pipeline financing: legal and contractual issues 9th africa oil and gas, trade and finance...

PIPELINE FINANCING: LEGAL AND CONTRACTUAL ISSUES

9th Africa Oil and Gas, Trade and Finance Conference and Exhibition

Héctor O. FARINALawyer

Maputo, MozambiqueJune 1st, 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


Pipeline Market Opportunities (I)Oil and Gas

Pipeline

ProductionCity gate/Oil & Gas Terminal

PIPELINENegociated

access Regulated

access

Pipeline

Destination


Pipelines Market Opportunities (II)(Gas Sector)


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


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


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


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.


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


Legal Aspects (I)The interest of Energy Sector Framework Laws

for the Development of Pipeline Systems

THE OIL & GAS UPSTREAM ACTIVITIES

THEELECTRICITYACTIVITIES

THEPIPELINE

ACTIVITIES

THE OIL DOWNSTREAM

ACTIVITIES

THE GASDOWNSTREAM

ACTIVITIES

THE ENERGY FRAMEWORK

LAWS COVERS:


Legal Aspects (II)The Pipeline Law

GENERALPROVISIONS

FINAL PROVISIONS

AUTHORIZATION FOR THE CONSTRUCTIONAND OPERATION OF

PIPELINES

RIGHTS AND OBLIGATIONS OF COMPANY

OPERATION OF PIPELINES:CONTROL

AND SANCTIONS

FINANCIAL, TAXAND CUSTOMS

PROVISIONS

The principle ofauthorization

The procedure forgranting authorizations

The renewal modification,transfer abandonment,suspension, withdrawal

of authorizations

Financialregulations

Temporary importation

Controlling of pipelines

Operation ofpipelines

Powers of the authorization holder

Occupancy of national and municipal domain

Accounting

Tax regime

Occupancy and acquisition of private lands

General obligationsof companies

Environment, public health, safety, security

THE PIPELINE LAW CONTAINS


Legal Aspects (III)Pipeline Access Regulation

Stages of market maturity

EMERGING DEVELOPED MATURE ACHIEVED DEVELOPMENT

Main policy objectives Project Development

Infrastructure Development

Industry Regulation

Industry Segmentation

Regulation Aims 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 examples Central America

Peru Cameroon

BrazilVenezuela

ArgentinaSouth Africa

CanadaNew Zealand

United KingdomUSA


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


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


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


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


Financial Issues (II) Risk Prevention

RESIDUAL RISKRESIDUAL RISK

FINANCIAL RISK

POLITICAL RISK

OPERATIONAL 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)


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


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


Conclusion

A Good Flow of Projects

pipeline financing: legal and contractual issues 9th africa oil and gas, trade and finance...

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