CONTENTS INTRODUCTION 2 SECONDARY GAS MARKET AND MARKET OPERATOR 2 ENCOURAGEMENT OF FRACKING 4 CHANGES IN MATTERS OF LPG 4 LIMITATIONS TO THE MARKET SHARE OF WHOLESALE OPERATORS 6 NEW TAX ASPECTS 6 OTHER NEW ASPECTS INTRODUCED BY THE ACT 8 COMING INTO FORCE AND TRANSITIONAL SYSTEM 11 LEGAL UPDATE I PUBLIC LAW GROUP May 2015 ACT 8/2015, AMENDING ACT 34/1998, ON THE HYDROCARBON SECTOR, AND REGULATING CERTAIN TAX AND NON-TAX MEASURES IN RELATION TO THE EXPLORATION, INVESTIGATION AND EXPLOITATION OF HYDROCARBONS WWW.CUATRECASAS.COM LEGAL UPDATE I PUBLIC LAW GROUP 2/11 INTRODUCTION On May 22, 2015, the Official Gazette of the Spanish State (“BOE”) published Act 8/2015, amending Act 34/1998 on the hydrocarbon sector and regulating certain tax and non-tax measures in relation to the exploration, investigation and exploitation of hydrocarbons (the “Act”). The Act, without prejudice to the points below, came into force on May 23, 2015. The following sections analyze the most significant aspects of the reform: a) The creation of an organized natural gas market facilitating the entry of new marketers and increasing competition, as well as a new single operator of the organized gas market, responsible for managing the gas hub. b) Encouraging the extraction of non-conventional gas and oil hydrocarbons through fracking, establishing incentives and specific provisions for autonomous regions and local authorities where this activity is carried out. c) The implementation of several measures for encouraging efficiency in competition in the liquid petroleum gas (“LPG”) sector and combating fraud. d) From January 1, 2016, limiting the market share of the wholesale operators of oil products in each province to 30% in terms of annual sales. e) New tax measures regarding the exploration and production of hydrocarbons, and particularly the creation of a new tax on the value of the production of hydrocarbons, and an amendment of the surface area fees relating to the national public domain of hydrocarbons, also creating new fees for carrying out seismic surveys and probes. SECONDARY GAS MARKET AND MARKET OPERATOR Act 8/2015 creates the secondary gas market, which to date was carried out in a nonregulated manner in bilateral relations between marketers. The new secondary market has an Iberian scope, intending to cover Spain and Portugal, although there is still no agreement between these countries on the full territorial expansion or the participation of the Portuguese Iberian market operator. The organized gas market will consist of a set of short-term gas sale and purchase transactions through physical handover at the virtual balance point of the system. Other transactions may be added according to regulations. The new market also is considered as gas commerce platform, established under article 10 of Commission Regulation 312/2014, of March 26. WWW.CUATRECASAS.COM LEGAL UPDATE I PUBLIC LAW GROUP 3/11 Apart from the market operator, referred to below, marketers, shippers and distributors, CORES and the technical system manager can also participate in the market. Moreover, a non-marketers can also participate by purchasing and selling gas. These new agents do not need to have previous third party access agreements (TPA). The Act regulates in detail the market operator (“MO”), its operations and shareholder composition. The MO will be responsible for managing the market, receiving sale and purchase offers, matching them and settling collections and payments. It is also in charge of enforcing guarantees, publishing prices and channeling any information between participants. As regards the shareholder composition, it is necessary to distinguish between those who, in principle, must participate in the MO and those who can participate voluntarily. Among the former are the Spanish and Portuguese Iberian energy market operators. Between the two they will hold 30% of the MO, of which two-thirds (20%) will belong to the Spanish operator and one-third (10%) to the Portuguese operator. The technical managers of the Spanish and Portuguese gas system will also participate with a joint stake of 20% (of which two-thirds will correspond to the Spanish manager and one-third to the Portuguese manager). As regards the remaining 50%, limits have been set regarding the participation of those shareholders performing activities in the energy sector: individual limits of 3% and joint limits of 30%. In the case of those not participating in the energy sector, the individual limit is 5%. Legislation seeks to increase the participation in the MO of all interested parties, who can make a request to acquire shares of the MO, which may be accepted if a shareholder wishes to sell its part. Otherwise, the capital will be increased to allow the applicant to enter (the Act excludes preferential acquisition rights). The Act foresees making the necessary adjustments to respect the legal limits despite the entry of new shareholders. The remuneration of the MO will be charged to those participating in the market. Transitionally, however, remuneration could be charged to the gas system. Finally, the Act deals with some immediate aspect of the process of constituting the MO, entrusting the Iberian energy market operator, Polo Español, S.A. with the adaptation of the company MIBGAS S.A. (acting as MO) to comply with the Act, so that the operator will begin its activities within four months. The Iberian energy market operator, Polo Español, S.A. is allowed to exceed the maximum legal limits established if it participates in the MO, to cover the share capital transitionally until the entry of other agents. WWW.CUATRECASAS.COM