23-04-2013

Gas Sector In Albania

Authors

  • Redi Basha, Corporate Lawyer LLB, LPC
    Partner at ABKons Law Firm

Historical Overview

Albania is an oil and gas bearing country. It is almost one century that Albania is producing significant petroleum quantities. Albania has the favourable geological and geochemical conditions for the discovery of new fields, providing exploration and commercial opportunities for oil and gas companies. Petroleum operations in Albania started early 1800 when the first geological surveys have taken place. Later, early 1900 petroleum operations were intensified and a lot of oil and gas fields were discovered. The cooperation with international petroleum industry has started around 1990, when some concessions were granted by Albanian government to the most known petroleum companies of the time. After 1990 several licensing rounds were organized and a number of petroleum agreements with foreign companies were approved. Petroleum operations carried on during these times produced also a great number of data that are used for evaluation and planning of the current petroleum operations.

The development of the natural gas sector in Albania is one of the priorities set out in the National Strategy of Energy. Albania is not connected to the international gas networks. Under these actual conditions, the supply of Albania with gas is foreseen to be achieved through international gas networks.

The natural gas reserves in Albania are not yet fully exploited due to the absence of the infrastructure and investments in the sector, and the State is willing and looking to co­operate with foreign investors for the development of the natural gas sector.

The Albanian natural gas market is influenced by international treaties and all the agreements in this sector have to comply with the requirements of these treaties or other international agreements. Albania is a party of the Energy Community and has signed the Athens Treaty on 25 October 2005 (ratified by the Albanian Parliament with Law No.9501, dated 3 April 2006).

A brief overview of the legislative framework for the Albania natural gas sector exploration, development and production

The Albanian legal framework for natural gas exploration, development and production in Albania is governed by Law No.7746, dated 28 July 1993 “On Petroleum (exploration and production)”, as amended, Regulation “For the procedures of the approval of petroleum agreement and license agreements”, approved by the Ministry of Economy Trade and Energy; Law No. 7811 dated 12 April 1994 “On Approval of the Decree No. 782 date 22.02.1994, “On the Fiscal System in the Hydrocarbons Sector (Exploration and Production)”, and the Law No. 9975, date 28.07.2008 “On the National Taxes”. This legal framework offers considerable flexibility to the Government in negotiating acceptable terms with oil companies. At the same time these laws give incentives and enough flexibility to attract international oil companies and thus stimulate oil exploration in the country. The Petroleum Law stipulates that all mineral deposits, including natural gas, existing in their natural condition within the jurisdiction of Albania, are the exclusive property of the State and all such resources are to be used for the benefit of the people of Albania. The ownership of the natural gas is transferred to the producer through a Production Sharing Agreement (“PSA”) with Ministry of Economy Trade and Energy, which is represented by the Albanian Natural Resources Agency.

The Government’s objective is to negotiate terms with the oil industry, which are fair and balanced, bearing in mind the usual risk, associated with exploration and the State’s legitimate right for revenues as owner of natural resources. At the same time based on the fiscal law the Albanian Government pursue to encourage the development of small and marginal discoveries.

What are the main generic non-technical terms of the PSA?

The Production Sharing Agreement includes provisions such as: i)the performance of a minimum work program, backed by a performance guarantee; ii) the presentation of an annual work program and budget; iii) preference given to local employment and supplies during petroleum operations, where these are competitive in terms of quality, availability and cost; iv) the opportunity for local service companies to bid and preference given to them when the offer is comparable or better than other third parties.; v) indemnify the State or the Ministry against all claims made by third parties in respect of injury, loss or damage resulting from the conduct of any operation carried out by the Contractor or by any subcontractor etc.

The Petroleum Law also provides access to private land after giving the occupier and the owner a minimum time notice. However, the Contractor must pay fair, just and equitable compensation with regard to any disturbance or damage caused during the conduct of petroleum operations. The PSA provides for the Contractor to conduct petroleum operations in a safe and proper manner in accordance with generally accepted international petroleum industry practice and shall cause as less damage as is reasonably practicable to the general environment including (inter alias) the surface air, seas, lakes, rivers, marine life, animal life, plant life, crops, other natural resources and property, and shall forthwith repair any damage caused to the extent reparable, and shall pay reasonable compensation for all damage which is beyond repair.

What are the types of authorisations available to prospective contractors?

The Petroleum Law stipulates 3 types of authorisations, which are all granted in the PSA

(a) an exploration permit giving the exclusive right to conduct exploration within the contract area (i.e. the designated geographical parameters) for a period not exceeding 5 years, or for a maximum 7 years in special circumstances; (b) a production permit giving the exclusive right for a period not exceeding 25 years to develop and produce reserves of gas located in the Contract Area; and (c) an evaluation/reconnaissance permit for a term of two years during which the permit holder may carry out the evaluation in an area using aerial, geophysical, geochemical, paleontological, geological, topographical and seismic surveys and studies and their interpretation. The Petroleum law also gives the right to the person holding a production permit the right to construct and operate gas pipelines in Albania.

