Regulatory Requirements for LNG Import Projects in terms ...

Regulatory Requirements for LNG Import Projects in

terms of the Gas Act, 2001 (Act No.48 of 2001)

Licensing of gas infrastructure

Third party access

Gas Pricing

Tariffs

NOVEMBER 2020

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Table of Contents

1. INTRODUCTION......................................................................................................... 4

2. LICENSING FRAMEWORK IN TERMS OF THE GAS ACT ............................. 7

2.1 Legal basis for issuing gas licences .............................................................................. 7

2.2 Types of licences required for LNG import projects ...................................................... 7

2.3 Key information required for LNG licence applications ................................................. 9

2.4 Registration of gas activities (including LNG importation) .......................................... 11

2.5 Access to the infrastructure ......................................................................................... 11

2.6 Gas/LNG specifications ............................................................................................... 12

2.7 Participation by Historically Disadvantaged South Africans ........................................ 13

3. REGULATION OF TARIFFS IN TERMS OF THE GAS ACT ......................... 13

3.1. Scope for the regulation of tariffs ..................................................................................13

3.2 Guidelines to monitor and approve gas transmission and storage tariffs ................... 13

4. REGULATION OF GAS PRICES IN TERMS OF THE GAS ACT .................. 14

4.1 Scope for regulation of gas prices ............................................................................... 14

4.2 Methodology for approving maximum prices for gas .................................................. 14

4.3 Non-discrimination provision ........................................................................................ 15

Attachments

Appendix A: Piped Gas Regulations, 2007

Appendix B: Gas Act Rules, 2009

Appendix C: Guidelines for Monitoring and Approving Transmission and Storage Tariffs for

the Piped Gas Industry in South Africa, 2017

Appendix D: Methodology for approving Maximum Prices for Gas, 2020

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List of acronyms and abbreviations

EIA Environmental Impact Assessment

FSRU Floating Storage Regasification Unit

GSA Gas Sales Agreement

HH Henry Hub

JKM Japan/Korean Marker

NERSA National Energy Regulator

NBP National Balancing Point

LNG Liquefied Natural Gas

RMIPPPP Risk Mitigation Independent Power Producers Procurement Programme

TTF Title Transfer Facility

TTF Title Transfer Facility

TPA Third Party Access

VTP Virtual Trading Point

ZEE Zeebrugge

ZTP Zeeburgge Trading Point

Gas Act Gas Act, 2001 (Act No.48 of 2001)

Regulations Piped-Gas Regulations, promulgated in terms of the Gas Act, 2001 (Act No.

48 of 2001), gazette No 29792, 20 April 2007

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1. INTRODUCTION

1.1 The National Energy Regulator (NERSA or Energy Regulator), a Schedule 3A Public

Finance Management Act, 1999 (Act No. 1 of 1999) Public Entity was established on

1 October 2005 in terms of the National Energy Regulator Act, 2004 (Act No. 40 of

2004) to regulate the:

(a) Electricity industry in terms of the Electricity Regulation Act, 2006 (Act No. 4 of

2006;

(b) Piped-Gas industry in terms of the Gas Act, 2001 (Act No. 48 of 2001); and

(c) Petroleum Pipelines industry in terms of the Petroleum Pipelines Act, 2003 (Act

No. 60 of 2003).

1.2 The functions of the Energy Regulator as prescribed in the Gas Act, 2001 (Act No.48

of 2001) (“Gas Act”) include the following:

(a) Issuing licences for gas infrastructure including – gas transmission and distribution

pipelines, storage, liquefaction and liquefied natural gas (LNG) re-gasification

facilities;

(b) Issuing licences for gas trading activity;

(c) Approval and monitoring of gas prices (for molecule) and tariffs (for infrastructure);

(d) Compliance monitoring and enforcement;

(e) Registration of gas production, importation and transmission of gas for own use;

(f) Undertaking investigations and inquiries into the activities of licensees;

(g) Promoting competition in the gas industry.

