Assessment Summary on Selected Transportation Routes

Gas Regional Initiative – Region: South-South East

Assessment Summary

on selected Transportation Routes

European Regulators’ Group for Electricity and Gas Contact: Council of European Energy Regulators ASBL 28 rue le Titien, 1000 Bruxelles Arrondissement judiciaire de Bruxelles RPM 0861.035.445

GRI-SSE Assessment Summary on selected Transportation Routes

Executive summary

The underlying report is the result of an analysis by regulators on impediments to transportation on selected transportation routes through the regional energy market South-South East. The report highlights a number of impediments which newcomers may encounter on these transportation routes. Against the background of underdeveloped trading activities at and between hubs of the region, this report shall be devoted to understanding the reasons that hinder it. The routes are analysed by focussing on its separate sections. Special focus is put on whether there are available capacities, whether there exists effective congestion management and how tariffs are computed and whether tariff information is published. Furthermore, transmission system operators were asked if operational balancing agreements at interconnection points have been signed between adjacent system operators. The main problems identified for each transportation route can be summarized as follows: ROUTE 1: UKRAINE-SK-CZ-GER: “The major difficulties for newcomers are missing Operational Balancing Agreements (OBAs) at border points.” ROUTE 2: UKRAINE-SK-A-SI: “Currently, it is not possible for new shippers to transport gas across the analysed route because of physical congestion at some interconnection points along the route; lack of appropriate long term congestion management on TAG system.” ROUTE 3: UKRAINE-SK-A-I: “Viability is still limited to incumbents and represents a bottleneck to the Italian market; lack of appropriate long term congestion management on TAG system” ROUTE 4: UKRAINE-SK-A-GER: “The transportation of natural gas on the whole route from Velke Kapusany to Oberkappel on a firm basis is not possible due to a lack of available capacity.” ROUTE 5: BELARUS-PL-GER: “TPA service may be provided only under permission of main shareholders, especially Gazprom-Export” ROUTE 6: ALGERIA-I-A-SK: “At present the Tunesian bottleneck and related regulation is the main problem. A lack of harmonisation with neighbouring networks may also hinder the usage for other markets.”

In summary, viability of the routes assessed in this report is still difficult for newcomers. A lack of transparency separates national markets and makes transport of gas over several TSO systems burdensome. In the cases where there exists contractual congestion, UIOLI provisions are often weak and secondary market trading is not facilitated by TSOs which also hinders effective viability of gas transport.

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Table of contents

1. INTRODUCTION...... 4

2. TRANSPORTATION ROUTES...... 5 2.1 ROUTE 1 – U KRAINE - SK - CZ - GER...... 5 2.2 ROUTE 2 – U KRAINE - SK - A - SI - I ...... 7 2.3 ROUTE 3 – U KRAINE - SK - A - I...... 12 2.4 ROUTE 4 – U KRAINE - SK - A - GER ...... 15 2.5 ROUTE 5 – B ELARUS - PL - GER ...... 18 2.6 ROUTE 6 – A LGERIA - I - A - SK ...... 22 3. CONCLUSIONS...... 25

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GRI-SSE Assessment Summary on selected Transportation Routes

1. Introduction

Integration and the development of regional gas hubs is a source of commodity re-trading and thus provides for access to natural gas within the borders of the EU. Since trade at and between hubs is very much underdeveloped in the Regional Energy Market SSE, this report will be devoted to understanding the reasons that hinder it. In this respect, 6 transportation routes have been identified with a view to a possible lack of gas liquidity in the Region. The Action Plan for the South-South East regional gas market (Ref.No.: GRI-SE-RCC-02-04) stated practical case studies for transportation of gas through the region as one of its four priority topics. The responses received during the public consultation on the Action Plan supported the case studies in principle. Regulators concluded to carry out a detailed viability analysis of the transportation routes. Practical case studies of gas transportation on the 6 routes through the region have been performed and the results are described in this report. Preliminary results have also been discussed with the transmission system operators of the region in a workshop held on November 24, 2006 and the results of this workshop have been incorporated into this report. Each transportation route is examined by its separate national sections as these are currently run differently. Figure 1 shows a map highlighting transportation routes 1-4. Figure 1

1 4

Source: GTE 2006

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2. Transportation routes

2.1 Route 1 – Ukraine - SK - CZ - GER

2.1.1 Description of the route

The route is used to transport Russian natural gas through Slovakia and the Czech Republic to Germany and further West, mainly to France. The Slovak section from Velke Kapušany to Lanzhot is run by SPP Preprava and the Czech section from Lanzhot to Waidhaus or Hora Svate Kateriny is run by RWE Transgas Net. The Route in the Czech Republic is divided into direction Lanzhot – Hora Svate Kateriny (hereinafter as “HSK”) and Lanzhot – Waidhaus (hereinafter as “W”). Table 1: Overview of information (as of November 2006) Route 1 SPP RWE Transgas Net Capacity situation Availability of firm and interruptible reduced firm capacity available at available firm capacity, for both exit capacities exit point Lanžot, interruptible points from 5 to 20 percent of technical contracts are available capacity available (capacity situation is displayed as traffic lights due to confidentiality reasons - only 2 shippers) Technical maximum capacity at 301 mcm/day 180 mcm/day section entry Available firm capacity at section 11 mcm/day 5 to 20 percent of technical capacity entry Technical maximum capacity at 134 mcm/day W 83,95 mcm/day section exit HSK 57,99 mcm/day Available firm capacity at section exit 7 mcm/day 5 to 20 percent of technical capacity Duration of contracts offered long-term, yearly and monthly long-term, yearly, monthly and daily

Congestion management Congestion Management UIOLI not applied, no bulletin UIOLI – day ahead available procedures (UIOLI principle, board, secondary market trading interruptible capacity, bulletin board Secondary Market) not known to SPP available, secondary market not forbidden Description of expansion plans no expansion plans no expansion plans

Description of Capacity Allocation fcfs Preference of contract with longer procedures duration. Fcfs for daily capacity Tariffs Description of the tariff methodology benchmarking prepared by SPP, benchmarking prepared by RWE applied ex ante approval of tariffs by NRA Transgas Net, ex ante approval of tariffs by NRA Availability of contractual or physical physical backhaul, tariffs published Capacity offered for both directions, backhaul flows and published tariffs same price for both directions. No demand for this service. Other issues Length of route section 470 km W – 401 km HSK – 379 km Tariff to be paid for each section of 0,187 0,170 the route (EUR/m 3/h/km/a)1 Units (flow rate) m3/h (at 20°C and 1,01325 bar) m 3/h (at 15°C and 1,01325 bar)

