INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE

Geopolitical dimension of natural gas

infrastructure

Sylvie Cornot-Gandolphe

Principal Gas Expert

International Energy Agency

GIE Annual Conference

Athens, 3-4 November 2005

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE

Agenda

1. The importance of cross-border gas trade

2. Main features of cross-border trade and their consequences

3. Do politics matter?

4. Conclusion: key role of governments

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE

The importance of cross-border trade

Minsk

St. Petersburg

Bratislava

Berlin

Rome

LjubljanaZagreb

Oslo

Algiers

Madrid

Cordoba

London

Copenhagen

Prague

Warsaw

Vienna

Stockholm

Helsinki

Athens

Paris

Essen

Lisbon

Budapest

Tunis

Brussels

Sofia

Bern

LyonBelgrade

Dublin

Bucharest

Emden

HuelvaCartagena

Barcelona

Fos-sur-Mer

La Spezia

Montoir

Zeebrugge

TyraEkofisk

Kårsto

KollsnesTroll

GullfaksStatfjord

HeimdalFrigg

Sleipner Stavanger

Oseberg

W'haven

Belfast

Minsk

St. Petersburg

Bratislava

Rome

LjubljanaZagreb

Oslo

Algiers

Madrid

Cordoba

London

Copenhagen

Prague

Warsaw

Vienna

Stockholm

Helsinki

Athens

Paris

Lisbon

Budapest

Tunis

Brussels

Sofia

Bern

LyonBelgrade

Dublin

Bucharest

HuelvaCartagena

Barcelona

Fos-sur-Mer

La Spezia

Montoir

Zeebrugge

TyraEkofisk

Kårsto

KollsnesTroll

GullfaksStatfjord

HeimdalFrigg

Sleipner Stavanger

Oseberg

W'haven

Belfast

ArzewSkikda

Bilbao

Istanbul

Sines

Krk

Rovigo

El Ferrol

Valencia

Today over 68% of OECD European

consumption crosses at least one

border

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE

OECD Europe is becoming more import dependent

Source: World Energy Outlook 2004

0

200

400

600

800

1980 1990 2004 2010 2020 2030

bc

m

Production Net imports

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE

“Ambre”

Several new cross-border pipelines will fill the supply “gap“

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE

Importance and main features of cross-border gas trade

Contributes to free and open trade For producers: Allows to reach markets and earn revenues For consumers: Reliable/ secure supplies For transit countries: Stable income

Also carries significant risks Highly capital-intensive Large up-front investment and subject to obsolescing bargain Involved different jurisdictions/no overarching legal regime Involved public and private stakeholders Characterized by their long life Mechanisms to share the profit and rent between the different players? Natural monopoly (regulation) Lack of flexibility (point A to B)

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE

Characteristics of gas pipelines and their consequences

Characteristics Consequences

PipelinesSubject to economies of scaleLarge upfront investmentHigh fixed costsPotential for natural monopolyChanging capacity is difficult when builtHistory of state involvement

Full capacity operation is key to profitability

Requires regulation

Limited flexibility

Public vs. private interest

Cross-borderDifferent legal and regulatory regimes apply Need contracts governed by different legal regimes

Benefits must be shared across the border

Differing energy markets, degree of competition

TransitRequires transit agreementsMay involve competing for markets (or for volumes)

Involves governments

Increase the number of players

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE

Five main overarching conditionsfor their successful realisation

Rules must be clearly defined and accepted by all parties

Projects must be driven by commercial considerations

Credible threats to deter obsolescing bargainMechanisms to create a balance and alignment of

interests between the partiesTransparency of the terms involved

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE

So, do politics matter?

Only those pipelines which have a commercial basis will fly…

…But, only if they get strong support by politicians

….Ideally, separation between the political and commercial roles of sovereign governments

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE

The Maghreb-Europe pipelineAn international successful project commercially

driven… June 1992 Sonatrach (Algeria) / Enagas (Spain) long-term supply agreement

to deliver gas at the Algerian-Moroccan border. Ministers meet in Hassi R’Mel decide to start the construction of

the pipeline July 19992 Signature of the Moroccan Convention: Moroccan government,

SNPP (Morocco) and Enagas establish the procedures for the construction, operation and use of the pipeline

Setting up of EMPL as project leader and pipeline owner November 1994 Transgas (Portugal) joins the project taking a 28% stake of

EMPL’s capital stockNovember 1996 Pipeline Commissioning: Algerian piped gas reaches Spain

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE

The Maghreb-Europe pipeline…Which needed strong political support

Algeria to supply

Morocco to provide transit

Necessary Agreement among three Governments

Spain to market the gas

Guarantee of the Spanish State: Through Enagas /Sagane

European Union Priority Project: Essen Summit, Dec. 1994

Supported by international financial institutions : mainly EIB

Declared of “public interest” in Morocco

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North European Gas Pipeline (NEGP)

Length: 1200 km Capacity: 55 bcm (2 lines) Expected start-up: 2010 (1st

line) Capital investment: €4 billion

(offshore section) Project finance basis for the

offshore section Capital structure:

Gazprom: 51% BASF 24.5% Eon 24.5%

TEN project

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE

NEGP: major uncertainties

Strategic importance for Gazprom: Access to the largest European gas markets (Germany, UK,

+others) Direct line (no transit fees/issues, also no TPA) Increased exports of Russian gas to Europe

Strategic importance for Europe Access to Russian upstream Diversification of routes Additional gas supplies

Clear disadvantage: Additional cost of NEGP compared with adding another string

to the Yamal pipelineAnd still a lot of uncertainties

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE

Conclusion: What can be done?

Active participation of Governments, Supranational Entities (i.e. EC through special financing vehicle) and Multilateral Organizations

Importance of multilateral legal regimes e.g. Energy Charter Treaty ECT binding and non-binding agreements WTO rules Importance of harmonizing investment and trade rules

Reinforce international dispute resolution mechanisms

INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE

Governments Should Contribute to:

Stable and sound macroeconomic policies Need secure investment climate in host countries Stability in fiscal regime Stability access to hard currency, effective legal protection

Transparent and efficient legal, regulatory and institutional frameworks Regulation on access to pipelines based on transparency,

non discrimination and cost-reflectivenessRemoval of market barriers to cross-border tradeEffective enforcement of rights Improving international political co-operation and

dialogue with gas producers/transit countries