently. Also, be issued to the operator of the licensee group wishing to construct in the event of an actual or threatened emergency in the UK that the pipeline (the “holder”) and will authorise the licensees (the will affect fuel supplies, the Secretary of State may use emergency “users”) to use the pipeline and apparatus. powers under the Energy Act 1976 to regulate or prohibit the Under the terms of the PWA, the holder may be named as operator. production, supply, acquisition or use of substances used as fuel. The operator will be responsible for organising or supervising the construction and operation of the pipeline and ensuring compliance 6 Transportation with all relevant legislation prevailing at the time. The holder must also provide the OGA with advance notice of any proposed modifications to the pipeline and any changes to the holder, owners, 6.1 Outline broadly the ownership, organisational and users or operator of the pipeline. regulatory framework in relation to transportation pipelines and associated infrastructure (such as See question 3.11 for further Government regulatory controls, natural gas processing and storage facilities). including environmental and health and safety. A party wishing to construct certain onshore pipelines must obtain Offshore and onshore pipelines and associated infrastructure are a pipeline construction authorisation from the Secretary of State, subject to different legal regimes in the UK. This section will focus pursuant to the Pipe-lines Act 1962 (as amended). The proposed on offshore infrastructure because the majority of the UK’s oil and pipeline owner must demonstrate to the Secretary of State that it has natural gas production is derived from offshore fields in the UKCS. consulted with certain bodies, most notably local authorities, and Offshore infrastructure includes offshore platforms and pipelines, landowners and occupiers affected by the proposed pipeline routing. onshore gas processing terminals and pipelines connecting those The application must specify the rights and consents required to terminals to the NTS. enable the pipeline to be constructed, and the extent to which the Offshore infrastructure is generally constructed, owned and applicant has been successful in obtaining such consents. Where the operated by private companies – in most circumstances, by licensees applicant has been unable to negotiate access rights or easements by developing offshore oil and natural gas fields. Given that the UKCS way of voluntary agreement with land owners or occupiers, subject has been in production for over 40 years, there is a well-established to the Secretary of State approving the application, the applicant network of offshore infrastructure bringing oil and natural gas may be entitled to exercise powers of compulsory purchase pursuant production ashore. to the Pipe-lines Act 1962. Onshore pipelines which are to be constructed by Gas Transporters and which meet the criteria set out The construction and operation of offshore infrastructure is in the Planning Act 2008 require development consent instead of a principally governed by the Petroleum Act. The terms of the pipeline construction authorisation under the Pipe-lines Act 1962. applicable production licence and field development programme approved by the OGA (previously by DECC) will also regulate With the exception of certain pipelines, the environmental the construction and operation of offshore infrastructure to a large management of onshore pipelines (and the onshore hydrocarbon extent. industry generally) is primarily overseen by the Department for Environment, Food and Rural Affairs, the Environment Agency For the regulatory framework relating to gas storage facilities, (in England), Natural Resources Wales (in Wales), the Scottish please see question 3.13. Environmental Protection Agency (in Scotland) and local authorities. Any party wishing to own, construct and/or operate any 6.2 What governmental authorisations (including onshore pipeline must have regard to the requirements of both UK any applicable environmental authorisations) are and EU environmental legislation. required to construct and operate oil and natural gas transportation pipelines and associated infrastructure? 6.3 In general, how does an entity obtain the necessary land (or other) rights to construct oil and natural gas transportation pipelines or associated infrastructure? The construction and operation of offshore infrastructure must Do Government authorities have any powers of be carried out in compliance with the terms of the applicable compulsory acquisition to facilitate land access? production licence. The Model Clauses applicable to a production licence (see question 3.2 above) prohibit licensees from installing In relation to onshore oil and gas pipelines, the Secretary of State any permanent structures or carrying out any works for the purpose has powers under the Pipe-lines Act 1962 to authorise a person of extracting petroleum from an area or conveying petroleum to a proposing to construct a pipeline to compulsorily acquire land if a place on land without the authorisation of the OGA (previously the voluntary arrangement cannot be reached between such party and Secretary of State) or without having a development and production the land owners, lessees and occupiers of the land in question. In programme in place which the OGA has either approved or served

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relation to offshore pipelines, the consent of the Crown Estate is ■ difficulties which cannot reasonably be overcome and which necessary for all oil and gas pipelines that cross the seabed within could prejudice the efficient, current and planned future UK territorial waters (12 nautical miles off the coastline). production of petroleum. If the OGA decides that access should be granted, it may serve a notice to that effect on the parties. This may allow for such things 6.4 How is access to oil and natural gas transportation pipelines and associated infrastructure organised? as: connections to be made to the owner’s infrastructure; authorise the owner to recover any necessary payments from the applicant; A licensee wishing to develop offshore oil and gas fields in close and set out the terms of access. In deciding the terms on which proximity to existing infrastructure will usually seek to negotiate any access should be granted, one of the main issues is the need access arrangements (e.g. gas transportation agreements) with the to identify the relevant costs and risks and to decide on fair and infrastructure owners. If the licensee is unable to agree a satisfactory appropriate terms. These will have to be decided on a case-by-case access arrangement with the infrastructure owners, then the licensee basis. United Kingdom may apply to the OGA to require access to be granted. Importantly, the OGA can issue an access notice under his own Please refer to question 6.6 for information on the third-party access initiative, where parties have had reasonable time in which to reach regime. an agreement and there is no realistic prospect of an agreement being reached. The Energy Act 2011 regime was amended by the Energy Act 2016 6.5 To what degree are oil and natural gas transportation to vest the relevant powers in the OGA, and to introduce some pipelines integrated or interconnected, and how is co- operation between different transportation systems reforms to the regime. In particular, the Energy Act 2016 introduced established and regulated? some changes to the regime to ensure that the application process does not need to be restarted where there is a change in ownership Because offshore pipeline systems are generally privately owned, of the relevant assets or interests. licensees wishing to connect new pipelines into existing pipeline The Code of Practice on Access to Upstream Oil and Gas systems or to interconnect existing pipeline systems will generally Infrastructure on the UKCS (the “Infrastructure Code of need to negotiate contractual arrangements with the existing pipeline Practice”) was launched in 2004 (and since revised, most recently owners. Rights of third-party access are discussed in more detail in in August 2017) to help open up access to infrastructure on the question 6.6 below. UKCS for new users so that small adjacent fields could be made Any connection of new pipelines to existing offshore pipeline economically viable. It provides a framework to oil and gas systems will also need to comply with the authorisations and infrastructure owners and users for the process which should be requirements referred to in question 6.2 above. followed in seeking, offering and negotiating access to offshore infrastructure. The Infrastructure Code of Practice applies to offshore and onshore oil and gas infrastructure up to the point that 6.6 Outline any third-party access regime/rights in natural gas enters into the NTS. The Infrastructure Code of Practice respect of oil and natural gas transportation and is intended to clarify, streamline and facilitate the timely resolution associated infrastructure. For example, can the of access requests on a negotiated, non-discriminatory basis. The regulator or a new customer wishing to transport oil or natural gas compel or require the operator/ Infrastructure Code of Practice is voluntary and is not legally- owner of an oil or natural gas transportation pipeline binding. As such, it does not fetter the OGA’s discretion under the or associated infrastructure to grant capacity or relevant legislation, but where an application is made to the OGA to expand its facilities in order to accommodate the new exercise its statutory powers relating to third-party access disputes, customer? If so, how are the costs (including costs the OGA will consider the extent to which the parties involved have of interconnection, capacity reservation or facility adopted the Infrastructure Code of Practice’s procedures. expansions) allocated? The Gas Act 1995 deals with third-party access to downstream The Energy Act 2011 sets out the third-party access regime that gas processing facilities – that is, facilities not covered by the applies to all upstream oil and gas pipelines and processing Energy Act 2011 regime, described above. The provisions in the facilities. Under the regime, owners of upstream infrastructure Gas Act 1995 apply to facilities that process gas for the purpose of are required to publish annually their main commercial conditions the gas being put into storage, an LNG import or export facility, a for access. Third parties wishing to obtain access to such facilities gas interconnector or a distribution system pipeline. Ofgem, the negotiate in good faith directly with the owners in the first instance regulator responsible for downstream gas and electricity markets, on the basis of these published commercial terms. Where a party enforces these provisions. that seeks access to upstream oil and gas infrastructure cannot agree Exemption from the application of third-party access rights may be rights of access with the owner, it has the right to apply to the OGA granted in special circumstances and is only available in relation to (previously the Secretary of State) for a notice granting the relevant interconnectors, LNG facilities and gas storage facilities. In Great rights. The OGA may consider such an application only if he or she Britain, Ofgem has the power to grant such exemptions but any believes that the parties have had reasonable time in which to reach grant remains subject to EU approval. In deciding whether to allow an agreement. In exercising its powers to determine third-party an exemption, Ofgem will consider the participants’ market shares access disputes, the OGA is required to act in accordance with the and any concerns over capacity-hoarding. MER UK Strategy, as well as various factors set out in section 82 of the Energy Act 2011, which include, among other things: 6.7 Are parties free to agree the terms upon which oil ■ the capacity which is or can reasonably be made available in or natural gas is to be transported or are the terms the pipeline or facility in question; (including costs/tariffs which may be charged) ■ any incompatibilities of technical specification which cannot regulated? reasonably be overcome; and Parties are free to agree the terms upon which oil or natural gas

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is to be transported. However, if a third party is unable to agree DCC Ltd was granted the DCC Licence by DECC. The DCC satisfactory terms of access with the pipeline owner (including the Licensee will manage the smart metering service on behalf applicable tariff), the third party can make an application to the of its users and will contract with, and manage, the data and OGA to require access to be granted. Please refer to question 6.6 communications service providers. The Smart Energy Code above for further details. (“SEC”) is a new industry code which is created and comes into force under the DCC Licence. It is a multiparty contract which sets out the terms for the provision of the DCC’s smart 7 Gas Transmission / Distribution meter communications service and specifies other provisions to govern the end-to-end management of smart metering. The DCC, energy suppliers and network operators are required by 7.1 Outline broadly the ownership, organisational and conditions of their licences to become a party to the SEC and regulatory framework in relation to the natural gas comply with its provisions. Other bodies who wish to use the transmission/distribution network. DCC’s services, such as energy efficiency and energy service

companies, must accede to the Code to do so. United Kingdom The Gas Act establishes the regulatory framework for the All gas licences are subject to standard conditions imposed by the downstream gas market in Great Britain. Ofgem is the gas and Secretary of State, but Ofgem is authorised to amend or modify electricity markets regulator. It operates under the direction these conditions as appropriate. and governance of the Gas and Electricity Markets Authority To facilitate effective competition, the Gas Act de-links the (“GEMA”). Ofgem is responsible for the regulation of the gas transportation, shipping and supply of natural gas and prohibits market in England, Scotland and Wales. The regulatory regime a person from holding a Gas Transporter Licence or a Gas is founded on a licensing system, which provides that certain key Interconnector Licence with any other type of gas licence. activities cannot be undertaken without a licence, or, in some The regulator, Ofgem, is responsible for granting licences. In instances, an exemption from the requirement to hold a licence. The granting licences, Ofgem takes into account the technical and Gas Act makes it an offence (punishable by a fine) for a person to financial suitability of applicants, their ability to comply with engage in the relevant activities without a licence or an exemption. relevant health and safety standards, and their ability to discharge The five types of gas licence are: their licence obligations. ■ Gas Transporter Licence – authorising the licensee (a Industry codes provide another important layer of regulation. This gas pipeline operator, “Gas Transporter”) to convey gas is achieved through licence conditions which require licensees to through pipelines to any premises within an area specified maintain or become parties to the relevant industry codes. The most by the licence (such area may be held by the Gas Transporter important of these is the UNC, mentioned above. or extend to pipelines operated by another Gas Transporter). The Gas Act imposes a duty on Gas Transporters to, amongst National Grid is the owner and operator of the high pressure NTS. other things, maintain an efficient and economical pipeline There are eight GDNs which each cover a separate geographical system and facilitate competition in the supply of gas. region of Britain. In addition, there are a number of smaller ■ Gas Interconnector Licence – authorising the licensee to networks owned and operated by Independent Gas Transporters: convey gas into, or through, a gas interconnector or to make most but not all of which have been built to serve new housing. such an interconnector available for use for the conveyance Four of the GDNs are owned by SGN, Northern Gas Networks and of gas. Wales & West Utilities. The other four GDNs were, until recently, ■ Gas Shipper Licence – authorising the licensee (a gas fully owned by NGG, but in March 2017 NGG completed the sale wholesaler, “Gas Shipper”) to contract with a Gas of a 61 per cent equity interest in National Grid Gas Distribution Transporter for gas to be introduced into, conveyed by means (the company that owns the GDNs) to a consortium of long-term of, or taken out of a pipeline system operated by that Gas infrastructure investors, and the company was re-named Cadent Transporter either generally or for purposes connected with Gas Limited. The entire UK network comprises 6,600 kilometres the supply of gas to any premises specified in the licence. of high-pressure national and regional transmission systems and Gas Shippers purchase natural gas from upstream producers or other traders or wholesalers and enter into contractual around 275,000 kilometres of lower pressure local distribution arrangements with Gas Transporters for the natural gas systems. The owners and operators of the NTS and the GDNs are to be transported to the customers of Gas Suppliers. Each each required to hold a Gas Transporter Licence, as discussed above. Gas Transporter is required to have in place a network code Northern Ireland operates its own gas market, under the oversight setting out the applicable transportation arrangements to of the devolved Government in Northern Ireland, and its own enable Gas Shippers to use the Gas Transporter’s pipeline. regulator, the Utility Regulator. The individual Gas Transporter’s network code will incorporate the Uniform Network Code (“UNC”), which sets out the detailed arrangements in relation to the supply and 7.2 What governmental authorisations (including any transportation of natural gas through the NTS. Gas Shippers applicable environmental authorisations) are required agree to be bound by the UNC by entering into, or acceding to operate a distribution network? to, a framework agreement with a Gas Transporter. ■ Gas Supplier Licence – authorising the licensee (a gas As mentioned in question 7.1 above, a Gas Transporter Licence retailer, “Gas Supplier”) to supply gas to any domestic or issued under the Gas Act is a key authorisation required for non-domestic premises through pipelines. Customers benefit the operation of a distribution network. In addition, there are a from the competition that exists between Gas Suppliers as a large number of planning, environmental and health and safety result of the UK having an open gas supply market. requirements that apply during the construction of a distribution ■ Smart Meter Communication Licence – as part of a new network, as well as during the ongoing operation of the network. regulatory regime for the roll-out of smart metering in GB, the For example, the Gas Safety (Management) Regulations 1996 Gas Act 1986 has been amended to provide for the licensing require each Gas Transporter to prepare a Safety Case document of a person providing a smart meter communication service. The licence is also referred to as a Data and Communications that sets out in detail the arrangements in place in relation to issues Company (“DCC”) Licence. In September 2013, Smart such as the management of gas escapes.

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An application to Ofgem could involve a request by the applicant 7.3 How is access to the natural gas distribution network that the relevant system operator increase the capacity of the relevant organised? pipeline through modification of associated works and apparatus, or for the installation into any such pipeline of an interconnection The Gas Act imposes a general duty on Gas Transporters (i.e. point. If Ofgem determines the dispute in favour of the applicant, network operators) to provide access. The Act states that a Gas by making an order requiring access to be granted, the applicant will Transporter must, in relation to its authorised area: develop and generally be obliged to pay for the reasonable cost of the relevant maintain an efficient and economical pipeline system for the work, as determined by Ofgem. conveyance of gas; and comply, so far as it is economical to do so, with any reasonable requests by third parties to connect to that system, and convey gas by means of that system to any premises; 7.5 What fees are charged for accessing the distribution network, and are these fees regulated? or to connect to that system a pipeline system operated by another

United Kingdom authorised Gas Transporter. Gas Transporters charge connection and use of system charges Specific duties to facilitate this access are dealt with in more detail derived by reference to price control formulae and subject to price in the terms of the licence conditions set out in the Gas Transporter control by Ofgem. From 1 April 2013, Ofgem introduced a new Licence held by operators of gas transmission and distribution performance-based model to set price controls, referred to as “RIIO” networks. In particular, network operators are required to maintain (which stands for “Revenue set to deliver strong Incentives, charging methodologies, relating to transportation (use of system) Innovation and Outputs”). Building upon the previous Retail charges as well as connection charges, which set out the principles Price Index formula (which used the rate of inflation as a benchmark of and methods used to calculate charges. Any charges must be and subtracts an efficiency factor to provide the allowed changes cost-reflective, facilitate competition, and reflect developments in in network prices), the RIIO model, among other features, uses gas distribution. The licence conditions expressly state that access rewards and penalties related to output delivery, extends the price to the system must be granted in accordance with the provisions control period to eight years from the previous five and introduces of the Gas Act and the Third European Gas Directive. Under the an innovation stimulus package. Gas Act licence-exempt network operators are also required to grant third-party access. RIIO-GD1 is the first gas distribution price control review to use the RIIO model. The RIIO-GD1 price control sets out the outputs All Gas Shippers must accede to the UNC, which defines the rights that the eight GDNs need to deliver for their consumers and the and responsibilities for users of the GB gas transportation system associated revenues they are allowed to collect for the eight-year (the NTS and GDNs), and provides for all system users to have equal period from 1 April 2013 until 31 March 2021. An equivalent price access to transportation services. Participation in the market under control review – RIIO-T1 – applies to gas transmission for the eight- the UNC is through forward-nominated trades with counter-parties year period from 1 April 2013 until 31 March 2021. and physical or non-physical within-day trading. Both balancing and charging take place on a daily basis. In addition to the balancing Under the terms of the Gas Transporter Licence, a Gas Transporter requirements, the UNC also deals with a number of other issues, must conduct its business to ensure that neither it nor any of its including entry and exit requirements, emergencies and storage. related companies obtains any unfair commercial advantage. If parties are unable to agree upon access arrangements, an application can be made to Ofgem to exercise its powers in relation 7.6 Are there any restrictions or limitations in relation to to third-party access (see question 7.4 below). acquiring an interest in a gas utility, or the transfer of assets forming part of the distribution network (whether directly or indirectly)? 7.4 Can the regulator require a distributor to grant capacity or expand its system in order to Please see the requirements and restrictions referred to under accommodate new customers? question 7.1 above.

As mentioned in question 7.3 above, the Gas Act requires every Gas Transporter to comply with any reasonable request for it to convey 8 Natural Gas Trading gas by means of its pipeline system to any premises, provided it would not prejudice the efficient operation of the Gas Transporter’s pipeline system. 8.1 Outline broadly the ownership, organisational and regulatory framework in relation to natural gas The Third European Gas Directive also requires that non- trading. Please include details of current major discriminatory third-party access to distribution and transmission initiatives or policies of the Government or regulator pipeline systems be provided, and that the gas regulator have the (if any) relating to natural gas trading. power to determine any disputes arising in relation to such access. In compliance with the requirements of the Third European Gas Trading takes place at a number of points in the gas supply chain. Directive, the Gas Act provides for Ofgem to determine any such In the mid-1990s, gas was principally traded from producers to Gas access disputes (so-called “Article 41 disputes”). Disputes about Shippers at the onshore entry points into the NTS, known as the connections and use of system can also arise in relation to specific “beach”. Beach trades are usually contractually documented under obligations of the transporter under the terms of their Gas Transporter gas supply/sale agreements. Licence. Ofgem has a wide range of dispute resolution powers that More recently, gas is predominantly traded after leaving the beach may be applicable in this context, and is able to determine disputes and entering the NTS, at the National Balancing Point (“NBP”): a between system operators and Gas Shippers, as well as between virtual location created by the UNC. Over-the-counter NBP trades system operators and gas users wishing to connect their premises are principally made on the terms of the “NBP ‘97” contract (which to the system. was updated and reissued in 2015 as “NBP 2015”), although ISDA

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contracts (with a gas annex attached) are also used. To effect a opened on 1 December 2014 and the REMIT transaction reporting trade, a party makes a nomination via Gemini (a dedicated computer obligations commenced on the following dates: application operated on behalf of NGG), setting out the volumes ■ for standard contracts (i.e. those traded on an organised of gas that it contracts to deliver or offtake from another party, the market place) – reportable from 7 October 2015; and date, and the entry or exit point to the NBP, unless the trade is solely ■ for non-standard contracts – reportable from 7 April 2016. within the NBP. The NBP is also where NGG, the Transmission System Operator, 8.2 What range of natural gas commodities can be balances the NTS on a daily basis. The UNC moved balancing traded? For example, can only “bundled” products from a monthly to a daily regime when it was introduced in 1996 (i.e., the natural gas commodity and the distribution (then called the “Network Code”), placing an obligation on NGG thereof) be traded? to physically balance the NTS each day. NGG passes on the costs of any shortfall to the Gas Shippers: a delivery shortfall by a Gas There is no obligation to trade only bundled products. Instead, gas United Kingdom Shipper will require the Gas Shipper to pay a punitive charge of the as a wholesale commodity, entry and exit capacity on the NTS and System Marginal Buy Price (which may be the highest price traded balancing services can all be traded independently. by NGG that day). Conversely, a Gas Shipper long of gas will be cashed out at the System Marginal Sell Price (which may be the lowest price traded by NGG that day). 9 Liquefied Natural Gas Gas can also be physically traded at the NBP via an anonymous, screen-based, within-day gas market: the on-the-day commodity 9.1 Outline broadly the ownership, organisational and market (“OCM”). This allows Gas Shippers to fine-tune their regulatory framework in relation to LNG facilities. daily positions and allows NGG to purchase and sell gas in order to balance the NTS. The OCM is operated by an independent market There are no LNG liquefaction or export facilities in the UK, and in operator, ICE Endex. view of the UK being a net importer of natural gas, no such facilities Any party that wishes to arrange for the conveyance of gas through are planned. However, there are a number of existing LNG import the NTS must hold a Gas Shipper Licence. However, in October sites currently operating in the UK (detailed in question 1.1 above). 2012, Ofgem confirmed that parties not involved in the physical conveyance of gas through the network, but who simply trade gas as 9.2 What governmental authorisations are required to a commodity at the NBP do not require a Gas Shipper Licence. The construct and operate LNG facilities? party will also need to accede to the UNC, irrespective of whether it is involved in the physical conveyance of gas through the network The construction and operation of LNG facilities must comply or not. with the relevant environmental, planning and health and safety Regulation (EU) No 1227/2011 of the European Parliament and requirements referred to in questions 3.11 and 3.13 above. There are of the Council of 25 October 2011 on wholesale energy market no specific UK Government authorisations required to construct and integrity and transparency (“REMIT”) came into force on 28 operate LNG facilities, other than the offshore unloading licence December 2011. REMIT, being an EU regulation, applies directly discussed in question 3.13 above. The offshore unloading licence, to parties engaging in gas trading in the UK, imposing prohibitions introduced under the Energy Act 2008, is intended to facilitate the on insider trading, market manipulation and an obligation to publish future development of any offshore fixed or floating LNG receiving inside information and to report suspicious transactions. Ofgem, the terminals. gas and electricity markets regulator, has been given the powers to enforce REMIT in GB. The Electricity and Gas (Market Integrity and Transparency) (Enforcement etc.) Regulations 2013, which 9.3 Is there any regulation of the price or terms of service in the LNG sector? entered into force on 29 June 2013, give Ofgem the necessary powers to enforce the REMIT provisions relating to the prohibition on insider trading and market manipulation, the obligation to publish The Third European Gas Directive provides that terms and inside information and to report suspicious transactions. Under conditions for the provision of such services by LNG system the Regulations Ofgem has investigative powers, and can impose operators, including rules and tariffs, must be established in a non- unlimited penalties. In addition, the Electricity and Gas (Market discriminatory and cost-reflective way and must be published (see Integrity and Transparency) (Criminal Sanctions) Regulations 2015 question 3.13 above for further details). supplement the civil penalties available under the 2013 Regulations by adding criminal penalties for particularly serious cases of 9.4 Outline any third-party access regime/rights in breach of REMIT provisions relating to insider trading and market respect of LNG facilities. manipulation. Under REMIT, gas market participants will also have to register The Third European Gas Directive requires EU Member States to with Ofgem and report to ACER (the Agency for the Cooperation implement a regime of third-party access to LNG facilities, which of Energy Regulators) transactions covered by REMIT. For the in the UK is implemented in the Gas Act. The EU Gas Regulation, purposes of the REMIT transaction reporting regime, market which forms part of the EU’s Third Energy Package together with participants have to register with Ofgem and report to the Agency the Gas Directive, also applies directly. for the Cooperation of Energy Regulators transactions covered Unlike the nTPA regime that applies to gas storage facilities, which by REMIT. A market participant is defined in REMIT as any is discussed in question 3.13 above, the regime that applies to LNG person, including transmission system operators, who enters into facilities is regulated third-party access. This means that access is transactions, including the placing of orders to trade, in one or more based on published tariffs and/or other terms and obligations which wholesale energy markets. REMIT registration in Great Britain have been approved by the regulator.