Gas day 06:00 am to 06:00 am 06:00 am to 06:00 am

OBAs concluded or schedule for OBA has been agreed, will be finally signed until the end of 2006 their implementation

1 transportation case: firm 10-year contract for 100.000 Nm 3/h, load factor = 0,913 (8.000 h per annum), fuel gas not included

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2.1.1.1 Capacity situation

Along the transportation route there is neither physical nor contractual congestion. In the Czech part of the route available and booked capacity is displayed as traffic lights due to confidentiality reasons (currently there are only 2 shippers). A long-term forecast of available capacities for up to 10 years is capacity information is not published according to the Regulation 1775/2005 by SPP Preprava. RWE Transgas Net publishes this forecast stating that even more than 20 percent of available technical capacity would be available in near future. With regards to the requirement of the Regulation to publish capacities down to daily periods, SPP Preprava announced during the workshop that this will be published in due time. Currently SPP Preprava only publishes monthly figures. Capacity booking in Slovakia is based on an entry/exit system, whereas in the Czech Republic booking is based on point to point principle. Details are published also in English on the website of SPP Preprava and RWE Transgas Net.

2.1.1.2 Congestion management

SPP Preprava does not provide a bulletin board and secondary market transactions do not have to be notified by shippers to SPP preprava and are therefore not know to the TSO. . Secondary market trading is not hindered by SPP but as well not facilitated as required by Regulation 1775. According to SPP’s business conditions, SPP may request shippers, who have made only insignificant use of their capacities for a period of at least 24 consecutive months, to offer these capacities to third parties which indicates a voluntary application UIOLI but no obligatory release of unused capacity by shippers supported by the TSO. RWE Transgas Net applies UIOLI in the form of day ahead interruptible capacity, has a bulletin board available and secondary market trading is not forbidden. Due to sufficient capacity situation congestion management rules are hardly applied or needed in reality. Long term congestion management is not applied but in praxi is not required as there is no congestion along the route. SPP Preprava expects a reduction of flows to the Czech Republic which would lead to a capacity increase in Baumgarten. This could change also the capacity situation on this route. Thus, there are no plans for expansion.

2.1.1.3 Tariffs

Tariffs of SPP Preprava are set on the basis of a benchmarking prepared by SPP Preprava and approved ex-ante to their application by the Regulatory Authority. SPP Preprava stated in the workshop that it considers benchmarking as an alternative to cost-based tariffs, a position which is supported by the ERU according to SPP Preprava. The fee is different for each entry/exit point and is dependant on transited volume and contract duration.

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Tariffs of RWE Transgas Net are based on the tariff methodologies prepared by RWE Transgas Net and approved by the Regulatory Authority. Tariffs based on this methodology are published by RWE Transgas Net. The methodology is based on the existence of competition on the relevant market for transit transmission services in the region of Eastern and Central Europe and therefore, a benchmarking exercise is undertaken by RWE Transgas Net. RWE Transgas Net uses West Austria Gas Pipeline (WAG) and the Yamal pipeline which crosses Poland as comparators.Tariffs include a firm and interruptible transportation fee, based on capacity and distance. Overrun and unbalance fees are also applicable. The fee is the same for all pairs of points and is not dependant on transited volume and for contracts longer than one year also not dependant on contract duration. Information on tariffs is also available from SPP Preprava and RWE Transgas Net in the form of a tariff calculator where network users can choose the desired entry/exit (pair of points) combinations for tariff calculation.

2.1.1.4 Other issues

An Operational Balancing Agreement (OBA) at border points Velke Kapušany,Lanzhot, Hora Svate Kateriny, Waidhaus has not been agreed between the TSOs and are currently negotiated. Up to now balancing and nomination processes are based on historical agreements (Gazprom Standards) which are not fully compatible with EASEE-gas common business practices (CBPs). This could be classified as a key problem of this route.

2.1.2 Viability Assessment

The transportation of natural gas from Velke Kapušany to Hora Svate Kateriny or Waidhaus on a firm basis is possible without any serious capacity problems in the near future. The main problem appears to be the access to upstream gas at Velke Kapusany for reasonable price, which is the main barrier to competition. The major difficulty for newcomers are missing Operational Balancing Agreement (OBA) at border points Velke Kapušany,Lanzhot, Hora Svate Kateriny, Waidhaus, which have not been agreed between the TSOs and are currently negotiated. Their full implementation should be effected as soon as possible. Access to underground storages along whole route for newcomers seems to be a problem.

2.2 Route 2 – Ukraine - SK - A - SI - I

2.2.1 Description of the route

The transport route starts at Velke Kapušany in the easternmost part of the Republic of Slovakia. This is also the first entry-exit point of this route. The route then runs through the Slovakian domestic entry-exit point, which is approximately in the middle between Velke Kapušany and the entry-exit point in Baumgarten. Baumgarten is also the border point between the Slovakian and Austrian transmission networks. This part of the route is operated by SPP Preprava, the Slovakian transmission system operator.

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The transmission network that runs across Austria is divided into two parts. The first part runs along the eastern Austrian border from the entry-exit point in Baumgarten to the domestic entry- exit point in Weitendorf (Trans Austria Gasleitung System; TAG). This part of the route is operated by OMV Gas GmbH, capacity rights are held by TAG GmbH 2. This is followed by a short part of the transmission network running from Weitendorf to the entry-exit point in Ceršak, at the border between Austria and Slovenia (Süd Ost Leitung, SOL). This part of the network is operated by OMV Gas GmbH. The last part of the route, running approximately through the middle of Slovenia from Ceršak to the entry-exit point in Šempeter pri Novi Gorici, is the transmission network operated by Geoplin plinovodi, the Slovenian transmission system operator.

2 Capacity rights for TAG pipeline have been transferred from the TAG shareholders OMV Gas GmbH and Eni s.p.A. to TAG GmbH for coordinated marketing of capacities. Operation and maintainance of the pipeline system has been transferred from TAG GmbH to OMV Gas GmbH, the latter who is also the licensed TSO according to the Austrian Gas Act. Roles and responsibilities of a “holder of capacity” and a “TSO” are equal according to the Austrian Gas Act.

