INTERNATIONAL AND CONTRACTUAL FRAMEWORK FOR SEE CROSS-BORDER PIPELINE PROJECTS

1. INTERNATIONAL AND CONTRACTUAL FRAMEWORK FOR SEE CROSS-BORDER PIPELINE PROJECTS Ana Stanič 23 June 2010

2. Cross-Border Pipeline Projects LEGAL FRAMEWORK FOR CROSS-BORDER PIPELINE PROJECTS • INTER-GOVERNMENTAL AGREEMENT (“IGA”) • HOST GOVERNMENT AGREEMENT (“HGA”) • Project Agreements framework of agreements concerning inter alia the engineering, design, construction, ownership, and operation of pipeline • Transportation Agreement necessary if owners of pipeline not the owners of the gas/oil • Other transportation related agreements re. inter alia (i) allocation and priorities within the pipeline, (ii) connection for inputs into and outputs from the pipeline and (iii) physical operation of pipeline • Financing Documents

3. Inter-Governmental Agreement (“IGA”) • Provides a UNIFORM FRAMEWORK for the cross-border pipeline project • TYPICALLY, KEY PROVISIONS: • not interrupt or impede the freedom of transit except as expressly provided in HGA • secure the granting of exclusive rights to land to construct pipeline • secure the authorisation and facilitation of imports and exports • secure the right to freely move goods, materials, supplies, technology and personnel • cooperate and coordinate with the other states and Project Sponsors to adopt uniform technical, safety and environmental standards for the construction, operation, and maintenance of pipeline • Project Agreements are accepted and approved • Commission set up to oversee compliance with and facilitate the implementation of IGA • HGAs to be signed between States and Project Investors attached

4. Host Government Agreement (“HGA”) TYPICALLY, KEY PROVISIONS: • Rights of Project Sponsors re. land, ownership of pipeline, water resources • Timing of construction and State’s termination rights in case of breach • State to provide a complete list of all licenses, visas, permits, and authorisations in order to carry out the Pipeline Project • Applicable tax and fiscal regime in respect of pipeline activities, including matters of foreign currency and import and export • Payment to Host State for construction and operation of pipeline (royalty, and/or land rental, or transit tariff etc) • No Taxes on Transfers, Contributions and Loans • Assignment of Project Sponsors’ rights • State guarantees as to validity of undertakings given by state organs and state-owned companies 3

5. Host Government Agreement (“HGA”) • Applicable environmental, health and safety standards and practices for the Pipeline Project attached • Compensation in case of expropriation and breach of undertakings including by state-owned companies • May also address matters of off-take and sales within the territory of Host State • Force majeure • Arbitration • Waiver of sovereign immunity • Governing Law • STABILISATION/CHANGE OF LAW 4

6. Stabilisation/Change of Law Clause ADDRESSES THE RISK OF A UNILATERAL MODIFICATION OF HGA BY STATE USING ITS PREROGATIVE POWERS • Two Possible Approaches: 1. STABILISATION CLAUSE lock in place the fiscal and other terms of HGA and the legislative regime as at the time HGA is signed 2. RENEGOTIATION CLAUSE in case of Change of Law parties to negotiate to amend HGA to restore “Economic Equilibrium” and if parties do not agree, matter referred to arbitration • CANNOT stop a government from doing what it pleases but violation usually triggers right to compensation 5

7. International Framework for SEE Pipeline Projects • WTO Agreements, and in particular Article 5 of GATT (Freedom of transit) • 1998 ENERGY CHARTER TREATY • BILATERAL INVESTMENT TREATIES • Bilateral Double Taxation Agreements • Bilateral and Multilateral Free Trade Agreements (eg. Russia/Serbia FTA and CEFTA) • EU Third Energy Package (Gas Directive) • effective unbundling of TSO from upstream and downstream operations [Article 9] • certification of TSO controlled by non-EU companies or states [Article 11] • Exemptions for new major infrastructure projects [Article 36] • Energy Community Treaty (Articles 10 and 25) 6

8. Energy Charter Treaty and Cross Border Pipelines • Regional multilateral treaty to promote reliable cross-border energy flows • Transit obligations set out in Article 7 (state to state) • RIGHTS ACCORDED TO INVESTORS: • Fair and Equitable Treatment • National Treatment treatment no less favourable than that which it accords to its own investors • Most Favoured Nation Treatment accord treatment no less favourable than that accorded to investors from other states • Prompt and adequate compensation in case of expropriation • Commence arbitral proceedings against state in case of breach of the above-mentioned rights 7

9. Bilateral Investment Treaties and Cross-Border Pipeline Projects TYPICALLY, RIGHTS ACCORDED TO INVESTORS : • FAIR AND EQUITABLE PROTECTION • National Treatment • Most-favoured Nation Treatment • Full protection and security • Free transfer of funds • COMPENSATION IN CASE OF EXPROPRIATION, NATIONALISATION AND OTHER TAKING • Commence arbitral proceedings against State for breach of above rights 8

10. Fair and Equitable Treatment (“FET”) • A state must maintain stable and predictable environment consistent with reasonable investor expectations; to accord due process in handling claims, act non-discriminatory and proportionately • Arbitral Tribunals examine the impact of state measures on the investor’s expectations which were created or reinforced by the state’s own acts • CMS v. Republic of Argentina (ICSID, 2005) Facts: License to a gas transportation company provided tariff to be calculated in USD, converted into pesos and indexed to PPI In 1999 Argentina temporarily suspended PPI adjustment. Later did so permanently but not for exports In 2001 Argentina passed law setting new exchange rate USD/peso Held: Argentina breached FET, as breached the legitimate expectations of the investor 9

11. Expropriation and Nationalisation • Investment shall not be expropriated or nationalised or subject to measures having the effect equivalent to expropriation or nationalisation except: • for a public purpose • in a non-discriminatory manner • in accordance with due process • against prompt, adequate and effective compensation • Direct expropriation • Seizure of factory • Appointment of state managers • Creeping/indirect regulatory measures Test:Whether action of state effectively deprives investor of whole or significant part of the investment • Key question: When does the conduct of state cross the line that separates valid regulatory activity from expropriation? 10