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Specifically, under the Gas Act, the owner of an LNG facility must effect of the RTFO is to create a subsidy and market for biofuels, publish the main commercial conditions relating to the grant to which are typically more expensive than petroleum products. In another person of a right to have gas treated at the facility. Any practice, suppliers blend biofuels with conventional oil products to charges for using the facility, or the method for calculating such comply with the RTFO. charges, must be approved by Ofgem. The conditions of access There are also a large number of environmental and health and safety must not discriminate against any applicants. Any third party that requirements that apply to facilities that process or store oil and oil wants to have gas treated at the LNG facility has the right to apply products. The most significant of these are the Control of Major to the owner. If the owner refuses the application, then that party Accident Hazards Regulations 2015. The aim of these Regulations is can make an application to Ofgem for the grant of rights to use the to prevent major accidents involving dangerous substances and limit facility. the consequences to people and the environment of any accidents The TPA exemptions regime that applies to LNG facilities is similar to which do occur. Operators of refining plants will normally require an that described in relation to storage facilities in question 3.13 above. environmental permit issued pursuant to the Environmental Permitting United Kingdom Each of South Hook LNG, Dragon LNG and Grain LNG has been (England and Wales) Regulations 2016, among other environmental granted an exemption by Ofgem from the application of third- permits and consents. Manufacturers or importers of oil products are party access rights under the Gas Act, which exemptions have been also required to comply with the EU’s REACH Regulation, which approved by the European Commission (which possesses the right to requires registration of all the chemical products circulated in the EU veto the granting of such an exemption). Each of these exemptions market by EU-based manufacturers and importers, as well as non-EU was granted on the condition that the access arrangements in respect companies exporting their products to the EU. of the LNG facilities contained capacity management and anti- In April 2018 the Government confirmed that it will implement a suite hoarding measures. At present there are no LNG facilities in Great of new regulatory measures designed to protect against fuel supply Britain which are subject to rTPA. disruptions. The new measures are intended to be in place by 2019 Ofgem retains the right to revoke an exemption if market and, subject to some minimum thresholds, they are intended to apply circumstances change. to the whole downstream oil and oil product industry. The regulatory measures, described as “fuel resilience measures”, will include: ■ measures to allow the Government to monitor fuel resilience, 10 Downstream Oil such as a requirement for the industry to report incidents or risks of disruption to fuel supplies; and ■ measures to allow the Government to protect fuel supply, 10.1 Outline broadly the regulatory framework in relation such as an ownership test to enable the Government to to the downstream oil sector. intervene for the protection of fuel supply, where operators or owners of critical downstream oil infrastructure do not The downstream oil sector, unlike gas, is not subject to the oversight meet satisfactory levels of financial soundness or operator of a market regulator like Ofgem. Nonetheless, there are some competence. specific regulatory requirements that apply, mainly relating to energy security and environment and health and safety issues. 10.2 Outline broadly the ownership, organisation and As a Member State of the EU and the IEA, the UK is required to regulatory framework in relation to oil trading. implement certain emergency oil stocking obligations. The UK meets its international obligations by directing companies to hold The price of crude oil that is bought and sold around the globe stocks. Section 6 of the Energy Act 1976 allows the Secretary of is directly or indirectly determined by reference to crude oil State for Business, Energy and Industrial Strategy to give directions benchmarks, also known as oil markers. There are three primary to businesses producing, supplying or using petroleum products benchmarks: West Texas Intermediate (“WTI”); Brent Blend; and within the UK market, requiring them to hold minimum levels Dubai. Other well-known blends include the Opec Reference of oil stocks. Currently, the level of the obligation is set at 67.5 Basket, Tapis Crude which is traded in Singapore, Bonny Light used days’ supplies for refiners and 58 days’ for non-refiners. The Oil in Nigeria and Mexico’s Isthmus. Stocking Order 2012 sets out the type, location and uses of stocks of Price formation in respect of the most widely used oil markers, WTI crude liquid petroleum and petroleum products that may be counted and Brent Blend, happens on futures exchanges, respectively the towards an obligated person’s stocks. In 2009, the Court of Appeal New York Mercantile Exchange (“NYMEX”) and Intercontinental dismissed a legal challenge, by an oil importing company, to the Exchange (“ICE”). The price formation mechanism on the way the Secretary of State has implemented the compulsory oil exchanges is, in turn, correlated with the physical availability of the stocking obligations in the UK (R (Mabanaft) v Secretary of State crude oil in the reference market. The physical reference market for for Energy and Climate Change [2009] EWCA Civ 224). Brent Blend is crude oil that is produced in the North Sea. The Renewable Transport Fuel Obligation (“RTFO”), established The price for crude oil to be delivered on a forward basis is often under the Renewable Transport Fuel Obligations Order 2007, determined by reference to the relevant futures price. Generally imposes an obligation on fuel suppliers to ensure that sustainable most oil cargoes and consignments that happen in Europe, Africa renewable fuel makes up a percentage of the volume of fuel they and the Middle East reference the Brent ICE futures contract. supply for road transport and non-road mobile machinery, tractors, and recreational craft that do not normally operate at sea. In 2018 Apart from offering a benchmark price for physical consignments of the Government introduced new targets under the RTFO, increasing oil, futures contracts also provide a tool to eliminate the risk relating the biofuels volume target from the previous 4.75 per cent to 9.75 to price fluctuations in the future. Most crude oil is traded ona per cent by 2020, and 12.4 per cent by 2032. For each litre of forward basis. Where a price for oil to be delivered in the future is biofuel (or kilogram of biogas) supplied, a Renewable Transport fixed at the outset the seller must seek protection against a decrease Fuel Certificate (RTFC) is issued. Obligated suppliers meet their in price. The buyer will have the opposite need. This makes forward obligation by redeeming RTFCs or by paying a fixed sum for each sellers and buyers natural holders of “short” and “long” positions on litre of fuel for which they wish to “buy-out” of their obligation. The the futures market.

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However, the futures market is not purely made up of entities As regards the interaction between the UK national competition that have an interest in physical oil. A large part of the market authorities, pursuant to the Competition Act 1998 (Concurrency) is speculative in nature. Namely, it consists of futures positions Regulations 2014 and the Gas Act 1986, Ofgem (which is taken by those who wish to have exposure to the price of crude responsible for the regulation of the energy sector in Great Britain) oil. Furthermore, the futures contracts referred to above provide and the Director General of Gas for Northern Ireland (within the for reference prices for so-called over-the-counter derivatives Northern Ireland Authority for Utility Regulation) have concurrent that are entered into bilaterally either for hedging purposes or for powers with the CMA to investigate suspected anti-competitive speculative purposes. activity and take action for breaches of competition law in the gas The combination of futures trading and over-the-counter derivatives sector. In particular, the CMA and Ofgem have concurrent powers is commonly referred to as “paper trading” as opposed to the to apply and enforce Articles 101 and 102 of the TFEU as well as physical trading of crude oil. A much larger number of paper trades Chapter I and II of the Competition Act 1998 (which prohibit anti- of crude oil take place than the physical crude oil trades that inform competitive agreements and abuse of a dominant position – see the relevant benchmark price. further question 11.2 below). United Kingdom Participants in both the physical and paper crude oil markets include The ERR Act gives the Secretary of State the power to make an producers, refiners, independent trading houses and, increasingly, order to remove Ofgem’s concurrent powers, if the Secretary of State the commodity trading arms of investment banks. considers that it is appropriate to do so for the purpose of promoting competition. This provision was included because there was a Physical trading of crude oil remains largely an unregulated activity. feeling in some quarters that Ofgem did not have a strong track- It is subject to rules for the handling and transportation of hazardous record in using its concurrent competition law enforcement powers. and polluting materials, as discussed in question 10.1 above. Crude In addition, the Government strengthened the primacy of general oil paper trading comes within the scope of new rules on derivatives competition law, to try to increase the use by sectoral regulators of trading, most notably the Markets in Financial Instruments Directive their competition enforcement powers rather than sector specific (MiFID) and MiFID II in the EU context. regulatory powers to promote competition within their relevant industries. Ofgem is now required to first consider whether it would 11 Competition be more appropriate to take action under the Competition Act 1998 before exercising its regulatory powers. The CMA and Ofgem (as well as other sectoral regulators) are also required to consult 11.1 Which governmental authority or authorities are more and share information, with the CMA being obliged to report responsible for the regulation of competition aspects, annually on the use of concurrent competition powers across all or anti-competitive practices, in the oil and natural regulated industries. gas sector? The interaction between Ofgem and the CMA is further governed As far as UK activities are concerned, competition law can be by a Memorandum of Understanding dated 18 January 2016 enforced by: (replacing an earlier MoU) between GEMA (for which Ofgem is the supporting administrative body) and the CMA, which deals with ■ the European Commission, which is the principal EU matters of general co-operation between the two regulators, as well institution responsible for enforcing the competition provisions contained in the Treaty on the Functioning of the European as the principles to be applied to case allocation. The MoU provides Union (“TFEU”) across the European Union; and/or that the basis for the determination of jurisdiction will be the general principle of which of them is better placed to exercise those powers, ■ the UK national competition authority, the Competition and Markets Authority (“CMA”), and the sectoral regulators with having regard to the factors set out in the CMA’s guidance on concurrent competition law enforcement powers, of which the concurrent application of competition law to regulated industries. most relevant to the natural gas sector is Ofgem, the gas and In addition, Ofgem or, in cases that raise public interest electricity markets regulator. Note that Ofgem has no role to considerations, the Secretary of State, can refer a market in the play in the oil market. natural gas sector to the CMA for an in-depth market investigation The enforcement powers of the European Commission in this context under the Enterprise Act 2002, if there are reasonable grounds for are likely to be affected by Brexit, but it is not yet clear exactly suspecting that any feature, or combination of features, of that what the position will be. For the purposes of this chapter, we have market prevents, restricts or distorts competition. The CMA has therefore focused on the position at the time of writing. considerable remedial powers if it concludes that a market operates The Enterprise and Regulatory Reform Act 2013 (“ERR Act”) such that there is an adverse effect on competition, including in introduced significant changes to the institutional structure of the extreme cases requiring divestments (as the CMA’s predecessor, UK competition law regime, with the creation of the CMA to replace the Competition Commission, did in its 2009 report in its market its predecessors, the Office of Fair Trading and the Competition investigation into BAA plc). Commission, from 1 April 2014. In June 2014, Ofgem used these powers to refer the UK energy The interaction between the European Commission and the national market to the CMA for an in-depth market investigation. The referral competition authorities is covered by the European Commission’s followed a competition assessment requested by the Government Notice on Cooperation within the Network of Competition in October 2013, which was completed by Ofgem jointly with the Authorities (2004/C101/03). The Commission indicates in this Notice Office of Fair Trading and the CMA. The market investigation (paragraph 14) that it is particularly well placed to deal with a case considered whether there are any features of the UK energy market where the agreements or practices have effects on competition in which prevent, restrict or distort competition, and if so, what action more than three EU Member States. However, it should be noted that is required to remedy, prevent or mitigate those effects. On 24 June the European Commission has conducted a number of investigations 2016, the CMA published its final report, two years after the market regarding agreements or conduct involving ostensibly national gas investigation reference was first made. While a detailed discussion markets, for example, its investigation into RWE’s ownership of the of all the complex issues addressed by the CMA is outside the German gas transmission network. scope of this chapter, it is pertinent to note that the CMA found that competition in the wholesale gas markets works well, and the

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presence of vertically integrated firms does not have a detrimental It should be noted that in the UK, individuals involved in cartel impact on competition. The CMA did, however, conclude that the activity (defined as agreements relating to price-fixing, market/ current system of gas settlement leads to an inefficient allocation customer sharing, output limitation or bid-rigging) may be subject of costs to parties and creates scope for gaming, which reduces the to criminal prosecution for the so-called “criminal cartel offence” efficiency and, therefore, the competitiveness of domestic retail under the Enterprise Act 2002. If found guilty, an individual may gas supply. Some reforms to the settlement process were therefore face an unlimited fine, up to five years’ imprisonment and/or director implemented. The CMA also identified a range of problems disqualification (see question 11.3 below). hindering competition in the retail market, including the extent of Abuse of dominant position consumer engagement, as well as certain shortcomings in regulation Article 102 of the TFEU and Chapter II of the Competition Act 1998 (for example, interventions designed to simplify prices, which prohibit conduct by one or more undertakings which amounts to the CMA found were not having the desired effect of increasing the abuse of a dominant position. The essence of dominance is the engagement, and limited discounting and reduced competition). A ability to behave independently of competitive pressures, i.e. the United Kingdom wide range of remedies to address the problems identified in the behaviour of customers, suppliers and competitors. An undertaking retail market have been implemented – including, for example, may have a sole dominant position or a collective dominant position a price cap on the prices offered to prepayment meter customers together with other competitors, although the latter is rare. EU during a transitional period (2017–2020). and UK competition law do not provide statutory market share The possibility of introducing a wider price cap on retail energy thresholds for defining dominance but, as a general rule, dominance prices was rejected by the CMA during its market investigation, but is unlikely to be a concern where market shares are less than 40 in October 2017 the Government separately proposed legislation to per cent; however, there is a rebuttable presumption of dominance introduce a cap on the gas and electricity tariffs charged to domestic where market shares are persistently 50 per cent or more. Factors customers on all standard variable and default rates. This would such as the size and number of competitors and customers, the ease be achieved by requiring Ofgem to modify the supply licence of setting up a new business in competition (“barriers to entry”), conditions of suppliers. The Domestic Gas and Electricity (Tariff and the strength of customers (“buyer power”) are all relevant to the Cap) Act 2018 was enacted on 19 July 2018. It is intended that the assessment of dominance. tariff cap will be in place from winter 2018/19 until the end of 2020 Holding a dominant position in a particular market is not prohibited (with the possibility that this period could be further extended by under either EU or UK competition law; what is prohibited is the Ofgem on an annual basis up to 2023). Pending the implementation abuse of that dominant position. Examples of potential abuse of of the tariff cap, Ofgem has announced that it is extending the a dominant position include charging unfair prices (which could existing prepayment meter tariff cap to other vulnerable domestic be excessively high for consumers or excessively low in order to customers. drive a competitor out of business) or imposing other unfair trading conditions, refusing to supply an existing customer without good 11.2 To what criteria does the regulator have regard in reason, limiting production, markets or technical development, or determining whether conduct is anti-competitive? applying different conditions to similar transactions with different parties. As indicated above, both EU and UK competition law is currently applicable in the UK (pending Brexit) and both may apply to the 11.3 What power or authority does the regulator have to same conduct. In summary, EU competition law applies where the preclude or take action in relation to anti-competitive agreements, business practices or behaviour concerned may affect practices? trade between EU Member States – a concept which is broadly defined. UK competition law will apply where there may bean Both the European Commission (under EU Regulation 1/2003) effect on trade within the UK. and the CMA and Ofgem (under the Competition Act 1998) have a Anti-competitive agreements broad range of powers to apply and enforce Articles 101 and 102 of Article 101 of the TFEU and Chapter I of the Competition Act the TFEU (as well as, for the CMA and Ofgem, the Chapter I and 1998 prohibit agreements and concerted practices which, by object II prohibitions under the Competition Act 1998). In short, these or effect, may prevent, restrict or distort competition. These laws powers include the ability: apply not only to formal written agreements, but also to informal ■ to investigate suspected infringements, including requesting oral agreements and can also apply to tacit understandings between information and documents, interviewing individuals and businesses. Under both EU and UK competition law, the prohibition conducting unannounced “dawn raids”; on anti-competitive agreements only applies where there is an ■ to impose interim measures during the investigation (in appreciable prevention, restriction or distortion of competition. practice, this happens very rarely); Some agreements, such as price-fixing or market-sharing cartels ■ to give directions to bring an infringement to an end; or (generally) resale price maintenance obligations, are considered ■ to accept binding commitments which address competition to be anti-competitive by their nature, regardless of their actual concerns without an infringement being found; and effects (known as “object restrictions”); others, such as exclusive ■ to impose financial penalties on undertakings of up to10 purchasing and supply obligations, will only infringe the law where per cent of an undertaking’s group worldwide turnover in anti-competitive effects can be shown. the business year preceding the date of the decision in the event of an infringement. Such fines can run up to tens and Agreements and concerted practices which prima facie prevent, hundreds of millions of pounds (the highest individual EU restrict or distort competition may nevertheless benefit from an fine so far is EUR 3.8 billion). exemption where, broadly speaking, the anti-competitive effects are outweighed by pro-competitive benefits for consumers (in practice, In addition to these powers, the Enterprise Act 2002 gives the CMA exemptions will not generally be available in cases involving the power to bring a prosecution for the criminal cartel offence (see “object restrictions”). question 11.2 above for further information). Finally, pursuant to the Company Directors Disqualification Act 1986 (as amended by