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Table 2: Overview of information (as of November 2006) Route 2 SPP TAG OMV Geoplin plinovodi Capacity situation Availability of firm and interruptible no firm capacity No firm capacity Available firm No firm capacity capacities available at exit available currently; capacity available at Ceršak; point Baumgarten, 9,933 m3/h available small amount interruptible at exit point available at contracts are Weitendorf as of Šempeter by Nova available April 2007 Gorica

Interruptible capacties (25.000 m3/h) available as of Oct 2007 Technical maximum capacity at 301 mcm/day 102,2 mcm/day 10,6 mcm/day 7,08 mcm/day section entry Available firm capacity at section 11 mcm/day 0 mcm/day 3,7 mcm/day 0 mcm/day entry Technical maximum capacity at 126 mcm/day 102,2 mcm/day 10,6 mcm/day 2,64 mcm/day section exit Available firm capacity at section exit 0,1 mcm/day 0 mcm/day 3,7 mcm/day 0,13 mcm/day Duration of contracts offered long-term, yearly 20 years and 1 year 1 day to 20 years Long term, yearly, and monthly (allocated by monthly auction); also 4 month contract Congestion management Congestion Management UIOLI not applied, bulletin board bulletin board Not yet available procedures (UIOLI principle, no bulletin board, interruptible UIOLI interruptible UIOLI Secondary Market) secondary market trading not known to SPP Description of expansion plans no expansion plans Expansion plans for No expansion plans Expansion plans 6.5 bcm (366,000 3 m /hr )– total; 1st step already allocated

Not sufficent to meet market demand Description of Capacity Allocation fcfs pro rata/auctions fcfs pro rata procedures Tariffs Description of the tariff methodology benchmarking methodology methodology methodology applied prepared by SPP, ex includes tariff and includes tariff and includes tariff and ante approval of cost principles, ex cost principles, ex cost principles, ex tariffs by NRA ante approval of ante approval of ante approval of tariffs by NRA tariffs by NRA tariffs by NRA Availability of contractual or physical physical backhaul, no physical no physical no physical backhaul flows and published tariffs tariffs published backhaul, tariffs not backhaul, tariffs not backhaul, tariffs not published published published Other issues Length of route section 470 km 237 26 235 Tariff to be paid for each section of 0,187 0,221 0,875 0,413 the route (EUR/m 3/h/km/a) 3 Units (flow rate) m3/h (at 20°C and m3/h (at 20°C and Nm 3/h (at 0°C and m3/h (at 15°C and 1,01325 bar) 1,01325 bar) 1,01325 bar) 1,01325 bar) Gas day 06:00 am to 06:00 08:00 am to 08:00 08:00 am to 08:00 08:00 am to 08:00 am am am am OBAs concluded or schedule for OBA at border point their implementation OBAs are in testing phase and will be fully to Italy will be implemented during the next 6 months checked, there should be no problems

3 transportation case: firm 10-year contract for 100.000 Nm 3/h, load factor = 0,913 (8.000 h per annum), fuel gas not included

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2.2.1.1 Capacity situation

Along the transportation route there exists contractual congestion or the situation is very close to the upper limit. There is some free capacity at entry point in Velke Kapušany, but at Baumgarten, the linking point between SPP and TAG system available capacity runs down to zero. Again there is some available capacity in Weitendorf, the connection point between the TAG and the OMV system SOL. However, the possibility to book capacity at this point is countered by available capacity of down to zero per cent at Ceršak at interconnection point between Slovenia and Austria and likewise restricted by the possibility to inject into the – currently congested – TAG System . At the end of the route at Šempeter by Nova Gorica it is again possible to book some minor amount of firm capacity. Most of the capacity data is published according to the Regulation 1775/2005. For most of the information which is not yet published in accordance with Regulation full compliance was announced at the workshop.

2.2.1.2 Congestion management

SPP stated that current congestion is the result of short-term commitments. SPP expects a reduction of flows to the Czech Republic which would lead to a capacity increase in Baumgarten due to hydraulic modifications. TAG tries to solve congestions short time by yearly auctions of one-year contracts. Improvements in short term congestion management have been introduced by the recent amendment to the Austrian Gas Act requiring system users to release their unused committed capacity, accompanied by a UIOLI provision to be applied by the TSO. TAG facilitates secondary market trading via a bulletin board. TAG tries to sort out current physical congestion by adding + 6.5 bcm total which is however not sufficient to meet market demand as required by Directive 2003/55/EC. Appropriate long term congestion management is therefore lacking. OMV is not confronted with congestion on the SOL system at this time. Geoplin does not meet congestion problems yet despite the fact that its system is on upper limit. In order to address long-term congestion, Geoplin will build one new compressor station.

2.2.1.3 Tariffs

Tariffs are set on the basis of a benchmarking prepared by SPP and approved ex ante to their application by the Regulatory Authority. SPP stated in the workshop that it considers benchmarking as an alternative to cost-based tariffs. According to their tariff methodology TAG, OMV and Geoplin plinovodi tariffs have to be calculated according to specified cost and tariff principles. The cost principles include a detailed description on the computation of capital expenditures, operating expenditures and cost of capital. Regarding backhaul flows, only SPP publishes tariffs and only there exists physical backhaul. On the other three parts of the route no physical backhaul flow is possible. To calculate tariffs SPP, TAG and OMV provide tariff calculators on their web pages. Geoplin plinovodi does not provide this service yet, but announced at the workshop that it will be provided in the future.

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Tariffs for TAG and SOL system are currently under evaluation resulting from the recent amendment to the Austrian Gas Act that introduced rTPA to the Austrian transit systems and requires regulatory approval of tariff methodologies.

2.2.1.4 Other issues

An Operational Balancing Agreement (OBA) at the interconnection point Baumgarten has been agreed between the TSOs and is currently in a testing phase. As stated during the workshop, the agreement should be in operation within the next 6 months (i.e. until May 2007). Concerning harmonisation of units and harmonisation of the nomination and matching process according to EASEE-gas common business practices (CBPs), the argument was brought forward that these CBPs are not compatible with Gazprom standards, especially concerning nominations. OBAs between Geoplin plinovodi and OMV are in the final phase and will be signed soon. Geoplin plinovodi announced that on the other side (border with Italy) of the route OBAs are in discussion phase but that they expect no difficulties for the conclusion.

