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Gas Regulation 2010A practical insight to cross-border Gas Regulation work

Published by Global Legal Group in association with Ashurst LLP , with contributions from:LEX Aguilar, Loera, Cortina & Martnez Estudio Glvez Abogados Fortunati & Asociados OFlynn Exhams Pachiu & Associates Rolim, Godoi, Viotti & Leite Campos Advogados Rosenberg, Hacohen, Goddard & Ephrat - Law Office Schnherr Rechtsanwlte GmbH Studio Legale Bonora e Associati Travieso Evans Arria Rengel & Paz Ura Menndez Vellani & Vellani Wardynski & Partners

Ali Budiardjo, Nugroho, Reksodiputro Garrigues Allens Arthur Robinson Azmi & Associates Bell Gully CMS Cameron McKenna Criales, Urcullo & Antezana Denton Wilde Sapte Dewey & LeBoeuf LLP Guerrero, Olivos, Novoa y Errzuriz Haavind IndoJuris Jankovic, Popovic & Mitic JeantetAssocis AARPI Lovells LLP Loyens & Loeff N.V.

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The International Comparative Legal Guide to: Gas Regulation 2010General Chapters:1 2Contributing Editor

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

Geoffrey Picton-Turbervill, Ashurst LLPBrand Manager

Country Question and Answer Chapters:3 4 5 6 7 8 9 Argentina Australia Austria Bolivia Brazil Bulgaria Chile Fortunati & Asociados: Roberto A. Fortunati & Monica Centeno Lappas Allens Arthur Robinson: Angus Jones & David Maloney Schnherr Rechtsanwlte GmbH: Christian Schmelz & Bernd Rajal Criales, Urcullo & Antezana: Adrin Barrenechea & Daniel Mariaca Rolim, Godoi, Viotti & Leite Campos Advogados: Maria Joo Rolim & Vitor Henriques CMS Cameron McKenna: Kostadin Sirleshtov & Pavlin Stoyanoff Guerrero, Olivos, Novoa y Errzuriz: Gonzalo Delaveau & Marcos Zavala JeantetAssocis AARPI: Thierry Lauriol & Sophie da Cunha Lovells LLP: Matthias Hirschmann & Violetta Pudell IndoJuris: Dhritiman Bhattacharyya & Dinesh Singh Ali Budiardjo, Nugroho, Reksodiputro: Philip R. Payne O'Flynn Exhams: Irene ODonovan & Frank M. OFlynn Rosenberg, Hacohen, Goddard & Ephrat - Law Office: Dan Hacohen Studio Legale Bonora e Associati: Luigi Giuri Lovells Horitsu Jimusho Gaikokuho Kyodo Jigyo: Anthony Raven & Kenji Okura Denton Wilde Sapte: Marla Valdez Azmi & Associates: Mohd Rasheed Khan & Azmi Mohd Ali Aguilar, Loera, Cortina & Martnez: Alejandro Loera & Mario del Bosque Loyens & Loeff N.V.: Roland W. de Vlam & Marc Custers Bell Gully: David Coull & Angela Bamford LEX: Adegbite Adeniji & Sina Sipasi Haavind: Rune Omdahl & Ian Anders Tobiassen Vellani & Vellani: Badaruddin F. Vellani Estudio Glvez Abogados: Francisco Glvez D. & Carlos Ral Vizquerra Wardynski & Partners: Weronika Pelc & Robert Zajdler Garrigues: Joo Rosado Correia & Sara Castelo Branco Pachiu & Associates: Delia Vasiliu & Florin Dobre Jankovic, Popovic & Mitic: Jelena S. Gazivoda & Marija M. Kostic Allen & Gledhill LLP, Ashurst LLP: Kelvin Wong & Daniel Reinbott Ura Menndez: Juan I. Gonzlez Ruiz & Mara Jos Descalzo Ashurst LLP: Mhairi Main Garcia Dewey & LeBoeuf LLP: Eli Farrah & Scott Mueller Denton Wilde Sapte: Marla Valdez & Ravshan Adilov Travieso Evans Arria Rengel & Paz: Vera De Brito de Gyarfas 8 16 25 34 43 53 61 70 83 91 100 108 117 124 133 140 148 155 163 172 179 186 196 205 213 221 229 239 251 260 270 279 292 303 311

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10 France 11 Germany 12 India 13 Indonesia 14 Ireland 15 Israel 16 Italy 17 Japan 18 Kazakhstan 19 Malaysia 20 Mexico 21 Netherlands 22 New Zealand 23 Nigeria 24 Norway 25 Pakistan 26 Peru 27 Poland 28 Portugal 29 Romania 30 Serbia 31 Singapore 32 Spain 33 UAE 35 USA 36 Uzbekistan 37 Venezuela

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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.

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

Alan Falach LL.M Managing Editor Global Legal Group [email protected]

Chapter 1

Lessons From the Tough Times The Return of the Debt Market and Fightback For Small to MidCap Oil and Gas CompaniesAshurst LLP

Huw Thomas

Nick Williamson

IntroductionHuw Thomas, a partner at Ashurst London, and Nick Williamson, a partner at Ashurst Abu Dhabi, consider the return of the debt market and lessons learned by small to mid-cap oil and gas companies and their lenders during the credit crunch. Now that we are some way on from the onset of the credit crunch and the dramatic fall in oil and gas prices from their summer 2008 highs, a sense of tentative optimism is returning to the market: what lessons can small to mid-cap oil and gas companies and their lenders learn as a result of their sometimes traumatic recent experiences?

opportunity to refinance, it is not surprising that things got tough for many small to mid-cap oil and gas companies. Some companies which had been more aggressive with the use of leverage and took on debt to finance pre-development assets, such as North Sea focused player Oilexco, were particularly badly squeezed..

Lessons to be Learned?How to get out of a holeSome companies have been in the fortunate position of having sufficient cash reserves, or production rates, to enable them to service their debt obligations without significant difficulty. For others, however, the liquidity trap has resulted in them having to consider urgent solutions to service their debt obligations. These solutions have variously involved the renegotiation of facilities, asset disposals, raising equity from current shareholders, raising cash from a strategic investor or mergers with other companies. Can we learn anything from the way different companies have approached possible solutions? Where companies have been open with their lending banks as to the difficulties they face and have worked co-operatively with them to find solutions, so maintaining the trust of their lending banks even in the midst of a crisis, the outcome has tended to be more favourable for all concerned. Borrowers who have tried to carry on as if nothing has happened, or have tied themselves in knots trying to find artificial solutions, have eventually found the going perhaps harder than it needed to be. Raising equity from existing shareholders is one possible solution, but this has not been easy in the current environment (with overleveraged small to mid-cap oil and gas companies not being in the enviable position of the likes of Cairn Energy and Tullow Oil). Companies which have been willing to consider imaginative solutions have been rewarded. An injection of cash from a new strategic investor has been an option, either for shares (in which case there is the issue of how existing shareholders will react to the dilution) or at the asset level. For instance, in September 2009, Sterling Energy, an oil and gas exploration and production company with interests in the Middle East, Africa and the Gulf of Mexico, successfully raised approximately 60m through a placing of its shares, allowing it to pay down a significant amount of its BBF. In autumn 2008, Dyas (a wholly-owned subsidiary of SHV, the largest privately owned conglomerate in The Netherlands) acquired a portion of the North Sea oil and gas assets of Ithaca Energy and also stepped into the shoes of The Royal Bank of Scotland under Ithaca Energys debt facility. Dyas subsequently converted the debt into further assets of Ithaca Energy, leaving the latter debt free. A

Debt TroublesFirst, it is important to understand the background to some of the difficulties which have been faced by small to mid-cap oil and gas companies since summer 2008. During the period of increasing oil and gas prices, many of these companies took on substantial amounts of debt to finance the development of upstream assets. A lot of this debt is in the form of borrowing base facilities (BBFs) under which the amount capable of being borrowed from time to time is calculated by reference to the value of reserves, which of course varies according to oil and gas prices. Some companies perhaps lost sight of the fact that, in the event of a dramatic fall in oil and gas prices, their borrowing capacity would suffer a similarly abrupt reduction. The borrowing base is typically redetermined every six months and a repayment will be necessary if the outstandings exceed the new borrowing base. Under the redetermination procedures, the lenders invariably have a wide discretion over setting the economic assumptions to be used in recalculating the borrowing base. Some banks will say privately that they deliberately did not reset their petroleum price decks too sharply down so as to avoid defaulting a large number of their borrowers overnight. Nevertheless, the result has often been a substantial and sudden reduction in a companys borrowing capacity and in some cases, the need to make an immediate repayment of debt in the tens of millions of dollars. Matters were made worse by the fact that, although BBFs have been typically structured as five to seven-year facilities, the commitments of the lenders start stepping down long before final maturity, with perhaps a step-up in interest rate margin. In a normal market the borrower would be expected to refinance the facility well in advance of the final maturity. But when the credit crunch hit, it became very difficult for all but the most established names to arrange refinancing. So when borrowing base amounts were redetermined sharply downwards, and credit markets dried up thus removing the

