EU security of supply: strategy for gas infrastructure

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2 EU security of supply: strategy for gas infrastructure Kamil Blažek, Partner, Kinstellar European Gas Summit, Berlin September 2014

3 Emerging Europe and Central Asia s Leading Independent Law Firm Kinstellar is the leading independent law firm in Emerging Europe, Turkey and Central Asia, with offices in Almaty (Kazakhstan), Belgrade (Serbia)*, Bratislava (Slovakia), Bucharest (Romania), Budapest (Hungary), Istanbul (Turkey) and Prague (Czech Republic). Operating as a single fully-integrated firm, Kinstellar delivers consistently high-quality services across all jurisdictions in an integrated and seamless style. We are particularly well suited to servicing complex transactions and advisory requirements spanning several jurisdictions. We deliver: market experience and local knowledge across a wide range of sectors a in-depth understanding of the legal, regulatory and commercial issues surrounding any type of transaction or project in the region dedicated team of local and internationally qualified lawyers a responsive, commercial approach and style value for money Kinstellar offices Regional experience * Kinstellar advises international and local clients in Serbia in cooperation with Zajednička advokatska kancelarija Marić & Mujezinović.

4 Overview of Presentation Importance of development of infrastructure projects for European energy security Financing of gas infrastructure projects European measures for infrastructure enhancement

5 Imports of natural gas into the EU Zdroj: BP Statistical Review 2013

6 European Gas Infrastructure Source: The Economist

7 European gas and electricity prices Source: Quarterly Report on European Electricity Markets (Q2 2013)

8 Financing of Gas Infrastructure Projects

9 Are gas infrastructure projects different? Gas infrastructure vs. other major infrastructure projects Gas infrastructure projects share many similar risks with other large infrastructure projects What makes the difference? Scoring of such risks Real challenge for gas infrastructure projects is the financing of such projects Financing risk is all about project risk

10 Financing Current Market Conditions We are in a period of financial conservatism: Effects of the Global Financial Crisis of 2008 will not disappear Causes for Eurozone troubles not (yet) solved Basel III requirements Not easy to finance projects without clear and positive risk assessment There are limited options Commercial banks Who else and in exchange for what? European energy champions but where have they all gone? Supplier s financing (Russia, GCC countries, USA, who else?) China, SWFs

11 Financing Concerns Primary Concerns for Financiers Long development / construction periods High capital costs, combined with cost uncertainties Regulatory uncertainty Sustainability of national government and EU commitment Medium- to long-term sustainability of European energy policy Political stability on both sides Operational success Supply chain Human resources Environmental responsibility, technical risks

12 Types of Risk Completion and delays Political Country Regulatory Labor & Materials Gas Market Cost overruns Operational Environmental Project finance basics: The risk should be borne by the party in the best position to manage the risk. Is there any risk premium and who can take it?

13 Parties Involved In a Gas Infrastructure Project Financing Entities Multilaterals, Commercial Banks Government EU Transporter Public Gas Supplier Pipeline project Operators Regulator EPC Contractor Owners Human Capital Risk Allocation?

14 Risk Allocation: The Players Risk allocation can be divided between Developer / Owner Operator Government(s) EPC contractor Material/technology supplier Insurance providers Transporter Regulator (final customers of gas infrastructure) Financing entities Lenders are probably the least likely entity for risk allocation purposes

15 Can we speak of real project finance in gas infrastructure? Remember, project finance is a term of art Limited / Non-Recourse structure Debt / Equity structure Financing Entities look to revenue stream of the asset Repayment is a function of achievement of commercial operation Financing entities can take the asset

16 Measures facilitating financing of the infrastructure projects Infrastructure Exemptions under EU Regulation 715/2009 and EU Directive Priority Infrastructure Projects Projects of Common Interest under EU Regulation No. 347/2013

17 Infrastructure Exemptions EU Regulation 715/2009 and EU Directive 2009/73 TPA, and Ownership unbundling requirements EXEMPTION Article 36 of the EU Directive and national laws Major new infrastructure upon request for a defined period

18 Infrastructure Exemption Requirements Enhancement of competition and security of supply Level of risk: condicio sine qua non Separate legal ownership of asset Charges for users; and Not detrimental to competition or the effective functioning of the market

19 Infrastructure Exemption Procedure Granted by NRAs on a case-by-case basis Advisory opinion of ACER Possibility to impose conditions Relevant body opinion may be required Notification to the European Commission Expiry of exemptions

20 Example of Exemption Conditions Pipeline exempted For a limited period of time, from: TPA under regulated prices, and Ownership unbundling, Condition of the exemption: Length and Capacity Limitation on Means of Reservation of Capacity Use it or Lose it Limitation on Capacity at a connection point Reverse Flow Possibility Confirm certain connectivity to other pipelines Exempted Capacity on Secondary Market Time Limitation

21 Projects of Common Interests (PCIs) Measures supporting CPIs implementation in the regulation: faster permitting allocation of cross-border costs EU financial support Only PCIs eligible List of PCIs PCIs identification process: Submission of proposals Assessment and ranking Adoption of regional lists Adoption of the Union-wide list How often is it updated? Possibilities to change?

22 Is it working in practice? Shannon LNG Project PCI 5.3 Great Britain and Ireland Decision of CER, Ofgem and Utility Regulator (the National Regulatory Authorities) Project Val de Saône France and Spain Submitted by GRT gaz Gas Interconnection Project between Poland and Lithuania Poland, Lithuania, Latvia, and Estonia National Regulatory Authorities unable to reach an agreement First Cross-Border Cost-Allocation decision on a PCI adopted by ACER STORK/Moravia Project between Poland and Czech Republic Poland and Czech Republic: in progress National Regulatory Authorities providing mixed signals

23 Conclusions

24 Conclusions Commitment and consistency Right financing structure Ensuring realistic expectations on all sides Need for political and policy stability Need for a strong European leadership

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