2.2.2 Viability Assessment

Currently, it is not possible for new shippers to transport gas across the whole analysed route because of physical congestion at some interconnection points along the route. In addition, the accessibility and user-friendliness of relevant information published on the TSOs websites differs significantly among operators. Different technical procedures represent serious obstacles to potential new shippers on this route.

One-stop-shop service provider – the new role of OMV Gas GmbH in Austria The recent amendment to the Austrian Gas Act introduced a one-stop-shop function under which OMV Gas provides services to shippers who want to carry out a transport which requires transportation contracts with more than one TSO. The aim of the new provision is to allow for easy network access to transit systems. Under this function OMV Gas has to - respond to properly completed transportation applications within 14 days of receipt - provide information on the available pipeline capacity for the whole transportation route and offer information on alternative routes if no capacity is available - compute the use of system charges for the whole transportation route - forward the necessary contract documents based on the approved general terms and conditions to the applicant This new function, which entered into force on 1 January 2007, has already raised interest by shippers and the services offered are taken up by the market. Beyond the fulfilment of its functions according to the Gas Act, OMV Gas also runs a central bulletin board as a trading platform for transit capacity on all Austrian transit systems.

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2.3 Route 3 – Ukraine - SK - A - I

2.3.1 Description of the route

The Route is used to transport natural gas from the Former Soviet Union countries (mainly Russian Federation) to Italy through Slovakia and Austria. The transport route starts at Velke Kapušany at the Ukrainian/Slovakian border and crosses the Slovakian/Austrian border to run through Baumgarten to the Italian Tarvisio. The first section of the route is operated by SPP-preprava, a.s. and the second section by TAG GmbH. There is one gas line in Slovakia consisting of 4 - 5 parallelly lead pipes of DN 500 to DN 1400, mostly with DN 1200 and DN 1400 pipes. The transit pipeline splits into two directions in the west territory of Slovakia – one part is directed to the Czech Republic, the other leads to the above mentioned border with Austria. The entry/exit point at Baumgarten links the two systems.

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Table 3: Overview of information (as of November 2006) Route 3 SPP TAG Capacity situation Availability of firm and interruptible no firm capacity available at exit Firm: 0 until 1.10.2007; 9,933 m3/h capacities point Baumgarten, interruptible available at exit point Weitendorf as of contracts are available April 2007 3 255,493 m /hr between 1.10.-31.12.2007. Interruptible: 0 until 1.10.2007; 3 25,000 m /hrinterruptible from 1.10.2007, to be shared with route 2 (Slovenia) Technical maximum capacity at 301 mcm/day 4.26 mcm/hr section entry 3 Available firm capacity at section 11 mcm/day 9900 m /hr entry Technical maximum capacity at 139 mcm/day TAG exit not published, Italian side (SRG) section exit entry capacity 88.3 mcm/day Available firm capacity at section exit 0 mcm/day 0 (until 1.10.2007); SRG available entry capacity 4.2 mcm/day Duration of contracts offered long-term, yearly and monthly 20 years ship-or-pay 9 months firm (1.1.-1.10.07) 1 year (1.10.06-1.10.07) Congestion management Congestion Management UIOLI not applied, no bulletin interruptible UIOLI enforced by TSO procedures (UIOLI principle, board, secondary market trading Bulletin Board exists Secondary Market) not known to SPP Description of expansion plans no expansion plans Two step expansion plans leading to 2 long term capacity increase of 366,000 3 m /hr (for 6.5 bcm), 1 st step already allocated; not sufficient to meet market demand Description of Capacity Allocation fcfs On existing capacity: FCFS. procedures On expansions: Pro rata (long term capacity), Auctions (short term capacity) Tariffs Description of the tariff methodology benchmarking prepared by SPP, Cost based. Distance and capacity related applied ex ante approval of tariffs by methodology includes tariff and cost NRA principles, ex ante approval of tariffs by NRA. Availability of contractual or physical physical backhaul, tariffs no physical backhaul services requested backhaul flows and published tariffs published on TAG, tariffs not published Other issues Length of route section 470 km 380 Tariff to be paid for each section of 0,187 0,125 the route (EUR/m 3/h/km/a) 4 Units (flow rate) m3/h (at 20°C and 1,01325 bar) m 3/h (at 20°C and 1,01325 bar)

Gas day 06:00 am to 06:00 am 08:00 am to 08:00 am

OBAs concluded or schedule for OBAs are in testing phase and will be fully implemented during the next 6 their implementation months

2.3.1.1 Capacity situation

Capacity situation at the entry point in Velke Kapušany is contractually bound, with some free firm capacity available for TPA. The exit point Baumgarten is physically congested. With respect to the available capacities, the SPP publishes monthly figures. A long-term forecast for up to 10 years and information on the daily free capacities will be available on the SPP website in 2007.

4 transportation case: firm 10-year contract for 100.000 Nm 3/h, load factor = 0,913 (8.000 h per annum), fuel gas not included

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On the TAG system, short-term firm capacity is fully booked until 1 October 2007. Approximately 255.000 m3/hr will be available from 1 October until 31 December 2007, their allocation is expected for next spring. Long-term capacity was allocated by 20-year contracts starting from 1 October 2008, by pro-rata criteria. Auctions for capacity available between 1 October 2006 and 1 October 2007 led to prices that are three times as high as fees for long term capacity. There is no guarantee that the auction revenues will be used for further capacity enhancement or otherwise returned to shippers.

2.3.1.2 Congestion management

There has been no contractual congestion in the Slovak section of the route so far, limited contractual congestion is from November 2006. TAG tries to solve congestions short time by yearly auctions of one-year contracts. Improvements in short term congestion management have been introduced by the recent amendment to the Austrian Gas Act requiring system users to release their unused committed capacity, accompanied by a UIOLI provision to be applied by the TSO. TAG facilitates secondary market trading via a bulletin board. TAG tries to sort out current physical congestion by adding + 6.5 bcm/year total which is however not sufficient to meet market demand as required by Directive 2003/55/EC. Appropriate long term congestion management is therefore lacking.