What is the actual benefit of Albanian Government from natural gas development?

The Albanian Government profit from the exploitation and production of natural gas is in a form of a share of production as stipulated in the PSA. Pursuant to the Law No.7811, dated 12 April 1994, “On approval of Decree No.782, dated 22 February 1994 “On the fiscal system in the hydrocarbons sector (Exploration-Production)”, and the Royalty according to the Law No.9975, dated 28 July 2008 “On the National Taxes”, the contractor will only be subject to tax on profit. The rate of tax is 50% of the realized profit and the royalty is 10% of sales revenues.

Are there any other permits for development of natural gas?

Apart from the PSA, any prospective contractor willing to develop natural gas reserves in Albania must obtain other permits such as an environmental permit, a development and an infrastructure permit according to the law “On Territorial Planning”, for the construction of the infrastructure required for the activity. The Petroleum Law provides that when an investor has entered into a PSA with METE, it is stipulated that the METE will use all its efforts to assist in ensuring that the contractor acquires all permits, licences, approvals or other lawful authorisations it may reasonably require to enable production operations to be carried in accordance with the PSA.

Is there any legislation or framework relating to gas storage in Albania?

Law “On Natural Gas Sector”, dated 30.06.2008, (“Gas Law”) provides that natural gas storage activity can be carried out by any company that is in possess of natural gas storage facilities under a hydrocarbon agreement signed according to provisions of the law no. 7746, dated 28.07.1993 “On hydrocarbons (Exploration and Production)”, as amended, or under any other legal form. Each possessor of storage facilities shall be obliged to manage these facilities in coordinated and integrated way in order to guarantee their optimization and the security of the natural gas system. Possessors of storage facilities are obliged to secure and provide the stocking services to persons that make a request for use of storage facilities provided that these services based on established criteria are technically and economically feasible. Access to storage facilities shall be permitted when technically or economically necessary for efficient access to the system for the supply of customers.

The Energy Regulatory Entity (ERE) defines the criteria and priorities for the access to storage facilities based on equal, non-discriminatory and objective conditions, as well as the obligations of the persons carrying out a storage activity.

How is transmission and distribution of natural gas regulated in Albania?

Gas Law stipulates that Energy Regulatory Entity (ERE) is the regulatory authority that establishes the criteria for ensuring to users with equal treatment and freedom of access to the gas transmission/distribution network, and defines the duties of the natural gas transmission/distribution operators. ERE issues the licences inter alia for activities such as: (i) transmission; (ii) distribution; (iii) supply; (iv)trade; (v) operating in the storage areas; and (vi) operating of LNG plants. These licences for transmission, distribution and supply are granted to only one entity for operating in a defined area. The activity of natural gas transmission and distribution is of a public interest and is performed respectively by a Transmission System Operator (“TSO”) and a Distribution System Operator (“DSO”). These operators own, operate, construct and maintain the transmission/distribution systems. They act in transparency and objectivity avoiding the discrimination between the system users.

The system operators conclude grid connection and grid access agreements with the third persons seeking access. The grid access can only be refused if such access is technically or economically impossible or unreasonable. Upon the request of the interested parties, in cases when the TSO and DSO refuses third party access to the grid, the ERE may review such decisions and in case of an unjustified refusal will order the granting of access. The TSO/DSO publishes the terms and conditions approved by the ERE for granting access to the transmission/distribution system to the third parties.

Given that Albania has not developed any gas infrastructure, there is currently no DSO or TSO in the gas sector, nor are there any Codes published in this respect.

What authorizations are required for natural gas supply and which authorities grant such approvals?

In order to operate a distribution network the entities has to obtain the distribution license issued by the ERE in accordance with the Gas Law. This licence is issued on a case by case basis and shall contain such terms and conditions as are deemed necessary, convenient or prudent by the ERE. Before applying for a distribution licence the entity has to obtain the special permit, the environmental permit, and infrastructure permit for construction of the distribution network.

What fees are charged for accessing the distribution network, and are these fees regulated?

The ERE is the authority that regulates the fees for accessing the distribution network and also for the payment of connection with the distribution network. Fees and their calculation are transparent and non-discriminatory. These fees enable the trade and efficient competition of the gas market. The ERE publishes all the fee proposals in the Official Gazette. At present, no fees are approved for distribution network access and use because Albania hasn’t developed yet a gas distribution system.

How are gas transport pipelines or associated facilities regulated?

