PIPELINE FINANCING: LEGAL AND CONTRACTUAL ISSUES 9th Africa Oil and Gas, Trade and Finance Conference and Exhibition Héctor O. FARINA Lawyer Maputo, Mozambique June 1 st, 2005 NOT AN OFFICIAL UNCTAD RECORD

2 © Haarmann Hemmelrath Oil & Gas: Market Segments  Exploration and production  Treatment and processing  Storage  Transport (pipelines, ships and wires)  Oil & Gas to power  Oil & Gas retail (industrial, commercial and residential)  Export

3 © Haarmann Hemmelrath Pipeline Market Opportunities (I) Oil and Gas Pipeline Production City gate/ Oil & Gas Terminal PIPELINE Negociated access Regulated access Pipeline Destination

4 © Haarmann Hemmelrath Pipelines Market Opportunities (II) (Gas Sector)

5 © Haarmann Hemmelrath Cross-Border Pipeline Challenges (I) Institutional Issues  Different and possibly conflicting laws and regulations among countries could impact the viability of the project  Subject to changes in the relations between the countries  Cross ownership on the various parts of the pipeline requires strategic and operational coordination to operate the pipeline as a single integrated facility  Risk of lack of coordination of objectives between host countries  Compatible institutional, legal, and regulatory framework for the management of cross-border pipelines in various countries

6 © Haarmann Hemmelrath Cross-Border Pipeline Challenges (II) Economic Issues  Assets in various countries vs cash flows generation in one country  Differences between oil and gas pipelines because the gas market does not have the flexibility and efficiencies of the oil market and requires a distribution network for wholesale clients such as power generators or industrial clients  The base-load revenue driver for the cross border gas pipeline in Africa is the power sector. Therefore the domestic electricity infrastructure and regulation of the electricity sector in the “downstream” markets should be well developed

7 © Haarmann Hemmelrath Cross-Border Pipeline Challenges (III) Financial Issues  Lenders must be ensured that as long as the pipeline is operating properly, revenue will be available to make debt service payments even if the natural gas market do not develop as expected through a long term ship or pay contract  Special attention to all factors that can affect the cash flow in particular upstream (sufficient gas proven reserve) and downstream (gas distribution network,electricity gas generator)  Competition from other pipes and other gas reserves  Competitivity of gas with other sources of energy in the downstream market

8 © Haarmann Hemmelrath Pipelines: Developing Projects  Projects: Supported by a modern legislation and, where appropriate, adopted regulation.  Contractual arrangements: tailored to fit the project.  Financing: Structuring the financing around the project’s cash flows  Operations: Highly qualified operators regulated in a transparent way for the benefit of the consumers and the economy.

9 © Haarmann Hemmelrath Roles of the Participants in Pipeline Projects Development Governments (National, Regional and Local Authorities) Policy maker for Energy sector Enacts laws and decrees Regulatory Authorities (Dedicated Agency, Multisectoral Agency) Enacts regulations Conducts the bidding process Private and Public Companies (Sponsors, Banks and financial Institutions) Participates in tenders Operates  Economic Context  Market Maturity and Organization  Number of Operators  Existing Alternatives  Regional situation and constrains  Backdrop  Appropriate Legal Framework  Regulations in place  Market Analysis  Procedures for Bidding process  Contractual Documentation  Needs  Capital  Financial Support  Technical and Legal Support  Guarantees against Commercial and Political Risks

10 © Haarmann Hemmelrath Legal Aspects (I) The interest of Energy Sector Framework Laws for the Development of Pipeline Systems THE OIL & GAS UPSTREAM ACTIVITIES THE ELECTRICITY ACTIVITIES THE PIPELINE ACTIVITIES THE OIL DOWNSTREAM ACTIVITIES THE GAS DOWNSTREAM ACTIVITIES THE ENERGY FRAMEWORK LAWS COVERS:

11 © Haarmann Hemmelrath Legal Aspects (II) The Pipeline Law GENERAL PROVISIONS FINAL PROVISIONS AUTHORIZATION FOR THE CONSTRUCTION AND OPERATION OF PIPELINES RIGHTS AND OBLIGATIONS OF COMPANY OPERATION OF PIPELINES:CONTROL AND SANCTIONS FINANCIAL, TAX AND CUSTOMS PROVISIONS The principle of authorization The procedure for granting authorizations The renewal modification, transfer abandonment, suspension, withdrawal of authorizations Financial regulations Temporary importation Controlling of pipelines Operation of pipelines Powers of the authorization holder Occupancy of national and municipal domain Accounting Tax regime Occupancy and acquisition of private lands General obligations of companies Environment, public health, safety, security THE PIPELINE LAW CONTAINS

12 © Haarmann Hemmelrath Legal Aspects (III) Pipeline Access Regulation Stages of market maturity EMERGINGDEVELOPEDMATUREACHIEVED DEVELOPMENT Main policy objectivesProject Development Infrastructure Development Industry Regulation Industry Segmentation RegulationAims at creating interest for investors Aims at developing networks Aims at opening the access and reducing costs to the benefit of consumers Aims at performing competition Country examplesCentral America Peru Cameroon Brazil Venezuela Argentina South Africa Canada New Zealand United Kingdom USA

13 © Haarmann Hemmelrath Contractual Issues (I)  Intergovernmental treaty Sets out relationship between states Sets out rights to be granted to investors  IGA ratified by law in host states

14 © Haarmann Hemmelrath Contractual Issues (II)  Host government agreements Set out detailed rights of investors Set out applicable tax regime for pipeline Set out obligations of state and investors Set out uniform standards to be applied for project  HGAs ratified by states, creating prevailing legal regime

15 © Haarmann Hemmelrath Contractual Issues (III) Sound Contractual Arrangements  Firm transportation contracts during the life time of financing  Payment in hard currency for firm capacity must represent most of the long term cash flow of the project  Additional investment to increase the capacity will be made once secured by related transportation agreements  Creditworthiness of the shippers  Direct agreements of host Governments when possible

16 © Haarmann Hemmelrath Financial Issues (I) Lenders Requirements  Assured Completion with EPC contract  Adequate Security Package  Offshore accounts  Cash Water Falls  Avoidance of currency and interest rate risks

17 © Haarmann Hemmelrath Financial Issues (II) Risk Prevention RESIDUAL RISK FINANCIAL RISK POLITICAL RISK OPERATION AL RISK GUARANTEES / INSURANCES PERFORMANCE BONDS MARKET RISK LONG TERM CONTRACTS DUE DILIGENCES CONSTRUCTION & TECHNICAL RISK/DELAYS TURN-KEY CONTRACTS GUARANTEES AND FINANCIAL/MULTILATERAL AGENCIES AND GOVERNMENT LEGAL AND REGULATORY RISK PROJECT FINANCING (Local Financing)

18 © Haarmann Hemmelrath Legal Regulatory Framework and Contractual Arrangements LEGISLATION Modern, and covering the main issues to facilitate the smooth realization of projects in the gas sector Adapted to market maturity Taking into account local laws and institutions, even in the case of the application of foreign laws and jurisdictions REGULATION CONTRACTUAL ARRANGEMENTS

19 © Haarmann Hemmelrath Conclusion  Stable political environment  Sound economic environment  Committed policy of liberalization  Absence of Civil unrest  Appropriate investor protection policies  Established legal framework  Clear institutional organization  Modernization of legislation to facilitate the contractual arrangements Are the prerequisites for

20 © Haarmann Hemmelrath Conclusion A Good Flow of Projects