LEGAL UPDATE I PUBLIC LAW GROUP 4/11 ENCOURAGEMENT OF FRACKING The reform encourages “non-conventional” forms of extraction or fracking, meaning extraction requiring the previous application of high volume hydraulic fracturing techniques, consisting of injecting into a well 1000 m3 or more of water at each fracking stage, or 10,000 m3 or more of water throughout the fracking process. The regulation establishes incentives for autonomous regions and local authorities where these activities are carried out, and a mechanism enabling landowners to participate in the profit. In addition, as analyzed in the section on “New Tax Aspects,” fracking is subject to better tax treatment under the new regulation, being charged at lower rates than “conventional” extraction methods (between one and two points, depending on the volume of gas extracted per tax period). Furthermore, the reform of the Hydrocarbons Act intends for any revenue deriving from the new tax regime to provide direct profit for the territories where the activities subject to a charge are carried out. The reform has thus created financial incentives for autonomous regions and local authorities where activities for the exploration, investigation and exploitation of hydrocarbons are set up, as a compensation mechanism for any possible damage these activities could cause. The amount, distribution and other aspects of these “incentives” will be established, subject to budgetary provisions, under the General Budget Act 38/2003, of November 17. CHANGES IN MATTERS OF LPG In the LPG sector, the main change refers to the supply of piped LPG, now classified as a wholesale form of supply. This supply format is defined by (i) its origin in one or more deposits, (ii) being piped, and (iii) its delivery to more than one supply point in the gas stage, with an individual measurement for each consumer. Given that this form of wholesale supply has not been subject to full independent regulation development, what has already been established in the Hydrocarbon Sector Act regarding the supply of piped gas fuel could also being applicable to the supply of piped LPG, at least until a specific regulation development is enacted, whereby the law confers the corresponding qualification. It is also stated that wholesale operators of LPG and retail marketers of bulk LPG must take out and maintain a civil liability insurance policy or other financial guarantees for a sufficient amount to cover the risks of the activities performed. This obligation is not new, since under article 21 of Royal Decree 1085/1992, of September 11, regulating the activity of the distribution of liquid petroleum gas, the supply company must keep up to date insurance policies to cover any risks resulting from the activities performed that could affect persons or assets. However, it is considered that an obligation of this type should be established in a rule with the same ranking as a law, with greater accuracy and coverage than the rule provided more vaguely to date in WWW.CUATRECASAS.COM LEGAL UPDATE I PUBLIC LAW GROUP 5/11 article 90 of the Hydrocarbon Sector Act regarding the obligatory nature of the coverage of risks affecting persons or assets, which could arise from performing the activities it regulates. Likewise, the wholesale operator of LPG and the retail marketer of bulk LPG must report on any event involving a change to data included in the declaration of liability they are required to submit to begin the activity. Moreover, they also have to report on the ceasing of the activity when this occurs. In this latter case, the National Market and Competition Commission will remove from the list of operators those reporting their ceasing. Moreover, the obligation of universal service imposed on the retail marketer of bulk LPG under article 25 of Royal Decree 1085/1992, of September 11, has been raised to the level of a law and its scope has been amended. However, as there is no delimitation of the territorial scope of the service through any administrative authorization, to now delimit the scope regarding the retail marketer’s obligation to attend to any consumers requesting LPG, the criterion used is that of the province in which the marketer is already acting. In addition, the wholesale operators of LPG must request from any retail marketer of LPG and holders of all the facilities they supply, documentation evidencing that their facilities comply with prevailing regulations. Until now, this duty of verification was limited to retail marketers of bottled LPG and holders of the facilities of bulk LPG. Other amendments initially established in the draft bill the government submitted to congress were not approved, according to which the distribution grids, regardless of whether LPG or natural gas is supplied, should be the only ones when trying to supply the same consumer or group of consumers, and that a retail marketer of LPG, with a distribution facility for piped LPG, would have a prioritized right to supply natural gas to consumers connected to its grid. These amendments were withdrawn from the project in the wording approved by congress, which it passed on to the senate, and they were not recovered in the final version of the law approved. LIMITATIONS TO THE MARKET SHARE IN RELATION TO WHOLESALE OPERATORS OF OIL PRODUCTS Act 8/2015 of May 21, amending Act 34/1998, of October 7, on the hydrocarbon sector and regulating certain tax and non-tax measures related to the exploration, investigation and exploitation of hydrocarbons, in its fourth additional provision prohibits “wholesale oil operators with a market share exceeding 