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Ashurst LLPquick fire-sale of assets, while not ideal, has sometimes been the only option for some if borrowing capacity has been exhausted. The problem with this strategy is that companies have found that the price gained for such assets may be at a discount to their value as a result of the need to inject cash quickly. If lenders are patient though, the result can be much more positive. In September 2009, Stratic Energy, an international oil and gas company operating principally in the North Sea and Italy, managed to pay down a significant amount of its bank debt through the sale of its interest in the pre-development Breagh gas field in the North Sea to RWE. Also, Sterling Energy finally found itself debt-free after the sale in December 2009 of its US assets. As the debt market returns it has become a fairly common ask from borrowers for a grace period (perhaps up to three months) to be allowed post borrowing base redetermination before a repayment becomes due, so as to allow time to pursue solutions before having to seek a bank waiver.

Lessons From the Tough Timescalculated by reference to the six-monthly projections have not in themselves been excessive. The problems have often arisen where a group has incurred exploration and appraisal expenditure on nonborrowing base assets and that expenditure is not included in the cash flow projection which is used as the basis for determining the groups borrowing capacity. The expenditure may be incurred by a member of the group which is not a BBF borrower but, nevertheless, it represents a drain on the cash of the group which might otherwise have been available as equity to support the development activities which are taking place within the ambit of the BBF. So lenders will be more wary of liabilities within the borrowers group which may not be directly related to the debt facility in hand, but which may have an untoward impact on the viability of the group as a whole. A number of borrowers, amongst them Oilexco, were caught out by incurring capital expenditure commitments, including, for example, obligations under drilling rig contracts, which were hard to curtail when the sudden downturn came. This experience may be expected to result in lenders seeking to impose tighter restrictions on the incurrence of such liabilities and it may well become market standard for BBFs to include whole group liquidity testing covenants and events of default.

Less leverageIt seems likely that the amount of debt which borrowers seek to take on and which lenders are willing to make available will be less aggressive in future. A reduction in borrowing capacity may be imposed by the lenders effectively attributing less value to the reserves being financed through, perhaps, adoption of more conservative oil and gas price assumptions or a refusal to take into account P50 reserves (those which have a 50 per cent or more probability of being economically recoverable), with an insistence only on P90 reserves (90 per cent or more probability of being economically recoverable). This could be particularly true of heavily development-weighted financings, i.e. where there is not a good balance of development and producing assets in the portfolio being financed. Although likely to receive strong push back from borrowers, a reduction in borrowing capacity may also be achieved by increasing the coverage of reserves required for a given amount of debt - for example, increasing the project life cover ratio used to calculate the borrowing base amount from the classic 1.5x to perhaps 1.6x. Also, there may be a more pronounced tendency to include cash sweep mechanisms to accelerate repayment of the financing - i.e. a requirement to apply a certain percentage of excess cash flow to debt repayment after an initial grace period, particularly in the case of junior facilities. Companies with simpler financing structures have, unsurprisingly, found it easier to work through their problems during the credit crunch. There may therefore be a desire for less complex debt structures going forward. Pre-development facilities have attracted particular criticism. Although they looked fairly conservative in that they attributed only a very few dollars in value to the oil and gas reserves, it has not always been attractive in a bearish commodity market with the availability of equity money severely constrained, to bring assets to the development phase. So it may be some time before we see pre-development debt financing make a return. Subordinated debt of any description is likely to be harder to raise, for a while at least. Inevitably, restructuring negotiations have been more tortuous where different lenders appear for different levels of commitment in the senior debt and the junior debt. From the borrowers point of view at least, it is clear that the ideal position is that the lenders are the same under the senior and junior facilities and that their percentage commitments are the same under both facilities.

Broader debt funding sourcesWith debt capacity and risk appetite among commercial banks having fallen back, there has been a heightened interest among borrowers in seeking out funding from multilateral lending bodies including the International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB). In the past, there has sometimes been a perception that these organisations are quite bureaucratic and timeconsuming to deal with. To cast off this image, they have been keen to show themselves to be quick to react and commercial in their approach. Where the loan needs to be, for political risk mitigation reasons, fronted by the multilateral lender with the commercial banks taking back-to-back participations, it will of course be necessary to use the multilaterals form of documentation, which will vary from the LMA forms commercial banks normally use. In a co-financing with commercial lenders where the multilateral umbrella is not required by the commercial lenders, it has sometimes been possible for borrowers to persuade multilaterals to set aside their traditional requirement for a separate loan facility agreement, with the additional work that can involve, in favour of participating in a single loan facility alongside the commercial banks, albeit with certain specific provisions applying for the benefit of the multilateral only. This approach can certainly make the documentation process much more straightforward.

ProspectsWhile the signs are looking more positive, the next few months will continue to be a crucial time for small to mid-cap oil and gas companies faced with onerous debt repayment obligations. There is no doubt that the sector has taken a hit in the last 18 months or so but the trauma has thrown up some good deals for larger companies with the cash and the desire to purchase a bolt-on company or asset portfolio with attractive production, reserves or resources. We may well see further consolidation in the sector and certainly can expect more surprises in these still uncertain times. Lending appetite appears to be increasing, although banks will no doubt be more selective about which deals to go into and the pendulum has firmly swung back to tighter structures underpinned by more conservative assumptions. It is a different market which will require different approaches, but a market that is all the more interesting for that.

Lenders seek more controlThe fundamentals of reserve-based financing have generally remained conservative compared to forms of lending in other sectors. For example, the available debt amounts under BBFs

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Ashurst LLP

Lessons From the Tough Times

Huw ThomasAshurst LLP Broadwalk House, 5 Appold Street London EC2A 2HA United Kingdom Tel: Fax: Email: URL: +44 20 7859 1238 +44 20 7638 1112 [email protected] www.ashurst.com

Nick WilliamsonAshurst LLP Suite 101, Tower C2, Al Bateen Towers Bainunah (34th Street), Al Bateen PO Box 93529, Abu Dhabi United Arab Emirates Tel: Fax: Email: URL: +971 02 406 7208 +971 02 406 7250 [email protected] www.ashurst.com

Huw Thomas is a partner in the energy, transport and infrastructure department in London and specialises in project finance. He has particular expertise in the development and financing of projects in the oil and gas and petrochemicals sectors. Huw has substantial experience of working in international markets, including work in the Middle East and Asia.

Nick Williamson is head of Ashursts Middle East practice. He is a partner in the corporate department in Abu Dhabi and specialises in M&A and corporate finance, advising both companies and financial advisers. Nick has particular expertise in mergers and acquisitions and equity capital markets, both domestic and international. He has extensive experience in the energy/natural resources sector.