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the Enterprise Act 2002), the CMA and/or Ofgem may apply to days from submission of a complete notification (extendable by a the court for an order disqualifying an individual from acting as a further 10 working days where the parties offer commitments or in director of a company for up to 15 years. An order will be granted certain other circumstances). At the end of Phase I, the European where the individual has been the director of a company involved Commission may decide to clear the merger (with or without in a breach of UK or EU competition law and the court decides that commitments) or initiate an in-depth Phase II investigation, which the director’s conduct makes him or her unfit to be concerned in the can take up to a further 90 working days and can be extended further management of a company. up to 125 working days (depending on whether the parties offer commitments and request or accept an extension). It should also be noted that, prior to notification, the European Commission will 11.4 Does the regulator (or any other Government authority) have the power to approve/disapprove expect the parties to engage in pre-notification discussions, including mergers or other changes in control over businesses submitting drafts of the notification. Even in straightforward cases, in the oil and natural gas sector, or proposed pre-notification discussions can take four to six weeks. In cases

acquisitions of development assets, transportation or raising competition concerns or novel issues, pre-notification United Kingdom associated infrastructure or distribution assets? If so, discussions can take several months. what criteria and procedures are applied? How long does it typically take to obtain a decision approving or If the EUMR applies to a transaction, it will in principle do so to the disapproving the transaction? exclusion of EU Member States’ national merger control regimes. The main caveat to this is that there are provisions in the EUMR that Mergers and acquisitions involving UK natural gas businesses may allow for the referral of transactions back to national competition be subject to either: authorities in certain circumstances, in particular where the transaction raises particular competition concerns in one Member ■ the EU Merger Regulation (“EUMR”); or State. ■ the UK merger control regime contained in the Enterprise Act 2002. UK Merger Control EUMR A merger that does not qualify for investigation under the EUMR is subject to the merger control provisions of the Enterprise Act 2002 A transaction will be subject to the EUMR where it involves an where the relevant jurisdictional thresholds are met, namely: acquisition of control (as defined under the EUMR) and the turnover of the parties involved (the “undertakings concerned”) meets the ■ the target has annual turnover in the UK of more than GBP 70 million; or relevant EUMR turnover thresholds. A transaction will be subject to the EUMR where it meets either the primary or secondary ■ as a result of the merger, the merged entity will have a share of supply in the UK (or a substantial part of the UK) of goods thresholds below. and services of at least 25 per cent and that share of supply is The primary thresholds are as follows: increased as a result of the merger. ■ the combined aggregate worldwide turnover of all the The UK Government has lowered the jurisdictional thresholds undertakings concerned is more than EUR 5 billion; and for mergers in certain key sectors, including defence, quantum ■ the aggregated EU-wide turnover of each of at least two of technology and computing hardware. But since this will rarely the undertakings concerned is more than EUR 250 million, relate to the oil and gas sector, this is not considered further here. unless each of the undertakings concerned achieves more than two- It should be noted that the UK merger control regime applies not thirds of its aggregate EU-wide turnover within one and the same only to acquisitions of a controlling interest but also to changes of EU Member State. control at a much lower level, thus the acquisition of what is known A transaction will also be subject to the EUMR if it meets the as “material influence” will potentially trigger the application of secondary thresholds below: the UK merger control regime. A shareholding of around 15 per ■ the combined aggregate worldwide turnover of all the cent has, in certain circumstances, been considered sufficient to undertakings concerned is more than EUR 2.5 billion; constitute “material influence”; for example, where a shareholder ■ in each of at least three EU Member States the combined in practice has the ability to block special resolutions because of the aggregate turnover of all of the undertakings concerned is spread of other shareholdings and general patterns of attendance at more than EUR 100 million; shareholders’ meetings. Moving up through the levels of control, ■ in each of at least three of these Member States the aggregate e.g. from material influence to a controlling interest, will also turnover of each of at least two of the undertakings concerned potentially trigger the application of the regime. is more than EUR 25 million; and The substantive test applied in UK merger control is whether the ■ the aggregate EU-wide turnover of each of at least two of the transaction may be expected to result in a substantial lessening of undertakings concerned is more than EUR 100 million, competition in any market or markets in the UK. In practice, this is unless each of the undertakings concerned achieves more than two- very similar to the EU test. thirds of its aggregate EU-wide turnover within one and the same Merger control review in the UK is a two-stage process. At the first EU Member State. stage, known as Phase 1, the CMA undertakes an initial review of If a transaction is caught by the EUMR, it must be notified to the the transaction and, where it has no material competition concerns European Commission and completion suspended until clearance about the merger, it will issue a clearance decision. Where there are has been obtained (in rare circumstances a derogation from this material concerns about the impact of the merger on competition, suspensory obligation can be obtained). The substantive test the CMA may either accept undertakings from the parties to address that the European Commission applies in assessing the merger is those concerns, or it may refer the merger to an Inquiry Group for whether the transaction significantly impedes effective competition an in-depth Phase 2 review. At that stage, the CMA may clear the in the EU or in a substantial part of it, in particular as a result of the merger unconditionally, may clear the merger subject to conditions, creation or strengthening of a dominant position. or may prohibit the merger outright. The CMA has wide powers The European Commission applies a two-phase procedure. It will to request information from the parties during the review process, carry out its initial assessment during Phase I, which lasts 25 working and will also consult interested third parties (such as customers,

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suppliers and competitors) for their views when assessing the likely impact of a merger. 12 Foreign Investment and International Obligations It is important to note that, unlike the EU merger regime, the UK merger control regime does not impose any mandatory notification requirements or waiting periods. This means that parties are free 12.1 Are there any special requirements or limitations on to complete their transactions without notifying them to the CMA acquisitions of interests in the natural gas sector or, in the event that the transaction is notified, without waiting for a (whether development, transportation or associated clearance decision prior to completion of the transaction. However, infrastructure, distribution or other) by foreign the fact that a merger is not notified by the parties does not mean companies? that it will escape scrutiny under the UK merger control regime. The CMA has the power to review mergers whether or not they are Limitations on acquisitions are generally a matter for the notified, and has a dedicated mergers intelligence team responsible competition authority in the UK or the EU (see section 11 above), United Kingdom for monitoring merger activity in the UK. As a member of the and have traditionally not been subject to a test based on the European Competition Network, the CMA may also learn about a nationality of the purchaser. merger through liaison with other national competition authorities One exception to this arises under the provisions of the Third who have received a (very often mandatory) notification of the European Gas Directive, which require that a special certification merger in question. Furthermore, the CMA may impose “initial process must be followed where a transmission system owner or enforcement orders” (often referred to as “hold separate” orders) transmission system operator is controlled by a person from a non- to prevent any (further) integration of the merging parties pending EU country. As part of the process, Ofgem is required to make an the outcome of the CMA’s investigation. In practice, hold separate assessment, in consultation with the European Commission, about orders are imposed on substantially all completed mergers at the whether foreign ownership or control of the transmission system earliest opportunity in Phase 1. Further, whilst the CMA is not able would give rise to any risk to security of supply. to stop formal legal completion of a transaction, it can impose a hold In addition, in July 2018, the Government published a White Paper separate order in respect of an anticipated merger, which prevents setting out proposals to strengthen very significantly its powers to any integration steps being taken either before or after completion. scrutinise transactions and projects on national security grounds. This power is believed to have been used in at least one case to date. What is being proposed is a notification system for transactions, Finally, the CMA can order the reversal of any integration steps that particularly those in “core areas” that may pose a potential threat may already have been taken. These powers must be taken into to the UK’s national security. The Government is proposing a account in considering whether to proceed with the merger without voluntary notification system rather than a mandatory one: but the notification and/or clearance. Government will have the power to “call-in” relevant transactions if The Enterprise Act 2002 also allows the Secretary of State no notification is made. If it is decided that a full national security to intervene in relation to mergers which raise public interest assessment of the transaction is required, then that assessment may considerations. The details of the procedure followed in such cases conclude that the transaction should be allowed, blocked, or allowed are beyond the scope of this publication, but further information can subject to conditions. Relevantly, the “core areas” that are intended be found in the UK chapter of the ICLG to: Merger Control 2018. to be covered by this new regime include, amongst others, upstream The Role of Ofgem in Mergers oil and gas infrastructure, LNG and gas storage facilities, and gas interconnectors. It is understood that the new regime is unlikely to Mergers in the gas sector are reviewed under the EUMR or the be brought into effect until 2020. Enterprise Act 2002 in the usual way, but where the transaction is subject to UK merger control, Ofgem will provide its views to the In relation to licences for the exploration and development of oil and CMA at Phase 1 and, where a reference is made, Phase 2, on the natural gas resources, the OGA (previously DECC) imposes certain impact of the merger and whether it may be expected to result in a residence requirements on licensees. In order to be a licensee, substantial lessening of competition, given its specialist knowledge companies must have a place of business in the UK. If the company of market conditions in the sector. However, the ultimate decision is licensee to a licence which covers a producing field, then the rests with the CMA. company must either be registered at Companies House as a UK company or carry on its business through a fixed place in the UK. Ofgem may provide its views to the European Commission on Additionally, more practical residence requirements may also be mergers involving UK energy businesses which are subject to the imposed by the OGA on a case-by-case basis if the company is also EUMR (as it did in relation to the 2008 merger between EDF and going to be the operator of the licence to ensure that the operator is British Energy). able to manage operations properly. It should be noted that, separately from the merger control assessment, Ofgem will always consider whether additional or amended licence conditions should be imposed in light of the 12.2 To what extent is regulatory policy in respect of the oil and natural gas sector influenced or affected merger; for example, the introduction or enhancement of financial by international treaties or other multinational ring-fencing provisions. The effect of mergers in regulated sectors arrangements? will also be taken into account when Ofgem undertakes more in- depth regulatory reviews of regulated markets. All regulation in the UK, including competition, environmental, health and safety and other sector-specific concerns is currently constrained by the requirements of EU law. As noted above, this position is likely to change as a consequence of Brexit, but the full outcome of EU/UK negotiations is not yet known at the time of writing.

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Although oil and gas operations are excluded from the HGCRA 13 Dispute Resolution 1996, advice should be sought with regard to ancillary activities which involve construction operations. 13.1 Provide a brief overview of compulsory dispute resolution procedures (statutory or otherwise) 13.2 Is your jurisdiction a signatory to, and has it duly applying to the oil and natural gas sector (if any), ratified into domestic legislation: the New York including procedures applying in the context of Convention on the Recognition and Enforcement of disputes between the applicable Government Foreign Arbitral Awards; and/or the Convention on authority/regulator and: participants in relation to oil the Settlement of Investment Disputes between States and natural gas development; transportation pipeline and Nationals of Other States (“ICSID”)? and associated infrastructure owners or users in relation to the transportation, processing or storage of natural gas; downstream oil infrastructure owners The UK ratified the New York Convention on 24 September 1975

or users; and distribution network owners or users in and the New York Convention came into force on 23 December United Kingdom relation to the distribution/transmission of natural gas. 1975. The UK applies the New York Convention only to the recognition and enforcement of awards made in the territory of In the context of the licensing regime under the Petroleum Act, if a another contracting state. dispute relating to a licence arises between the OGA and a licensee, ICSID was ratified by the UK on 19 December 1966, and it came then, pursuant to the Model Clauses, the dispute is required to be into force on 18 January 1967. referred to arbitration unless the licence expressly provides that the matter under dispute is to be determined, decided, directed, approved or consented to by the OGA. The arbitration is by a single 13.3 Is there any special difficulty (whether as a matter arbitrator appointed by the OGA and the licensee or, if they are not of law or practice) in litigating, or seeking to enforce judgments or awards, against Government authorities able to agree, by the Lord Chief Justice of England (or the person or State organs (including any immunity)? specified in the Model Clauses if the dispute applies to a licensed area within the Scottish or Northern Irish areas). There is no special difficulty in litigating, or seeking to enforce The OGA has also been vested with new powers under the Energy judgments or awards against the UK Government. Public bodies Act 2016 to consider disputes between industry participants. The enjoy no immunity against litigation in the UK and are subject to OGA has the power to compel parties to participate in the dispute the rule of law on the same basis as individuals and non-state owned resolution process, but the OGA’s ultimate findings are not legally organisations and other entities. binding (in contrast to the OGA’s decisions in third-party access disputes). 13.4 Have there been instances in the oil and natural gas Elsewhere in this chapter, third-party access disputes have been sector when foreign corporations have successfully discussed. Depending on whether the dispute relates to downstream obtained judgments or awards against Government or upstream infrastructure, an application for resolution of the authorities or State organs pursuant to litigation dispute can be made to Ofgem or the OGA. before domestic courts? In relation to disputes arising in the context of the downstream gas market, involving the holders of licences issued under the Gas Act We are not aware of any instances where foreign corporations or and other third parties, the Gas Act sets out various provisions for organisations have obtained commercial judgments or awards the determination of disputes by Ofgem. In addition, the Gas Act against UK Government authorities in the context of the oil and sets out various enforcement powers. If a gas licence holder has natural gas sector. However, the legal system in England and Wales a decision made against it by a Government authority pursuant to is internationally recognised as being independent and impartial. these enforcement powers, reasons for this decision must be given There is no reason why foreign corporations could not obtain and any representations or objections which have been made in judgments or awards against the UK Government. relation to the dispute must be considered by the authority. If a licence holder desires to question the validity of an order, or appeal 14 Updates a penalty imposed, it may apply to the High Court within 42 days of service of the notice of the decision. Judicial review may also be available where all other avenues for appeal have been exhausted. 14.1 Please provide, in no more than 300 words, a In particular, judicial review is often the main remedy if a party summary of any new cases, trends and developments wishes to challenge Ofgem’s decision-making process. The Gas in Oil and Gas Regulation Law in your jurisdiction. Act sets out a separate regime relating to decisions made by Ofgem in relation to licence condition modifications. Under the relevant Brexit provisions of the Gas Act, if Ofgem proposes licence condition On 23 June 2016, the UK held a referendum to decide whether modifications (relating to the licences discussed in question 7.1 the UK should remain a member of the EU. The outcome of that above), then an appeal against a decision of Ofgem to amend the referendum is that the UK has decided to terminate its membership licence conditions can be made to the CMA by the licence holders, of the EU (referred to as “Brexit”). On 29 March 2017 the UK certain materially affected persons or a qualifying body representing Government served notice under Article 50 of the Treaty on them. Market participants may also appeal to the CMA certain European Union of the UK’s intention to withdraw from the EU, decisions by Ofgem relating to industry code modifications. formally commencing the process by which the UK will leave the It should also be mentioned that under the Housing Grants, EU. The Government has already enacted the European Union Construction and Regeneration Act 1996 (“HGCRA 1996”), there (Withdrawal) Act 2018, which will remove the supremacy of EU is a statutory right for parties to a construction contract to refer their law over UK domestic law following the UK’s withdrawal from the disputes to adjudication. Parties cannot contract out of this right. EU. However, the Act also deals with the fact that the removal of

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EU law from UK law on the day of Brexit would leave large gaps Tax changes relating to decommissioning in UK law. The Act therefore provides for existing EU law (that In the context of UKCS M&A transactions, decommissioning applies to the UK at the time of Brexit) to be reimported as domestic issues, and particularly the question of with whom the economic UK law, but subject to adaptations as required. burden of decommissioning liabilities should lie, have frequently From a purely regulatory perspective, it is unlikely that Brexit will been a significant challenge. Currently the ability of oil and gas have any significant impact on the fundamental structure of the companies to access tax relief on their decommissioning costs UK upstream oil and gas industry and its governing legal regime, depends on the extent of their tax payment history, and this is including the licensing system. The regulatory framework applying obviously a disadvantage for new entrants who do not have a tax to the upstream industry, and in particular environmental and health history. For this reason, the Government is introducing a new and safety regulation, is highly developed independently of EU “transferable tax history” (“TTH”) regime, to provide for transfers law, and, at this stage, the industry view is that any impact is likely of tax history between buyers and sellers of late-life assets in the UK to be minor. The offshore decommissioning regime mainly stems offshore oil and gas industry in an effort to maximise tax relief for United Kingdom from international conventions and domestic legislation, and it is decommissioning expenses. TTH will allow a seller of an interest therefore expected to be largely unaffected. in a UKCS oil licence to transfer some of its tax history to the buyer The impact of Brexit on the downstream gas industry will be of the field. The buyer will then be able to set the decommissioning determined by whether the UK will still participate in the single cost of the field against the TTH. TTH will be available for licence European gas market. transfers that receive OGA approval on or after 1 November 2018. At the time of writing, the final outcome of the UK Government’s negotiations with the European Commission is not known, but there Acknowledgment is growing speculation that a “no deal” Brexit may be a possibility. The authors would like to thank Justyna Bremen, senior expertise A “no deal” Brexit could lead to a period of uncertainty, which could lawyer at Ashurst, for her invaluable assistance in the preparation undermine investor confidence, as well as leave the industry exposed of this chapter. to tariffs and restrictions on the import of goods and services. In addition, it is possible that post-Brexit a second referendum on Scottish independence from the UK could take place.

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Philip Thomson Julia Derrick Ashurst LLP Ashurst LLP Broadwalk House Broadwalk House 5 Appold Street 5 Appold Street London, EC2A 2HA London, EC2A 2HA United Kingdom United Kingdom

Tel: +44 20 7859 1243 Tel: +44 20 7859 1117 Fax: +44 20 7638 1112 Fax: +44 20 7638 1112 Email: [email protected] Email: [email protected] URL: www.ashurst.com URL: www.ashurst.com

Philip Thomson is a partner in Ashurst’s resources and utilities team. Julia Derrick is a partner in Ashurst’s resources and utilities team based in London and has a broad range of experience in corporate He specialises in project development and financing with a particular and commercial matters, with a particular focus on the upstream and United Kingdom focus on the midstream and downstream oil and gas sector. He has midstream oil and gas sectors. Her experience includes advising extensive experience acting for project sponsors, borrowers, lenders clients on acquisitions and disposals of upstream oil and gas assets, and host governments. His experience also includes joint ventures, development of upstream and midstream oil and gas projects commercial contracts, M&A transactions and restructuring transactions (including LNG liquefaction and regasification projects), and sales in the energy sector, as well as asset finance. arrangements for oil, gas and LNG. He has a particular focus on the LNG industry. Between 2010 and 2014, he was based in Ashurst’s Singapore office. He is recognised in Chambers 2015 for his “good knowledge of project finance in the oil and gas sector”. He is also cited for having “a very calming influence when it comes to discussing those big issues”.

Ashurst is a leading global law firm with core businesses in advising on corporate, finance and the development and financing of assets in the energy, resources, transport and infrastructure sectors. We have an international network of 26 offices in 16 countries and our specialist team of experts span the globe, with a significant presence in global energy hubs. With more than 1,600 partners and lawyers working across 10 different time zones, we are able to respond to our clients wherever and whenever they need us. As leading industry advisors, we are renowned for our proven track record of delivering on major projects and transactions across the oil and gas sector and have a team of lawyers who are dedicated to, and work exclusively in, the industry. We provide an end-to-end specialist advisory service covering the full value chain, from upstream oil and gas, LNG (including liquefaction, regasification and LNG sales arrangements) to pipelines, refining, petrochemicals and the marketing and trading of fuels. In addition to our full sector service, we draw on the practice specialisms of lawyers across the team to advise on all aspects of work of relevance to your business, including M&A, corporate finance, joint ventures, commercial agreements, project financing and development, environmental law, maritime/shipping law and dispute resolution together with associated areas such as competition and regulation, tax and international law. As a result, we have a deep understanding of the oil and gas industry and how it works from a number of different perspectives.

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USA John P. Cogan, Jr.

Stone Pigman Walther Wittmann PLLC James A. Cogan

In 2016, the US produced 26.7 trillion cubic feet (Tcf) of dry gas. 1 Overview of Natural Gas Sector Although dry natural gas production in 2017 did not surpass previous highs set in 2015, gross withdrawals of natural gas and marketed 1.1 A brief outline of your jurisdiction’s natural gas production reached annual record volumes of 90.9 and 78.9 billion sector, including a general description of: natural cubic feet per day (Bcf/d), respectively, in 2017. Domestically, the gas reserves; natural gas production including largest onshore producing fields are located in Texas, Oklahoma, the extent to which production is associated or Wyoming, New Mexico, Louisiana, North Dakota and Colorado. non-associated natural gas; import and export of Offshore production, primarily in the Gulf of Mexico, also serves a natural gas, including liquefied natural gas (LNG) critical role in the US’s natural gas sector. liquefaction and export facilities, and/or receiving and re-gasification facilities (“LNG facilities”); natural gas Increased domestic production in recent years has decreased pipeline transportation and distribution/transmission the volumes of natural gas imported into the US. In 2017, the network; natural gas storage; and commodity sales US imported approximately 3 Tcf of natural gas, continuing the and trading. downward trend from 2007’s peak of about 4.5 Tcf. The Federal Energy Regulatory Commission (FERC) reports that, as of July In the US, natural gas is domestically produced and readily 2018, the US has 12 LNG import terminals. However, as indicated available to end-users through an extensive pipeline infrastructure. above, interest is now focused on developing export LNG facilities The growth in shale gas production in recent years is one of the and, in some cases, re-fitting existing import facilities for export. most vitalising forces in US energy markets today. A few years Since 2015, the US’s export capacity has nearly quintupled. As ago, analysts foresaw a growing US reliance on imported sources of a result, the US became a net producer of natural gas in 2017 for natural gas, and significant investments were made in regasification the first time in 60 years. Most of the US’s natural gas exports are facilities for imports of liquefied natural gas (LNG). Today, by pipeline (and most go to Canada and Mexico), but increasing LNG terminal operators are re-exporting LNG produced in other amounts are being exported by tanker in the form of LNG. countries and temporarily stored in the US. More significantly, the The US’ natural gas transportation network delivers more than first LNG produced in the modern era from natural gas reserves 23 Tcf of natural gas to over 70 million customers annually. The located in the lower 48 states of the US was exported from Cheniere network, excluding gathering system operators, is made up of about Energy’s terminal at Sabine Pass, Louisiana in February of 2016. A 1.5 million miles of mainline and other pipelines and includes more number of additional terminal operators, developers and producers than 200 mainline transmission pipeline systems and more than have applied or are preparing to apply for permits to export LNG 1,300 local distribution companies (LDCs). Over 300,000 miles from the US. As a result, significant investments are being made to of interstate and intrastate transmission pipelines transport natural re-outfit existing regasification terminals into liquefaction terminals. gas from producing areas to market areas. Construction of new Additionally, new onshore and offshore terminals are being planned transmission and local distribution pipelines during the last decade to liquefy domestically produced natural gas for export. surpassed that of any other decade since the 1950s. Over the past several years, shale gas development in the US Underground natural gas storage provides pipelines, LDCs, domestic fields has been a “game changer” for the US natural gas producers and shippers with an inventory management tool, market, turning the US into the largest gas producer in the world. seasonal supply backup and access to supplies for balancing. About The sustainability of this boom depends on the size of the shale gas 125 natural gas storage operators manage roughly 400 underground resource base, the price level required to sustain its development, storage facilities. In August of 2017, the US had a total natural gas and whether there are technical or environmental factors that might underground storage capacity of approximately 9.2 Tcf. dampen its development. Beyond those questions, the level of future natural gas production in the US will also depend on the level Natural gas is priced and traded at different locations throughout the of domestic consumer demand (the US is the largest consumer of US. These locations, referred to as “market hubs”, exist across the natural gas in the world), which will be shaped by prices, economic country and are located at the intersection of major pipeline systems. growth, and policies affecting fuel choice. There are over 30 major market hubs in the US, the best known of which is the Henry Hub, located near Erath, Louisiana. Future US natural gas proved reserves have increased every year since contracts for natural gas are traded on the New York Mercantile 1999. Shale gas development has helped to increase total US natural Exchange (NYMEX). These contracts are based on natural gas for gas reserves by almost 50 per cent over the past decade. physical delivery at the Henry Hub.