2.3.1.3 Tariffs

Tariffs are set on the basis of a benchmarking prepared by SPP and approved ex ante by RONI, the regulatory authority of the Slovak Republic. Criterion comparison considers also the parameters concerning the transported gas quantities, the negotiated daily maximum and length of the validity of contract, parameters of the chosen potential transmission network users. Benchmarking is considered as an alternative to cost-based tariffs. On the Austrian section of the route, tariffs are published and include a firm and interruptible transportation fee, based on capacity and distance. Overrun and unbalance fees are also applicable. Fees are different from those applied to Austrian domestic transportation by the same pipeline and are not yet approved by the NRA. The approval process of the tariff methodology will be concluded early 2007.

2.3.1.4 Other issues

The interconnection point Baumgarten is a space where the OBA has been agreed between the TSOs and it is in a testing phase. Contractual conditions are only regulated starting from 1 January 2007 in Austria.

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2.3.2 Viability Assessment

The daily transportation of natural gas through the route section in the territory of Slovakia amounts to about 10 mil. m3 free firm capacity at the entry point in Velke Kapušany and approximately 290 mil. m3 contractually allocated capacity at this point. There is no free firm capacity in Baumgarten exit point (free firm capacity amounts to approximately 6.5 mil. m3 in Lanžhot per day). Trading in the secondary gas market cannot be monitored in a due form for the reason of no explicit obligation to report for users. Viability of this route is still difficult for newcomers and represents a major bottleneck for gas supply on the Italian market. Some capacity enhancement has been undertaken, notably after pressure from European, Austrian and Italian competition authorities and energy regulators, but it is not clear whether these are satisfactory. Full booking of short term auctions at high prices as well as of long term allocation procedures seem to indicate that residual demand has not yet been met. On the other hand uncertainty about demand, which is related to progress of other infrastructure for supply of the Italian market; and authorisation difficulties in Austria have been mentioned as reasons for the so far limited expansion. Recently allocation of capacity enhancements led to some problems. Auctions led to very high prices. Pro-rata allocation procedures paved the way to speculative behaviour and excessive lots fragmentation, actually paying more than the published tariff to win the capacity. As a consequence of which shippers who will actually use the capacity may end up paying more than the published tariff, and the competitive and liquidity contribution from this source would be undermined. The Austrian section of the route has become slightly more open due to the recent introduction of a rTPA in Austria. Tariffs are not yet regulated and may be discriminatory with respect to those used for domestic transportation by means of the same infrastructure. Regulation powers on contractual conditions of transit pipelines in Austria was only introduced from 1 January 2007 . One of the main viability barriers on TAG system is physical congestion accompanied by a lack of willingness of the TSO to meet the market demand appropriately. Capacity booking procedures and criteria differ on the Italian and Austrian side of the border, which hampers use of the route. Common criteria are being discussed.

2.4 Route 4 – Ukraine - SK - A - GER

2.4.1 Description of the route

The transport route starts at Velke Kapusany at the Ukrainian/Slovakian border and crosses the Slovak Republic and Austria to run to Oberkappel at the German/Austrian border. The first section of the route is operated by SPP preprava and the second section by OMV Gas GmbH, capacity rights are held by TAG GmbH 5. The entry/exit point at Baumgarten links the two systems. Table 4 gives an overview of information on the 2 sections of the route.

5 Capacity rights for TAG pipeline have been transferred from the TAG shareholders OMV Gas GmbH and Eni s.p.A. to TAG GmbH for coordinated marketing of capacities. Operation and maintainance of the pipeline system has been transferred from TAG GmbH to OMV Gas GmbH, the latter who is also the licensed TSO according to the Austrian Gas Act. Roles and responsibilities of a “holder of capacity” and a “TSO” are equal according to the Austrian Gas Act.

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Table 4: Overview of information (as of November 2006) Route 4 SPP BOG Capacity situation Availability of firm and interruptible no firm capacity Firm capacity capacities available at exit available at entry point Baumgarten, point Baumgarten interruptible but no firm capacity contracts are available at exit available point Oberkappel, interruptible contracts are available

Interruptible contracts are available Technical maximum capacity at 301 mcm/day 29 mcm/day section entry Available firm capacity at section 11 mcm/day 5 mcm/day entry Technical maximum capacity at 139 mcm/day 17 mcm/day section exit Available firm capacity at section exit 0 mcm/day 0 mcm/day Duration of contracts offered long-term, yearly long-term (up to 20 and monthly years), yearly and monthly Congestion management Congestion Management UIOLI not applied, interruptible UIOLI, procedures (UIOLI principle, no bulletin board, bulletin board Secondary Market) secondary market trading not known to SPP Description of expansion plans no expansion plans Pipeline Systems to be expanded up to 1.420.000 m³/h by 2011 in direction Baumgarten - Oberkappel; additional market survey assessing further expansion Description of Capacity Allocation Fcfs Fcfs procedures Tariffs Description of the tariff methodology benchmarking methodology applied prepared by SPP, ex includes tariff and ante approval of cost principles, ex tariffs by NRA ante approval of tariffs by NRA Availability of contractual or physical physical backhaul, physical backhaul, backhaul flows and published tariffs tariffs published backhaul tariff not explicitly published but described on TSOs website Other issues Length of route section 470 km 245 km Tariff to be paid for each section of 0,187 0,241 the route (EUR/m 3/h/km/a) 6 Units (flow rate) m3/h (at 20°C and Nm 3/h (at 0°C and 1,01325 bar) 1,01325 bar) Gas day 06:00 am to 06:00 06:00 am to 06:00 am am OBAs concluded or schedule for OBAs are in testing phase and will be fully their implementation implemented during the next 6 months

6 transportation case: firm 10-year contract for 100.000 Nm 3/h, load factor = 0,913 (8.000 h per annum), fuel gas not included

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GRI-SSE Assessment Summary on selected Transportation Routes

2.4.1.1 Capacity situation

Along the transportation route there exists contractual congestion. At the exit point in Baumgarten, linking the SPP system to the BOG system, there is no firm capacity available. While there is available firm capacity at the entry point Baumgarten into the BOG system ,the exit point of the BOG system at Oberkappel, at the German border, is physically and contractually congested. Most of the capacity data is published according to the Regulation 1775/2005. A long-term forecast of available capacities for up to 10 years is missing from SPP and BOG. With regards to the requirement of the Regulation to publish capacities down to daily periods, SPP announced during the workshop that this will be published in due time. Currently SPP only publishes monthly figures.