30% from increasing the number of facilities under a system of ownership or by virtue of any other title conferring on them the direct or indirect management of the facility, or subscribe new exclusive distribution agreements with retail distributors that exploit the facility for the supply of fuels for vehicles, regardless of who holds the ownership or in rem right over it.” WWW.CUATRECASAS.COM LEGAL UPDATE I PUBLIC LAW GROUP 6/11 The fourth additional provision establishes a prohibition per se on contracting additional exclusive distributors when the operator has a market share exceeding 30%. Council Regulation 1/2003, on the implementation of the rules on competition laid down in articles 81 and 82 of the Treaty (now articles 101 and 102 of the Treaty on the Functioning of the European Union “TFEU”), establishes in article 3 that national rules cannot result in the prohibition of agreements1 that could affect trade between Member States but do not restrict competition in the sense of article 101.1 of the TFEU or meet the conditions described in section 3 of that article. We believe the law could contradict this provision of Regulation 1/2003, of a higher rank, since it prevents operators with more than 30% market share from contracting new exclusive distributors, even if the agreement is not contrary to article 101.1 TFEU or, if it is, is compatible with the conditions specified in section 3 of article 101 TFEU. NEW TAX ASPECTS Act 8/2015 has also approved amendments affecting the tax scope, as summarized below. It introduces a new real direct tax from January 1, 2016: the tax on the value of the extraction of gas, oil and condensates. 2 The purpose of this tax, according to the preamble of the Act, is “for part of the wealth arising from the use of the assets of the public domain to revert to the company to which, under the Constitution and the law, such assets belong.” Under article 13 of the Act, extraction in Spanish territory of gas, oil and condensates, in exploitation concessions of hydrocarbon deposits referred to in title II of the Hydrocarbon Sector Act 34/1998, of October 7, is a taxable event, and the payers of the this tax will be legal persons and entities performing these extraction activities. To these effects, the Act considers as Spanish territory the territorial seabed, exclusive economic area, continental shelf and all other seabeds under national sovereignty. The taxable income of this new tax is determined by the value of the gas, oil and condensates extracted by the taxpayer during the tax period, once the first purification and separation treatment has been carried out. 1 In contrast to unilateral practices in respect of which the Member States can adopt stricter legislations. 2 Following the same legislative technique used in the case of the tax on fluorinated greenhouse gas (approved by Act 16/2013 of October 29, establishing certain measures on environmental taxation and adopting other tax and financial measures), this new tax is regulated independently by Act 8/2015, without falling within Act 38/1992, on December 28, on Excise Duties. However, given the nature of this new tax on the value of the extraction of gas, oil and condensates, we understand that, as in the case of the tax on fluorinated greenhouse gases, management tasks will also be assumed by the competent bodies in matters of Excise Duties. WWW.CUATRECASAS.COM LEGAL UPDATE I PUBLIC LAW GROUP 7/11 The full amount of the tax will be determined by applying the progressive charge scale applicable from the two described below, established in article 17 of the new Act, and whose tax rates depend on the production volume: PRODUCTION OF OIL AND CONDENSATES Barrels extracted in tax period Tax rate Exploitation on land Exploitation at sea Up to 365,000 2% 1% From 365,001 to 3,650,000 6% 5% More than 3,650,000 8% 7% GAS PRODUCTION Volume extracted in tax period Exploitation at sea Exploitation on land conventional conventional not conventional Up to 32,850,000 m3 1% 3% 1% From 32,850,000 to 164,250,000 m3 3% 4% 3% More than 164,250,000 m3 4% 5% 4% To these effects, the new act established that the tax period will be the calendar year, with the accrual taking place on the last day of the tax period (December 313 ). The taxpayers must self-settle the tax in the first 20 days of April of the year following the accrual of the tax. However, the Act also requires that, in the first 20 calendar days of October, taxpayers must make a partial payment on account of the liquidation corresponding to the tax period in progress, determined depending on the value of the extraction in the first 6 months of the tax period. In addition, the new Act, with effects from May 23, 2015, amends the regulation of the surface area fee established in the first additional provision of Act 34/1998, and which is revoked as from that date. The new regulation on the surface area fees, set forth in article 21 of Act 8/2015, adds two additional tariffs. Thus, the Act has added a third tariff for including probes in investigation permits and in exploitation concessions, and a fourth tariff for acquiring seismic data in exploration authorizations, investigation permits and exploitation concessions, also establishing the amounts relating to these tariffs. The amounts are maintained for the two existing tariffs (first tariff for investigation permits and the second for exploitation concessions). Finally, it is worth mentioning that article 7 of Act 8/2015, to ensure that revenue arising from tax features will revert particularly to the autonomous regions and municipalities where such activities take place, establishes