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The production and delivery of natural gas in the US is subject to surpassed 9 million barrels per day in 2017, approaching the early significant regulation from a number of regulatory bodies, including 1970s’ record-setting production levels. Unlocking reserves found in FERC, the Department of Energy (DOE), the Department of shale rock is credited with this boom in oil production. Transportation (DOT) and state regulatory bodies. In brief, under States leading American crude oil production are: Texas; North Dakota; the current regulatory framework, pipelines and LDCs are heavily California; New Mexico; Oklahoma; California; Colorado; Alaska; regulated with respect to the services they provide. Interstate Wyoming; Louisiana; and Utah. However, only Texas produces more pipeline companies, which can serve only as transporters of natural oil than produced in the federal offshore properties. gas, are regulated by FERC in the rates they charge, the access The country’s rising oil production is being met with declining they offer to their pipelines, and the siting and construction of domestic oil consumption due to stricter fuel-efficiency policies, as new pipelines. Similarly, LDCs are regulated by state regulatory USA well as a slow-down in many sectors of the economy. This, together bodies, which oversee their rates and services, and procedures for with the rise in natural gas production, has many experts predicting maintaining adequate supplies for their customers. In contrast, that the US will achieve energy independence within the next 20 years. natural gas producers and marketers are not heavily regulated. While producers are subject to environmental and conservation controls and are required to obtain the proper authorisations and 2.2 To what extent are your jurisdiction’s energy permits before commencing drilling operations, particularly on requirements met using oil? federal lands, the prices that production and marketing companies charge are a function of competitive markets, subject to FERC’s Oil is a critical resource for the US. Oil meets about 37 per cent of monitoring for market manipulation and abuse. US energy demand.

1.2 To what extent are your jurisdiction’s energy 2.3 To what extent are your jurisdiction’s oil requirements requirements met using natural gas (including LNG)? met through domestic oil production?

As of 2017, natural gas represented 29 per cent of US energy The share of US consumption met through domestic oil production consumption, petroleum represented 37 per cent, coal represented has been growing since 2005. In 2017, 77 per cent of the petroleum 14 per cent, renewable energy represented 11 per cent, and nuclear consumed by the US was provided by domestic production, and electric power represented 9 per cent. only 19 per cent depended on net petroleum imports, the lowest percentage since 1967.

1.3 To what extent are your jurisdiction’s natural gas requirements met through domestic natural gas 2.4 To what extent is your jurisdiction’s oil production production? exported?

Domestic production provides over 90 per cent of the US’ natural Until the end of 2015, US oil exports were made up almost entirely gas requirements. The US imported approximately 3 Tcf of natural of refined petroleum products, not crude oil. Petroleum products gas in 2017, 97 per cent of which was imported from Canada by exports averaged 4.273 million barrels per day in 2015. The bulk of pipeline. these petroleum exports went to Mexico and Canada. In December of 2015, the 40-year general ban on crude oil exports 1.4 To what extent is your jurisdiction’s natural gas was lifted, and crude oil exports have been on the rise since. In production exported (pipeline or LNG)? 2017, the US exported an average of 1,158,000 barrels per day of crude oil. By October of 2018, the US was exporting an average of Natural gas exports exceeded 3.1 Tcf in 2017, making the US a net 1,847,000 barrels per day of crude oil. In light of the shale boom, exporter of natural gas for the first time in decades. About 78 per the light, sweet crude derived from shale formations, which is not cent of this volume was exported by pipeline to Canada (accounting well-suited for the US Gulf Coast refineries, represents a particularly for 37 per cent of total pipeline exports) and Mexico (accounting attractive commodity to export. for 63 per cent of total pipeline exports). However, increasing amounts of domestic natural gas production are being exported in the form of LNG. In 2017, the US exported over 707 Bcf of 3 Development of Oil and Natural Gas LNG. Lead importers of US LNG include Mexico (importing approximately 20 per cent of US exported LNG), South Korea 3.1 Outline broadly the legal/statutory and organisational (importing approximately 18 per cent of US exported LNG) and framework for the exploration and production China (importing approximately 15 per cent of US exported LNG. (“development”) of oil and natural gas reserves including: principal legislation; in whom the State’s mineral rights to oil and natural gas are vested; 2 Overview of Oil Sector Government authority or authorities responsible for the regulation of oil and natural gas development; and current major initiatives or policies of the Government 2.1 Please provide a brief outline of your jurisdiction’s oil (if any) in relation to oil and natural gas development. sector. The determination of a legal and organisational framework applying The oil sector in the US has been suffering from a significant decline to oil and gas activities depends in part on whether the underlying of oil prices beginning in the second half of 2014. However, prices resources are owned by the government or private parties and began to climb in the first half of 2016. US total crude oil production whether the location is onshore or offshore.

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The development of oil and gas reserves on federal lands occurs through leasing programmes managed by the Department of the 3.3 If different authorisations are issued in respect of Interior (DOI). Upstream activities on federal onshore properties different stages of development (e.g., exploration appraisal or production arrangements), please specify are governed by the Mineral Leasing Acts of 1920 and 1947 and are those authorisations and briefly summarise the most regulated by the Bureau of Land Management (BLM), an agency important (standard) terms (such as term/duration, that is part of the DOI. The BLM reviews and approves permits scope of rights, expenditure obligations). and licences for companies to explore and develop oil and natural gas on federal lands, and, once projects are approved, it enforces Authorisations for the various stages of development are generally regulatory compliance. Offshore development is governed by the addressed in the oil and gas lease agreement. Typical provisions USA Outer Continental Shelf Lands Act and is regulated by the Bureau in natural gas project leasing include: 1) a granting clause, which of Ocean Energy Management (BOEM). BOEM, a bureau in the describes the substances that can be explored and developed; 2) DOI, is the agency that manages the exploration and development provisions that define the lessee’s right to surface operations; 3) of lands lying seaward of state coastal waters that are under US delay rental terms, under which a lease automatically terminates if jurisdiction (the outer continental shelf or OCS). drilling is not started in a specified timeframe unless a payment is At the state level, public agencies generally regulate oil and natural made; 4) dry-hole and shut-in provisions that allow for extension gas development and production, while the leasing of private land of the term of the lease when no hydrocarbons are discovered or for oil and natural gas development is generally left up to each production ceases; 5) a royalty clause, which allocates to the lessor individual landowner. a portion of the hydrocarbons produced; and 6) pooling provisions, The regulation of transportation of oil and natural gas in the US granting the lessee the right to consolidate the leased land with is divided between the federal government and state authorities. adjoining leased tracts. FERC is the primary federal regulatory agency governing oil and natural gas transportation. FERC’s regulatory authority extends to 3.4 To what extent, if any, does the State have an the interstate transportation of oil and natural gas, the importing of ownership interest, or seek to participate, in the oil and natural gas by pipeline or LNG import terminals, and certain development of oil and natural gas reserves (whether environmental and accounting matters. Actual construction of LNG as a matter of law or policy)? terminals (import and export) is primarily regulated by FERC, if the terminals are onshore, and by the Maritime Administration and As a matter of law, neither the federal government nor individual Coast Guard if they are offshore. State regulatory agencies have state governments have an ownership interest or participate directly jurisdiction over retail pricing, consumer protection, natural gas as a party in the development of oil and natural gas reserves, except facility construction, and environmental issues not covered by the under lands owned by such governments. The US does hold an federal agencies. ownership interest in the mineral estate under federal lands, except Possible federal regulation from Congress and the Environmental where otherwise transferred. The situation is similar with respect Protection Agency (EPA), relating to an extraction method for natural to lands owned by the individual states. Pursuant to the Mineral gas known as hydraulic fracturing (dubbed “fracking”), could be on Leasing Act and Outer Continental Shelf Lands Act, the federal the horizon. The EPA continues to study the potential environmental government leases federal lands for exploration and production of risks of fracking. In December of 2016, it released a report which natural gas, and collects royalties on the gas produced. linked fracking to water pollution in some circumstances. However, uncertainties and data gaps remain in the studies. The role of 3.5 How does the State derive value from oil and natural fracking in earthquakes also remains controversial. State and local gas development (e.g. royalty, share of production, governments are also involved in these controversies. taxes)?

Federal and state governments mainly derive value from oil and 3.2 How are the State’s mineral rights to develop oil and natural gas reserves transferred to investors or natural gas development through leasing mineral estates underlying companies (“participants”) (e.g. licence, concession, federal and state lands and the collection of royalty payments. service contract, contractual rights under Production Under the Mineral Leasing Act, for example, competitive and non- Sharing Agreement?) and what is the legal status of competitive leases are conditioned upon payment to the government those rights or interests under domestic law? of a royalty of at least 12.5 per cent in amount or value of the gas production that is removed or sold from the leased land. In addition to In the US, rights to oil, gas and other minerals are generally held royalties, leases are conditioned upon payment of annual rental fees. by the owner of the surface until and unless the mineral rights are Income taxes as well as oil and gas production or severance taxes severed and granted to others. To the extent governmental bodies and the like are also imposed by various governmental bodies having control those rights, i.e. in state and federal government-owned lands jurisdiction over applicable reserves. and offshore, those rights are conveyed through leases, as is the case with mineral rights owned by private parties. These leases convey 3.6 Are there any restrictions on the export of non-vested protectable property rights that may be regulated and production? their value diminished for a proper government purpose. In general, the mineral estate owner/lessee has the right of reasonable access to Section 3 of the Natural Gas Act of 1938, as amended, requires that and use of the surface estate in order to exploit the minerals. anyone who wants to export natural gas to a foreign country must first obtain an authorisation from the DOE. Crude oil exports are regulated by the Energy Policy and Conservation Act, as amended (EPCA). See additional details in the responses set forth in sections 4 and 5 below.

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the development of oil and natural gas reserves in the US. One of the 3.7 Are there any currency exchange restrictions, or more prominent sets of environmental regulations at the federal level restrictions on the transfer of funds derived from is the National Environmental Policy Act (NEPA), which requires a production out of the jurisdiction? federal agency to prepare an environmental impact statement before any major federal action. As part of the NEPA process, the BLM There are currently no currency exchange restrictions or restrictions may require that oil and natural gas developers comply with Best on the transfer out of the jurisdiction of funds derived from production. Management Practices to ensure that development on the public lands is conducted in a manner that prevents or lessens its environmental 3.8 What restrictions (if any) apply to the transfer or impact on public lands resources. Additionally, the Federal Onshore

disposal of oil and natural gas development rights or Oil and Gas Leasing Reform Act prohibits certain types of oil and USA interests? gas leasing on lands recommended for wilderness allocation. State regulations, such as compulsory pooling and well spacing, may also As a general matter, for privately owned lands, there are no restrictions restrict development of oil and natural gas. on the transfer or disposal of oil and natural gas development rights or interests unless specifically provided for in a contract. Leases of 3.12 Is there any legislation or framework relating to privately owned lands may expressly grant or limit the authority of the abandonment or decommissioning of physical the parties to transfer or assign the lease. structures used in oil and natural gas development? If In the case of leases of federal lands, an entity may transfer its interest so, what are the principal features/requirements of the in the acreage in the lease, with approval of the Secretary of Interior, legislation? by assignment of the record title interest or by transfer of operating rights or working interests. At the state level, assignment of a lease, or Section 7(b) of the Natural Gas Act requires a natural gas company transfer of rights thereunder, may require approval of state authorities. to obtain approval from FERC before abandoning all or any portion of its facilities subject to the jurisdiction of FERC. FERC may only permit the abandonment of natural gas facilities upon finding that (1) 3.9 Are participants obliged to provide any security the available supply of natural gas is depleted to the extent that the or guarantees in relation to oil and natural gas continuance of service is unwarranted, or (2) that the present or future development? public convenience or necessity permits such abandonment. The plugging and abandonment of oil and natural gas wells are also subject A lessee of federal land must provide the BLM with a bond of to state regulation and, for federal lands and the Outer Continental at least $10,000 to ensure compliance with all the lease terms, Shelf, to regulation by the Department of the Interior. including environmental protection before they begin geophysical exploration on leased or public lands. The BLM may require an increase in the bond amount whenever conditions warrant. For 3.13 Is there any legislation or framework relating to multiple leases, a lessee may provide a $25,000 state-wide bond or gas storage? If so, what are the principal features/ $150,000 nationwide bond. The BOEM also requires bonds in place requirements of the legislation? for federal offshore lease activity. Offshore bonds vary depending on the level of activity on the lease and the number of leases covered A certificate of public convenience and necessity issued by FERC by the bond. Offshore bonds may range from $50,000 for a specific is required for interstate storage projects under Section 7(c) of the lease with no activity, to up to $3 million to cover multiple leases Natural Gas Act. Generally, absent an exemption, storage facilities with development operations. Secondary bonds may also be must be certificated by FERC if the natural gas is transported in required by the BOEM where conditions warrant. States may also interstate commerce. Exemptions from FERC jurisdiction over require the filing of a bond or alternative security. storage projects apply in circumstances where transportation by interstate pipelines has not begun (production, gathering) or has ended, or where the company receives gas from an interstate pipeline 3.10 Can rights to develop oil and natural gas reserves within or at the border of its state, if all the natural gas so received granted to a participant be pledged for security, or is ultimately consumed within that state, and if the rates and service booked for accounting purposes under domestic law? of the company and its facilities are subject to regulation by a state commission (known as a Hinshaw company). Storage projects that Specific lease terms, or applicable statutes, may restrict granting a are exempt from the Natural Gas Act are regulated at the state level. security interest in development rights. Otherwise, such rights can normally be pledged for security. Some oil and gas-producing states Interstate pipelines that already hold blanket, open access certificate have special statutory provisions relating to the perfection and priority authorisations from FERC may test and develop potential new storage of security interests in oil and natural gas. Oil and natural gas reserves reservoirs over a three-year period without further authorisation. New can be booked for accounting purposes. The basic rules for booking companies will lack a blanket, open access certificate and thus cannot reserves are found in the FASB Financial Accounting Standards, the test and develop potential reservoirs unless FERC issues temporary SEC regulations and the Society of Petroleum Engineers Guidelines certificates and exempts temporary operations from certificate for the Evaluation of Petroleum Reserves and Resources. requirements. Under these temporary authorisations, storage developers may conduct activities that are necessary to support the certificate application or to prevent degradation of the field for storage operations. 3.11 In addition to those rights/authorisations required to explore for and produce oil and natural gas, what Prior to certificate approval, tariff and rates for storage services must other principal Government authorisations are be developed. Rates can be cost-based or market-based. The EPAct required to develop oil and natural gas reserves (e.g. allows FERC to grant market-based rates for new storage capacity environmental, occupational health and safety) and even if a company is unable to demonstrate that it lacks market power from whom are these authorisations to be obtained? as long as FERC determines (1) that the market-based rates are in the public interest and necessary to encourage the construction of the A variety of interrelated statutes and agency regulations may apply to storage capacity, and (2) that customers are adequately protected.

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FERC requires that storage capacity be allocated to new customers (other than diesel fuels) pursuant to oil and gas-related fracking on a non-discriminatory basis. A storage developer can obtain operations. binding commitments for storage services from customers and Under the Obama administration, the EPA actively pursued satisfy FERC’s non-discriminatory access regulatory requirements additional measures to regulate unconventional mineral production. by holding a so-called “open season”. In 2012, the EPA issued regulations under the Clean Air Act The certificate process also involves an environmental review, requiring producers to capture 90 per cent of emissions from which may require the preparation of an environmental impact hydraulically fractured gas wells. In 2014, the EPA issued UIC statement. FERC sometimes issues a preliminary determination permitting guidance for the injection of diesel fuels in fracking on non-environmental issues in order to resolve these issues and operations, which guidance is applicable in states employing the USA provide some certainty so that the project may be financed or an UIC programme for Class II injection wells. In 2016, the EPA open season held. The preliminary determination is subject to issued standards prohibiting the discharge of wastewater pollutants FERC’s resolution of environmental issues in a subsequent order. from onshore unconventional mineral production facilities to publicly owned water treatment plants. Additionally, in 2016 the EPA released its study analysing the impact of fracking activity on 3.14 Are there any laws or regulations that deal specifically with the exploration and production of unconventional drinking water. oil and gas resources? If so, what are their key The federal government manages the production of oil and gas on features? federal and tribal lands, and the BLM is the main agency tasked with its oversight. In 2015, the BLM promulgated regulations Development in hydraulic fracturing (fracking) and directional applicable to oil and gas related fracking activity on federal and drilling technologies has enabled production of natural gas and tribal lands. These rules sought to ensure the protection of water oil from shale and other unconventional formations. Fracking supplies by establishing stricter well construction standards, is a well simulation technology that involves applying highly ensure environmentally responsible management of flowback, and pressurised water, sand, and chemicals to fracture rock. Once the require public disclosure of chemicals used in fracking operations. rock is fractured, liquid known as “flowback” flows out of the rock In Wyoming v. Jewell, several states petitioned a federal district to the earth’s surface through the wellbore. Flowback consists court in Wyoming to enjoin the enforcement of these rules. The of hydrocarbons in addition to the injected chemicals and brines, district court set aside the rules after determining that BLM lacked metals, radionuclides and other naturally occurring compounds. congressional authority to regulate fracking. In 2017, in line with Directional drilling involves the drilling of non-vertical wells. the Trump Administration’s goal to reduce regulation on the energy Technologies like fracking and directional drilling have greatly industry, the BLM announced plans to repeal the rules. As a result, increased domestic energy production, so much so that some experts the Tenth Circuit dismissed appeals of the district court’s judgment predict US energy independence in the near future. However, as prudentially unripe. environmental, public health, and seismic concerns associated with these technologies have ignited a nationwide controversy over their 4 Import / Export of Natural Gas (including regulation and the extent of the federal government’s role in such regulation. LNG) Because most unconventional oil and gas resources occur on non- federal lands, states are principally responsible for their regulation. 4.1 Outline any regulatory requirements, or specific Recent development in the drilling and fracturing technologies terms, limitations or rules applying in respect of employed in producing these unconventional formations has caused cross-border sales or deliveries of natural gas many mineral rich states to regulate the technologies specifically, (including LNG). as opposed to relying on more general regulations governing the production of oil and gas. In general, features of these state Pursuant to Section 3 of the Natural Gas Act, the import and export regulations include requirements for disclosure of chemicals used of natural gas, including LNG, requires authorisation from the in fracking and water resources protection measures. However, the Department of Energy. The Department of Energy authorises two approaches for regulating unconventional mineral development vary types of natural gas imports and exports: blanket authorisations; and from state to state, leading to a lack of nationwide uniformity. As a long-term authorisations. result, some interest groups and Congresspersons have pressed the Blanket authorisations allow the authorised party to import or federal government to play a larger role in unconventional mineral export for up to two years. Blanket authorisations do not obligate resource development. Conversely, other interest groups argue that the holder of the authorisation to import or export natural gas, and varying geological, topographical and climate conditions from state no contracts are required to be filed with the application. Long- to state make states uniquely qualified to regulate unconventional term authorisations are used for natural gas imports or exports that mineral development within their own jurisdictions. will last longer than two years. Typically, holders of long-term Although unconventional mineral resource development is largely authorisations have, or intend to have, a signed gas purchase or sales regulated by individual states, the federal government does exercise agreement in place for more than two years. some control over unconventional oil and gas production on state Although FERC approval is not required for the actual import lands through the provisions of several federal environmental or export of natural gas, FERC does oversee the construction acts. Because natural gas production can result in discharges and operation of natural gas import and export facilities (with to surface waters, such activity requires a National Pollutant corresponding jurisdiction for offshore terminal approvals resting Discharge Elimination System (NPDES) permit. Additionally, the primarily with the Maritime Administration and the Coast Guard) Safe Drinking Water Act (SDWA) requires Underground Injection and has the authority to review proposed rates for the interstate Control (UIC) permits for deep-water-injection wastewater disposal. transportation and sale of imported natural gas. Formerly, in order Notably, however, the SDWA UIC permitting programme excludes to get FERC approval for the construction and operation of an LNG from its requirements the injection of fluids and other materials terminal, FERC required “open access” for all market participants