2.4.1.2 Congestion management

Against the background of contractual congestion on both sections of the route the question arises of how SPP and BOG deal with short-term/ long-term congestion. This issue was addressed during the workshop and BOG replied that concerning short-term congestion interruptible UIOLI is applied as well as a bulletin board offered. BOG is currently evaluating the results of a market survey conducted to evaluate the need for a possible system expansion to cover long term congestion management. SPP stated that current congestion is the result of short-term commitments. SPP expects a reduction of flows to the Czech Republic which would lead to a capacity increase in Baumgarten due to hydraulic modifications. However, if congestion should turn into a longer term contractual congestion, SPP would get in contact with the relevant users and ask them whether they would not need their committed capacity anymore (according to SPP’s business conditions, SPP may request shippers, who have made only insignificant use of their capacities for a period of at least 24 consecutive months, to offer these capacities to third parties). There are no plans for expansion since congestion is not judged as being long-term.

2.4.1.3 Tariffs

Tariffs are set on the basis of a benchmarking prepared by SPP and approved ex ante by the Regulatory Authority. SPP stated in the workshop that it considers benchmarking as an alternative to cost-based tariffs. According to the tariff methodology which is currently in the process of approval, BOG tariffs have to be calculated according to specified cost and tariff principles. The cost principles include a detailed description on the computation of capital expenditures, operating expenditures and cost of capital. The tariff principles lay down instructions on computation of tariff escalation, backhaul flows, time factors and interruptible transportation services. The methodologies for tariff calculation by BOG have to be approved ex ante by the Regulatory Authority. The approval process of the tariff methodology will be concluded early 2007. Information on tariffs is available from SPP and BOG. SPP offers a tariff calculator where network users can choose the desired entry/exit combinations for tariff calculation. BOG offers an Online Capacity Booking system where information on tariffs can be gained. A registration free of charge to the system is necessary.

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GRI-SSE Assessment Summary on selected Transportation Routes

Physical backhaul transport is possible on both systems. SPP’s tariff calculator displays backhaul tariffs which are lower than tariffs for transportation in the main flow direction (East-West). BOG does not display backhaul tariffs but publishes a description on their calculation. Backhaul tariffs are the same as tariffs for transportation in the main flow direction (East-West) except in the case where a shipper books “simultaneous” contracts. These are contracts which are identically for in both directions, as far as quantity, duration and entry/exit point are concerned. The tariff for this capacity booking equals 135% of the tariff applicable for transportation in the main flow direction (East-West).

2.4.1.4 Other issues

2.4.2 Viability Assessment

The transportation of natural gas from Velke Kapusany to Oberkappel on a firm basis is not possible due to a lack of available capacity on the primary market at section exit points. Information on secondary market trading of capacity rights is not available for the section of the route operated by SPP. On the bulletin board of BOG there are 2 offers and 1 request for capacity posted (as of November 30, 2006). All in all, secondary market trading of capacity rights could be considered as being not very liquid. Furthermore, it is questionable, if trading on the secondary market is transparent for the section operated by SPP. A more stringent application of the UIOLI provisions could lead to more available capacity. Given the different units used on the 2 sections of the route it was argued that conversion can easily be calculated applying the respective conversion factors. From a user’s point of view such calculation would be feasible but could not be considered as being neither user-friendly nor transparent. Harmonisation of units along the route should thus be effected. Differences between neighbouring gas balancing regimes increase the administrative burden and may require additional risk management. The use of OBA’s could mitigate some of the effects of these differences. Their full implementation should be effected as soon as possible.

2.5 Route 5 – Belarus - PL - GER

2.5.1 Description of the route

Poland has become an important transit country since the opening of the Yamal pipline, which brings gas from Russia via Belarus. Initially intended as part of the development of the huge gas reserves of the Yamal Peninsula, the pipeline now acts as an alternative transport route to Ukraine for the shipping of Western Siberian gas to Western Europe.

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GRI-SSE Assessment Summary on selected Transportation Routes

The Yamal line crosses 684 km of Poland (starts at Kondratki and run to Mallnow) and currently has a capacity of 32,3 BCM. It is owned and operated by a private company EuRoPol GAZ S.A., which in turn is owned by the Polish Oil and Gas Company (POGC) in 48%, by Gazprom in 48 % and 4 % by a Polish-registered company (Gas-Trading). Gas-Trading has both Russian and Polish shareholders.

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GRI-SSE Assessment Summary on selected Transportation Routes

Table 5: Overview of information (as of November 2006) Route 5 Gaz System Capacity situation Availability of firm and interruptible available capacities Technical maximum capacity at 108 mcm/day section entry Available firm capacity at section 1,2 mcm/day entry Technical maximum capacity at • Wlocławek – 1,9 mcm/h section exit • Lwowek – 5,3 mcm/h • Mallnow – 93,6 mcm/h Available firm capacity at section exit 0 mcm/h Duration of contracts offered Minimum 1 month

Congestion management Congestion Management interruptible, UIOLI principle procedures (UIOLI principle, Secondary Market) Description of expansion plans second pipeline foreseen

Description of Capacity Allocation fcfs procedures Tariffs Description of the tariff methodology Methodology included into the tariffs applied Ordinance issued by Minister of Economy. Establishing a gas transmission tariff is elaborated with the application of the cost- based methodology. Regulator is responsible for its approval (ex-ante). Availability of contractual or physical not available backhaul flows and published tariffs Other issues Length of route section 684 Tariff to be paid for each section of 0,1484 the route (EUR/m 3/h/km/a) 7 Units (flow rate) cm/h (at 20 ºC and 1,01325 bar)

Gas day 08:00 am to 08:00 am

OBAs concluded or schedule for Not being officially negotiated their implementation

2.5.1.1 Capacity situation

After completion of the last compression station in 2005 the pipeline reached the target capacity. Transportation services were not performed for third parties, however, transmission capacity of the pipeline was not fully reserved by main shareholders. In 2005 Gazprom-Export transmitted 23,67 bcm to Germany, POGC received for domestic purposes 2,98 BCM, whereas Gas-Trading did not use its right for capacity. The contract for gas transmission through the Polish territory is valid until the end of 2019. Not all capacity data is published according to the Regulation 1775/2005.