Ashurst operates at the heart of the energy industry worldwide. With a global energy team of over 80 lawyers we can assemble teams to provide the highest quality advice tailored to our clients needs. We have helped hundreds of companies, financial institutions and governments deal successfully with challenging energy projects by developing innovative solutions. Our lawyers provide a comprehensive service to the energy and natural resources industry in the following areas: Upstream oil and gas LNG Power Renewables Nuclear We advise on all aspects of work in the energy industry: Mergers, acquisitions and corporate finance Project and acquisition financing Environmental law Commercial agreements Contact Geoffrey Picton-Turbervill, Head of Ashursts Global Energy Team. Tel: +44 (0)20 7859 1209; Email: [email protected] Greenfield projects International law Joint ventures Litigation and arbitration Pipelines Refining and petrochemicals Mining Water


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Chapter 2

Floating LNG Regasification: Legal IssuesAshurst LLPAnthony Patten

IntroductionAnthony Patten, a partner at Ashurst London, considers the increasing popularity within the LNG industry of floating regasification and the specific issues which need to be considered in respect of the long-term lease or charter of a floating storage and regasification unit. LNG (liquefied natural gas) is formed by the cooling of natural gas to -163C (-260F), resulting in its condensation and conversion into a liquid. Liquefaction causes a significant reduction in volume1, meaning that LNG can be transported much more costeffectively over longer distances than natural gas via utilisation of purpose-built road tankers, railway tankers and LNG carrier ships. On arrival at an unloading destination, the LNG is regasified for distribution to the end-user. If the LNG has been transported via an LNG carrier ship (an LNGC), a floating storage and regasification unit (FSRU) allows regasification to be undertaken offshore. Specifically, an LNGC moors alongside the FSRU and unloads its LNG cargo into tanks onboard the FSRU for storage prior to its passage through the FSRUs onboard regasification system. The regasified natural gas is then piped to shore for onward distribution to the end-user via the existing gas pipeline network.

the long-term charter by the Dubai Supply Authority of an FSRU from Golar. The FSRU will be constructed by conversion of the LNGC Golar Freeze and will be moored at Jebel Ali Port, Dubai. Golar Freeze will remain classified as an LNGC, but is intended to be used only for FSRU service and will be permanently moored at Jebel Ali Port; the purchase from Golar by OLT Offshore LNG Toscana S.p.A. (OLT) (a joint venture company of which E.ON and Iride are the major sponsors) of the LNGC Golar Frost, for subsequent conversion into an FSRU, which is to be permanently moored at OLTs offshore LNG terminal in Livorno, Italy (delivery of the FSRU is scheduled for the second half of 2010); and the charter by Kuwait Petroleum Corporation of a regasification vessel from Excelerate Energy, which will be stationed at the existing Mina Al-Ahmadi jetty facility in Kuwait and form the basis of Kuwaits first LNG import terminal. Interest in FSRU utilisation is increasing as parties seek to take advantage of the associated benefits (please refer to table 1). With this in mind, summarised below are the main issues which parties should consider when negotiating the long-term lease or charter of an FSRU (please note that our commentary assumes an arms length charter hire relationship between owner and charterer, being one where the owner does not have an equity stake in the receiving gas terminal).

Reliance on FSRUs in Todays LNG MarketThe worlds first FSRU based on conversion of an existing LNG vessel commenced operation in Pecem, Brazil in January 2009. Chartered by Petrobras from Golar LNG Limited (Golar), the conversion of the Golar Spirit (a 1981-built ship) into an FSRU was completed in June 2008. While primarily intended to provide storage and regasification services, Golar Spirit has also retained its ability to operate as an LNGC. In contrast, other FSRUs forsake this flexibility and are, instead, designed to remain permanently moored at the LNG unloading port (other than for relocation due to drydocking or in emergency circumstances). Currently, a number of other FSRU (or similar) projects are ongoing including: the long-term charter by Petrobras of a second FSRU from Golar, which is intended to be moored in Rio de Janeiro, Brazil. The FSRU was constructed by conversion of the LNGC Golar Winter (completed Q2 2009) and will retain the flexibility to operate as a LNGC; the utilisation of shuttle and regasification vessels (SRV) in the Gulf of Mexico Gateway Scheme and the Teesport Project (Teesside, UK). An SRV is a form of intermittent FSRU as it operates as a shuttle vessel which serves both as an LNGC and, on arrival at the unloading destination, an LNG regasification plant;

Table 1 - Potential benefits of FSRU projects Potentially lower costs than on shore LNG regasification terminals, with quicker development time. Flexibility of location - an FSRU is a converted LNG vessel and can therefore be relocated if necessary. More simplified decommissioning than onshore LNG regasification terminals. Ability to meet seasonal peaks in gas demands. Extension of life for ships converted into an FSRU. Ability to meet a shortfall in gas production during an interim period, e.g. while a permanent energy production facility is being constructed. Ability to access rapidly high-value gas markets. Decreased construction and delivery risk for the host country (although consideration must be given to the potential repercussions for the host country if delivery of the FSRU is delayed). Potential reduction in carbon dioxide emissions - commentators believe that use of an FSRU may result in increased burning of gas rather than diesel for energy generation, which, in turn, will significantly reduce carbon emissions.

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Ashurst LLPIssues for Consideration in the Long-term Charter of an FSRUTiming of transactionTypically, a long lead time follows execution of an agreement for the long-term charter of an FSRU. This is because construction of an FSRU or conversion of an LNGC into an FSRU is both timeconsuming and costly, thus generating significant capex costs for the owner which are not typically incurred on a speculative basis.

Floating LNG Regasification: Legal Issues

more general definition (i.e. an event or circumstance that is beyond the reasonable control of a party, acting as a reasonable and prudent operator, and materially and adversely affects the ability of a party to perform its obligations under the TCP). An exhaustive list of force majeure events does, arguably, offer more certainty to the parties with respect to identifying whether an event of force majeure has occurred, but is dependent on each event being adequately defined and the list of force majeure events being sufficiently comprehensive. Extent of force majeure. How far along the LNG value chain should a force majeure event be permitted to run? For example, should the charterer be permitted to seek force majeure relief under the TCP for a force majeure event affecting a downstream gas buyer or upstream LNG supplier? Should the owner be permitted to seek force majeure relief for a force majeure event affecting the shipyard at which the FSRU is being built? No definitive answers can be given to these questions as the equitable solution may largely depend on the relationships (if any) between the various parties along the LNG value chain and, ultimately, the level of control that the owner and/or the charterer may have over such parties. Relief. The occurrence of a force majeure event typically relieves a party from performing its obligations under an agreement and thus prevents that party from being in breach. With respect to a TCP, the primary obligations for which the parties will seek relief are payment of charter hire (charterer) and provision of services (owner). Consideration must therefore be given to the extent to which relief is granted and for how long. For example, should a termination right accrue for the non-affected party and/or the affected party after a prolonged period of continuous force majeure? Extension of term. If a force majeure event occurs, should the charter term be extended by a period equal to the duration of the force majeure event? Any such extension may provide an opportunity for the charterer to make good any shortfall in gas delivered to its downstream gas buyer(s) during the force majeure period or, alternatively, allow the owner to recoup any shortfall in charter hire received. However, the charterer must consider whether the supply contracts under which it provides natural gas to its downstream buyer(s) permit it to make good any such shortfall and/or whether the contracts will remain in place during the extension period. Conversely, the owner must have regard to any future arrangements (i.e. post-charter period) that are already in place for the FSRU. Off-specification. An FSRU is designed to receive and regasify LNG within defined specifications. Any LNG received outside these specifications (Off-spec LNG) may cause damage to the regasification unit. An FSRU is also designed (and typically contracted) to produce natural gas within defined specifications - gas not falling within these specifications (Off-spec Gas) may be unacceptable to the downstream gas buyer and, potentially, cause damage to the receiving gas network while exposing the charterer to a claim for damages. Consideration must therefore be given to what recourse should be available to the owner and charterer for accepting delivery of Off-spec LNG and Off-spec Gas respectively. Options include: a right for the receiving party to refuse to accept delivery of the Off-specification product; a reduction in charter hire if Off-spec Gas is delivered; and

Form of agreementThe form of agreement typically used for the charter of a ship is a time charter party (TCP). Depending on whether the FSRU is to be permanently moored or is to retain its flexibility to operate as an LNGC, an FSRU project may adopt characteristics of: (i) an LNGC; (ii) a land-based regasification facility; and/or (iii) an offshore floating crude oil storage or production unit. One may therefore need to consider issues deriving from each of these types of project.2