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to LNG terminals on a non-discriminatory basis. However, after the wholly within a single state are generally subject to regulation Hackberry decision in 2002, which was later codified in the EPAct by the state within which they operate. FERC regulates the rates of 2005, FERC can no longer deny an application solely on the basis and services offered by interstate pipeline companies, and, with that the applicant proposes to use the LNG terminal exclusively respect to natural gas pipelines, FERC regulates the construction or partially for gas that the applicant or an affiliate of the applicant and abandonment. A key component of the regulatory framework is will supply to the facility; nor can FERC condition an approval on that pipelines must offer access to their transportation infrastructure the requirement that the LNG terminal offers services to customers to all market participants on a non-discriminatory basis, referred to other than the applicant, or any affiliate of the applicant, in order to as “open access”, allowing marketers, producers, LDCs, and end- secure the order. FERC also has authority to grant Presidential Permits users access to transportation services, on an equal basis. Interstate for natural gas import or export facilities located on the international pipelines can serve only as transporters of natural gas and are no USA boundary of Canada or Mexico. Currently, the North American Free longer permitted to act as merchants and sell bundled products. Trade Agreement (NAFTA) allows for the free trade of natural gas FERC has defined “transportation” to include “storage”, “exchange”, among the US, Mexico, and Canada; exports to member countries are and “backhaul” and the rates, terms and conditions for each of these excused from export controls, and imports from member countries will services are set forth in each pipeline company’s FERC-approved not incur tariffs. Although President Trump has recently negotiated tariffs. a new version of NAFTA (which is still subject to congressional There is a significant difference between the way FERC regulates approval), now called the United States-Mexico-Canada Agreement, natural gas pipelines pursuant to the Natural Gas Act (NGA) and oil many of the features of NAFTA that supported an integrated North pipelines pursuant to the Interstate Commerce Act of 1887 (ICA). American energy market are expected to remain unchanged. Pursuant to the NGA, a company must obtain FERC authorisation to A number of applications have been approved for the export of LNG construct, commence service on, or abandon an interstate natural gas liquefied from natural gas produced in the US. Under the Energy pipeline. FERC decides whether the proposed natural gas pipeline Policy Act of 1992, exports to countries with which the US has a free project is in the public interest and whether the rates and terms of trade agreement are deemed to be consistent with the public interest, service are in the public interest. In addition, when FERC certifies and applications for such importation or exportation are to be granted a natural gas pipeline, the pipeline developer can rely on FERC’s without modification or delay. Applications for export to non-FTA federal eminent domain authority and federal pre-emption of state countries are given more scrutiny by the DOE but are being approved. and local laws that might otherwise interfere with FERC-approved project (although such use of FERC’s eminent domain authority has 5 Import / Export of Oil been the subject of several legal challenges over the past few years). In contrast, oil pipelines have a unique regulatory model with a sharing of federal and state jurisdiction. FERC regulates oil 5.1 Outline any regulatory requirements, or specific pipelines rates and tariffs, but there is no requirement for FERC to terms, limitations or rules applying in respect approve an oil pipeline’s rates or tariff prior to commencement of of cross-border sales or deliveries of oil and oil service, nor does FERC have jurisdiction over oil pipeline entry, products. construction, commencement of new services or abandonment. Oil pipeline developers may not rely on FERC’s federal eminent One of the primary statutory controls on exports of oil and oil products domain authority. Instead, developers of interstate oil pipelines is The Energy Policy and Conservation Act, as amended (EPCA), must navigate each different state’s rules and regulations governing originally passed in the wake of the Middle East oil embargos. Exports the construction of pipelines and permitting processes. of refined petroleum products are generally permitted without restriction, but from the 1970s through 2015, export of crude oil was Oil and natural gas pipelines are also subject to various environmental generally prohibited under EPCA. In December of 2015, the general and safety laws during the construction and operation of the ban on the export of crude oil was lifted. Historically, there have also transportation facilities. Once pipeline projects become operational, been statutory restrictions on the export of crude oil transported on safety is regulated, monitored and enforced by the Department pipelines that benefit from federal rights-of-way, are produced on the of Transportation Pipeline and Hazardous Materials Safety outer continental shelf, or are produced from the Naval Petroleum Administration (PHMSA). Reserve. The Department of Commerce’s Bureau of Industry and Security (BIS) regulates crude oil exports to countries or persons 6.2 What governmental authorisations (including subject to embargoes or sanctions and to persons subject to a denial any applicable environmental authorisations) are of export privileges. required to construct and operate oil and natural gas transportation pipelines and associated Oil imports may be subject to tariffs ranging from 5.25¢ to 52.5¢ infrastructure? per barrel depending on the type of petroleum. However, oil and petroleum products from certain free trade agreement and For the construction of interstate natural gas transportation pipelines preferential trade programme countries receive duty-free treatment. and associated infrastructure, Section 7 of the NGA mandates that developers obtain FERC approval, in the form of a “certificate of 6 Transportation public convenience and necessity” authorising the construction, operation or expansion of such facilities. Under Section 7(c), FERC will grant a certificate if it determines that the proposed project is in 6.1 Outline broadly the ownership, organisational and the public interest. Any abandonment of “certificated transportation regulatory framework in relation to transportation facilities” must also be approved by FERC, as required in the pipelines and associated infrastructure (such as public interest under Section 7(b) of the NGA. Part 157 of FERC’s natural gas processing and storage facilities). regulations allow for public participation in the certification process and require applicants to make a good faith effort to provide notice FERC regulates interstate pipelines that transport oil and natural of the proceeding to affected persons, such as landowners, and state gas in interstate commerce, whereas intrastate pipelines that operate and local governments where the project is located.

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Project construction for pipelines must also comply with multiple provide a transportation service to any party that reasonably requests environmental statutes including, but not limited to, the Clean Water service, even where capacity is constrained. Where a new customer Act, the Clean Air Act, the Coastal Zone Management Act of 1972, requests service on a capacity-constrained oil pipeline, the existing and the Endangered Species Act of 1973. In October of 2006, FERC customers may all lose some of the capacity they would otherwise finalised rules for the co-ordination of all federal environmental have had. reviews and authorisations for natural gas infrastructure projects to Pipelines are required to have on file with FERC tariffs of general ensure that the required authorisations are processed expeditiously. applicability that provide for the rates, terms and conditions Under those rules, FERC acts as the lead agency for federal applicable to the various services offered on the pipeline. FERC’s environmental reviews, establishes a schedule for the completion open access regulations govern the various services offered by the USA of reviews of requests for authorisations necessary for a proposed pipeline, including firm and interruptible service, temporary or project and maintains a consolidated record of those decisions to permanent release of capacity that shippers previously subscribed expedite potential judicial review. to on the pipeline, and business practices for pipeline operations and In contrast to natural gas pipelines, no similar certifications are communications. required from FERC or any other federal agency for the siting and construction of domestic oil pipelines. Oil pipeline developers must 6.5 To what degree are oil and natural gas transportation work under each state’s regulatory and permitting regime and are pipelines integrated or interconnected, and how is co- subject to various state and federal environmental and safety laws. operation between different transportation systems However, before a company may construct and operate a pipeline established and regulated? to transport natural gas or crude oil between the US and a foreign country, it must obtain a presidential permit. The US natural gas pipeline network is a highly integrated transportation and distribution grid that can transport natural gas 6.3 In general, how does an entity obtain the necessary to and from nearly any location in the lower 48 states. Shippers land (or other) rights to construct oil and natural gas can choose from a number of alternate routes to move gas from transportation pipelines or associated infrastructure? production areas to market areas and to access storage facilities. Do Government authorities have any powers of In 2000, FERC created the framework for market participants to compulsory acquisition to facilitate land access? obtain interconnection, provided the following five conditions are satisfied: (i) the party seeking the interconnection must agree to Developers may acquire land rights through purchases from bear the costs of constructing the interconnection; (ii) the proposed individual landowners or through negotiation of rights-of-way, or interconnection must not adversely affect the pipeline’s operations; easements. (iii) the proposed interconnection and resulting transportation must With respect to natural gas pipelines, Section 7(h) of the NGA not result in diminished service to the pipeline’s existing customers; also allows a natural gas pipeline certificate holder to obtain such (iv) the proposed interconnection must not cause the pipeline to rights through federal eminent domain, i.e., the inherent power of be in violation of any applicable environmental or safety laws or the government to compel a landowner to surrender certain rights regulations with respect to the facilities required to establish the to land in exchange for just compensation (although this aspect of interconnection; and (v) the proposed interconnection must not the NGA has been the subject of several recent court challenges by cause the pipeline to be in violation of its right-of-way agreements landowners). or any contractual obligations with respect to the interconnection facilities. FERC’s policy objective is to ensure that competitive Unlike natural gas pipelines, oil pipelines lack the federal eminent markets operate fairly with open access to the pipeline systems. domain authority and federal pre-emptive rights that accompany the FERC natural gas certificate process. Oil pipelines must rely on However, FERC has held that the ICA does not grant FERC the differing state laws of eminent domain or direct negotiations with authority to order an interconnection between oil pipeline carriers landowners. (Enbridge Energy, L.P., 139 FERC 61,134 (2012)). The plain language of the ICA requires carriers to provide facilities to allow Eminent domain procedures are also generally available under state for the interchange of traffic between existing lines and existing law for common carrier pipelines located within the state. connecting lines and requires carriers to refrain from discriminating among connecting lines. Many view this discrepancy of FERC 6.4 How is access to oil and natural gas transportation authority over natural gas pipelines and oil pipelines as a growing pipelines and associated infrastructure organised? industry issue that needs to be addressed.

The NGA established a regulated system of private contract carriage for natural gas pipelines. Pursuant to FERC’s rules and 6.6 Outline any third-party access regime/rights in respect of oil and natural gas transportation and regulations, access to natural gas transportation pipelines and associated infrastructure. For example, can the associated infrastructure is available to market participants on a non- regulator or a new customer wishing to transport discriminatory basis. FERC Orders Nos. 436 and 636 require that oil or natural gas compel or require the operator/ interstate pipelines offer open access to all qualified shippers on a owner of an oil or natural gas transportation pipeline non-discriminatory basis. While an interstate natural gas pipeline is or associated infrastructure to grant capacity or not required to provide requested transportation services for which expand its facilities in order to accommodate the new capacity is not available or that would require the construction or customer? If so, how are the costs (including costs of interconnection, capacity reservation or facility acquisition of new facilities, it must provide available capacity expansions) allocated? without preference in the quality of service provided, the duration of service, the categories, prices, or volumes of natural gas to be As noted in question 6.4, while interstate pipelines are required transported. to provide open access transportation service, an interstate natural The ICA established a system of oil pipelines as common carriers gas pipeline is not required to provide requested transportation instead of contract carriers. This means that oil pipelines must service for which capacity is not available or that would require

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the construction or acquisition of any new facilities; however, an of sales and purchases, volume of transactions at fixed prices and interstate oil pipeline is required to provide capacity to all customers, volume of transactions reportable to price index publishers. Buyers and capacity for each customer may be reduced to accommodate a or sellers operating under a blanket sales certificate authority that buy new customer. Within the natural gas transportation infrastructure, or sell less than that amount of gas must also submit an annual report a notable exception to the open access requirement, as mentioned in for identification and certain reporting purposes but need not report question 4.1, applies to LNG terminals. aggregate volumes of relevant transactions. A market participant that buys or sells less than that amount of gas and does not operate under a blanket sales certificate authority is not required to submit the annual 6.7 Are parties free to agree the terms upon which oil or natural gas is to be transported or are the terms report. The annual report is due on 1 May of each year. (including costs/tariffs which may be charged) USA regulated? 7 Gas Transmission / Distribution FERC has authority over the rates, terms and conditions for service over interstate natural gas transportation facilities, and, pursuant to 7.1 Outline broadly the ownership, organisational and its authority under Sections 4 and 5 of the NGA, FERC ensures that regulatory framework in relation to the natural gas rates, terms and conditions are “just and reasonable”. Traditionally, transmission/distribution network. rates that are costs-based are deemed “just and reasonable”, i.e., the rates allow the pipeline operator an opportunity to recover the Although some large end-use customers (e.g., industrial, commercial, costs and expenses of operating the pipeline (including taxes and and electric generation customers) receive natural gas directly from depreciation), as well as a fair return on the capital invested in the high-capacity interstate and intrastate pipelines (addressed in question pipeline. An interstate pipeline’s cost-based rates are established by 4.1), state-regulated LDCs distribute the majority of natural gas to end- FERC in a Section 4 rate proceeding, which is frequently lengthy users through thousands of miles of small-diameter distribution pipe. and complex. Essentially, FERC examines the pipeline’s books There are two basic types of local distribution companies: (1) investor- and records to ensure that the proposed rates properly reflect the owned utilities; and (2) public gas systems owned by local municipals, pipeline’s prudently-incurred cost of providing transportation co-operatives or other governmental bodies. services. The approved rates are incorporated in the pipeline’s tariff The retail sale and distribution of natural gas in the US is regulated on file with FERC and represent the maximum rate the pipeline can by the individual states and localities in which the LDCs operate, charge for transportation services. Pipelines and shippers, however, and extends to the rates charged to various classes of customers are free to negotiate a discount to that maximum rate, provided it is (e.g., residential, small commercial, commercial and large industrial offered on a non-discriminatory and non-preferential basis. customers), as well as a range of operational issues such as FERC also permits pipelines that lack market power to request curtailment, balancing and other general terms and conditions of negotiated rates for shippers, provided the customers have access service. There are regulatory commissions in all 50 states which to recourse rates under an approved tariff. In order to implement a supervise the rates, services and operations of LDCs. Traditionally, negotiated rate transaction, a pipeline must file either the negotiated LDCs have been awarded exclusive franchise rights to distribute rate agreement itself or a tariff sheet describing the agreement. and sell natural gas in a specified geographic area. However, many Continuing its efforts to “carry out Congress’ mandate to protect states have created retail choice programmes in which customers consumers by protecting the integrity of the markets for physical have the option to choose from whom they purchase their gas and gas”, FERC issued two orders intended to increase the transparency require the LDCs to provide distribution services. of the price and availability of supply in natural gas markets. See Certain aspects of the operation of natural gas distribution lines are Pipeline Posting Requirements under Section 23 of the Natural also subject to the safety and security regulations of PHMSA, as Gas Act, 125 FERC 61,211 (2008) and Transparency Provisions noted in question 6.1. Compliance with certain PHMSA rules has of Section 23 of the Natural Gas Act, Order No. 704, 121 FERC been delegated to state authorities. 61,295 (2007). In both cases, FERC exercised its expanded market transparency authority under Section 23 of the NGA, a section 7.2 What governmental authorisations (including any added to the NGA by the EPAct. The first order requires interstate applicable environmental authorisations) are required (and, formerly, certain major non-interstate pipelines) to post on a to operate a distribution network? daily basis capacity, scheduled flow information and actual flow information. According to FERC, the requirement would provide LDCs are typically granted franchises or charters by state or local a complete picture of daily supply and demand information across governments to provide gas distribution services in an exclusive the US. FERC believes that the additional information required of service territory. The procedures under which an LDC may expand pipelines will improve the efficiency of physical flows of natural or transfer its franchise rights vary under state law. gas across the US’ pipeline system and facilitate price transparency in markets for the sale or transportation of physical natural gas in interstate commerce to implement Section 23 of the NGA. 7.3 How is access to the natural gas distribution network Importantly, the federal Fifth Circuit in Tex. Pipeline Ass’n v. FERC organised? vacated this rule in 2011 to the extent it applied to wholly intrastate pipeline companies, holding that FERC lacks the jurisdiction to Access to the various distribution systems across the US is a matter regulate such pipeline companies in this regard. of state law and policy generally administered by state public utility commissions and varies by state. Generally, LDCs must provide The second order, among other things, introduces a new annual distribution services to all customers located on their distribution reporting requirement for any buyer or seller of more than 2.2 million system on a non-discriminatory basis. mmBtus of physical natural gas each year. Such entities must report aggregate volumes of relevant transactions, including total volume

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subject the certificate holder to any other regulation by FERC under 7.4 Can the regulator require a distributor to grant the NGA, and there is no requirement to file rates or contracts with capacity or expand its system in order to FERC. accommodate new customers? A major pricing point for natural gas futures contracts and spot sales in the US is the Henry Hub, a junction of nine interstate and four The standards under which LDCs may be compelled to grant intrastate pipelines. Henry Hub is located in Erath, Louisiana and is capacity or expand their systems for new or existing customers are the pricing point for natural gas futures contracts traded on the New established on a state-by-state basis. York Mercantile Exchange (NYMEX). Growing out of several high-profile market manipulation cases in USA 7.5 What fees are charged for accessing the distribution the early 2000s, FERC promulgated a “code of conduct” for persons network, and are these fees regulated? holding blanket marketing certificates to protect against market manipulation. FERC Order No. 673 requires sellers, to the extent The rates and terms under which LDCs must offer services over they report transactions to publishers of natural gas indices, to notify their systems are established on a state-by-state basis and vary FERC of the details of their arrangement, report the information among the states. Generally, the rates and services of an LDC are accurately, update FERC on any change in their reporting practice, subject to regulation by a state commission. and “adhere to any other standards and requirements for price reporting as the Commission may order” (18 C.F.R. § 284.403(a)). 7.6 Are there any restrictions or limitations in relation to The code of conduct also directs blanket certificate holders to retain, acquiring an interest in a gas utility, or the transfer for a period of five years, “all data and information upon which of assets forming part of the distribution network it billed the prices it charged for the natural gas sold pursuant to (whether directly or indirectly)? its market-based sales certificate or the prices it reported for use in price indices” (18 C.F.R. § 284.403(b)). In addition, EPAct US M&A activity involving gas LDCs has increased over the past few amendments to the NGA in 2005 significantly increased FERC’s years, with several high-dollar transactions occurring since 2014. In authority to impose penalties and fines for market manipulation and general, the acquisition or transfer of distribution network assets that cover-ups. This trend has continued with the issuance of FERC are necessary in the provision of service to the public may require the Order No. 704 to improve the transparency of wholesale natural gas prior approval of a state commission in which the assets are located, prices and supplies, together with significant enforcement activities. but the specific restrictions and limitations vary from state to state. Frequently, state law requires a demonstration that the acquisition of a gas utility or transfer of utility assets is in the public interest, either 8.2 What range of natural gas commodities can be traded? For example, can only “bundled” products by showing no net harm to, or net benefits for, customers resulting (i.e., the natural gas commodity and the distribution from the transaction. The Federal Trade Commission (FTC) and the thereof) be traded? Department of Justice (DOJ) also have authority under the Hart Scott Rodino Antitrust Improvements Act of 1976 (HSR) over mergers Natural gas is traded in its physical state and in the form of futures and significant acquisitions of – and by – natural gas distribution contracts, as well as through “hedges” and other derivatives. Under companies, as discussed in section 10 below. FERC Orders Nos. 436 and 636, the sale and trading of natural gas has been “unbundled” from interstate transportation services. At the 8 Natural Gas Trading state level, the sale and distribution of natural gas was traditionally sold as a bundled service, but in recent years several states have introduced retail choice programmes that allow LDCs’ customers to 8.1 Outline broadly the ownership, organisational and purchase natural gas from third-party suppliers. regulatory framework in relation to natural gas trading. Please include details of current major initiatives or policies of the Government or regulator 9 Liquefied Natural Gas (if any) relating to natural gas trading.

Until 1985, when FERC issued Order No. 436 authorising third- 9.1 Outline broadly the ownership, organisational and party transportation on interstate gas pipelines, there was no natural regulatory framework in relation to LNG facilities. gas trading to speak of. Gas producers sold their production to the pipeline owners who, in turn, sold to LDCs and large industrial LNG projects are subject to various laws and regulations that are users. This dramatic change in the regulatory environment opened administered by agencies of the federal government, DOE, EPA, the way for the dramatic increase in natural gas trading over the past FERC, the US Coast Guard/Maritime Administration, and the US 30 years. The market situation was further enhanced with the issue Army Corps of Engineers, as well as the individual states. of Order No. 636 in 1992, which completed the unbundling of gas To construct an LNG facility, import/export authorisation from the sales and transportation services on interstate pipeline systems. Department of Energy’s Assistant Secretary of Fossil Energy must Natural gas traders can be affiliated with producers, with interstate be obtained. The Assistant Secretary must approve the application pipelines or with LDCs or they can be completely independent. A unless it determines that the import/export is not consistent with the trader who is affiliated with a pipeline or an LDC must conduct itself public interest. After the import/export authorisation is obtained, in an arms-length, independent manner in dealings with its affiliate. FERC must review the application pursuant to its exclusive While pipelines and LDCs remain closely regulated, natural gas jurisdiction under Section 3 of the NGA. Depending on the location traders are not heavily regulated. FERC Order No. 547 grants any of the proposed project (onshore or offshore), the US Coast Guard person who is not an interstate pipeline the blanket authority to and Maritime Administration (MARAD) may have jurisdiction. purchase and resell natural gas. Those purchases and sales are made The US Coast Guard and MARAD has jurisdiction for the siting at negotiated, free market prices. This blanket authority does not and operation of all LNG terminals in federal waters, pursuant to

