RENEGOTIATION OF NATURAL GAS LICENSE AGREEMENTS: HOLDING THE GOVERNMENT HARMLESS FROM INTERNATIONAL OBLIGATIONS?

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development and Investment
(Apr 2009)
CHAPTER 16A
RENEGOTIATION OF NATURAL GAS LICENSE AGREEMENTS: HOLDING THE GOVERNMENT HARMLESS FROM INTERNATIONAL OBLIGATIONS?
Pedro Serrano Espelta
Marval O'Farrel
Buenos Aires

Pedro Serrano-Espelta is a partner of Marval, O'Farrell & Mairal. He specializes in corporate law, M&As, shareholders' disputes and oil & gas. He has advised local and foreign companies in corporate matters, including joint ventures, distribution and agency agreements, mergers, acquisitions, international arbitration and privatizations. Mr. Serrano Espelta was a Visiting Scholar at the University of California at Berkeley from 1993 to 1995 and received his master in laws degree (LL.M.) from the University of California at Los Angeles in 1997. He previously worked in the law firm The Americas Law Group in San Francisco, California, from 1993 to 1996, where he advised American, Canadian and Mexican companies in distribution agreements, project financing and joint ventures. He also advised the government of the Republic of Chile in relation to its inclusion to the North American Free Trade Agreement (NAFTA). Mr. Serrano-Espelta has presented at conferences and seminars on issues related to his expertise. He is a member of the Bar of the City of Buenos Aires.

Table of Contents

1. Renegotiation Process, Agreements and Indemnities

2. International arbitration proceedings against the Government

2.1. Transportadora de Gas del Norte S.A.

2.2. Transportadora de Gas del Sur S.A.

2.3. Metrogas S.A.

2.4. Gas Natural Ban S.A. - Distribuidora de Gas del Centro S.A. Distribuidora de Gas Cuyana S.A.

2.5. Camuzzi Gas Pampeana S.A. - Camuzzi Gas del Sur S.A.

3. Request to waive arbitration rights. Indemnities

4. Lack of compensation for the first years after the Emergency Law

5. New restrictions to the transfer of shares

6. Overview of the Renegotiation Process in each Gas Company

6.1. Companies which do not have an Agreement in place

6.1.1. Gas Nea S.A.

6.2. Companies which Executed Transitory Agreements with a Trust

6.2.1. Transportadora de Gas del Norte S.A.

6.2.2. Transportadora de Gas del Sur S.A.

6.2.3. Metrogas S.A.

6.3. Companies which Executed Transitory Agreements without a Trust

6.3.1. Distribuidora de Gas del Centro S.A.

6.4. Companies which Executed Definitive Agreements

6.4.1. Gas Natural Ban S.A.

6.4.2. Distribuidora de Gas Cuyana S.A.

6.4.3. Litoral Gas S.A.

6.4.4. Camuzzi Gas Pampeana S.A.

6.4.5. Camuzzi Gas del Sur S.A.

6.4.6. Gasnor S.A.

7. Summary - Conclusion

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On January 6, 2002, Law No. 25,561 was enacted (the "Emergency Law"). The Emergency Law declared a public emergency in the social, economic, administrative, financial and currency exchange fields, and delegated extraordinary powers to the Executive Branch ("Government").¹ Among other provisions the Emergency Law converted natural gas distribution and transportation tariffs into pesos at the exchange rate of one peso to one US Dollar, eliminated all adjustment clauses and any indexation mechanism in Dollars or other foreign currencies (i.e., the US Producer Price Index - "PPI") and empowered the Government to renegotiate all public law contracts, including gas transportation and distribution licenses ("Gas Licenses").

The purpose of this work is to provide an overview of the status of the international arbitration proceedings filed against the Government due to the amendments introduced to the Gas Licenses and briefly explain how the Government, through the mandatory renegotiation of the Gas Licenses, has attempted to make the gas companies and their shareholders responsible for any damages suffered by the Government as a consequence of the arbitration awards.

1. Renegotiation Process, Agreements and Indemnities

The renegotiation process was supposed to take place during the months following the enactment of the Emergency Law. In February 2002, the Government created a Special Commission to deal with the renegotiation of the public utility contracts. However, more than one year after the creation of this Special Commission, the process was at a complete standstill. In July 2003, the Government created a new commission, the so-called Unit for the Renegotiation and Analysis of Public Utility Contracts (Unidad de Renegociación y Análisis de Contratos de Servicios Públicos - "UNIREN"). However, the renegotiation process did not start to yield results until 2006.