Charter hireCommencement date. Consideration must be given to the date upon which the FSRU is deemed to be on-hire and, thus, from which charter hire is payable. Specifically, the owner will want to ensure that charter hire is due from the date the FSRU is delivered in accordance with the owners obligations under the TCP. This may be the date that the FSRU is actually delivered at the unloading port or, if the charterer is unable to accept delivery, a deemed delivery date. Conversely, the charterer will want to ensure that payment of full charter hire only commences as and when the FSRU is delivered in accordance with the contracted specification. Terms of charter hire. The charter hire is typically a fixed daily fee which is due if the FSRU is performing within certain defined limits. The owner has no ability to manage the extent to which the FSRU is utilised and should therefore carry no risk in respect of underutilisation. However, consideration should be given to what recourse is available to the charterer if the FSRU is underperforming. Potential recourse includes a proportionate reduction in the charter hire and/or an extension of the charter hire period. Creditworthiness of counterparties. As is the case with other long-term contracts, consideration should be given during TCP negotiations to the creditworthiness of each party. The owner will primarily be concerned about the charterers ability to pay the charter hire when due. If the charterers creditworthiness is inadequate, a letter of credit may be requested by the owner or, alternatively, the ultimate parent company of the charterer (or a group company with sufficient credit strength) may act as guarantor of the charterers obligations. In contrast, the charterer will want to ensure it is sufficiently protected in the event that the owner fails to deliver the FSRU on time. Such protection may include the payment of liquidated damages by the owner. Force majeure. Although the occurrence of force majeure in the LNG industry is relatively rare, the consequences can be significant. Careful consideration must therefore be given to the extent to which force majeure relieves a party from its obligations under the TCP. Scope of definition. Thought needs to be given to whether the definition of force majeure includes an exhaustive list of agreed force majeure events or a


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Ashurst LLPgranting of an indemnity to: (i) the owner for any costs incurred in cleaning or remedying the FSRU and/or venting the Off-spec LNG; and (ii) the charterer for loss suffered as a result of unknowingly accepting Off-spec Gas (e.g. inability to fulfil contractual obligations to its downstream gas buyer(s)). Regulatory concerns. Consideration should be given to what regulatory permits, licences and other forms of consent (together, Permits) are required for mooring and operating the FSRU at the unloading port. This requirement will vary depending on the country in which the unloading port is located. Sufficient time and resource must be dedicated to ensuring all Permits are secured prior to the FSRUs arrival. Furthermore, the TCP should expressly state which party is responsible for securing the Permits. Typically, a distinction is drawn between those Permits necessary for FSRU mooring and operation, which are for the owners account, and those Permits required for construction and operation of the LNG terminal and mooring platform, which are for the charterers account. Third party access regimes. A further regulatory concern which should be considered is the applicability of third party access regimes. In various jurisdictions (such as in the EU), local law requires the owner of certain infrastructure to make available to third parties (on reasonably competitive or regulated terms) some or all of that infrastructures capacity. Consequently, the owner is prevented from awarding 100 per cent of the infrastructure capacity to one party and, by extension, an FSRU owner may be prohibited from contracting 100 per cent of the nominal regasification capacity to a sole charterer. Liability and indemnity. The parties to a TCP should give careful consideration to the liability regime which they wish to rely on. The two options which typically underpin liability regimes are: guilty party pays, whereby one party (party A) indemnifies the other party (party B) for any liability incurred by party B as a result of the acts or omissions of party A; and mutual hold harmless (also known as knock-forknock), whereby one party (party C) is responsible for and indemnifies the other party (party D) against any liability incurred by party D which relates to personal injury, illness or death of personnel employed by party C (or party Cs affiliates) or damage to property belonging to party C (or party Cs affiliates) (and vice versa). Consequently, the indemnity provided by party C is effective even if liability accrues due to the actions of party D. The parties may agree not to apply knock-for-knock principles where the non-indemnifying party has committed gross negligence or wilful misconduct. Arguably, the mutual hold harmless approach allows for strict allocation of liability as each party bears responsibility for its own property and personnel (which responsibility it could ordinarily seek to manage through insurance). In contrast, the guilty party pays approach requires determination of fault and, thus, scrutiny of the actions of each party, which may result in dispute if the parties fail to agree. The parties should also consider whether to exclude liability for consequential loss. Permitting recovery of consequential loss potentially exposes the parties to loss which may be difficult to foresee at the time of entry into a TCP.

Floating LNG Regasification: Legal IssuesRights of compensation for nonperformance. The ability of a party to claim compensation for a counterpartys failure to perform its obligations under an agreement is always an area of focus during pre-contractual negotiations. With respect to a TCP, the owners primary concern is to ensure that the charterer continues to pay full charter hire in the event of charterer default (e.g. failure by the charterer to provide, operate and/or maintain a mooring berth for the FSRU at the unloading port, failure to secure all necessary permits, etc.). Conversely, the charterer will seek relief from payment of the charter hire if the owner is in default (e.g. late delivery of the FSRU). Furthermore, the charterer may seek liquidated damages as a means of compensation for any loss suffered under gas supply contracts with downstream gas buyers. Termination rights. To avoid future uncertainty, the termination rights of each party to a TCP should be expressly identified. Typical termination rights may include: a right for the owner to terminate for non-payment of charter hire. The daily charter hire is typically a considerable amount, therefore the owner may require a termination right after a short period of non-payment to limit any compounding effect and, ultimately, its financial exposure to the charterer; a right to terminate for prolonged force majeure. When considering if and/or when a termination right accrues following a force majeure event, thought should be given to, among other factors, how long the force majeure event must continue prior to a termination right accruing and which party the termination right accrues to (i.e. non-affected party only or both the affected and non-affected party); a right for the charterer to terminate for prolonged late delivery of the FSRU. Given that the charterer is likely to have gas supply contracts in place with downstream buyers, late delivery of the FSRU may have significant consequences for the charterer. The charterer may therefore seek a right to terminate the TCP in such circumstances and negotiations are likely to centre on what period of delay must pass before any such termination right accrues; a right for the non-affected party to terminate for bankruptcy and/or commencement of insolvency proceedings; and a right for the charterer to terminate for loss (actual or constructive) of the FSRU.

Endnotes1 2 LNG is estimated to have less than 0.2 per cent of its original natural gas volume. Note that this article does not consider any specific marine law issues (e.g. salvage, outbreak of war, additional war expense and New Jason clauses), but such issues should be taken into account by all parties during TCP negotiations.

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Ashurst LLP

Floating LNG Regasification: Legal Issues

Anthony PattenAshurst LLP Broadwalk House, 5 Appold Street London EC2A 2HA United Kingdom Tel: Fax: Email: URL: +44 20 7859 2464 +44 20 7638 1112 [email protected] www.ashurst.com

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

Ashurst operates at the heart of the energy industry worldwide. With a global energy team of over 80 lawyers we can assemble teams to provide the highest quality advice tailored to our clients needs. We have helped hundreds of companies, financial institutions and governments deal successfully with challenging energy projects by developing innovative solutions. Our lawyers provide a comprehensive service to the energy and natural resources industry in the following areas: Upstream oil and gas LNG Power Renewables Nuclear We advise on all aspects of work in the energy industry: Mergers, acquisitions and corporate finance Project and acquisition financing Environmental law Commercial agreements Contact Geoffrey Picton-Turbervill, Head of Ashursts Global Energy Team. Tel: +44 (0)20 7859 1209; Email: [email protected] Greenfield projects International law Joint ventures Litigation and arbitration Pipelines Refining and petrochemicals Mining Water


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7

Chapter 3

ArgentinaFortunati & Asociados

Roberto A. Fortunati

Mnica Centeno Lappas

1 Overview of Natural Gas Sector1.1 A brief outline of Argentinas natural gas sector, including a general description of: natural gas reserves; natural gas production including the extent to which production is associated or non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) liquefaction and export facilities, and/or receiving and regasification facilities (LNG facilities); natural gas pipeline transportation and distribution/transmission network; natural gas storage; and commodity sales and trading.

needed. Pursuant to the applicable laws and regulations the Federal Government, through its Executive Branch, is the one that establishes the policy on gas matters either for the up-stream and down-stream sectors. Between 2003 and 2007 a carve out to that capacity was made by virtue of certain law and decrees of the Executive Branch of the Federal Government, allowing the provinces to concede exploration and gas exploitation fields previously transferred to such provinces (Law 24,145). Note that Argentina is organised as a Federal country. In this respect, it is worth mentioning that several provincial laws and regulations often overlap with Federal ones. As a result of the described legal framework there are Federal and provincial Enforcement Authorities (for the up-stream sector), usually belonging to the Executive Branch of the given Government. When the domain and jurisdiction of the oil and gas reservoirs have been transferred by virtue of Law 24,145 -and subsequent Law 26,197- the licensing capacity of exploration and exploitation of gas reservoirs has also been transferred to the relevant provinces. Transportation and distribution including commercialisation and storage of natural gas are regulated by the Federal Government, and have been licensed to private companies. This notwithstanding, the Federal Government is an indirect holder of a stake in certain companies. Currently, the Federal Government -for reasons that are not necessary grounded on commercial reasons- is delaying the appropriate adjustment of tariffs for transportation and distribution of gas.1.2 To what extent are Argentinas energy requirements met using natural gas (including LNG)?