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the Deepwater Port Act. FERC’s authority, as amended under the will supply to the facility; nor can FERC condition an approval on EPAct, is addressed in question 9.2. the requirement that the LNG terminal offers service to customers other than the applicant, or any affiliate of the applicant, in order to secure the order. 9.2 What governmental authorisations are required to construct and operate LNG facilities? 10 Downstream Oil As noted in question 9.1, the first step in obtaining approval for the construction and operation of an LNG facility in the US is to present an application to import/export gas to the Assistant Secretary of 10.1 Outline broadly the regulatory framework in relation USA Fossil Energy at the DOE. to the downstream oil sector. Pursuant to Section 3 of the NGA, (as amended by the EPAct), FERC has exclusive authority to approve or deny an application Since the 1990s, the US petroleum market has been relatively free for the “siting, construction, expansion, or operation” of an LNG from legislation that regulates, subsidises or taxes oil. However, terminal. FERC must review the environmental impact of the the Petroleum Marketing Practices Act (PMPA) (15 U.S.C. §2801– proposed LNG project pursuant to the National Environmental 2806) sets certain requirements for contracts between gasoline Policy Act (NEPA) and for compliance with other environmental refiners or distributors and their retailers. and safety standards. This includes a review of the potential impact to public safety, including thermal and flammable vapour exclusion 10.2 Outline broadly the ownership, organisation and zone modelling and marine safety analysis. FERC also conducts a regulatory framework in relation to oil trading. Cryogenic Design Review to verify the safe design of the facilities and the reliability of the system. As part of the approval process, the Physical trading of oil is carried out by oil producers and oil company must obtain a water quality certificate, a dredge fill permit trading merchants who buy, store, transport and sell oil. Crude and Coastal Zone Management clearance from the state in which oil futures and options are traded through standardised contracts construction will occur. on commodities exchanges, primarily the New York Mercantile FERC continues to monitor the design and construction of the Exchange (NYMEX). The main contract for trading futures and project through detailed monthly reports. After construction options is the NYMEX contract for West Texas Intermediate crude, is complete, prior to commencing operations, the company priced for delivery at Cushing, Oklahoma, the country’s largest must receive written approval from the Director of the Office of point for storage and delivery of crude oil. Oil trading is regulated Energy Projects. Thereafter, the facility will be subject to periodic primarily by the US Commodity Futures Trading Commission inspection by FERC, and the operator is required to file annual (CFTC). reports summarising plant operations, maintenance activity, and accounts of other events. The Department of Transportation has authority under the Pipeline Safety Act to prescribe minimum 11 Competition operation, maintenance and safety standards for the location, design, installation, construction, inspection and testing standards of LNG 11.1 Which governmental authority or authorities are facilities. responsible for the regulation of competition aspects, The US Coast Guard and Maritime Administration administer a or anti-competitive practices, in the oil and natural gas sector? similar process for the approval of LNG projects in federal waters. Pipelines leading from deepwater LNG terminals come under FERC jurisdiction above the “high water mark” when the pipeline comes Competitive and anti-competitive practices in the industry are onshore. monitored mainly by the Department of Justice (DOJ), Federal Trade Commission (FTC) and FERC. The DOJ and FTC enforce the anti-competition laws of general application (called “antitrust 9.3 Is there any regulation of the price or terms of service laws” in the US) established under the Hart Scott Rodino Antitrust in the LNG sector? Improvements Act of 1976 (HSR), the Clayton Antitrust Act (1914), the Federal Trade Commission Act (1914) and the Sherman Antitrust The LNG sector is lightly regulated by FERC. LNG projects are Act (1890). In addition, certain FERC orders are designed to prevent not required to offer open access service or to maintain tariffs or anti-competitive behaviour in the natural gas markets. Competition rate schedules. The rates, terms and conditions of LNG terminalling principles also inform the review and approval by FERC of the rates services are mutually agreed to by the parties. The EPAct provides, and of tariffs for transportation and storage service. FERC created however, that any order for an LNG terminal that offers open access its own Office of Enforcement with responsibility for identifying shall not result in subsidisation of expansion capacity by existing and taking action against fraud and anti-competitive practices in customers or degradation of service to existing customers. the electricity and gas sectors. FERC and Commodities Futures Trading Commission monitor oil and natural gas trading practices. 9.4 Outline any third-party access regime/rights in In addition to the federal agencies, most states have antitrust laws respect of LNG facilities. generally based on the federal antitrust statutes that are enforced by the state attorney general or private plaintiffs. Unlike interstate pipelines, where open access regimes are required by FERC, third-party access rights to LNG facilities depend upon the 11.2 To what criteria does the regulator have regard in market and contractual circumstances of a particular LNG facility. determining whether conduct is anti-competitive? Currently, after the Hackberry decision in 2002, later codified in the EPAct of 2005, FERC cannot deny an application solely on the basis In reviewing mergers or acquisitions in the gas market, the FTC that the applicant proposes to use the LNG terminal exclusively or and DOJ examine whether the effect “may be substantially to lessen partially for gas that the applicant or an affiliate of the applicant

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competition, or to tend to create a monopoly”. The EPAct provides that it is unlawful for an entity to use a “manipulative or deceptive 12 Foreign Investment and International device or contrivance” in connection with any purchase or sale Obligations of natural gas or purchase or sale of any transportation services. The individual states also have antitrust laws that may be used to 12.1 Are there any special requirements or limitations on challenge anti-competitive conduct. acquisitions of interests in the natural gas sector (whether development, transportation or associated infrastructure, distribution or other) by foreign 11.3 What power or authority does the regulator have to companies? preclude or take action in relation to anti-competitive USA practices? Any transaction by or with any foreign person which could result in Generally, the regulators have the broad authority to investigate, control of a US business by a foreign person is subject to review by prevent and penalise unfair methods of competition. All of the the Committee on Foreign Investment in the United States (CFIUS). federal and state antitrust enforcement agencies have the power CFIUS is an inter-agency committee chaired by the US Secretary of to seek monetary damages and a variety of equitable remedies for Treasury which conducts reviews of foreign investments pursuant to violation of the anti-competition laws they are authorised to enforce. the Foreign Investment and National Security Act of 2007 (FINSA), Many of these laws carry criminal penalties, and damages are subject which amended Section 721 of the Defense Production Act of to increase for punitive or exemplary purposes. The EPAct grants 1950. Under FINSA, the US President, acting through CFIUS, is FERC authority to impose fines or penalties of up to $1 million per authorised to review foreign acquisitions of controlling interest in day for violations of the NGA, any rule, regulation or order issued US businesses if national security is implicated. The President may by FERC. In addition, the Clayton Act authorises private parties prohibit a transaction (or force divestiture of a completed transaction to sue for triple damages when they have been harmed by conduct if the transaction has not previously passed muster with CFIUS) that that violates either the Sherman or Clayton Act and to obtain a court threatens to impair the national security of the US. order prohibiting the anti-competitive practice in the future. A CFIUS review focuses on a foreign person’s power to control a US business, not on the form of the transaction. Thus, a covered transaction may include asset acquisitions, equity investments, joint 11.4 Does the regulator (or any other Government ventures and long-term leases. Providing notice of a transaction to authority) have the power to approve/disapprove mergers or other changes in control over businesses CFIUS is voluntary, but CFIUS may initiate a review even after the in the oil and natural gas sector, or proposed closing of a transaction if approval has not been sought and granted acquisitions of development assets, transportation or before closing. CFIUS reviews are subject to statutory timeframes associated infrastructure or distribution assets? If so, that require a CFIUS review of a completed notification within what criteria and procedures are applied? How long 30 days and completion of an investigation, if deemed necessary, does it typically take to obtain a decision approving or within 45 days, with additional time authorised under certain disapproving the transaction? conditions. FINSA expanded the mandate of CFIUS to review foreign investments, including consideration of the potential effect HSR requires companies planning large mergers and acquisitions on critical infrastructure and critical technologies. to notify the government of their plans in advance. Approval can be obtained within 30 days following submission of all required Lastly, the Mineral Leasing Act prohibits foreign ownership of information, although the approval process may take much longer leases except through stock ownership in a domestic corporation. if a potentially material effect on competition is suspected. As The foreign stockholders cannot come from countries that deny discussed in question 11.2, the FTC will examine whether the similar privileges to citizens of the US. proposed transaction significantly lessens competition in the relevant market. FERC has jurisdiction under Section 7 of the 12.2 To what extent is regulatory policy in respect of the NGA to approve the acquisition or abandonment of jurisdictional oil and natural gas sector influenced or affected facilities, but its authority does not generally extend to merger or by international treaties or other multinational other changes in control in the business sector. arrangements? Many state laws require their public utility commissions to review The importation or exportation of natural gas to a country with and approve the change of control of a state jurisdictional gas utility. which the US has an effective free trade agreement is deemed to be Generally, state laws require a demonstration that a proposed change in the public interest, and is usually not controversial. For example, of control is in the public interest by showing net benefits for, or no applications for export of LNG to free trade agreement countries net harm to, customers of the regulated utility. State laws may also are generally required to receive automatic approval by the DOE, require a demonstration that the acquiring entity has the financial, while applications for export to non-FTA countries are reviewed on managerial and technical expertise or capability to own and operate a case-by-case basis. the gas utility. Reviews of the change of control of a gas utility by a state public utility commissions normally take three to 12 months Oil and petroleum imports are often entitled to duty free treatment for completion. under several trade agreements and preferential trade programmes.

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departed from its own precedent by directing the pipeline company 13 Dispute Resolution to recover costs of expansion incrementally, thus violating the non- discriminatory provisions of the Natural Gas Act and imposing 13.1 Provide a brief overview of compulsory dispute unfair retroactive remedies. resolution procedures (statutory or otherwise) applying to the oil and natural gas sector (if any), including procedures applying in the context of 14 Updates disputes between the applicable Government authority/regulator and: participants in relation to oil and natural gas development; transportation pipeline 14.1 Please provide, in no more than 300 words, a USA and associated infrastructure owners or users in summary of any new cases, trends and developments relation to the transportation, processing or storage in Oil and Gas Regulation Law in your jurisdiction. of natural gas; downstream oil infrastructure owners or users; and distribution network owners or users in Crude Oil Exports relation to the distribution/transmission of natural gas. In December of 2015, the 40-year general ban on crude oil exports was lifted. By October of 2018, the US was exporting an average of There are no provisions mandating compulsory dispute resolution 1,847,000 barrels per day of crude oil. In light of the shale boom, the procedures in suits with the government. For private parties, light, sweet crude derived from shale formations, which is not well- FERC adopted Order No. 578, which allows parties to voluntarily suited for the US Gulf Coast refineries, represents a particularly submit disputes to alternative dispute resolution procedures, such attractive commodity to export. as settlement negotiations, conciliation, facilitation, mediation, fact- finding, mini-trials and arbitration. Energy Policy Modernization Act In the summer of 2016, the United States Senate passed an almost 800-page bill dealing with many aspects of energy, called the Energy 13.2 Is your jurisdiction a signatory to, and has it duly ratified into domestic legislation: the New York Policy Modernization Act. One of the more significant provisions Convention on the Recognition and Enforcement of of the bill dealt with improving the procedures for the export of Foreign Arbitral Awards; and/or the Convention on domestically produced natural gas by way of LNG. The bill fell just the Settlement of Investment Disputes between States short of passage in a bicameral Congressional conference at the end and Nationals of Other States (“ICSID”)? of 2016. A new bill, the Energy and Natural Resources Act, was introduced in 2017. It builds on the Energy Policy Modernization Although the US is a signatory of the New York Convention on the Act, addressing a wide range of issues. It features 11 titles on the Recognition and Enforcement of Foreign Arbitral Awards, it applies following topics: efficiency; infrastructure; supply; accountability; the Convention “only to recognition and enforcement of awards conservation; federal land management; National Park System made only in the territory of another Contracting State”, and only to management; sportsmen’s issues; water infrastructure; natural “differences arising out of legal relationships, whether contractual hazards; and Indian energy. While enactment of this bill is unlikely, or not, which are considered as commercial under the national law”. several of its provisions were incorporated into other bills that were The US is also a signatory to the Convention on the Settlement of enacted throughout 2018. Investment Disputes between States and Nationals of Other States. Election of Donald Trump as President In view of the election of Donald Trump as President in November 13.3 Is there any special difficulty (whether as a matter of 2016, a regulatory environment that is friendlier to the energy of law or practice) in litigating, or seeking to enforce industry is evolving, but vocal opposition to many initiatives of judgments or awards, against Government authorities the new administration are surfacing. The current White House or State organs (including any immunity)? administration, with its “America First Energy Plan”, has created an environment that many consider very friendly to the oil and gas As natural gas production, transmission and local distribution industry. Regulations have been aggressively rolled back and goals facilities in the US are not typically owned by the federal government of “energy independence” and “energy dominance” set. Changes or by the individual states, this question has limited application in were implemented very quickly, causing some in the industry to the US. Moreover, such suits would be subject to the restrictions of become concerned about uncertainty and the impact on oil prices. the Eleventh Amendment to the United States Constitution and the As changes continue to be made, it remains to be seen how they doctrine of sovereign immunity. will impact the industry over time. What is certain is that all of this Certain distribution systems may be owned and operated by change will come with unique challenges. municipalities or other governmental entities, and the extent to which judgments may be enforced against such entities is a matter of state law and, therefore, varies among the states. Acknowledgment The authors would like to thank Annie G. McBride and Violet A. 13.4 Have there been instances in the oil and natural gas Obioha for their invaluable assistance in the preparation of this sector when foreign corporations have successfully chapter. obtained judgments or awards against Government authorities or State organs pursuant to litigation before domestic courts?

Yes. An example of such litigation is the case of TransCanada PipeLines Ltd. v. F.E.R.C., 24 F.3d 305 (D.C. Cir. 1994). In that case, the District of Columbia Circuit ruled in favour of Canada- based TransCanada. The D.C. Circuit found that FERC arbitrarily

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John P. Cogan, Jr. James A. Cogan Stone Pigman Walther Wittmann PLLC Stone Pigman Walther Wittmann PLLC 1001 McKinney, Suite 1600 1001 McKinney, Suite 1600 Houston, TX 77002 Houston, TX 77002 USA USA

Tel: +1 713 651 1881 Tel: +1 713 651 1881 Email: [email protected] Email: [email protected] URL: www.stonepigman.com URL: www.stonepigman.com USA

John is a veteran of structuring, negotiating and completing international James is an experienced practitioner in the areas of upstream business matters, particularly related to energy. Examples of John’s transactions representing E&P and service providers in acquisitions work are his involvement in: the development of LNG liquefaction and divestitures, financing and corporate structuring. He also has projects in Canada, Colombia, Indonesia, Nigeria, Qatar, Trinidad, experience in midstream projects, particularly LNG facilities and the United States and Yemen; LNG regasification projects in Canada, transportation, pipeline development and transportation, maritime Chile, Jamaica, Mexico and the United States; upstream production- transportation, and oil and gas marketing. He is a member of the sharing and other types of oil and gas development contracts in Bolivia, Association of International Petroleum Negotiators and the Institute for Burma (Myanmar), Colombia, Ecuador, Kazakhstan, Saudi Arabia, Energy Law. He is a graduate of the University of Texas School of Law the United States and Venezuela; downstream processing plants and a member of the Texas Bar. in Argentina, Colombia, Mexico and the United States; and power projects in Argentina, Brazil, China and the Dominican Republic. John also serves as an arbitrator and expert witness in disputes relating to these types of matters.

Stone Pigman Walther Wittmann PLLC has extensive experience assisting clients in all aspects of energy-related transactions, business formations, project financings, M&A, strategic alliances and the purchase and sale of major energy assets. In addition to developing project structures, we often serve as lead counsel on contracts for joint ventures, joint operations, sales and purchases, processing, services, transportation, development, investment, production sharing, farm-out agreements, drilling, storage, construction, operation and management and technology licensing. We have handled hundreds of domestic and international energy deals that involve the exploration, extraction, processing, transportation and sale of hydrocarbons, renewables and other natural resources. Our clients include small and large entities, major and independent oil companies, drilling companies, oil field service providers, lenders, developers, government agencies and foreign investors.

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Venezuela Juan Carlos Garantón-Blanco

Torres, Plaz & Araujo Valentina Cabrera Medina

which make up 61% of Venezuela’s electricity generation needs, 1 Overview of Natural Gas Sector while the remainder is generated from fossil fuels, from which diesel makes up a significant amount and gas a limited amount (close to 1.1 A brief outline of your jurisdiction’s natural gas 34%), the remainder is supplied as NGL (mostly in the form of LPG). sector, including a general description of: natural Close to 100% of motor vehicles are fuelled with gasoline, even gas reserves; natural gas production including when the Government has put in place programmes to foster the the extent to which production is associated or use of natural gas and provided for the mandatory installation of gas non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) systems in most new vehicles; said efforts have fallen short in light liquefaction and export facilities, and/or receiving and of the very limited existence of gas fuelling facilities and the heavily re-gasification facilities (“LNG facilities”); natural gas subsidised price of gasoline. pipeline transportation and distribution/transmission In any case, the importance of gas cannot be downplayed, as it has network; natural gas storage; and commodity sales become a significant alternative for low-income families in urban and trading. areas which rely on LPG distribution networks across Venezuela. The current data on Venezuelan gas reserves is not uniform and hence there can be interesting differences between what the Venezuelan 1.3 To what extent are your jurisdiction’s natural gas Government reports and what independent parties report. Under any requirements met through domestic natural gas of the sources, Venezuela maintains the largest reserves of natural production? gas in the Americas, and some of the largest reserves worldwide. Close to all natural gas production is used within Venezuela. Up to Data provided by State-holding oil and gas company “Petróleos 2015, Venezuela imported some 400 mmcfd of gas from Colombia de Venezuela, S.A.” (hereinafter referred to as “PDVSA”), in its through the Trans Andean Antonio Ricaurte pipeline, built jointly financials for financial years 2015/2016, show that at the close between Colombia’s Ecopetrol and Venezuela’s PDVSA Gas of 2016 proven developed reserves totalled 20.27 tcf. Analysts (an affiliate of PDVSA). In its financial reports, PDVSA has not identified that initial commercial gas reserves were at 22.36 tcf evidenced gas imports for the year 2016 (the same is confirmed and remaining gas reserves stood at 14.88 tcf at the close of 2016. in OPEC’s yearly report, as well as by some analysts). Cardon IV While most of the reserves consisted of associated gas (and hence (Perla) production made up for most of the prior shortfall (reserves onshore), most of the non-associated gas reserves corresponded stand at 6.53 tcf, and production for 2016 stood at 500 mmcfd). to offshore projects concentrated in two major areas, Urdaneta (located on the north-western shores of Venezuela) and Mariscal A significant amount of associated gas produced is reinjected Sucre (located north-east of Venezuela). into oil field production operations, other amounts are devoted to the petrochemical market (mostly handled by State-owned or Based on PDVSA’s financials for 2016, total natural gas production -controlled entities), and to energy generation in gas and combined- on December 31, 2016 was estimated at 7,926 mmcfd. NGL cycle power plants (handled by PDVSA or CORPOELEC), and production was estimated at 131.3 mbpd. According to the same some of it is used for domestic gas distribution through gas pipelines report, of the whole 7,926 mmcfd of natural gas (mostly methane or GLP containers consumption. gas) produced in Venezuela during 2016, 2,476 mmcfd were sold in the domestic market, and 2,260 mmcfd were reinjected to oil fields. Also, 3,192 mmcfd were destined for PDVSA’s internal use (mainly 1.4 To what extent is your jurisdiction’s natural gas as fuel in field and refinery operations). production exported (pipeline or LNG)?

Gas is produced in Venezuela by PDVSA Gas (a subsidiary of 1.2 To what extent are your jurisdiction’s energy requirements met using natural gas (including LNG)? PDVSA) or by private parties (under E&P licences, whether operating on their own or co-ventured with PDVSA), which may be allowed under the law and/or the terms of their licences to market Gas does not play a significant role in Venezuela’s current energy mix. produced gas domestically or overseas (to date, onshore licences With regards to energy generation, according to Venezuela’s State- allow for exclusive sale in the domestic market, while awarded owned electricity utility parent company, CORPOELEC, most of offshore licences allow for overseas sales or a mixed approach). Venezuela’s energy generation is supplied from hydraulic sources

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No exports of natural gas took place in the year 2016 (or during prior Under such a scenario, it remains clear that Venezuela’s oil and gas years). The Perla project in the Dación IV block is expected to market future relies on the ability to attract private investors, which may part of its massive production in international markets on its own, or to allow for much-needed investment in oil production, and may also sell domestically to PDVSA Gas for the latter to resell both domestically allow Venezuela to release financial resources which are gravely and internationally (initially through the use of the Antonio Ricaurte needed in dealing with restructuring debt service and supplying pipeline, linking with the Colombian north-eastern market). No other basic public goods to the Venezuelan population. projects (i.e. offshore projects) are expected to advance any export sales any time soon. The parties to the Perla project are still negotiating with 2.2 To what extent are your jurisdiction’s energy PDVSA (which has a buy-in interest in the project) the ratio of export/ requirements met using oil? local sales as well as other significant project issues.

Venezuela PDVSA Gas is currently responsible for all downstream gas-related As referred to above, Venezuela’s energy mix is composed mainly operations in Venezuela, including commercialisation. All onshore by hydro and thermal (fossil fuel) generation. licensees sell to PDVSA Gas at domestic market rates. It is envisaged Based on official data provided by the State-controlled energy that the commercial feasibility for offshore gas projects will rely company CORPOELEC, 62% of the country’s energy is produced heavily on the possibility for the licensees to market at least part in the energy park located in the Guayana Region, which consists of the gas produced overseas (which may be needed under current of several hydroelectrical generation structures. The other 35% of Unitisation Agreements between the Governments of Trinidad & the energy mix is covered by thermoelectrical generation facilities Tobago and Venezuela for certain Plataforma Deltana projects). throughout the rest of the country. Some of these thermoelectric facilities use oil and/or gas in order to generate the necessary heat 2 Overview of Oil Sector to initiate their respective process. However, in recent years there have been projects to turn the oil-consuming facilities into only gas- consuming facilities, in order to save oil for trading. This is the case 2.1 Please provide a brief outline of your jurisdiction’s oil for the India Urquía, Termocarabobo and Juan Bautista Arismendi sector. y Luisa Cáceres de Arismendi generation facilities.