During 2006, the UNIREN proposed the first definitive versions of renegotiation agreements. These agreements, which had to be ratified by the Government to become effective, included both an amendment to the gas distribution or transportation licenses, as applicable, and the granting of a temporary tariff increase on account of the final tariff to be determined after a future full rate case.

As originally proposed, the stay of all claims arising out of or relating to the Emergency Law and/or the elimination of the PPI adjustment was a condition precedent to the Government's ratification of the agreements. Once the full rate case was approved all claims had to be dismissed and discharged or, if not possible, the licensees had to replace the stay and eventual dismissals of the claims with an indemnity aimed at protecting the Government against those claims. The indemnity was to be granted and paid for entirely by the gas companies.

Some of the licensees executed these first versions of renegotiation agreements. Gas Natural Ban is, however, the only company whose agreement was ratified by the

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Government. One of the reasons could be found in the fact that Gas Natural SDG S.A., the indirect majority shareholder, agreed to grant an indemnity in favor of the Government.

Except for the Gas Natural Ban case, the Government never issued the executive decrees necessary for the agreements to enter into effect.

Considering that the extraordinary powers granted by the Emergency Law were about to expire, in 2008, the Government proposed new renegotiation documents, including interim and definitive renegotiation agreements along with separate indemnities.

The interim agreements are envisioned to grant a temporary tariff increase on account of the final tariff to be determined after a full rate case. These interim agreements are to become effective upon ratification by the Government. As with the first version of renegotiation agreements, a condition precedent for ratification was that the licensees and their shareholders should suspend all outstanding claims and commit not to initiate new actions.

In case the suspension and/or the commitments were not granted, the licensee could replace them by granting a separate temporary indemnity in favor of the Government. When neither the suspensions nor the indemnities were granted, the Government proposed a different version of transitory agreements which included the obligation to transfer the temporary tariff increase to a trust to be created to the effect.

The temporary indemnity is supposed to remain in force until after the licensees and their shareholders have dropped all of their claims. Basically, its purpose is to indemnify the Argentine Government in case it has to pay any claims based in current or future actions arising out of or relating to the Emergency Law and/or the elimination of the PPI adjustment.

The definitive renegotiation agreements, which approve the variables and formulas for the full rate case and amend the gas distribution and transportation licenses, will also become effective upon ratification by the Government. In this case, as condition for ratification, the licensees have to grant a permanent indemnity to cover any claims past or future relating to the Emergency Law and/or the PPI adjustment. This indemnity shall be granted even if the gas companies and all of their direct or indirect shareholders (current, past or future) have dropped their claims.

The definitive indemnity follows the term of the definitive renegotiation agreement (i.e., the duration of the gas distribution or transportation license being renegotiated). Its purpose is to indemnify the Government and the clients of the natural gas service should the Government has to pay any monies arising out of or relating to the Emergency Law and/or the PPI adjustment.

2. International arbitration proceedings against the Government

As a consequence of the suspension of the PPI adjustment, the enactment of the Emergency Law and the measures adopted by the Government since then many foreign

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investors brought arbitration claims against the Government under different bilateral investment treaties.

As of today, out of the six arbitrations initiated by foreign investors against the Government, one is concluded, three are currently in the annulment proceedings and two have been suspended by agreement of the parties. The awards rendered against the Government as compensation for the violation of the investment protections amount to approximately US$ 610 million plus interest.

Below is a list, along with a brief description of the status, of the claims brought by foreign investors of the gas distribution and transportation companies.

2.1 Transportadora de Gas del Norte S.A.

Case Name: CMS Gas Transmission Company v. Argentine Republic (ICSID Case No. ARB/01/8).

Status: The Arbitral Tribunal awarded CMS US$ 133,200,000 plus interest as compensation. The Government requested the annulment of this award, but the ad hoc committee dismissed most of the Government claims and upheld the award.

2.2 Transportadora de Gas del Sur S.A.

Case Name: Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic (ICSID Case No. ARB/01/3).

Status: The Arbitral Tribunal awarded Enron US$ 106,200,000 plus interest as compensation. The Government requested the annulment of this award and the ad hoc committee has yet...