7 transportation case: firm 10-year contract for 100.000 Nm 3/h, load factor = 0,913 (8.000 h per annum), fuel gas not included

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GRI-SSE Assessment Summary on selected Transportation Routes

2.5.1.2 Congestion management

Principles of congestion management via interruptible basis and UIOLI are applied. Due to the fact that EuRoPol GAZ S.A. is not the TSO designed by the Regulator, operability on this pipeline is regulated by the bilateral contracts between EuRoPol Gaz (POGC) and Gaz- System S.A. On July 1 st 2005 Gaz-System was separated from POGC and become the TSO for domestic transportation system, managing and nominating interconnectors’ capacities.

Reservation of Total transmission Name of the Direction Kind of Place of transmission capacities for system Country ) of submitted connection capacity * long term ) operator supplies nominations** [mcm/year] contracts [mcm/year]

EuRoPol Poland Wlocławek 2 800 1 580 Poland a)

Gaz Lwowek 1 100 1 100 Poland a)

*) Maximal continues transmission capacity which can be offered by a transmission system operator to network users, taking into consideration integrity of the system and exploitation requirements of transmission lines. ** ) Kinds of nomination: a) monthly and daily in a weekly cycle, b) daily in weekly cycle. Source: GTO Gaz – System.

2.5.1.3 Tariffs

The procedure of tariff approval (ex ante by the Regulator) is specified in Art.47 of the Energy Law and the tariff ordinance. According to this ordinance the tariff should guarantee: – covering justified costs of performed activities, that means costs necessary from technical, organisational or economic reasons to run activities, – profit, necessary for realisation of investment plans contained in development plans agreed with the President of ERO, – protection of consumers against unjustified rise of prices.

Information on tariffs is available on the Regulator’s website. Gaz-System does not offer a tariff calculator.

2.5.2 Viability Assessment

The transportation of natural gas from Kondratki to Mallnow on a firm basis is possible, however due to the contractual requirements the TPA service may be provided only under permission of main shareholders, especially Gazprom-Export. There are no problems to fulfil the balancing requirements although there is no availability of storage and flexibility services. Information on secondary market trading is not available.

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GRI-SSE Assessment Summary on selected Transportation Routes

The Polish domestic law does not contain specific provisions on natural gas transit. However non- discriminatory provisions of the Energy Charter Treaty (ratification in 2001) and WTO (ratification in 1995) are part of the Polish law. Nevertheless the proper assessment of this route is difficult due to the potential lack of consistency of legal provisions (Energy Law and “acquis communautaire”) with commercial agreements. Firstly, it should be stated that there is no derogation for application of legal provision of the Gas Directive 2003/55/EC and Gas Regulation 1775/2005 to the Polish section of Yamal pipeline. Due to the lack of agreement between the main stakeholders, the EuRoPol GAZ S.A. did not submit an application to set up the TSO in accordance with appropriate provisions of the Energy Law. It should be noted that only upon a motion of the owner of the transmission pipeline, the Regulator can issue a decision designating the TSO on this line. In this case, on the basis of special agreement only the technical issues are carried out by the Gaz-System S.A. The transmission grid code approved by the Regulator on August 1st 2006, does not apply to this route yet. From the regulatory point of view a full implementation of the provisions of the Gas Regulation 1775/2005 should be effected as soon as possible.

2.6 Route 6 – Algeria - I - A - SK

2.6.1 Description of the route

The route includes: • the Italian section of the Transmed pipeline from Mazara to the Minerbio hub, where gas is carried from Algeria through the Trans-Tunisian pipeline and the submarine section of the Transmed; • the SnamReteGas (SRG) system between Minerbio and Tarvisio, where a backhaul gas transportation would be carried out • the TAG system to Baumgarten (backhaul), and • the SPP system (backhaul). From these systems gas may also be transferred to neighbouring consumption areas of Austria, Slovenia, Czech Republic, Hungary and Slovakia.

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GRI-SSE Assessment Summary on selected Transportation Routes

Table 6: Overview of information (as of November 2006) Route 6 Snam Rete Gas TAG Capacity situation Availability of firm and interruptible YES (backhaul) Not offered capacities due to lack of demand Technical maximum capacity at 81.6 mcm/day (backhaul) NA section entry Available firm capacity at section 1.2 mcm/day (backhaul) NA entry Technical maximum capacity at NA (backhaul) NA section exit Available firm capacity at section exit 9 mcm/day (backhaul) NA Duration of contracts offered 1-5 years (firm); 1 year or seasonal (backhaul) NA (interruptible) Congestion management Congestion Management Unplanned capacity (i.e. booked but (backhaul) NA procedures (UIOLI principle, not nominated) may be purchased. Secondary Market) Bulletin boards and PSV (virtual trading point) transfer service available Description of expansion plans Entry capacity (mcm/day): (backhaul) NA - 85.1 from 1.1.07 - 86.0 from 1.10.07 - 86.6 from 1.10.09 Description of Capacity Allocation Merit order and pro-rata within (backhaul) NA procedures each category. Priority to: 1. Pre Aug. 98 LT contracts, limited to average daily quantity; 2. Post Aug. 98 LT contracts, limited to average daily quantity; 3. LT contracts for remaining quantity; 4. other contracts. Tariffs Description of the tariff methodology Decided by NRA: cost based, entry (backhaul) NA applied exit, defined for 4 years and updated by price cap. Tariffs based on capacity (70%) and commodity flow (30%) Availability of contractual or physical YES See route 3 backhaul flows and published tariffs Other issues Length of route section Ca. 1720 Km 380 Km Tariff to be paid for each section of 3.99 €/ m 3/day/a (backhaul) NA the route (EUR/m 3/h/km/a) 8 (ca. 0.046 €/ m 3/h/km/a) Units (flow rate) m3/day (at 15°C and 1,01325 bar) m 3/h (at 20°C and 1,01325 bar) Gas day 6.00 - 6.00 8.00 - 8.00

OBAs concluded or schedule for Under discussion with TAG Under discussion with their implementation SRG

2.6.1.1 Capacity situation

Capacity currently not entirely used; problems occur upstream, notably in the Tunisian section (TTPC), and partly in the Mediterranean section (TMPC). After the reinforcement of TTPC expected in the next two years (about 6.5 Gmc/y in two steps) the Italian section will also need some enhancements. However regulation of such reinforcement, expected to be determined through open seasons, is missing. This could affect the timeliness of the reinforcement. Tarvisio exit capacity is available but not currently used.