From the second half of 2015 to date, there has been a significant drop 2.3 To what extent are your jurisdiction’s oil requirements in both production and export volumes; this is against a backdrop met through domestic oil production? where the price of oil and oil products in international markets fell sharply and – while increasing somewhat during the first half of In general, all domestic requirements for oil products are met 2017 – continues to remain low (in light of the substantial budgetary through domestic production. According to the PDVSA’s Financial needs of Venezuela). According to PDVSA’s Financial Statements Statements Management Report for the financial year 2016, as of Management Report for the financial year 2016, hydrocarbons December 31, 2016, 510 mbpd was supplied to the domestic market. exports dropped to 2,189 mbd. This represents a reduction compared to the financial year 2015, where Venezuela’s exports were close to 2,425 mbd. OPEC puts Venezuela’s production during the last 2.4 To what extent is your jurisdiction’s oil production quarter of 2016 at 2,021 mbd (according to secondary sources), and exported? during the second quarter of 2017 at 1,955 mbd. At the end of 2016, proven reserves stood at 302,250 mmb, according Based on the data provided by PDVSA in its financials for to PDVSA’s Financial Statements Management Report for the 2015/2016, Venezuela exported 1,818 mbpd of crude oil during financial year 2016. Only 13.56% of the proven reserves (40,995 2016. The exports were delivered to the following countries: mmb) correspond to conventional crude oil (condensates, light, Country Volume (mbd) medium and heavy oil) and the remaining 86.43% to extra-heavy Aruba 18 crude oil reserves (261,253 mmb), most of which is located in the Bahamas 13 Orinoco Oil Belt (“FPO”) area. Significant reserves relate mostly to Belgium 7 extra-heavy crude oil, of which the cost of extraction and upgrading China 354 tends to be significantly higher. In fact, a closer look reveals that Cuba 45 developed reserves stand at 12,944 mmb. Curacao 122 Developing the said reserves requires a significant investment France 13 not only in production but also in upgrading the extra-heavy oil Germany 7 (“EHO”) to produce synthetic crude oil (“SCO”) which may be India 429 processed in refineries accepting such a diet, or alternatively, it Jamaica 2 requires combining the EHO with light oil in order for the same Malaysia 24 to be marketed as blend (diluted crude oil or “DCO”). Blending Russia 3 avoids the costs and time required for building the facilities needed Spain 8 to upgrade the EHO, but requires buying large amounts of diluent Sweden 23 (light crude oil) from overseas in order to blend and sell DCO (at a Thailand 5 price lower than the price paid for the diluent). United Kingdom 4 United States of America 734

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Orgánica de Hidrocarburos Gaseosos” or “LOHG”) published in 3 Development of Oil and Natural Gas Official Gazette No. 36,793, dated September 23, 1999. Basic policing and regulatory powers correspond to the Federal 3.1 Outline broadly the legal/statutory and organisational Government through the Presidency and the Ministry of Petroleum. framework for the exploration and production In the case of gas activities there is a limited degree of regulatory (“development”) of oil and natural gas reserves power vested in the National Gas Agency (“Ente Nacional de Gas” including: principal legislation; in whom the State’s or “ENAGAS”). mineral rights to oil and natural gas are vested; Government authority or authorities responsible for The main legal and regulatory instruments which govern oil activities the regulation of oil and natural gas development; and and which are generally applicable to all participants are: the LOH; current major initiatives or policies of the Government General Regulations to the 1943 Hydrocarbons Law (inasmuch as

(if any) in relation to oil and natural gas development. its provisions do not collide with those under the LOH); Decree No. Venezuela 1,648, dated April 24, 2002, which limits the reservation of oil by- Ownership of oil and gas reservoirs located within Venezuela products to the extent they were already traded by PDVSA affiliates; (including its territorial sea, EEZ and continental shelf) is vested on Resolution No. 335, dated December 31, 2004, related to gasoline Venezuela as per the Constitution (Article 12), and the same cannot border trade; Resolution No. 236, dated October 10, 1995, related to be sold, mortgaged or otherwise encumbered. The ownership and the export of fuels; Decree No. 2,335 published in Official Gazette No. management of hydrocarbons reservoirs is vested exclusively at 37,734, dated July 17, 2003, the creation of the Commission which Federal Level (Article 156, cardinal 12 of the Constitution), and sets royalties; Resolution No. 197 published in Official Gazette No. hence both ownership (and hence the granting of mineral rights) as 37,753, dated August 14, 2003, which provides a general consumer well as regulatory powers are vested on the same. tax break for taxpayers dedicated to refining or manufacturing While ownership is vested on the Federal Level of Government hydrocarbons; and Resolution No. 336 published in Official Gazette (“Poder Público Nacional”), under Articles 113 and 302, mineral No. 37,853, dated December 9, 2004, on fuel retail sales. rights to explore for and extract hydrocarbons can be granted to The main legal and regulatory instruments governing gas activities investors (whether local or foreign), whether acting on their own or are: the LOHG; its General Regulations, as per Decree No. 840 co-ventured with the Venezuelan State. published in Official Gazette No. 5,471, dated May 31, 2002; With the passing of the Gas Master Law (“Ley Orgánica de Resolution No. 194 published in Official Gazette No. 37,505, dated Hidrocarburos Gaseosos”) in early 1999, the framework has been August 14, 2002, which delegates to the ENAGAS certain powers; segregated between gas activities and oil activities. The same was Resolution No. 216 published in Official Gazette No. 37,645, dated acknowledged in the 1999 Constitution (approved later in the said March 7, 2003, which sets the fiscal value of associated natural gas; year), which provides for the reservation of oil activities in its Resolution for the price setting of methane gas at dispatch centres; Article 302 (under a reservation, which must be provided for under Resolution for the setting of distribution charges for methane gas; a Master Law – Ley Orgánica – the relevant activity is extracted Resolution No. 165 published in Official Gazette No. 36,227, from the constitutional principle of economic freedom, and hence dated June 13, 1997, for LPG Price Setting; and Resolution No. the activity can only be advanced by private parties if and when 197 published in Official Gazette No. 37,982, dated July 19, 2004, approved by the State, and under the conditions provided therefor). regarding natural gas for vehicles. The constitutional reservation may expand to other activities if provided by a Master Law, but the current constitutional reservation 3.2 How are the State’s mineral rights to develop oil does not refer to gas activities, nor does it explain whether private and natural gas reserves transferred to investors or parties can engage in oil activities or how, and hence the same is to companies (“participants”) (e.g. licence, concession, be supplemented by the law. service contract, contractual rights under Production An additional provision, Article 303, expresses that the Venezuelan Sharing Agreement?) and what is the legal status of those rights or interests under domestic law? State will own all of the shares of the company created to direct and coordinate the oil activity, i.e. PDVSA. Under the same, PDVSA could not be subject to privatisation by means of sale or disposition According to the LOHG, E&P activities related to non-associated of its shares, nor could the same become a publicly traded entity gas reservoirs can be advanced by State instrumentalities (such as (such as Petrobras or Ecopetrol) as it was envisioned during the PDVSA Gas) or by private parties. Private parties require a licence second half of the 1990s. issued by the MPPP. Under the LOH, investors may only participate in E&P activities for oil reservoirs by entering into an Empresa The current legal framework for oil is covered under the Mixta joint venture with a PDVSA affiliate. Hydrocarbons Master Law (“Ley Orgánica de Hidrocarburos” or “LOH”) issued by means of a Presidential Decree with force of Licences under the LOHG are granted by the Ministry of Petroleum law in 2001, and subject to a single amendment in 2006 (Official for the carrying out of exploration and production within the assigned Gazette No. 38,493, dated August 4, 2006). The law encompasses area, at the sole risk of licensee, in exchange for the payment of oil upstream activities (named primary activities), as well as royalties identified in the law or the licence. The licence affords midstream and downstream activities (excluding gas activities, as the licensee a personal right (not a real estate right) which is to be referred to below, and petrochemical activities, which are governed respected while the same remains in force. Such right can be assigned by a particular law). with the prior consent of the Ministry, but cannot be formally pledged, mortgaged or encumbered. The rights include ownership of extracted Natural gas activities, which encompass upstream activities on non- gas at the wellhead and the ability to freely market the gas (with the associated gas reservoirs as well as midstream and downstream limitations provided under the licence). At the end of the term for the activities on all gas produced (including trading, collecting, licence, the rights and any main assets devoted to the activities revert processing, industrialising, transporting and distributing, among to Venezuela without any additional compensation and free of charges others) whether from non-associated or associated gas reservoirs, or burdens. The main terms and conditions are provided in the LOH, are covered under the Gas Hydrocarbons Master Law (“Ley its General Regulations and the relevant licence.

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Under the LOH a private investor may only participate in E&P Under the LOH and the relevant award instruments, the Empresa activities by co-venturing with a State-owned entity under particular Mixta has to pay different royalties, contributions and taxes, which conditions. Said joint venture is called an Empresa Mixta, and while can be considered fairly regressive as most of the same are computed under the law there is no particular requirement for a particular legal on a gross basis. The standard royalty is 30% of the volume of vehicle or form to be adopted, so far the same has been advanced hydrocarbons extracted, which is topped up with an extraction as a Compañía Anónima (a company in shares) where the State tax of 3.33%. A reduction to 20% may be afforded under certain instrumentality (a PDVSA affiliate, mostly the “Corporación conditions in the case of mature or extra-heavy oil fields. Venezolana del Petróleo, S.A.” or “CVP”) owns a majority stake (the Other royalties and taxes under the LOH include: (i) surface tax; (ii) law calls for more than a 50% stake, but in practice the State has held a own consumption tax; and (iii) export registrar tax. 60% stake), and is vested with positive control of certain managerial On top of the same, corporate income tax applies, subject to: a decisions and the day-to-day management of the Empresa Mixta. Venezuela particular schedular rate of 50% on the net taxable income of The set-up of an Empresa Mixta requires Congress’ (“Asamblea the company (which nowadays is excluded from adjustment per Nacional”) approval (which sets a framework of conditions, as well inflation); and a windfall tax, applicable on the Empresa Mixta on as a Decree granting the relevant hydrocarbons rights, a Resolution the local sale of crude oil (and synthetic crude oil) or their exports. from the Ministry of Petroleum determining the relevant area, an It consists of two separate taxes: (a) a tax on extraordinary prices Empresa Mixta agreement and the company bylaws, among others). is equal to 20% over any excess of the realisation price for the One particular feature of the rights afforded is that while said rights Venezuelan basket over the price set in Venezuela’s annual budget, encompass ownership of the oil and associated gas extracted at the provided the latter does not exceed USD 80/bbl; and (b) a tax on wellhead, there is a reservation on trading and marketing and, as a exorbitant prices, i.e. the realisation price for the Venezuelan basket result, the company can only sell its oil (unless the same is vertically exceeds USD 80/bbl. integrated and manufactures products or synthetic crude oil) to a Government instrumentality (commonly “PDVSA Petróleo, S.A.” or In the case of the latter, the bracket is made up of three different “PPSA”). rates as follows: (i) 80% for when the realisation price is in excess of USD 80 but below USD 100; (ii) 90% for when the realisation price is in excess of USD 100 but below USD 110; and (iii) 95% for 3.3 If different authorisations are issued in respect of when the realisation price is in excess of USD 110. different stages of development (e.g., exploration appraisal or production arrangements), please specify Last but not least, the Congressional approvals to date consistently those authorisations and briefly summarise the most call for application of a “shadow” royalty, under which the Empresa important (standard) terms (such as term/duration, Mixta must ultimately pay an amount if there is an excess of over scope of rights, expenditure obligations). 50% of the yearly value of crude oil extracted against the sum of all amounts paid during such year, such as income tax, royalty, With regards to the LOHG, neither the law nor the Regulations severance taxes, LOCTI contributions and any other levies, taxes or provide for different consents or authorisations by the MPPP at contributions based on revenues (gross or net). the different stages (e.g. prospection, exploration, appraisal); The regime is far simpler for gas licences, the LOHG sets in nonetheless, it is common for the setting of the same in the relevant favour of the State a royalty of 20%, and certain licences provide licence and according to the corresponding tender protocol for the for additional royalties commonly ranging between 1% and 7%. process (if the award is the result of a bidding or auction process). Corporate income tax is applied under the general rules, with a top It is also common to set certain minimum exploratory work rate of 34%. programmes and a budget, as well as a plan for relinquishment of areas. For pursuing a LOHG E&P licence the conditions are: (i) a description of the project; (ii) the proposed term, which shall not 3.6 Are there any restrictions on the export of exceed 35 years, renewable for an additional term not exceeding production? 30 years; (iii) submission of a five-year exploration plan and description of the minimum work programme and budget, which There are no current restrictions for gas, but the LOHG could shall be submitted in the same period; and (iv) any special economic provide restrictions as the statutes afford priority to the domestic consideration offered (i.e. in addition to standard royalties). market in a very broad and unspecified manner. The limitations are commonly covered in the relevant licences which refer not only to whether the output will be marketed locally (initial onshore licences, 3.4 To what extent, if any, does the State have an such as those for YucalPlacer) or both locally and overseas (Cardon ownership interest, or seek to participate, in the IV ) but which may encompass the obligation to erect liquefaction development of oil and natural gas reserves (whether as a matter of law or policy)? facilities and pursue the sale of LNG (such as the licences for Plataforma Deltana). It is always advisable to have clear provisions in the relevant licence allowing for the export of produced gas. For oil E&P activities, see the answer to question 3.3 above. In the case of upstream gas activities, some of the licences call for As referred to above, in the case of oil production, crude oil may risk exploration and the ability for PDVSA Gas to back in to a only be sold by the Empresa Mixta to a PDVSA affiliate. The LOH limited non-controlling interest (cf. Cardon IV project or some of and Decree No. 1,648, dated January 15, 2002, have been read the Plataforma Deltana projects). as allowing for by-products and synthetic crude oil (SCO) to be exported by the Empresa Mixta. It is always advisable to have clear provisions allowing for the export in the approval from Asamblea 3.5 How does the State derive value from oil and natural Nacional. gas development (e.g. royalty, share of production, taxes)?

Regarding the fiscal take, there is a split between upstream oil and upstream gas.

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3.7 Are there any currency exchange restrictions, or 3.11 In addition to those rights/authorisations required restrictions on the transfer of funds derived from to explore for and produce oil and natural gas, what production out of the jurisdiction? other principal Government authorisations are required to develop oil and natural gas reserves (e.g. Oil Empresas Mixtas as well as gas licensees are vested with rights environmental, occupational health and safety) and from whom are these authorisations to be obtained? (under Exchange Agreements 9 and 37, respectively) to keep the amounts they need in order to comply with their obligations in foreign currency (including payment of dividends to shareholders Some of the key consents and authorisations required are: (i) and payments to creditors). environmental permits and approvals, to be issued by the Ministry of Environment; (ii) drilling permits from the MPPP; (iii) In the case of foreign investments and financing, under CC35 the authorisations for the construction, operation and dismantling of Venezuela bringing of foreign currency into Venezuela by means of international facilities and equipment from the MPPP; (iv) permits for imports, investments (i.e. capital or other forms of equity contributions) and water transport and operations (offshore operations) from the financing in foreign currency may be carried out under DIPRO or Agency for Waterways (INEA); and (v) permits, consents and DICOM, as identified in the Government programming. This has supervision from Ministries and agencies in charge of the health and proven to be a problem, as the programing is fairly opaque. safety of workers such as the INPSASEL, among others. Under the current F/X Regulations there is no requirement for contributions in foreign currency, or loans granted to companies 3.12 Is there any legislation or framework relating to incorporated in Venezuela, or to branches of foreign companies set the abandonment or decommissioning of physical up in Venezuela, to be brought into Venezuela or transformed into structures used in oil and natural gas development? If Bolivars. so, what are the principal features/requirements of the legislation? 3.8 What restrictions (if any) apply to the transfer or disposal of oil and natural gas development rights or There are few rules and regulations regarding abandonment and interests? decommissioning, and the same correspond to arcane provisions under former Hydrocarbons Law Regulations (still in place) and The transfer of a gas licence requires prior consent from the MPPP, more general rules issued by the Ministry of Environment on the which can withhold the transfer, and approval commonly takes a matter. In the case of gas activities, the licence sets the main rules, long time while trying to obtain payment of an “assignment bonus” including the set-up of a trust to fund all relevant costs. In any from the assignee. Further consents may be required from other case, abandonment and remediation must be carried out with the participants under the respective JOA instruments. In addition, the full supervision of the Ministry of Environment. There are also licences commonly include a limited change in control provision some limited provisions for abandonment in the Empresa Mixta which requires consent from the MPPP. agreements. The transfer of shares in an Empresa Mixta also requires consent and possibly right of first refusal of the majority shareholder (CVP) as 3.13 Is there any legislation or framework relating to well as prior consent from the MPPP, and depending on the wording gas storage? If so, what are the principal features/ of the Asamblea Nacional approval, its approval too. Furthermore, requirements of the legislation? there is a direct and indirect change in control provision which requires the MPPP’s consent. Gas storage is broadly regulated under the LOHG and its Regulations. No particular technical rules are provided for other than general industry standards as approved and incorporated under 3.9 Are participants obliged to provide any security the ISO. As storage has been handled exclusively by PDVSA Gas, or guarantees in relation to oil and natural gas development? to date, there seems to be little incentive to set more detailed rules on the matter. Yes, participants are obliged to provide financial securities. Such financial securities extend to: (a) a parent company guarantee to 3.14 Are there any laws or regulations that deal specifically secure performance; (b) the posting of bonds securing completion of with the exploration and production of unconventional exploration commitments and minimum work programmes; and (c) oil and gas resources? If so, what are their key bonds or securities aimed at covering for environmental liabilities features? and other liabilities associated with the investors’ compliance with Venezuelan laws. Answer not available at time of print.

3.10 Can rights to develop oil and natural gas reserves 4 Import / Export of Natural Gas (including granted to a participant be pledged for security, or booked for accounting purposes under domestic law? LNG)

No, the rights afforded to develop oil cannot be pledged for security. 4.1 Outline any regulatory requirements, or specific The same applies with regards to gas licences. There is no local terms, limitations or rules applying in respect of law limitation for private investors in oil or gas E&P activities to cross-border sales or deliveries of natural gas book reserves. Generally accepted financial standards (international (including LNG). financial standards as applicable in Venezuela) would apply. For participants other than those which produce/extract gas (whether from associated or non-associated reservoirs), a prior permit from

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the MPPP is required for the trading of gas. Gas producers (i.e. those who produce gas within Venezuela under an Empresa Mixta 6.2 What governmental authorisations (including or a licence) can market their gas locally or overseas under the any applicable environmental authorisations) are required to construct and operate oil and natural terms of the relevant licence. gas transportation pipelines and associated Where a permit is required, the same applies whether the sale will infrastructure? be an export sale, an import sale or a sale in the domestic market. The permit is akin to a licence and contains most of its terms and The MPPP grants a permit for the construction and operation of conditions. We know of no permit having been issued to date and transportation pipelines and associated infrastructure. Transportation PDVSA Gas remains as the single marketer in Venezuela. permits identify a relevant area for the purpose of granting a five-year exclusivity right to provide the services for the capacity authorised

Venezuela (expansions and extensions require additional permission). 5 Import / Export of Oil Permission requires a bidding process which may be waived by the MPPP on national interest grounds with prior approval of the 5.1 Outline any regulatory requirements, or specific National Executive. terms, limitations or rules applying in respect Private parties interested in providing transportation services must of cross-border sales or deliveries of oil and oil obtain and keep updated a qualification from the MPPP. The request products. for a qualification must include any and all documents evidencing technical capability as well as proposals for national participation Crude oil marketing (whether domestic or overseas) is reserved and content. The same must be updated every three years when no to State-owned instrumentalities. Marketing of synthetic crude transportation services have been provided during said term. oil (i.e. crude resulting from upgrading processes or SCO) and oil The environmental and health and security permits required are the products may be carried out under the terms of the Empresa Mixta same as those indicated in the answer to question 3.11 above. instruments, including cross-border sales. Both PDVSA affiliates may import crude oil and oil products, but in the case of the former, importing light crude oil and oil products remains an important 6.3 In general, how does an entity obtain the necessary part of the process for upgrading extra-heavy crude oil into SCO or land (or other) rights to construct oil and natural gas blending the same into DCO. transportation pipelines or associated infrastructure? Do Government authorities have any powers of compulsory acquisition to facilitate land access? 6 Transportation Needed land (or other) rights to construct and maintain oil and natural gas transportation pipelines and associated infrastructure 6.1 Outline broadly the ownership, organisational and may be pursued in a negotiated manner by the permit holder; failing regulatory framework in relation to transportation negotiation, both the LOH and the LOHG provide for appropriate pipelines and associated infrastructure (such as means for compulsory acquisition or provision of real estate rights natural gas processing and storage facilities). (easements and rights or way) or other relevant rights of use or way. Since the nationalisation of the oil industry back in 1975, the ownership The granting of easements and rights of way under the LOHG and of transportation facilities and associated infrastructure has remained the LOH (the provisions are mostly similar) would require: (a) for with State-owned entities (PDVSA affiliates), with the exception of privately owned land, if no agreement is met with the owner of the dedicated pipelines for the extra-heavy oil projects (EHOP) of the land, court proceedings are to be initiated, under which the court Orinoco Oil Belt. Here, again, the rules are split for oil transportation will grant the consent, and experts will determine payable amounts (under the LOH) and gas transportation (under the LOHG). for the rights afforded which is to be deposited; and (b) for Federal Lands (“Terrenos Baldíos”) the Federal Government and the permit In the case of oil transportation and ownership of the corresponding holder shall agree on the amount payable, unless the permit holder facilities, the LOH calls for a reservation of activities carried out on is exempted from payment. Expropriation under the LOHG would pipelines and associated infrastructure which were owned and operated require a court expropriation proceeding to be carried out as per the by State-owned entities at the time the LOH entered into force. As general provisions of the Expropriation Law. such, most of the oil pipeline infrastructure is owned and operated by PPSA, and the same cannot be privatised or sold out for private-party operation. New transportation facilities can be erected and operated, 6.4 How is access to oil and natural gas transportation but the LOH is not sufficiently clear as to whether a licence or permit pipelines and associated infrastructure organised? is required. Under the LOHG, gas transportation is a public service and gas Access to oil transportation pipelines is not covered under the LOH, transportation pipelines/systems may be erected and its operation and the same has not been exercised to date by private parties (i.e. carried out by private parties under permits, which are subject to standing alone as carriers) other than by Empresas Mixtas or PPSA for similar terms and conditions (as applicable, e.g. term, reversion of the purposes of dedicated projects, such as Faja Projects, on the basis assets upon termination, etc.) to those of gas E&P licences. Permits of synergy provisions in the relevant Asamblea Nacional approvals or allow for exclusive operation for a five-year term and encompass the Asamblea Nacional agreement. In the said scenarios, the private ownership of the system and the ability to collect a tariff. The carrier parties act as carriers, as commonly the owner carries its own oil is liable from entry point to the designated delivery point, and does through the pipeline and only allows use of excess capacity under not hold title to gas being shipped. The LOHG restricts vertical agreement with third parties. As far as we know, to date, all access integration, calls for open access, and provides for base tariffs and has been carried out under agreements between the interested parties. guidelines to be set by the ENAGAS.