Natural gas leads the Argentine energy matrix, and its importance has been growing during the last 50 years. Such growth accelerated after the privatisation process of the gas industry that started in the early 90s. After the referred to privatisation, the industry developed dramatically, suffering however, the strong impact of the 2002 Argentine economic and financial crisis. Since then, the negative impact of price controls for the up-stream sector, as well as the lack of timely adjustment of tariffs for transportation and distribution -which value deteriorated in US Dollars terms- added to the existence of debts acquired in foreign currency has put the industry in a rather complicate situation. It is expected that it may start to get out from such point sometime this year. The gas up-stream sector is regulated by a specific legislation (the Law on Hydrocarbons), while transportation, distribution, commercialisation and storage is specifically regulated by other law (the Law on Gas) and its specific complementary regulation. The Law on Hydrocarbons contemplates that the Federal or local Governments where the reservoir is located may grant concessions for a limited period of time, which can be extended. Such time at Federal level is 35 years, which can be extended for an additional 10-year period. At Federal level, the Secretariat of Energy regulates exploration and production. Local administrative authorities have similar capacity with respect to fields transferred to the provinces. Various gas fields originally granted under concession by the Federal Government have been transferred to the provinces where they are located. Since the privatisation of the gas industry in the early 1990s, transportation, distribution and commercialisation is regulated by the Gas Enforcement Authority. Due to a shortage of energy in Argentina during the year 2008, the Federal Government enacted certain incentives to stimulate additional exploration and production of natural gas to be destined to the local market. It is worth mentioning that such incentives have not yet been enough to increase production and add more reserves as much as

As explained herein above (see question 1.1), the energy matrix of Argentina indicates a high presence of oil and gas. Such percentage could reach far beyond 80% of the total energy sources. In this respect, by 1992 gas reserves were 541 MM dam3. In 2007, reserves declined to 394 MM dam3. LNG has started to be used in the local market since 2008, in order to avoid the serious consequences derived from a shortage of natural gas production in winter time -when residential consumption increases. That resulted in the lease of a vessel by the private company YPF (subsidiary of Repsol), to deliquify imported LNG. Liquefaction plants are not in operation in the country at the time this response is given.

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Fortunati & Asociados1.3 To what extent are Argentinas natural gas requirements met through domestic natural gas production? 2.3

ArgentinaIf different authorisations are issued in respect of different stages of development (e.g., exploration appraisal or production arrangements), please specify those authorisations and briefly summarise the most important (standard) terms (such as term/duration, scope of rights, expenditure obligations).

Most of the local demand is satisfied with local production. However imports, mainly from Bolivia, are needed to secure the gas supply requirements. In this respect, the existing import agreement between the Argentine Government -through Energa Argentina S.A. (ENARSA)- and the Government of Bolivia is currently been revised. It can be assumed that the main objective for the Argentine Government is to secure gas supply for a longer term, and on the Bolivian side is to obtain a better price. Private local producers claim that prices to be paid for the imported gas would be higher than the ones paid to them for their gas. Certainly, this reflects a punctual situation that may vary from time to time.1.4 To what extent is Argentinas natural gas production exported (pipeline or LNG)?

Exploration is conducted under exploration permits, which grant an exclusive right to explore the relevant area and get a concession to exploit the discovered gas fields. The holder of an exploration permit has to pay a royalty and to comply with the investments committed and related obligations. The exploitation concession entitles the holder of it to extract and own the gas. The concessionaire is entitled to get also a transportation concession for the extracted gas. Note that the exploitation concession does not grant property over the reservoirs, which continue to belong to the relevant States. Thus, the concessionaire pays a royalty to the States usually equivalent to 12% of the value of the gas extracted. This percentage could be reduced under certain circumstances. The concessionaire also undertakes to carry out the investments committed in the bidding conditions. Exploration and exploitation of hydrocarbons is deemed of national interest, and thus can be conducted even without the consent of the landowner -but certainly with the prior awarding of Court order to enter into the property. As mentioned before, authorisations to survey land can be obtained with respect to unexplored areas. All information obtained under such authorisations has to be delivered -at Federal level- to the Secretariat of Energy. Permits for the exploration and concessions for exploitation of areas are usually granted as a result of a bidding process, and consequently, terms and conditions may vary from one to another. This notwithstanding, such terms contemplate that concessions are granted by the Executive Branch of the Government prior inscription in Registers held by the Secretariat of Energy -at Federal level- is required to participate in those bidding process. Foreign companies are certainly allowed to be registered.2.4 To what extent, if any, does the State have an ownership interest, or seek to participate, in the development of natural gas reserves (whether as a matter of law or policy)?

Despite the shortage of production mentioned above, there are export agreements in force pursuant to which natural gas is exported to Chile and to Uruguay. In 2008, Argentina exported 22.72 MM m3 to Uruguay and 393.30 MM m3 to Chile.

2 Development of Natural Gas2.1 Outline broadly the legal/statutory and organisational framework for the exploration and production (development) of natural gas reserves including: principal legislation; in whom the States mineral rights to natural gas are vested; Government authority or authorities responsible for the regulation of natural gas development; and current major initiatives or policies of the Government (if any) in relation to natural gas development.

Based on the Argentine Constitution as amended in 1994, and on legislation enacted pursuant to it, property of on-shore gas reservoirs corresponds to the National State or to the Provincial State where they are located. As a result of that, an important number of fields originally under the jurisdiction of the Federal Authorities have been transferred from the Federal State to provincial ones. It is worth mentioning that off-shore oil and gas reservoirs belong to the National State since 12 nautical miles.2.2 How are the States mineral rights to develop natural gas reserves transferred to investors or companies (participants) (e.g. licence, concession, service contract, contractual rights under Production Sharing Agreement?) and what is the legal status of those rights or interests under domestic law?

Despite the privatisation process that took place in the early 90s, in 2004 through Law 25,943, the Federal Government created ENARSA. ENARSA is a state owned company that carries out by itself or by third parties, not only the exploration and exploitation of oil and gas, but also its distribution and commercialisation. ENARSAs goal is to promote the development of energy in the country. Furthermore, it is important to mention that as stated in Article 2 of Law 25,943, since October 2004 ENARSA is the owner of the exploration permits and exploitation concessions of all national maritime areas that then were not subject to such permits or concessions.2.5 How does the State derive value from natural gas development (e.g. royalty, share of production, taxes)?

Mineral rights are vested to private companies for a limited period of time by means of explorations permits or exploitations concessions. Survey authorisations can be requested by private companies in connection to areas without sufficient data to be subject to exploration activity. Concessions are granted for 35 years extendable for 10 years pursuant to the Law on Hydrocarbons. Partial relinquishments of the granted area are contemplated to occur from time to time.

The Provincial States get the royalties from exploitation concessionaires that are usually 12% of gas produced value and also collect local taxes. The royalties are paid on a monthly basis. Under certain circumstances the royalty could be paid in kind. The National State gets the taxes collected at Federal level (mainly


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Argentina

Fortunati & AsociadosIncome Tax and Value Added Tax). Taxes on exports are currently in force. Title holders of explorations permits pay a canon until exploitation starts if that would be the case. The canon is calculated on the basis of the surface of the land covered under the permit, and paid annually.2.6 Are there any restrictions on the export of production?

Argentina2.11 In addition to those rights/authorisations required to explore for and produce natural gas, what other principal Government authorisations are required to develop natural gas reserves (e.g. environmental, occupational health and safety) and from whom are these authorisations to be obtained?

Argentina

Gas exports require a prior approval of the Federal Government. Pursuant to the Law on Hydrocarbons such exports can only take place to the extent that the supply to domestic market is secured. Since 2004 further regulations in this respect have been enacted due to the shortage of energy in the local market. For example in 2004, a Rationalisation Program for the Exports of Natural Gas has been put in place.2.7 Are there any currency exchange restrictions, or restrictions on the transfer of funds derived from production out of the jurisdiction?