that “the General State Budgets, in accordance with existing financial availability, will establish provisions for the autonomous regions and local authorities in whose territories the activities are performed of exploration, investigation and exploitation of hydrocarbon deposits constituting the taxable event of the tax on the value of the extraction of gas, oil and condensates, and tariffs three and four on surface area fees.” 3 Taking into account the entry into force of this new tax, the first accrual will take place on December 31, 2016. WWW.CUATRECASAS.COM LEGAL UPDATE I PUBLIC LAW GROUP 8/11 OTHER NEW ASPECTS INTRODUCED BY THE ACT In addition to the amendments analyzed in the above sections, Act 8/2015 introduces other significant aspects: - Minimum safety stock: Measures are established regarding the minimum safety stock in the natural gas sector, enabling the government to distinguish statutorily between strategic and operative stock, how these should be calculated and those responsible for its constitution, maintenance and management. - Reinforcement of the role of CORES: The reform strengthens the role of the Corporación de Reservas Estratégicas de Productos Petrolíferos (CORES): It is qualified for the acquisition, control and management of strategic gas stocks, including those of natural gas, in the manner and for the amount determined statutorily, although it is specified that any drawdowns will be made at a price equal to the average weighted acquisition cost or at market price if this is higher, excluding any exceptions to be developed statutorily. It is attributed control of the maintenance of the minimum safety stock, and the obligation to diversify natural gas supplies. It is entitled to access the facilities of regasification, shipping and storage of natural gas and the organized market. CORES’s board of directors and other CORE’s management bodies must have sufficient representation of the wholesale operators that are specified by law, marketers of natural gas, and representatives of the Ministry of Industry, Energy and Tourism, who must be designated from among public officers with proven experience in the energy sector. The vote of the representative members will be scaled according to the volume of their annual financial contribution. The Ministry of Industry (which will appoint, inter alia, the President of CORES) may veto any resolutions of the corporation infringing the Hydrocarbons regulations. - Amendments to the system of administrative silence and notifications: A new precept has been introduced to regulate the system of administrative silence in proceedings brought at the request of the interested party, so that if the maximum period expires without the party being informed of any decision, the request or offer submitted can be deemed dismissed, excluding labor plans. It also states that in these proceedings, personal notification of any administrative acts and decisions will only be required for the applicants themselves, those who have submitted tender bids and, where applicable, the operator or holders of the permits, authorizations or WWW.CUATRECASAS.COM LEGAL UPDATE I PUBLIC LAW GROUP 9/11 concessions, regardless of their publication, which will replace the notification in relation to any other interested parties. 4 - Amendment of the definition of wholesale operators and introduction of cases of extinction of temporary qualification or disqualification: The definition of wholesale operator has been amended to include holders of refineries and biofuel production plants. It also establishes the possibility, after the corresponding proceedings, of declaring the extinction of its qualification any of the requisites required for the exercise of its activity are not fulfilled, or of applying a temporary disqualification during any sanctioning instruction proceedings, depending on the circumstances. - Amendment of the registration of retail distribution facilities for oil products: Information presented to fulfill Order ITC/2308/2007, of July 25, is entered into the register of retail distribution facilities established under article 44 of the Hydrocarbon Act 34/1998, including the new obligation of autonomous regions to enter in the registry of the Ministry —within one month— the information already established in that precept and also any projects for opening new facilities qualified for the supply of vehicle fuels and the state of processing. - Mutual recognition of licenses for marketing natural gas: The Act establishes that companies qualified for marketing natural gas in a Member State of the European Union with which there exists an agreement for the mutual recognition of licenses for the marketing of natural gas, are only required to notify the commencement or ceasing of the activity, without prejudice to the constitution of any financial guarantees necessary in contracting access to the facilities. - New functions of the technical system manager: It also introduces the new functions of the technical system manager, besides those established under article 64 of Act 34/1998, particularly that of providing CORES any information it requires for (i) performing its function of maintaining a stock of natural gas of a strategic nature; (ii) performing in coordination with the organized gas market operator of the functions statutorily assigned to it to ensure the correct operations of the market; (iii) assuming of the functions established for the transport network manager, including the performance of balance sheet action, under Commission Regulation (EU) no. 312/2014, of March 26, 2014; and (iv) acquiring or selling on the organized gas market the gas necessary to exercise its functions and, particularly, acquiring and selling gas for maintaining the system in balance sheet transactions under applicable regulations. - Amendments relating to properties affected by the construction of gas and oil facilities: An amendment is included to describe the effect on individual properties arising from the construction of gas and oil facilities, and to safeguard the security of these facilities. 