Legal and regulatory issues in LNG projects

1.    Introduction

In this article we consider some of the legal and regulatory issues that must be taken into account when considering LNG projects.

LNG is natural gas transformed by a cooling process to a liquid form. This process reduces natural gas volume by approximately 600 times. Thus, LNG is easier and cheaper to handle and store. LNG also enables natural gas to be transported by ship, making this fuel available throughout the world without depending on pipelines.

Depletion of gas reserves and cost reductions brought about by technology improvements have seen a substantial expansion of the global LNG market.

An LNG project involves the construction of a liquefaction plant located in the country producing natural gas and a re-gasification plant in the country that will consume the gas. Special purpose vessels and port facilities, as well as storage facilities also have to be built.

2.    Conditions for LNG development in Argentina

Natural gas is an essential part of Argentina’s energy mix as it amounts to more than 50% of primary energy consumed within the country. Supply shortages and transport capacity constraints have caused the country to cut natural gas exports to Chile, Brazil and Uruguay and start importing this fuel from Bolivia. However, doubts have arisen concerning the reliability of the supply and the prices of this source. This situation, coupled with the very tight conditions of markets of liquid fuels that are used as natural gas replacements, has created the conditions where considering an LNG project in Argentina might be not only deemed viable but even considered necessary by both public and private sector sectors, as a means of guaranteeing long term natural gas supply. Although the cost of an LNG project can be high, international pipelines in other parts of the world have proved to be an insecure source of energy despite the enormous investments required for their construction.

Extra storage capacity is also a value added by LNG projects that could be relevant for peak-shaving purposes. Currently there is only one peak-shaving facility in Argentina.

Re-gasification plants could be located either in Argentina (importing natural gas from countries located relatively near such as Venezuela, Angola and Trinidad y Tobago) or in countries already connected by pipelines to Argentina such as Chile (where the Quinteros project is due to be operational by 2009) or Uruguay.  

In Argentina, there are no legal constraints for LNG projects to be undertaken purely by private companies or by some degree of public-funded options ranging from state-owned companies such as ENARSA, a public-private partnership or even a trust fund sponsored by the government.

3.    Main legal and regulatory issues

Given the scale of facilities that need to be built for an LNG project, capital costs for such a project will be high. Thus, a stable and predictable regulatory framework is desirable to provide incentives for both investment and financing in the long term.

Regulations currently in force include no specific provisions regarding neither LNG nor re-gasification activities. Regardless of any specific regulation, it should be noted that:

i)             natural gas importation does not need to be previously authorized by the government to proceed (Law No 24,076, section 3);

ii)            compliance with the relevant environmental, planning and safety requirements in force must be met before proceeding with the project;

iii)            projects could qualify for profit and VAT tax relief directed to investment in infrastructure as foreseen in Law No 25,924 and its regulations, or similar tax relief schemes to be approved in the near future;

iv)           projects could qualify for tax relief for import duties as foreseen in Resolutions No 256/2000 and No 142/2007 of the Ministry of Economy.

To foster investment in LNG projects certain regulatory measures could be considered:

i)             total or partial exemption of third party access rights to gas imported and stored as LNG;

ii)            freedom for parties to enter into LNG purchase agreements with prices and other terms and conditions freely set.