The main governmental authorisations to be mentioned are: (i) depending on which manner rights are acquired -e.g. acquisition of a company instead of the eventual need for approval by the Federal Antitrust Authority; (ii) if applicable the concession to transport gas from the production facilities e.g. through a gas pipeline; (iii) the correspondent provincial environmental permits, and eventually health and safety certificates; and (iv) Court authorisations to have access to private lands in case of lack of agreement with landowners.2.12 Is there any legislation or framework relating to the abandonment or decommissioning of physical structures used in natural gas development? If so, what are the principal features/requirements of the legislation?

Regulations on hydrocarbons enacted back in 1989 based on the Law on Hydrocarbons contemplate that exporters have to transfer back into the Argentine market at least 30% of the export proceeds in foreign currency. In addition, since 2002, as a result of the economic and financial crisis that took place in Argentina, there is a general foreign currency exchange control in force in the country. That control has an impact on trade financing as well.2.8 What restrictions (if any) apply to the transfer or disposal of natural gas development rights or interests?

Federal and local regulations contemplate abandonment situations. The more precisely regulated matter is the one related to the abandonment of wells. At Federal level, a series of rules have been issued by the Secretariat of Energy. Most of them follow international standards. With respect to other installations dedicated to the operation of any given field, the Law on Hydrocarbons, contemplates that upon termination of the concession, the same shall pass on -free of any lien- to the State to which the property revert. From the beginning of gas exploitation in Argentina (1907) to the present, approximately half of the drilled gas wells turned to be unproductive. Hence, such wells have been or will be timely abandoned due to inactivity. In light of the above, Argentine laws have foreseen the proceedings to be carried out by concessionaires for the abandonment of gas wells as well as ecological measures to be taken in order to avoid a negative environmental impact. Pursuant to Article 69 of the Law on Hydrocarbons, concessionaires must adopt all the necessary measures to avoid damages to oil and gas fields, as a consequence of well abandonment. Besides, concessionaires will be responsible for damages caused to the State or to third parties. Resolution 5/1996 enacted by the Secretariat of Energy states that inactive or to be abandoned wells shall be categorised by concessionaires according to their location, status (i.e. active or inactive), priority (i.e. importance of situations that may be generated as a result of the conditions of the well). Such categorisation will be considered to determine the term for the abandonment established by the above Resolution. The above Resolution makes a distinction between the two kinds of gas well abandonment, the temporary and the definitive, which shall be determined by the concessionaire of the corresponding area where the well is located. Such determination will be made according to technical, commercial or operative reasons. Abandonment could be temporary when well may be reused in the future. As regards the techniques to abandon gas wells, the Authority recommends concessionaires to adopt certain techniques detailed in Resolution 5/1996 for temporary or definitive abandonment. For instance, in case that the abandonment is definitive, the well shall be isolated with cement to prevent further damages to the well area. If the abandonment is temporary, concessionaires may also adopt other measures that may be more adequate -technically and economicallywith respect to each well or area provided that they comply with the

The assignment of rights to explore and exploit gas fields is subject to the prior approval of the Enforcement Authority. At Federal level such Authority is the Secretariat of Energy. As established in the Law on Hydrocarbons, the assignee has to evidence adequate technical and financial capacities to hold such rights.2.9 Are participants obliged to provide any security or guarantees in relation to natural gas development?

No, exploration and exploitation do not require the granting of guarantees per se. However, as contemplated in the Law on Hydrocarbons, the granting of guarantees are often required in bidding process until awarding takes place.2.10 Can rights to develop natural gas reserves granted to a participant be pledged for security, or booked for accounting purposes under domestic law?

Certainly, based on the nature of the rights rested, security interests can be created over rights to explore and exploit gas fields. It is worth mentioning that the Law on Hydrocarbons dedicates some provisions on this matter, providing certainty to the process of creation and perfection of security interests on these assets. Prior authorisation of the Enforcement Authority to disposition of rights is requested, and eventual assignee of such interests shall meet the technical and financial capacities to exercise those rights in accordance to local regulation requirements. Local laws contemplate rules for the appropriate accounting of natural gas reserves.

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Fortunati & Asociadosrequirements regarding environmental security and protection and as long as the Enforcement Authority does not object them. Concessionaires must provide to the relevant Enforcement Authority with certain information concerning the abandonment of a gas well within 45 days from the date in which such abandonment took place. Furthermore, the Secretariat of Energy -at Federal level- enacted in 1996 a Resolution stating that concessionaires must file annually with the Secretariat of Energy a report detailing the activities performed within each concessioned field, including the ones related to the abandonment of wells. All the activities connected with well abandonment must be supervised by a qualified inspector of the operating company.

ArgentinaThe Federal Authority is the one that grants the required authorisation in order to construct and operate natural gas pipelines when they cross the territory of more than one province or when pipes are built to export gas.

4.3

In general, how does an entity obtain the necessary land (or other) rights to construct natural gas transportation pipelines or associated infrastructure? Do Government authorities have any powers of compulsory acquisition to facilitate land access?

3 Import / Export of Natural Gas (including LNG)3.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect of cross-border sales or deliveries of natural gas (including LNG).

In order to construct new gas sites or even to expand existing ones, transporters and distributors must be granted the correspondent authorisations issued by the Gas Enforcement Authority. Gas carriers are entitled to get easements on the surface land from where the pipes would be laid down in case they cannot reach an agreement with landowners. These easements can be obtained from the Gas Enforcement Authority, and of the same nature of the ones to be acquired by natural gas producers.4.4 How is access to natural gas transportation pipelines and associated infrastructure organised?

As indicated before (see response to questions posed in section 2 above), export of natural gas requires the prior approval of the Secretariat of Energy. Resolution 299/98 regulates natural gas exports, defining its limitations and the necessary requirements needed to obtain the Secretariats approval to export natural gas. During the last years, Argentinas Government followed a strong policy of intervention in the local gas market. Furthermore, the Law in Hydrocarbons and the Law on Gas, highlight that natural gas authorisations for exportation will be granted, to the extent that it does not affect Argentinas domestic supply. As the Law on Gas states in Article 3, as far as natural gas imports are concerned, they do not require any kind of authorisation. Copy of the import and export agreements are to be filed before the Gas Enforcement Authority.

The principle that rules the activity is the open access, without discrimination. Preferences among different parties shall be based and by objective reasons, before the Gas Enforcement Authority. Carriers have to offer to third parties, the excess capacity of their systems through bidding process. The Gas Enforcement Authority is the one that should resolve conflict among the parties.4.5 To what degree are natural gas transportation pipelines integrated or interconnected, and how is co-operation between different transportation systems established and regulated?

4 Transportation4.1 Outline broadly the ownership, organisational and regulatory framework in relation to transportation pipelines and associated infrastructure (such as natural gas processing and storage facilities).

As a result of the Privatisation of Gas del Estado, in 1992 Transportadora Gas del Norte and Transportadora Gas del Sur became the owners of the main gas pipe transportation system. The interaction and cooperation for a more efficient nationwide transportation system is a requirement to be complied with as contemplated in the Law on Gas, and regulation enacted pursuant to it.4.6 Outline any third-party access regime/rights in respect of natural gas transportation and associated infrastructure. For example, can the regulator or a new customer wishing to transport natural gas compel or require the operator/owner of a natural gas transportation pipeline or associated infrastructure to grant capacity or expand its facilities in order to accommodate the new customer? If so, how are the costs (including costs of interconnection, capacity reservation or facility expansions) allocated?

Natural gas transportation is contemplated in the Law on Gas, and subsequent regulations, establishing that gas transportation shall be carried out under authorisation -by means of a concession, licence, or permit- granted by the Executive Branch of the Federal Government. The laws in force contemplate that this activity is to be performed by private companies, and that the States could also participate in case of absence of interest from private parties.4.2 What Governmental authorisations (including any applicable environmental authorisations) are required to construct and operate natural gas transportation pipelines and associated infrastructure?

As indicated above, the transportation of natural gas requires an authorisation -by means of a concession, licence or permit- to be granted under the Law on Gas usually for a term of 35 years that could be extended for another 10 years.

As indicated above, the rule is the open access to the transportation system with respect to the capacity that has not been already acquired by other parties. Carriers however, could be obliged pursuant to the terms of the authorisations granted- to expand their gas transportation systems to the extent that: (i) such extension is convenient to the needs of the public transport service; and (ii) applicable tariffs may allow the recovery of the investment and maintain an adequate profitable business as contemplated in the Law on Gas.


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It is mandatory to be granted from the National Authority a concession title in order to construct and operate natural gas pipelines.