The Law “On the development, transportation and trade of oil, gas and their by-products” sets the regulatory framework in relation to transportation pipelines and associated infrastructure. Network and associated facilities are under the ownership of the respective operators. These operators must be established as joint stock companies and must conduct gas transportation activities pursuant to the obtained concession permit. Additionally, according to the Petroleum Law, the Council of Ministers will grant the operator the authorisation to construct, lay and operate pipelines within the territory of Albania after it has entered into a PSA with the METE, and ownership issues of the network and associated facilities shall be regulated in the PSA.

To construct and operate natural gas transportation pipelines and associated infrastructure one requires to obtain a special permit with a 30-year term with the right of renewal (pursuant to the Gas Law) approved by the Council of Ministers. Additionally some of the key permits required include inter alia also: (i) the environmental permit pursuant to the Environmental Protection Law; (ii) the development and construction permit; and (iii) the infrastructure permit according to the law “On Territorial Planning”.

How is land acquired for construction of gas pipelines?

The investor that has obtained the concession permit or special permit for the construction and operation of gas transportation pipelines and associated infrastructure is to enter into contractual agreements with the respective land owners over which the pipeline will be constructed, by means of an easement agreement as provided by the Albanian Civil Code (this shall be the case if the land is both State or private-owned).

Another options is that the investor may benefit from the provisions of the Law “On Expropriations and Temporary Use of Private Property for a Public Interest” No.8561, dated 22 December 1999 as amended, (“Expropriation Law”), which provides for the expropriation or the temporary use of the private property which is only to be applied in cases when the performance of the works is considered to be for the public interest and is done with full and fair compensation to the owner.

Natural Gas Trading

In order to conduct natural gas trade activities in Albania the entities shall obtain the trade licence to be issued by the ERE. Pursuant to the draft regulation on the “Natural Gas Sector Rules and Procedures on Licensing, Modification, Partial/Full Transfer, Revocation and Renewal of Licenses”which is not yet in force, the ERE is entitled to issue licences inter alia also for: (i) supply of natural gas (retail sale); and (ii) trading of natural gas (wholesale) for companies that met the requirements of this regulation. The duration of the validity of a licence for supply and trading shall be for a term of 5 years with the right of renewal.

Liquefied Natural Gas

According to the Gas Law the LNG system operator has to be a person who is licensed by the ERE to operate LNG plants. The main duties of the LNG system operator are the operation, maintenance and the secure, stable development of the plant. The LNG system operator also has to: (i) connect the plant with the transmission network in accordance with the technical requirements for the usage of the plants; (ii) establish and provide a metering system for the gas movement; (iii) dismiss and the regasification of the LNG upon the signed contracts; (iv) provide similar (equal) and non-discriminatory conditions for the plant access; and (v) provide regular information for the transmission system operator and gas trade participants, related to the functioning and development of the interconnected systems and also for the expected reduction of plant capacities.

The LNG system operator has the right to refuse the access to the plants in the cases provided in the Gas Law. The LNG operator has also the rights to: (a) buy natural gas for its own needs and for the compensations of the plant losses; (b) restrict or prohibit temporally the dismissal and regasification of the LNG when there are serious threats on human life, health and wealth, in case of planned works for the maintenance and reconstruction of the plants, and when the users don’t respect their contractual obligations.

In order to construct and operate LNG facilities the entity has to obtain a special permit to be granted by the Council of Ministers for a 30-year period, with the right of renewal to be followed with the licence of operating LNG plants from the ERE and also the environmental permit and construction site and construction permits by the respective authorities.

Are there any new Developments in Albania in Gas Sector?

There is a proposed pipeline scheme that will bring natural gas from new sources in the Caspian region to western and south-eastern Europe which is called the Trans Adriatic Pipeline (TAP). The TAP will transport gas via Greece and Albania, across the Adriatic Sea and into southern Italy. The project is designed to expand transportation capacity from 10 to 20 bcm per year. TAP also envisages physical reverse flow of up to 80 per cent and the option to develop natural gas storage facilities in Albania to further ensure security of supply. TAP’s transportation solution will be approximately 800 kilometres in length (Approx.: Greece 478 km; Albania 204 km; offshore Adriatic Sea 105 km; Italy 5 km). Transport will begin near the Greek-Turkish border (Komotini), cross Albania and the Adriatic Sea, and connect with the Italian natural gas distribution system near San Foca in Italy. TAP’s route from Greece through Albania is strategically important for South Eastern Europe, by providing a new energy supply option they urgently need and making a considerable contribution to the region’s economic development and political stability. The governments of Italy, Greece and Albania confirmed their political support for the Trans Adriatic Pipeline (TAP) project with the signing of a Memorandum of Understanding in September 2012. TAP has been granted the status of “National Importance” by the National Territorial Council which clears the way for the drafting of the National Sectorial Plan for the project. The Full ESIA Report to be submitted to Albanian authorities in January 2013.

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