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Editorial comment

At the moment there is a lot to keep the international legal community focused on pipelines, especially when it comes to getting more gas to European markets.


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At the moment there is a lot to keep the international legal community focused on pipelines, especially when it comes to getting more gas to European markets. There are a number of potential pipeline projects in the development stage - each designed in one manner or another to deliver gas westwards, each of course in direct competition with the others and each involving complex legal and financing structures. Take for instance the South Stream and Nabucco Projects. The former, announced in 2007, aims to see Russian gas delivered to Bulgaria and then on to Italy and Austria through a 990 km pipeline across the Black Sea and sponsored by Gazprom and ENI. Nabucco in contrast, on the back of a 3300 km onshore pipeline crossing the Caucacus and Turkey, will deliver Central Asian gas to Turkey, the Balkans and on to western Europe; here RWE, OMV and BOTAS are the key participants.

What will determine the success or otherwise of each of the different projects is not an easy question to answer. We can be sure that a number of different factors will come into play, ranging from technical design, the availability and cost of financing (particularly challenging in current times) to political considerations – not least for the likes of Turkmenistan, which must decide which way to jump: sell direct to the Europeans through Nabucco or support another non-Russian route (for instance through the Caspian Development Corporation project which the World Bank has recently started to champion) or maintain the equilibrium and send all production north to Russia.

However, there is one certainty – cross border pipeline projects require a high level of co-operation between the different governments involved to facilitate construction, operation and dealing with the various issues of mutual concern, including concerns specific to transit. The contents of most inter-governmental agreements (IGAs) follow an identifiable pattern, obviously the more governments involved the more difficult reaching agreement will be, but experience helps with identifying the matters that need to be agreed on (certainly if finance is a pre-requisite). In most cases, the IGA will be agreed with reference to a specific project, though there have been a few examples of agreements of more general application.

Most importantly for the sponsors, the IGA will set out the governments’ commitment to the project and to facilitating the construction and operation of the pipeline in a co-ordinated manner. A typical IGA will deal with implementation (and a commitment to enact special laws if necessary), freedom of transit, a commitment to grant necessary land and other access rights, common construction, technical, environmental and safety standards, emergency rules and dispute resolution. Other crucial areas to be addressed are the common tariff regime, taxation and investor protection – not always easy where transit is involved. The IGA will need to be complemented by a series of host government agreements (HGAs), a bi-lateral agreement between the sponsor and the host government recognising the sponsor’s right to build and operate and giving the sponsor some remedy to ensure government properly administers local laws and the IGA. The HGA will also touch on some of the same issues as the IGA.

Reaching agreement on the IGAs and HGAs for the likes of South Stream and Nabucco will determine in a large part whether or not the project proceeds to implementation and, crucially, in what timescale. As noted, there are numerous other issues to overcome if a cross-border pipeline project is to be a success but the issue here is that reaching legal agreement at the IGA and HGA level (and at an early stage) is a must.

News in recent days suggests, at least so far as Nabucco is concerned, that the penny has dropped (at last). Turkey and the EU having previously failed to resolve various transit and tariff issues have made up their differences with an agreement due to be signed in June. Though the lawyers may not be completely finished, the focus of attention should shift (mercifully, in many eyes) towards the more practical, with technical issues becoming order of the day.