Fortunati & Asociados4.7 Are parties free to agree the terms upon which natural gas is to be transported or are the terms (including costs/tariffs which may be charged) regulated? 5.4

ArgentinaCan the regulator require a distributor to grant capacity or expand its system in order to accommodate new customers?

Argentina

Tariffs are regulated, as well as most of the terms and conditions to render the transportation service. Pursuant to the Law on Gas, every distributor must apply the same gas tariffs for the same service, to all consumers. Tariffs -which are originally established in the terms and conditions of the authorisation granted- may vary among different clients when the characteristics of the service that is rendered changes. Tariffs, to be modified, require the approval of the Gas Enforcement Authority. As mentioned, applicable tariffs and its adjustment terms have been settled at the time the privatisation took place. However, after the Argentine economic and financial crisis of 2002, the effective revision of the agreed tariffs -to be adequate at the new situationhas been delayed, jeopardising the gas transportation business.

The Law on Gas in Article 32 stipulates that distributors can be obliged to expand their installations, to the extent that is deemed convenient to satisfy the needs of the distribution public service. Tariffs will have to allow the recovery of the distributors new investments, and maintain an adequate profitable business for the distributor as contemplated in the Law on Gas.5.5 What fees are charged for accessing the distribution network, and are these fees regulated?

5 Transmission / Distribution5.1 Outline broadly the ownership, organisational and regulatory framework in relation to the natural gas transmission/distribution network.

The Law on Gas dedicates chapter IX to tariffs. Tariffs are originally established in the bidding conditions, and are expected to compensate distributors in addition to its operating costs, taxes, amortisation, taking into consideration the cost of natural gas, and the need of maintaining a reasonable profitable business. Different tariffs may certainly apply but to the extent it is economically justified based on differences in the service rendered, and approved by the Gas Enforcement Authority.5.6 Are there any restrictions or limitations in relation to acquiring an interest in a gas utility, or the transfer of assets forming part of the distribution network (whether directly or indirectly)?

The gas industry in Argentina is organised in three sectors: (i) production; (ii) transportation; and (iii) distribution. Distribution through pipelines, are considered a regulated public service to be rendered pursuant to an authorisation -by means of concession, licence or permit- granted by the Secretariat of Energy, as contemplated in the Law on Gas. The Gas Enforcement Authority is the ENARGAS, the same Gas Authority that regulates transportation of natural gas. It is contemplated that the service be rendered by private companies. In 2006 the Federal Government created a fund to be destined to the expansion of energy facilities, including the ones that may be required to the natural gas transport and distribution services.5.2 What Governmental authorisations (including any applicable environmental authorisations) are required to operate a distribution network?

Effectively, there are restrictions. None of the following gas market players can have control over gas distribution companies: (i) gas carriers and their controlling entities; (ii) consumers that acquire natural gas from producers; and (iii) operators of storage facilities. Due to the fact that the distribution of gas is considered a public service, it is a strongly regulated industry where distributors cannot dispose their assets and networks in a non-limited way. As a consequence of this, they cannot lease, sublease or assign them to other uses that are not related with the distribution of gas.

6 Natural Gas Trading6.1 Outline broadly the ownership, organisational and regulatory framework in relation to natural gas trading. Please include details of current major initiatives or policies of the Government or regulator (if any) relating to natural gas trading.

The Law on Gas stipulates that all companies rendering gas distribution services must obtain in advance the correspondent authorisation of the Executive Branch and, the correspondent provincial authorisations dealing with construction and maintenance of pipelines. The Executive Branch authorisations are granted for 35 years and can be extended for 10 more years. Article 16 of this same Law, demands that all gas distributors start the construction of any facility with the prior authorisation of the Gas Enforcement Authority.5.3 How is access to the natural gas distribution network organised?

The legal framework for gas trading is regulated by the Law on Gas and subsequent regulations pursuant to it. Decree 180/2004 updated regulation of the electronic wholesale market for natural gas (MEG). Players on the market are not only traders but also gas producers. This entity creates an Authority in charge of the coordination of the trading. In this respect, traders must be registered with the Secretariat of Energy.6.2 What range of natural gas commodities can be traded? For example, can only bundled products (i.e., the natural gas commodity and the distribution thereof) be traded?

Pursuant to the Law on Gas, distribution is a public service organised on the open access basis with respect to the excess capacity of the given system. Conflicts with distributors shall be decided by the Gas Enforcement Authority. All natural gas distributors must respond to every gas consumers demand in 30 days.

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In 2004, the Executive Branch of the Federal Government, introduced certain modifications to Argentinas gas market regulation (different from a pure bundling structure), created a fund for investments in transportation and distribution in the gas sector and classified consumers into different categories depending on gas expenditures.

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Fortunati & Asociados7 Liquefied Natural Gas7.1 Outline broadly the ownership, organisational and regulatory framework in relation to LNG facilities. 8.4

ArgentinaDoes the regulator (or any other Government authority) have the power to approve/disapprove mergers or other changes in control over businesses in the natural gas sector, or proposed acquisitions of development assets, transportation or associated infrastructure or distribution assets? If so, what criteria and procedures are applied? How long does it typically take to obtain a decision approving or disapproving the transaction?

There is no regulation related to liquefaction facilities; Argentina lacks these facilities.7.2 What Governmental authorisations are required to construct and operate LNG facilities?

As far as the natural gas sector is concerned, the Commission and the Gas Enforcement Authority are the ones in charge of analysing the different transactions in the gas market. Article 16 of the Antitrust Law stresses that it is mandatory for the Commission to request the Gas Enforcement Authoritys opinion when analysing a possible merger in the gas area. In addition, Article 8 of this Law, states that transactions in this field must be reported to the Commission when the amount of the total turnover of the undertakings concerned, exceeds the sum of Two Hundred Million Pesos ($200,000,000). Nevertheless, further in this law, various cases of mergers of these quantities are exempted from notification.

There is no regulation in this area.7.3 Is there any regulation of the price or terms of service in the LNG sector?

There is no regulation in this area.

8 Competition8.1 Which Governmental authority or authorities are responsible for the regulation of competition aspects, or anti-competitive practices, in the natural gas sector?

9 Foreign Investment and International Obligations9.1 Are there any special requirements or limitations on acquisitions of interests in the natural gas sector (whether development, transportation or associated infrastructure, distribution or other) by foreign companies?

Antitrust Law 25,156 aims to control and prevent economic concentrations and all those conducts that jeopardise the market. Article 17 of the Law contemplates the creation of an autonomous Enforcement Authority. However, it has not been created yet. A Commission whose chairman is the Secretary of Trade is the Authority currently performing such functions. The gas market has a double regulatory check with respect to eventual antitrust practices. The Gas Enforcement Authority has also the capacity to approve or reject concentration of players in the gas market (see question 8.4 below).8.2 To what criteria does the regulator have regard in determining whether conduct is anti-competitive?

No special requirements or limitations on acquisitions of interests in the natural gas sector exist in the Argentine applicable laws. In other words, before the local laws foreign investors are to be treated as well as national ones.9.2 To what extent is regulatory policy in respect of the natural gas sector influenced or affected by international treaties or other multinational arrangements?

As stated in Article 1 of the Antitrust Law, Argentina punishes two main behaviours: (i) the lessening of competition -by limiting, restricting and falsifying or distorting competition-; and (ii) the abuse of a dominant position. It is considered a prohibited practise a business that is anticompetitive and inefficient. Article 2 of this Law, contains 14 different types of anti-competitive practices. This Article contains only a descriptive list of prohibited conducts. Other undescribed antitrust behaviours will also be condemned.8.3 What power or authority does the regulator have to preclude or take action in relation to anti-competitive practices?

Pursuant to the Argentine Constitution, local laws have to conform to international treaties. Argentina is a party to numerous international treaties for the promotion and protection of foreign investments, e.g. with France (Law 24,100), Spain (Law 24,118), Italy (Law 24,122), United States (Law 24,124), Canada (Law 24,125), Switzerland (Law 24, 099) and Chile (Law 24,342). In reference to gas commerce, Bolivia and Argentina have signed several agreements. Bolivia is Argentinas best gas supplier. Gas commercialisation between them must respect the terms and conditions set in the treaties agreed by them. Argentina and Chile have agreed to encourage free importation and exportation of natural gas. A few years ago, the energy shortage situation in Argentina derived in the interruption of gas supply to Chile.

