MAJOR GAS PIPELINE PROJECTS IN ROMANIA

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1 LEGAL ISSUES RELATED TO MAJOR GAS PIPELINE PROJECTS IN ROMANIA Bryan W. Jardine, Managing Partner Wolf Theiss Romania ROMANIA GAS FORUM 100 YEARS OF GAS INDUSTRY IN ROMANIA PLOIESTI - 1 JULY 2009

2 MULTINATIONAL GAS PIPELINE PROJECTS: NABUCCO AND SOUTH STREAM MAIN LEGAL FRAMEWORK MAIN REGULATORY ISSUES TRANSPORTATION VS. TRANSIT TRANSPORTATION OF NATURAL GAS TRANSIT OF NATURAL GAS MAJOR GAS INFRASTRUCTURE

3 CASE STUDY: NABUCCO TRANSPORT PIPELINE/ TRANSIT PIPELINE/MAJOR GAS INFRASTRUCTURE? APPROVALS AND LICENCES ENVIRONMENTAL OBLIGATIONS RIGHTS OVER LAND FOR CONSTRUCTION OF PIPELINE PROJECTS CONCLUSION

4 MULTINATIONAL GAS PIPELINE PROJECTS (I) - NABUCCO Scope: Transport of natural gas from Caspian region, Middle East and Egypt via Turkey, Bulgaria, Romania and Hungary to Austria Status t (including information obtained from recent press releases): Nabucco is included in the EU Trans-European Energy Network Programme The intergovernmental agreement for the Nabucco development is intended to be signed in July 2009 Construction works are intended to commence in 2010 By Decision no. 1228/2008, as further amended and supplemented, ANRE approved: (i) a 25 year partial exemption of Nabucco from the national requirements regarding third parties access to the gas transport systems and from the tariffs' procedures; and (ii) the conditions for such exemptions

5 MULTINATIONAL GAS PIPELINE PROJECTS (II) - SOUTH STREAM Scope: A major trans-black Sea gas pipeline that carries natural gas from Russia to Bulgaria and further to Italy and Austria Status (according to recent press releases): On 15 May 2009 Russia, Italy, Bulgaria, Serbia and Greece signed the agreement for the construction of the South Stream pipeline pp Romania's direct involvement appears to be rather unlikely; however, Romania might provide technical support to Russia in connection with the operations at the Black Sea

6 MAIN LEGAL FRAMEWORK Romania Gas Forum Years of Gas Industry in Romania 2009 Regulatory regime for oil and gas sector Law no. 351/2004 the Gas Law, as further amended and supplemented Law no. 238/2004 the Petroleum Law, as further amended and supplemented GD no. 784/2000 for the approval of the Regulation concerning the award of authorizations and licenses in the gas sector Decision of ANRGN (currently ANRE) no. 1362/2006 for the approval of the validity conditions of the licence for the transport of gas GD no. 1043/2004 for the approval of: (i) the Regulation regarding the access to the National Transport System of Gas (SNT), (ii) the Regulation regarding the access to the gas distribution systems and (iii) the Regulation regarding access to the upstream supply pipelines, as further amended d and supplemented Regulatory regime for public goods, award of public contracts and concession GEO no. 34/2006 regarding the award of public contracts, public work concession contracts and service concession contracts, as further amended and supplemented Law no. 213/1998 regarding public property and its legal regime, as further amended and supplemented GEO no. 54/2006 regarding the regime of concession contracts for public goods, as further amended and supplemented Law no. 33/1994 regarding the expropriation for public interest Law no. 50/1991 regarding the authorization of construction works, as further amended and supplemented Gas Law (in what concerns the concession of the public services and goods) Petroleum Law (in what concerns the concession of the public services and goods)

7 MAIN REGULATORY ISSUES Economic sector of strategic importance; therefore, highly regulated Overlap of the regulations regarding natural gas: the natural gas sector appears to be regulated by both the Petroleum Law and the Gas Law (gas is included in the broad definition of petroleum ) Overlap of the regulatory powers of the two relevant regulators, ANRM and ANRE (former ANRGN): the concession agreement for the operation of the SNT was executed with ANRM, the regulatory authority in the oil sector, and not with the regulator in the natural gas sector