8 transportation case: firm 10-year contract for 100.000 Nm 3/h, load factor = 0,913 (8.000 h per annum), fuel gas not included

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GRI-SSE Assessment Summary on selected Transportation Routes

2.6.1.2 Congestion management

An UIOLI provision exists but some doubts are raised about its feasibility. It is generally agreed that improvements are needed, however at present there is no commercial congestion on Italian entry points, notably at Mazara, therefore any limitations to UIOLI do not hamper network access.

2.6.1.3 Tariffs

Tariffs are generally seen favourably by shippers on the Italian section. They are fully regulated and among the lowest in Europe. Some complaints have been raised about the fixed term component which may be a problem for very small shippers.

2.6.1.4 Other issues

Besides capacity bottlenecks in Tunisia and the Sicilian Channel, it is not easy to contract gas upstream. Algeria is the only supplier and tends to behave in a conservative way. Difficulties arise from the need to secure simultaneous approval from Algerian, Tunisian and Italian trade authorities. Some shippers complained about the effectiveness of conflict resolution mechanisms. Criticisms were raised also with respect to current compulsory retail conditions, which would amount to a regulated selling tariff. This only applies to about 20% of the market. Currently balancing charges are not a problem. However a more advanced balancing system in Italy would possibly foster the development of a balancing market, but may leave smaller players in a difficult competitive condition with respect to the incumbent. In particular, the introduction of scheduling penalties may foster the development of a balancing market. This process has not adequately progressed so far due to metering difficulties and fears about the competitiveness of such market. Italian storage, though large by European standards, is not adequate and can hardly be used except for seasonal load management. No real alternative is currently available for balancing. The Italian system actually is balanced by storage level variations. It has been alleged that some storage unbalance charges may be too high and not cost reflective: but this reflects the priority role of storage for seasonal peak shaving for the residential sector and aims at discouraging the speculative usage of current limited available capacity. Further, some shippers complain about the lack of coordination between transportation and storage systems.

2.6.2 Viability Assessment

The Mazara-Tarvisio route is well equipped to be a major source of natural gas not only for Italy and Slovenia, as it is currently the case, but also for the rest of the SSE market and for other Central European countries. Access is fully regulated, capacity is available and tariffs are relatively low. Features of upstream supply however are not likely to lead to significant liquidity increase. At present the TTPC bottleneck and related regulation is the main problem, but it is expected to be relieved in the next few years. However the Italian section capacity also needs reinforcement, which is currently uncertain and related to those of other gas pipelines and LNG terminals and the relevant regulatory framework. Lack of harmonisation with neighbouring networks may also hinder the usage of this section for other markets.

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GRI-SSE Assessment Summary on selected Transportation Routes

Capacity on backhaul sections of this route in Austria is not currently offered, due to lack of demand, while it is available in Slovakia.

3. Conclusions

The assessment of the six transportation routes through the Regional Energy Market South-South East has identified several impediments for new market entrants. Within the European Union the transportation of gas on these routes is complicated by • the lack of active facilitation by TSOs of secondary market trading of capacity rights; • insufficient short-term congestion management (e.g. weak UIOLI provisions, no interruptible transportation contracts offered); • no plans for addressing long-term congestion (e.g. the TAG system, where no open season is carried out to assess future market demand) • different capacity booking and tariff methods within the route (e.g. Entry/Exit vs. point to point);

The tables below summarize the findings.

Which tariff structure is applied? SPP RTN BOG TAG OMV Geoplin SRG GAZ System

Route 1 E/E distance

Route 2 E/E distance distance distance

Route 3 E/E distance

Route 4 E/E distance

Route 5 distance

Route 6 distance E/E

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GRI-SSE Assessment Summary on selected Transportation Routes

Are there available firm capacities *)? SPP RTN BOG TAG OMV Geoplin SRG GAZ System

Route 1 YES YES

Route 2 NO NO YES NO

Route 3 NO NO

Route 4 NO NO

Route 5 NO

Route 6 NO **) YES

*) One-year contract for capacity of 100.000 Nm 3/h (from November 2006 to October 2007) on a firm basis. **) Since physical backhaul is not possible on the TAG system, possible backhaul transportation contracts will be concluded on an interruptible basis only.

Which short-term congestion management procedure is applied? SPP RTN BOG TAG OMV Geoplin SRG GAZ System interr. UIOLI, Route 1 None bulletin board interr. UIOLI, interr. UIOLI, Route 2 None None bulletin board bulletin board interr. UIOLI, Route 3 None bulletin board interr. UIOLI, Route 4 None bulletin board Route 5 interr UIOLI interr. UIOLI, Route 6 bulletin board bulletin board

Are there plans for capacity expansion? SPP RTN BOG TAG OMV Geoplin SRG GAZ System

Route 1 No plans No plans exp. planned, Route 2 No plans No plans exp. planned not sufficient exp. planned, Route 3 No plans not sufficient Route 4 No plans Open season

Route 5 No plans

Route 6 backhaul exp. planned

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GRI-SSE Assessment Summary on selected Transportation Routes

Have OBAs between neighbouring TSOs been concluded? SPP RTN BOG TAG OMV Geoplin SRG GAZ System

Route 1 under neg. under neg. in testing in testing in testing Route 2 NO phase phase phase in testing in testing Route 3 phase phase in testing in testing Route 4 phase. phase Route 5 NO

Route 6 under neg. under neg.

The main problems identified for each transportation route can be summarized as follows: ROUTE 1: UKRAINE-SK-CZ-GER: “The major difficulties for newcomers are missing Operational Balancing Agreements (OBAs) at border points.” ROUTE 2: UKRAINE-SK-A-SI: “Currently, it is not possible for new shippers to transport gas across the analysed route because of physical congestion at some interconnection points along the route; lack of appropriate long term congestion management on TAG system.” ROUTE 3: UKRAINE-SK-A-I: “Viability is still limited to incumbents and represents a bottleneck to the Italian market; lack of appropriate long term congestion management on TAG system” ROUTE 4: UKRAINE-SK-A-GER: “The transportation of natural gas on the whole route from Velke Kapusany to Oberkappel on a firm basis is not possible due to a lack of available capacity.” ROUTE 5: BELARUS-PL-GER: “TPA service may be provided only under permission of main shareholders, especially Gazprom-Export” ROUTE 6: ALGERIA-I-A-SK: “At present the Tunesian bottleneck and related regulation is the main problem. A lack of harmonisation with neighbouring networks may also hinder the usage for other markets.”

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