The Commission has been empowered to investigate mergers and acquisitions. Anti-competitive behaviours can be denounced by (i) the Commission, (ii) by an order issued by the Secretary to the Commission, or (iii) by a third party. The Commission may cease or desist such orders. These can be appealed with the competent Court of Appeals.


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Fortunati & Asociados10 Dispute Resolution

Argentina10.3 Is there any special difficulty (whether as a matter of law or practice) in litigating, or seeking to enforce judgments or awards, against Government authorities or State organs (including any immunity)?

10.1 Provide a brief overview of compulsory dispute resolution procedures (statutory or otherwise) applying to the natural gas sector (if any), including procedures applying in the context of disputes between the applicable Government authority/regulator and: participants in relation to natural gas development; transportation pipeline and associated infrastructure owners or users in relation to the transportation, processing or storage of natural gas; and distribution network owners or users in relation to the distribution/transmission of natural gas.

Disputes in the gas market related to the rendering of gas transportation and distribution must be submitted to the Gas Enforcement Authority. Its decision can be challenged following the administrative proceeding contemplated in local Federal laws, or directly appealed before the Court of Appeals of the City of Buenos Aires with jurisdiction on Administrative Federal Matters. The term to appeal is 15 days counted as from the service of process of the decision. Penalties imposed by the Gas Enforcement Authority can be directly appealed before the Appellate Court on Administrative Federal Matters of the City of Buenos Aires, within 30 days since the penalty is notified.10.2 Is Argentina a signatory to, and has it duly ratified into domestic legislation: the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and/or the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID)?

A former Attorney General of the Treasury has stated, while in office, that awards like the ones issued by ICSID arbitration panels can (sic) be revised by local tribunals. He explains that the nonulterior revision is incompatible with the Argentine constitutional and legal system. He argues that the non-ulterior revision confronts the constitutional principle of local judicial control. This position seems to have not much supporters currently. However, neither payments have been made yet in connection to awards favourable to plaintiffs, nor local Courts have revised those awards. It is worth mentioning that during recent renegotiation of authorisations (e.g. gas distribution), plaintiff agreed to waive their claims before ICSID arbitration tribunals.10.4 Have there been instances in the natural gas sector when foreign corporations have successfully obtained judgments or awards against Government authorities or State organs pursuant to litigation before domestic courts?

Argentina

In several cases foreign competitors have been able to invoke bilateral investment treaties and conventions. This resulted in several arbitration claims. Some gas industry plaintiffs obtained favourable awards before ICSID arbitration panels. This notwithstanding we are not aware of payments made under such awards yet.

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Updates

Argentina has signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID). The former one has been ratified by Law 23,619 and the latter one, by Law 24,353.

11.1 Please provide, in no more than 300 words, a summary of any new cases, trends and developments in Gas Regulation Law in Argentina.

In November 2009, the Gas Enforcement Authoritys official site published the beginning for the construction of an underwater gas pipeline. This pipeline will cross the Strait of Magallanes. This new project implies a highly complex and strategic work that has been fostered by the Gas Enforcement Authority within 2006-2009.

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Fortunati & Asociados

Argentina

Roberto FortunatiFortunati & Asociados Av. Leandro N. Alem 855, 23rd floor Buenos Aires Argentina Tel: Fax: Email: URL: +54 11 5219 1300 +54 11 5219 1313 [email protected] www.fortunati.com.ar

Mnica Centeno LappasFortunati & Asociados Avenida Leandro N. Alem 855, 23rd floor Buenos Aires Argentina Tel: Fax: Email: URL: +54 11 5219 1300 +54 11 5219 1313 [email protected] www.fortunati.com.ar

ROBERTO A. FORTUNATI established Fortunati & Asociados back in February 2003. His professional activity is mainly concentrated in banking, and corporate finance mainly focused in the oil and gas and mining sectors. He has also been acting as consultant to The World Bank in insolvency matters. Mr. Fortunati acted as leading local counsel for several major project financings, mainly related to mining (including the one related to Veladero Gold Project in 2004), oil and gas, and utilities. He has led the market in the area of outof-court debt restructurings (work-outs), and largely participated in the privatisation of state-owned companies, M&A and in the startup of venture capital investments. He is member of the board of directors of several corporations, including his acting as independent director and member of auditing committees, and arbitrator to the MAE (the local OTC electronic market). In the academic ground, he is a member of the Advisory Board of the School of Law of Torcuato Di Tella University, Buenos Aires, and teaches project financing in a postgraduate course on Oil and Gas Law, at the School of Law of the University of Buenos Aires. Mr. Fortunati is a frequent lecturer on oil and gas, debt restructuring, project financing, and other financial matters. Mr. Fortunati acted as General Counsel of Citigroup in Argentina, after being partner and member of the Administration Committee of Estudio Beccar Varela, in Buenos Aires. He started his professional career as in-house counsel of Amoco Argentina Oil Company. He graduated from the Law School of the University of Buenos Aires in 1979.

MONICA CENTENO LAPPAS graduated in 2007 as attorney at law from Universidad Austral, in Buenos Aires, Argentina. In 2006 she was a foreign student (exchange program) at Universidad Rey Juan Carlos in Madrid, Spain. She joined the Fortunati & Asociados in June, 2008. From January through April, 2008 she was a foreign intern at Gnzalez Calvillo S.C Abogados in the City of Mexico, Mexico D.F. Her area of practice is General Corporate Law. She is a member of the Buenos Aires Bar Association. Languages: Spanish, English and French.

Fortunati & Asociados is a law firm founded in 2003 which provides legal services and representation to local and international companies in a wide variety of industries. The Firm counts with a team of highly qualified professionals which, to the highest international standards, works in a coordinated manner in order to efficiently respond to the demands of todays globalised businesses, caring on providing personalised services to attend the most diverse needs that its clients may have for their diversified transactions. Clients of the Firm include industrial and commercial companies, financial institutions and private funds. Practice Areas: Energy & Natural Resources. Corporate Finance. Capital Markets. Private Equity. Litigation & Arbitration. The Firm is member of worldwide and regional associations of leading law firms serving international clients. Mergers & Acquisitions. Banking Law. Real Estate. Tax.


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Chapter 4

AustraliaAllens Arthur Robinson

Angus Jones

David Maloney

1 Overview of Natural Gas Sector1.1 A brief outline of Australias natural gas sector, including a general description of: natural gas reserves; natural gas production including the extent to which production is associated or non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) liquefaction and export facilities, and/or receiving and regasification facilities (LNG facilities); natural gas pipeline transportation and distribution/transmission network; natural gas storage; and commodity sales and trading.

Worlds 2nd largest LNG exporter by 2020. Australias major LNG markets currently include Japan, China, Chinese Taipei and the Republic of Korea. Some recent LNG Sale and Purchase Agreements concluded between Australia and its trading partners include: ExxonMobil and PetroChina Company Limited agreeing on the supply of approximately 2.25 mtpa of LNG sourced from the Gorgon Project over a 20-year term; ExxonMobil and Petronet LNG Limited agreeing on the supply of approximately 1.5 mtpa of LNG sourced from the Gorgon Project over a 20-year term; and Chevron securing three separate supply agreements for a total of nearly 3 mtpa of LNG sourced from the Gorgon Project to Osaka Gas (25-year term), Tokyo Gas (25-year term) and GS Caltex (20-year term). A further agreement with Chubu Electric is expected to be confirmed before the end of 2009. Transportation and distribution/transmission network Refer to section 5. Commodity sales and trading Refer to section 6.1.2 To what extent are Australias energy requirements met using natural gas (including LNG)?

Natural gas reserves and production As of January 2009, Australias natural gas reserves were estimated to be over 170 trillion cubic feet with 30 trillion cubic feet being proven reserves. In 2008-09, Australias gas production was 40.1 billion cubic metres and is forecast to increase to 50.7 billion cubic metres in 2009-10. This increase is due to the realisation of new conventional gas fields plus production of methane from coal seams. Australias natural gas is produced from a number of offshore and onshore basins. Key gas provinces include the Carnarvon Basin off the north-west coast of Western Australia, the Gippsland Basin off the coast of Victoria, the onshore Cooper Basin in the north-east of South Australia, the onshore Surat-Bowen Basin in Queensland and the Timor Sea area to the north of Australia, incl

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