8 TRANSPORTATION VS. TRANSIT Although the Directive 2003/55/EC concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC ( Gas Directive ) ) has abolished the distinction between transit flows and national transport and considers them within a unique category of transmission, the Gas Law continues to maintain the distinction. Transportation of natural gas = the activity organized for the carrying of natural gas through the National Transportation System of Natural Gas (the "SNT") SNT = the natural gas transportation system under high pressure of over 6 bars and composed of the main pipelines and all the installations, equipment and facilities related thereto, through which natural gas extracted from the production fields or imported gas is taken for the purpose of being delivered to distributors and direct consumers, for storing and export purposes and to the customers from other countries Transit of natural gas = the transportation through the SNT and/or through main pipelines dedicated to transit activities, throughout Romania, of the gas originating from one state towards another state

9 TRANSPORTATION OF NATURAL GAS Operated through the SNT Regulated activity Public service of national importance SNT is in the public property of the Romanian State SNT may be exploited based on a concession agreement, together with the related public natural gas transportation service (currently the operator of SNT is Transgaz). Pursuant to the Petroleum Law, investments made by title holder of the concession over the Petroleum SNT and the related public service, out if its own resources, in new assets "similar to" the assets that are qualified by the law as public property, which are not part of the Petroleum SNT, but which may be interconnected with the system, will be their private property. The Gas Law does not have a similar provision; it is not clear whether the provisions of the Petroleum Law were meant to also apply to assets related to natural gas transportation; in any event, the above provision would apparently apply exclusively to the operator of the SNT. Legislative clarification would be preferable. Conclusion: Natural gas transportation seems to be at the moment a natural monopoly. Private property p over assets similar to the ones forming the SNT (possibly also transport pipelines) appears to be permitted only in the person of the operator of the SNT. Legislative clarification would be preferable.

10 TRANSIT OF NATURAL GAS (I) Through SNT and/or through other dedicated main pipelines Transit through SNT May only be carried out by the operator of the SNT (currently Transgaz) Is a regulated activity No concession agreement separate from the concession agreement for the transport public service is necessary between the same parties (Romanian state and the operator of the SNT)

11 TRANSIT OF NATURAL GAS (II) Romania Gas Forum Years of Gas Industry in Romania 2009 Through SNT and/or through other dedicated main pipelines Transit through dedicated main pipelines By corroborating the definitions in Gas Law and Petroleum Law, the dedicated pipelines appear to be the main pipelines used exclusively for activities of transit of gas throughout the Romanian territory between two different locations situated on the borderline of Romania, constructed based on an intergovernmental agreement, which have the legal regime and are operated according to the special law which approves the intergovernmental agreement It appears that no concession agreement would be required for natural gas transit activity performed through dedicated main pipelines, as natural gas transit is not qualified as a public service Authorizations and licences to be issued by ANRE are however necessary The transit pipelines appear to be private property of the developer Natural gas transit through dedicated main pipelines is not part of the regulated segment of the natural gas market

12 MAJOR GAS INFRASTRUCTURE Relatively new concept under Gas Law Romania Gas Forum Years of Gas Industry in Romania 2009 Represents the major infrastructure involving (i) interconnections between Member States, (ii) LNG and (iii) storage facilities Interconnection pipeline = transport pipeline which crosses a borderline between states for the sole purpose of the connection of their SNTs Unclear legal nature of the interconnection pipelines: (i) gas transport pipelines and/or (ii) gas transit pipelines pp Enjoys a special regime because, if certain conditions are met, they may, upon request, be exempted from observing the obligation of allowing third party access to the transport system and the tariffs provided by the regulators May be private property of a legal person; to benefit from the special exemption regime above, must be private property of a legal person which is separate, at least in terms of it legal form, from the transport operator in whose system the infrastructure will be build In case the major gas infrastructure pipelines (interconnection pipelines) may be qualified as transport pipelines, this would represent the first intention of the Romanian legislator to allow private property over transport pipelines (which consequently should not be part of the SNT) in the person of another entity than the operator of the SNT. Legislative clarification would be preferable.