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Under the LOHG and its General Regulations, access is provided Under the LOHG and its Regulations, parties are free to agree for clients under the terms and conditions of the permit (i.e. on the on the terms and conditions under which gas will be transported, basis of the original proposal which identifies the clients), and the although there are limitations imposed by the tariffs (caps) identified carrier is only obliged to commit to additional services if and when by the MPPP and the Ministry of Commerce by joint ruling. Joint economically viable (to engage in an expansion or extension). The Resolution No. DM/139 and DM/019 of 2006, which set the conditions for nominations are to be agreed between the carrier and distribution charges and methodology, remain in place. the shipper, and the risks are borne by the carrier from the entry point through to the delivery point, as identified in the relevant agreement. Other conditions are to be set in supplementary regulations not 7 Gas Transmission / Distribution issued to date. Tariffs are set (as a cap) on a five-year basis by the MPPP and the Ministry of Commerce (acting jointly), but the 7.1 Outline broadly the ownership, organisational and Venezuela relevant tariff may be adjusted annually (as per the discretion of the regulatory framework in relation to the natural gas Ministries) as per an efficiency factor (not set to date) and inflation. transmission/distribution network.

6.5 To what degree are oil and natural gas transportation Under the LOHG, gas distribution is a public service and pipelines integrated or interconnected, and how is co- distribution systems may be erected and their operation carried out operation between different transportation systems by private parties under permits, which are subject to similar terms established and regulated? and conditions (as applicable, e.g. term, reversion of assets upon termination, etc.) to gas transportation permits. Permits encompass To date, all gas systems are owned and operated by PDVSA Gas; ownership of the system and the ability to collect the charges. The hence, there are no regulations or agreements regarding integration, carrier acquires title to the gas at the entry point. interconnection or co-operation in place. At present, no distribution permits have been issued and most distribution systems are owned and operated by PDVSA Gas, the 6.6 Outline any third-party access regime/rights in remainder were privately owned prior to the entering into force of the respect of oil and natural gas transportation and LOHG. associated infrastructure. For example, can the regulator or a new customer wishing to transport oil or natural gas compel or require the operator/ 7.2 What governmental authorisations (including any owner of an oil or natural gas transportation pipeline applicable environmental authorisations) are required or associated infrastructure to grant capacity or to operate a distribution network? expand its facilities in order to accommodate the new customer? If so, how are the costs (including costs The MPPP grants a permit for the construction and operation of of interconnection, capacity reservation or facility distribution systems and associated infrastructure. Distribution expansions) allocated? permits identify a relevant area for the purpose of granting a five- year exclusivity right to provide the services. Permission requires Third-party access to oil transportation facilities and associated a bidding process which may be waived by the MPPP on national infrastructure is broadly provided for in the LOH (Article 21). interest grounds with prior approval of the National Executive. The provisions in the old Hydrocarbons Law Regulations (1943) Periodical qualification similar to the one applicable to transportation and other arcane regulatory provisions related to open access are permits is required. to be applied to supplement the LOH provision. Under the same, The environmental and health and security permits required are the the carrier must come to an agreement with the shipper(s) if there is same as those indicated in the answer to question 3.11 above. spare capacity, and if there is more than one third-party shipper and no agreement is reached the regulations usually call for apportioning the spare capacity on a pro rata basis. If no agreement is reached, 7.3 How is access to the natural gas distribution network the MPPP may force access and provide the conditions for the same. organised? Third-party access under the LOHG and its Regulations calls for the carrier and third-party shipper(s) to agree on conditions and tariffs, Under the LOHG and its General Regulations, access is to be and access is compulsory provided there is spare capacity and no provided for clients as agreed with the distributor, but the MPPP clients are adversely affected. If the parties cannot agree on terms may intervene when the carrier does not provide continuous service and conditions, the MPPP has broad authority to set the same. or discriminate among clients. The MPPP may determine rules for certain volumes to be allocated to domestic consumption or industrial consumption. Tariffs are set (as a cap) on a five-year basis 6.7 Are parties free to agree the terms upon which oil by the MPPP and the Ministry of Commerce (acting jointly), but the or natural gas is to be transported or are the terms relevant tariff may be adjusted annually (as per the discretion of the (including costs/tariffs which may be charged) regulated? Ministries) as per an efficiency factor (not set to date) and inflation.

There are no oil tariffs set by the MPPP for oil transportation 7.4 Can the regulator require a distributor to grant activities. In any case, to the extent applicable, if there is no capacity or expand its system in order to agreement between the parties, the MPPP may apply the basic accommodate new customers? conditions identified in the old Hydrocarbons Law Regulations related to oil transportation concessions. To date, we do not know The regulator can require a distributor to dedicate volumes to certain of a single case where the same has been applied by the MPPP. client bases. The regulator cannot require distributors to expand their systems in order to accommodate new customers.

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7.5 What fees are charged for accessing the distribution 9.2 What governmental authorisations are required to network, and are these fees regulated? construct and operate LNG facilities?

Under the LOHG and its Regulations, parties are free to agree No particular provisions are covered in the LOHG. on the terms and conditions under which gas will be transported, although there are limitations imposed by the tariffs (caps) identified 9.3 Is there any regulation of the price or terms of service by the MPPP and the Ministry of Commerce by joint ruling. Joint in the LNG sector? Resolution No. DM/139 and DM/019 of 2006, which set the distribution charges and methodology, remain in place. There are no regulations in place. Venezuela 7.6 Are there any restrictions or limitations in relation to 9.4 Outline any third-party access regime/rights in acquiring an interest in a gas utility, or the transfer respect of LNG facilities. of assets forming part of the distribution network (whether directly or indirectly)? There are no particular provisions regarding third-party access to The transfer of interest in a gas utility requires prior consent from LNG facilities. the Ministry (and the successor-in-interest meeting the required technical qualifications). Pursuant to Article 60 of the Regulations, 10 Downstream Oil disposing or retiring essential assets of a distribution network requires the prior consent of the MPPP, and the request is to be submitted at least six months prior to the scheduled date for the 10.1 Outline broadly the regulatory framework in relation retirement or disposition. to the downstream oil sector.

The downstream oil sector is regulated by the Hydrocarbons Master 8 Natural Gas Trading Law (LOH).

8.1 Outline broadly the ownership, organisational and 10.2 Outline broadly the ownership, organisation and regulatory framework in relation to natural gas regulatory framework in relation to oil trading. trading. Please include details of current major initiatives or policies of the Government or regulator (if any) relating to natural gas trading. Article 57 of the LOH establishes that crude oil trading activities may only be exercised by companies created by the State, while the trading of oil products may be exercised by both private parties Similar to transportation and distribution, under the LOHG, gas and State-owned entities, unless the same is further reserved by trading can be carried out by private parties under permits. Producers the State. No broad reservation regulations have been issued and are allowed to market the gas they produce to traders, major Decree No. 1,648, dated April 2002, provides for a reservation consumers or other final consumers. At present, no distribution on trading carried out at said time by PDVSA affiliates; under the permits have been issued and PDVSA Gas does all of the trading rules, Empresas Mixtas would be entitled to trade oil products they as an intermediary. manufacture (but not crude oil). As such, certain Oil Belt Empresas Mixtas are allowed to trade Upgraded Crude Oil (UCO), which is 8.2 What range of natural gas commodities can be treated not as crude oil but as an oil product. traded? For example, can only “bundled” products (i.e., the natural gas commodity and the distribution thereof) be traded? 11 Competition

All natural gas commodities can be traded, i.e. natural gas, methane, natural gas liquids, and other commodities resulting from 11.1 Which governmental authority or authorities are processing. responsible for the regulation of competition aspects, or anti-competitive practices, in the oil and natural gas sector? 9 Liquefied Natural Gas The MPPP is the governmental authority responsible for the regulation of competition features and anti-competitive practices 9.1 Outline broadly the ownership, organisational and in the oil and natural gas sectors; with regards to the gas sector, regulatory framework in relation to LNG facilities. the ENAGAS is vested with powers to oversee and supervise competition in gas pricing, transportation and distribution. There are no particular provisions in the LOHG or its Regulations related to the erection, ownership or operation of LNG facilities, 11.2 To what criteria does the regulator have regard in whether in relation to liquefaction facilities, regasification ones, determining whether conduct is anti-competitive? or export/import facilities. Certain gas E&P licences include commitments for the erection, operation, and or supply of gas to LNG Since, to date, most of the systems are operated by PDVSA Gas, facilities in Venezuela (e.g. licences awarded for Plataforma Deltana). the regulator has not set any criteria which could be relevant in There are no LNG facilities in place in Venezuela even though determining whether conduct is anti-competitive. different projects have been advanced and projects for developing and operating liquefaction facilities as part of the Mariscal Sucre project.

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2007. The resulting Unitisation Agreements (the first was signed in 11.3 What power or authority does the regulator have to 2013) cover three gas reservoirs located in common frontier areas: preclude or take action in relation to anti-competitive Loran-Manatee Field is the largest, with an estimated 10.25 tcf of practices? reserves. Venezuela holds a 73.75% ownership interest, and Trinidad & Tobago holds 26.25%. Ownership of the Cocuina-Manakin Field, The MPPP has broad powers under the LOH and the LOHG to apply with an estimated 740 bcf of reserves, is 66% held by Trinidad & penalties, limit anti-competitive practices and, in the case practices Tobago and 34% held by Venezuela. The Dorado-Kapot Field has breach a legal or regulatory provision or the terms of a permit, to an estimated 310 bcf of reserves and is 84.1% held by Trinidad & terminate the relevant permit. Tobago and 15.9% held by Venezuela. Other bilateral treaty obligations can also impact regulatory policy.

11.4 Does the regulator (or any other Government For example, the friendship and bilateral treaties with the Russian Venezuela authority) have the power to approve/disapprove Federation has not only allowed for the financing of different projects mergers or other changes in control over businesses and identification of a common agenda between Venezuela and in the oil and natural gas sector, or proposed acquisitions of development assets, transportation or Russia, but has also allowed for the setting up of terms and conditions associated infrastructure or distribution assets? If so, for certain Empresa Mixta projects which would otherwise be what criteria and procedures are applied? How long provided in Asamblea Nacional approvals. Furthermore, bilateral does it typically take to obtain a decision approving or treaties with the People’s Republic of China (“PRC”) have resulted disapproving the transaction? in financing and significant commitment of oil output to the PRC as well as projects for converting debt into investment. Yes, the regulator has the power to approve/disapprove mergers or With regards to gas, Venezuela is a member of the Gas Exporting certain changes in control over businesses in the oil and natural gas Countries Forum (“GECF”), an international governmental sectors. There is no established criteria and the MPPP has acted organisation created as a forum for exchanging experience and mostly on a case-by-case basis. When lacking particular provisions, information among its member countries. GECF aims at gathering the proceedings for approval would need to be carried out under some of the world’s leading gas producers, with the objective of the terms of general administrative law. Practice shows the MPPP increasing the level of coordination and collaboration among member commonly takes a very long time to issue a decision. countries. No production or export commitments by its members are covered or envisaged under the GECF’s current framework. 12 Foreign Investment and International Obligations 13 Dispute Resolution

12.1 Are there any special requirements or limitations on 13.1 Provide a brief overview of compulsory dispute acquisitions of interests in the natural gas sector resolution procedures (statutory or otherwise) (whether development, transportation or associated applying to the oil and natural gas sector (if any), infrastructure, distribution or other) by foreign including procedures applying in the context of companies? disputes between the applicable Government authority/regulator and: participants in relation to oil There are no special requirements or limitations. While the LOHG and natural gas development; transportation pipeline does not require for the foreign entity to incorporate a special purpose and associated infrastructure owners or users in relation to the transportation, processing or storage affiliate or domicile a branch in Venezuela to carry out operations, of natural gas; downstream oil infrastructure owners in practice, gas E&P licences have required domiciliation of a or users; and distribution network owners or users in branch. It is foreseeable that upstream licences and downstream relation to the distribution/transmission of natural gas. permits will require a branch domiciliation, at least in the case of the operator (when rights are awarded to several companies under a Article 24, ordinal b of the LOHG allows for arbitration as a means joint operating agreement or unincorporated joint venture). of dispute resolution in the granting of gas E&P licences if and when the Government and the licensee so agree (Article 19 of the 12.2 To what extent is regulatory policy in respect of the LOHG). In case there is a lack of an agreement, any dispute which oil and natural gas sector influenced or affected arises thereof is submitted to litigation before the local courts. by international treaties or other multinational Licences granted to date establish arbitration as an alternative for arrangements? dispute resolution, but the same may be rendered useless as the provision under the licences require parties to agree to arbitration International treaties and multinational arrangements influence and its terms and conditions in the event of a dispute; hence, there is Venezuela’s regulatory policies on many levels. no set commitment to advance with the same. Nevertheless, if the With regards to multilateral commitments on oil, OPEC quota parties so agree, the award shall be final and binding. system obligations play a significant role and may result in A similar treatment (i.e. arbitration as a means of dispute resolution curtailment obligations extending to Empresas Mixtas. Other oil if and when the Government and the permit holder so agree; and if multilateral commitments, such as the PetroCaribe energy supply there is no agreement, any dispute is submitted to court litigation) is agreement (18 countries are currently participants, Venezuela being to be afforded to permits or consents associated with transportation, the sole supplier), may also affect oil marketing. distribution, storage, marketing and processing (Article 27 of the Border Delimitation Treaties and subsequent Unitisation Agreements LOH). may play a significant role. In particular, treaties with Trinidad & A similar regime applies under the LOH to controversies arising Tobago, such as the Delimitation Treaty of 1990 and the Framework under Empresas Mixtas agreements. Treaty on the Unitisation of Hydrocarbons Reservoirs of March

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and the past decade, some significant tax and royalty litigation was 13.2 Is your jurisdiction a signatory to, and has it duly carried out with mixed results. The experience has been different ratified into domestic legislation: the New York in the case of litigation against the State or its instrumentalities on Convention on the Recognition and Enforcement of commercial matters (e.g. price setting or compliance by PDVSA Foreign Arbitral Awards; and/or the Convention on the Settlement of Investment Disputes between States Gas with a supply agreement) where there is a significant bias in and Nationals of Other States (“ICSID”)? favour of the Government and its instrumentalities.

Venezuela is a signatory to the New York Convention on the 14 Updates Recognition and Enforcement of Foreign Arbitral Awards, the same was duly ratified and remains enforceable.

Venezuela On January 24, 2012, Venezuela denounced the Convention on the 14.1 Please provide, in no more than 300 words, a Settlement of Investment Disputes between States and Nationals summary of any new cases, trends and developments in Oil and Gas Regulation Law in your jurisdiction. of other States. Venezuela joined Ecuador and Bolivia as the only countries that have officially separated from the International Centre for Settlement of Investment Disputes (“ICSID”). Despite The main developments in Venezuela are related with the financial this, Venezuela has an extensive bilateral investment treaty network stability of PDVSA and its ability to meet its financial obligations, in place under most of which ICSID or alternative institutional as well as with the issuing of sanctions by the U.S. Government arbitration means (e.g. ad hoc panels or UNCITRAL) can be pursued against the Venezuelan Government and its instrumentalities whether Venezuela is a party or not to the ICSID Convention. (including PDVSA and its affiliates). With regards to PDVSA’s financial stability, international oil prices have recovered throughout 2017, but production and exports have 13.3 Is there any special difficulty (whether as a matter been missing the targets identified in Venezuela’s government mid- of law or practice) in litigating, or seeking to enforce judgments or awards, against Government authorities term plan (“Plan de la Patria”), and the same continued to fall or State organs (including any immunity)? during the past three years (OPEC identifies production at 1,938 mbd for June 2017), with a bleak forecast in light of the slowing Historically, litigating in Venezuela against the Government or its of operations by main drillers Schlumberger and Halliburton. A instrumentalities has been a painful and mostly fruitless process. look at PDVSA financials for 2016 show a decline in net income Litigation is slow and there are certain financial privileges and of 88.7% to $828 million in 2016 due to the decline in production procedural prerogatives which apply to the Government (Ministries) and low prices, under which PDVSA will not be able to cope and certain Government instrumentalities which may delay or even with needed investments in its own operations or in the cash-calls prevent the possibility to successfully advance litigation before required by its participation in Empresas Mixtas, which is likely to the Venezuelan courts against the Government or its entities, or to further accelerate the loss in production. effectively collect an award in Venezuela. In addition, there is a In addition, in August 2017, the U.S. issued sanctions against natural bias in favour of the Government and Government entities, high-level government officials as well as restricting the ability as most judges’ appointments are interim. for U.S. citizens and companies to enter into financial transactions Enforcement of foreign decisions and arbitral awards has been with PDVSA and its affiliates. The imposed sanctions resulted in recognised (albeit theoretically) by the Supreme Tribunal of Justice limitations related to U.S. customers as well as certain services in the Constitutional Chamber, including ICSID panels’ awards. To providers since, in many cases, payment conditions agreed with be sure, Venezuela enjoys immunity of jurisdiction unless it waives PDVSA can be recharacterised as financial transactions. The the same. While its instrumentalities are not subject to immunity of sanctions will likely generate additional restraints to the already jurisdiction, the LOH and LOHG provide for application of local limited ability of the Venezuelan Government to restructure its own jurisdiction unless the parties have decided to submit to arbitration. debt and that of PDVSA. It remains to be seen what will happen if there is a request for On the other hand, Russia’s Rosneft seems to be poised to close a enforcement. deal with the Venezuelan Government for the development of two offshore Paria gas fields (Patao and Mejillones) through a licence. The two fields hold a combined 180 bcm of natural gas. If closed, 13.4 Have there been instances in the oil and natural gas sector when foreign corporations have successfully the project is likely to be the largest gas project in place, together obtained judgments or awards against Government with the already producing Cardón IV project. authorities or State organs pursuant to litigation before domestic courts?

Yes, in some instances oil and natural gas investors have pursued and successfully obtained judgments from local courts. During the 1990s

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Juan Carlos Garantón-Blanco Valentina Cabrera Medina Torres, Plaz & Araujo Torres, Plaz & Araujo Campo Alegre Urb., Francisco de Miranda St. Campo Alegre Urb., Francisco de Miranda St. “Torre Europa”, 2nd Floor “Torre Europa”, 2nd Floor Capital District, 1060 Capital District, 1060 Venezuela Venezuela

Tel: +58 212 905 02 11 Tel: +58 212 905 02 11 Fax: +58 212 905 02 00 Fax: +58 212 905 02 00 Email: [email protected] Email: [email protected] URL: www.tpa.com.ve URL: www.tpa.com.ve

Juan Carlos is a senior partner of Torres, Plaz & Araujo (TPA). His Valentina is a senior partner at Torres Plaz & Araujo (TPA). She has Venezuela practice focuses primarily on energy (oil, gas and petrochemicals), focused her professional practice on the areas of corporate, tax, mining, electricity and infrastructure projects, covering corporate, tax energy and international commerce. and public law structuring and advising, as well as advice on project She has ample experience participating in: finance projects for both and corporate financing. private and public entities; mergers; investment structuring and He has acted as counsel to international oil companies in projects protection; advice regarding foreign exchange matters; and legal in Venezuela on regulatory matters, as well as corporate and tax advice regarding taxation, both national and municipal, with particular structuring for ventures under former operating agreements and experience in the area of international taxation. association agreements, as well as for the setting up and operation Valentina has in-depth knowledge of the energy sector, with of Empresas Mixtas and gas licences. He has also advised sponsors experience: advising gas exploration projects under the licence on project and corporate financing, including the set-up of the local system; in the negotiation of mixed companies for the production of financial arrangements and security packages and the review and hydrocarbons; negotiating and advising in Engineering, Procurement implementation of the financial arrangements in Venezuela, and follow- and Construction Contracts (EPC) for the construction, commissioning up financial completion. Juan Carlos has also advised oil companies and/or modernisation of electric and petrochemical plants; advising on features in relation to ICSID arbitration related to expropriation of contractors of the oil industry in providing services inherent in onshore their oil assets or interests in Venezuela. and offshore oil production; and advising in international arbitration Juan Carlos received his J.D. from Universidad Católica Andrés Bello and negotiation of disputes arising under Venezuelan law. in 1991, his LL.M. from Universidad Católica Andrés Bello in 1993, and his LL.M. from New York University in 2003. He is a faculty member of Universidad Católica Andrés Bello.

Torres, Plaz & Araujo (TPA) is a global practice firm, with highly specialised members in their respective areas of expertise. We are known for our ability to provide innovative solutions, our commitment to our clients and our professional prowess, not only limited to assessing and balancing the risks associated with their businesses but also to provide innovative and efficient alternatives to deal with the same. Our firm has specialised in energy since the early 1990s, when we advised in the set up and project financing of large projects in the Orinoco Oil Belt, and then during the last decade by advising in the migration of operating service agreements and strategic associations into mixed-capital companies and in the negotiation of new areas for international oil and gas companies. Our consulting services in energy matters span from the structuring of businesses, to the analysis of regulatory and commercial aspects, corporate tax structuring and corporate finance for projects. Our advice in this regard includes: structuring and advice for organising joint ventures, gas licences and gas transportation, distribution, industrialisation and processing activities, petrochemical projects and refinery by-product industrialisation and processing, negotiation of drilling contracts, both onshore and offshore; and day-to-day advice in matters relating to operations involving contracting, supplies, EPC and service agreements, labour conflicts, tax issues and dispute resolution, among others.Furthermore, the firm has developed its practice in different areas, such as: administrative law; antitrust; arbitration; mediation and reconciliation; aviation; banks and financial institutions; capital markets; consumer protection; commercial and corporate; energy; the environment; expropriations and nationalisations; family businesses; finance; financial law; foundations and non-profit organisations; insurance; litigation; maritime and transportation; media and telecommunications; mergers and acquisitions; mining; pharmacy and biotechnology; project finance; real estate and construction; taxation; and planning, among others.

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