1. 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

2. 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

3. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE The importance of cross-border trade Today over 68% of OECD European consumption crosses at least one border

4. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE OECD Europe is becoming more import dependent Source: World Energy Outlook 2004

5. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE “Ambre” Several new cross-border pipelines will fill the supply “gap“

6. 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)

7. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Characteristics of gas pipelines and their consequences CharacteristicsConsequences Pipelines Subject to economies of scale Large upfront investment High fixed costs Potential for natural monopoly Changing capacity is difficult when built History of state involvement Full capacity operation is key to profitability Requires regulation Limited flexibility Public vs. private interest Cross-border Different 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 Transit Requires transit agreements May involve competing for markets (or for volumes) Involves governments Increase the number of players

8. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE Five main overarching conditions for 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 bargain Mechanisms to create a balance and alignment of interests between the parties Transparency of the terms involved

9. 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

10. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE The Maghreb-Europe pipeline An 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 stock November 1996 Pipeline Commissioning: Algerian piped gas reaches Spain

11. 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

12. INTERNATIONAL ENERGY AGENCY AGENCE INTERNATIONALE DE L’ENERGIE North European Gas Pipeline (NEGP) Length: 1200 km Capacity: 55 bcm (2 lines) Expected start-up: 2010 (1 st 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

13. 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 pipeline And still a lot of uncertainties

14. 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

15. 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-reflectiveness Removal of market barriers to cross-border trade Effective enforcement of rights Improving international political co-operation and dialogue with gas producers/transit countries