13 CASE STUDY: NABUCCO TRANSPORT PIPELINE / TRANSIT PIPELINE / MAJOR GAS INFRASTRUCTURE? (i) The qualification of Nabucco pipeline as one or more of the categories above and (ii) its ownership regime under Romanian law appear to depend substantially on the manner the project is structured Nabucco already benefited from the third party access and regulated tariffs exemptions under the legal provisions regarding major gas infrastructure Decision no. 1228/2008, as further amended and supplemented Since it appears that it will serve both for transit of gas and for supply of the crossed-by national markets, Nabucco appears to be partially a transit and partially an interconnection pipeline (major gas infrastructure)

14 APPROVALS AND LICENCES (I) I. For the construction of pipelines/transport pp p facilities (to be obtained by the developer/beneficiary) General authorizations: Building permit Authorizations/permits for labour safety and fire security Environmental approval and authorization Authorizations/licenses specific to the natural gas industry: Authorization for the establishment of facilities (for both transportation and transit facilities) Authorization for running the facilities (for both transportation and transit facilities) Authorization for the modification of facilities (necessary in case the transportation or the transit facilities already authorized are modified) II. For the operation of the pipelines/transport facilities: Transport license Transit license

15 APPROVALS AND LICENCES (II) III. For the construction of pipelines/transport facilities (to be obtained by the construction companies) Authorizations under Gas Law and Order no. 55/2007 regarding the approval of the regulation for the authorization of design, execution and exploitation works in the natural gas sector, as further amended and supplemented: - authorization of the construction companies by ANRE - authorization of the personnel of the construction companies by ANRE (e.g. authorized fitters/plumbers) Depending on the specific activities involved by the construction of the pipelines pp or any related constructions: - Authorizations for the use of explosives/precursors - Authorizations for equipment under pressure and for the metering equipment

16 ENVIRONMENTAL OBLIGATIONS Environmental Impact Assessment The construction of large-diameter gas pipelines one of the activities that are most likely to have a negative environmental trans-boundary (cross- border) impact Environmental approval Environmental authorization/integrated environmental authorization

17 RIGHTS OVER LAND FOR CONSTRUCTION OF PIPELINE PROJECTS (I) Depending on the manner the project is structured, a pipeline pp designated for natural gas transportation may be developed on plots of land held under either of the following forms of ownership: public ownership of the Romanian State and/or the locall administrative i i subdivisions (counties, towns or communes ) private ownership of the Romanian State and/or the local administrative subdivisions private ownership of private persons, either individuals or legal entities

18 RIGHTS OVER LAND FOR CONSTRUCTION OF PIPELINE PROJECTS (II) Depending on the form of ownership under which the subject property is held, the following rights over land could be considered for a pp pipeline project: the ownership right: if the subject property is in the private ownership of: (i) Romanian State (and/or local subdivisions) or (ii) private persons the right of superficies (ownership over the construction and a right of use over the land on which the construction is developed, granted for the entire lifetime of the construction): if the subject property is in the private ownership of: () (i) Romanian State (and/or local subdivisions) or () (ii) private persons concession right: if the subject property is in the private or public ownership of Romanian State (and/or local subdivisions) Securing easements for the maintenance works should also be envisaged in case a pipeline is not operated under a concession agreement, since the legall easements under Gas Law would not apply

19 CONCLUSION The overlap between the scope of the Petroleum and Gas Laws, the legal discrepancies between the Gas Directive and the Gas Law regarding continuation of distinction between transport and transit activities, as well as the unclear legal ownership regime for the major transport/transit/interconnection pipelines may impede the development of major pipeline pp projects in Romania. Consequently, legislative clarifications should be adopted in order to remove and resolve any such ambiguity or lack of clarity in the existing legislation.

20 THANK YOU FOR YOUR ATTENTION! Bryan W. Jardine has lived and worked in Romania since Since that time, he has been involved in many significant privatization, telecom, energy, infrastructure, M&A and PPP projects in the CEE region. In 2005, Mr. Jardine joined the leading Vienna-based law firm of Wolf Theiss as the managing partner of the successful Bucharest office. Representative transactions in the energy sector encompass legal advice for: Trade House "KazMunaiGaz JSC, Kazakhstan, on the acquisition of a 75% stake in Rompetrol Group N.V.; U.S. investor on the acquisition of two coal- fired power plants in Romania being privatized by the Romanian state and the associated coal mine assets; U.S. investor on the acquisition of a majority interest in a Romanian gas distribution company from the EBRD and EBRD-backed private equity funds and the subsequent exit there from; European equity fund on investment in a Romanian gas distribution company in Western Romania; U.S. oil company on acquisition of six oil field drilling concessions from the national oil company following privatization and spin-off of these oil field assets post-privatization; and the employees association in Romanian national oil company on issues related to the proposed acquisition and sale of shares post-privatization privatization in the respective company to third party custodian. Wolf Theiss si Asociatii SCA Tel: bryan.jardine@wolftheiss.com