4 The new administrative silence system is applicable to proceedings under way when the Act (Sixth Transitional Provision) comes into force. WWW.CUATRECASAS.COM LEGAL UPDATE I PUBLIC LAW GROUP 10/11 - Definitive liquidation: The Act establishes that the definitive liquidation of the income and costs of the gas system for each financial year, from that corresponding to the year 2015, must be carried out before December 1 of the year following that which corresponds. - Introduction of new infringements: The Act reviews types of infringements, introducing new administrative infringements, including in the scope of liquid hydrocarbons, classifying as serious offences any non-fulfillments of measures favoring competition introduced in Act 11/2013, of July 26, on measures for supporting entrepreneurs and stimulating growth and job creation. Furthermore, a new very serious infringement is included relating to the obligation to supply bottled LPG to homes. The rule also specifies infringements for processing infringements for which the National Market and Competition Commission would be competent. COMING INTO FORCE AND TRANSITIONAL SYSTEM Act 8/2015, of a basic nature, 5 came into force on May 23, 2015, except for the provision of Title II (on measures relating to the exploration, investigation and production of hydrocarbons 6 ) which will come into force on January 1, 2016, except Chapter III, regulating surface area fees. In line with the Final Provisions, the Act amends several norms, particularly regarding Act 18/2014, of October 15, approving urgent measures for growth, competitiveness and efficiency, amending the regulation of the annual financial contribution to the National Energy Efficiency Fund. The norm also establishes specific transitional provisions relating to the following issues: - The constitution of the market operator, which must start operating within four months from the date the Act is enacted, and its financing, which will transitionally be established through an order of the Ministry of Industry. - Any payments to owners of the land supradjacent to exploitation concessions of hydrocarbon deposit, which will be applicable to exploitation concessions granted once the Act enters into force. 5 Except in relation to the tax on the value of the extraction of gas, oil and condensates, the regulation of which is the exclusive competence of the State. 6 Under the 8th Final Provision, the following will come into force on January 1, 2016; the provisions relating to the new tax on the value of the extraction of gas, oil and condensates, incentives for autonomous regions and local authorities where activities relating to the exploration, investigation and exploitation of hydrocarbons are carried out, on the obligation to install hydrocarbon measuring devices, and the surface area fee, as well as payments to owners of the land supradjacent to exploitation concessions of hydrocarbon deposit (applicable to exploitation concessions granted from the coming into force of Act 8/2015, under its Third Transitional Provision). WWW.CUATRECASAS.COM LEGAL UPDATE I PUBLIC LAW GROUP 11/11 - The National Market and Competition Commission’s functions and competences in sanctioning matters. - Transitional system of specific amendments. 7 - The amendments to the system of administrative silence and of notifications will be applicable to proceedings under way when the Act comes into force. - The contents of the Fourth Additional Provision of the Act on exclusive agreements of wholesale operators will be applicable from July 1, 2016, with the contents of the Fifth Additional Provision of Act 11/2013, of July 26, on measures supporting entrepreneurs and stimulating growth and job creation being applicable until then. - Finally, efficiency conditions are maintained for 2015, so that the amendments introduced into article 71.1 of Act 18/2014, of October 15, on the approval of urgent measures for growth, competitiveness and efficiency will be applicable from January 1, 2016. © 2015 CUATRECASAS, GONÇALVES PEREIRA. All rights reserved. This newsletter contains a selection of news and information prepared by Cuatrecasas, Gonçalves Pereira. This information does not constitute legal advice in any of our professional practice areas. The intellectual property rights to this newsletter belong to Cuatrecasas, Gonçalves Pereira. Any reproduction of this newsletter in any way and the distribution, assignment or any other full or partial use of this newsletter is prohibited, unless with the prior consent of Cuatrecasas, Gonçalves Pereira. 7 Under the Fifth Additional Provision, until the statutory development of the terms and conditions for connections between transport and distribution networks of natural gas, amendments introduced into article 73.1 of Act 34/1998, through section eight of article 2 of the Act, will not be applicable. Furthermore, amendments introduced into article 91.1 of Act 34/1998 will not be applicable to connection facilities of natural gas deposits with the transport network that, when this provision comes into force, have administrative authorization to manage the facilities.