1.3 Other legal instruments that NERSA relies on to execute its mandate in terms of the

Gas Act are as follows:

(a) Piped Gas Regulations, 2007 - Appendix A

(b) Gas Act Rules, 2009 - Appendix B

(c) Guidelines for Monitoring and Approving Transmission and Storage Tariffs for the

Piped Gas Industry in South Africa, 2017 - Appendix C

(d) Methodology for approving Maximum Prices for Gas, 2020 - Appendix D

1.4 This document seeks to simplify the regulatory requirements of the Gas Act regarding

the regulation of gas infrastructure developed as part of LNG-to-power projects in

South Africa, including LNG storage and re-gasification, and gas pipeline facilities as

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well as the associated gas importation, storage, re-gasification, transmission and

trading activities. The document does not provide substantive rules nor create rights,

assign duties, or impose new obligations not outlined in the Piped Gas Regulations

made by the Minister in terms of section 34(1) of the Gas Act as well as the existing

rules and methodologies published by NERSA in relation to its mandate in terms of the

Gas Act.

1.5 The document clarifies the requirements for licensing of LNG import terminals and the

associated infrastructure, the registration of the LNG importation operations, the

regulation of maximum prices for gas and tariffs for the infrastructure, third party access

to the infrastructure, and the role of NERSA in determining LNG specifications as set

out in the legislation. The definition of key terms that are relevant to this discussion are

also provided below.

1.6 The key definitions to note in the Gas Act in relation to the subsequent discussion on

LNG-to-power projects include the following:

"gas" means all hydrocarbon gasses transported by pipeline, including natural gas,

artificial gas, hydrogen rich gas, methane rich gas, synthetic gas, coal bed methane

gas, liquefied natural gas, compressed natural gas, re-gasified liquefied natural gas,

liquefied petroleum gas, or any combination thereof;

“price” means the charge for gas to a distributor, reticulator or final customer;

“re-gasification” means converting liquefied natural gas to a gaseous state at a

re-gasification plant;

"service" means any service relating to the transmission, distribution, storage, trading,

liquefaction or re-gasification of gas;

"specification" means the chemical and physical composition, calorific values and

Wobbe Index of the gas that conforms to recognised international standards and the

pressure of the gas at point of entry to shared systems;

"storage" means the holding of gas as a service and any other activity incidental

thereto, but excludes storage of gas in pipelines which are used primarily for the

transmission and distribution of gas;

"storage company" means any person storing gas;

"tariff" means the charge for gas services to any customer;

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"trading" means the purchase and sale of gas as a commodity by any person and any

services associated therewith, excluding the construction and operation of

transmission, storage and distribution systems, and "trading services" has a

corresponding meaning;

"transmission" means the bulk transportation of gas by pipeline supplied between a

source of supply and a distributor, reticulator, storage company or eligible customer,

or any other activity incidental thereto, and "transmit" and "transmitting" have

corresponding meanings;

"transmission company" means any person transmitting gas;

"uncommitted capacity" means such capacity determined by the Gas Regulator in a

liquefaction, re-gasification, transmission, storage or distribution facility as is not

required to meet contractual obligations.

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2. LICENSING FRAMEWORK IN TERMS OF THE GAS ACT

2.1 Legal basis for issuing gas licences

2.1.1 In accordance with section 15(1) of the Gas Act, no person may, without a licence

issued by the Energy Regulator:

(a) Construct gas transmission, storage, distribution, liquefaction and re-gasification

facilities or convert infrastructure into such facilities;

(b) Operate gas transmission, storage, distribution, liquefaction or re-gasification

facilities; or

(c) trade in gas.

2.1.2 Section 16(1) of the Gas Act prescribes the form and manner in which the licence

applications must be submitted, and section 16(2) prescribes the information that must

be included in the licence application. These requirements are further expanded in the

Gas Act Rules, 2009 (see Appendix B).

2.2 Types of licences required for LNG import projects

2.2.1 The types of licences required in terms of the Gas Act for the different LNG import

facilities and related infrastructure are provided in Table 1 below:

Table 1: Licence requirements for LNG import facilities

Type of licences Requirements for the different types of LNG facilities

Construction licence (a) Land based/fixed LNG terminal

Licence for the construction of the LNG storage facility

Licence for the construction of the LNG re-gasification

facility

(b) LNG Floating Storage and Re-gasification Unit (FSRU)

No construction licence is required for FSRUs in terms of

the Gas Act. NERSA will consider a licence for the

operation of the FSRU.

(c) Small-scale LNG operations

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No construction licence is required for small-scale LNG

facilities (e.g., LNG trucks or Iso-LNG containers) in terms

of the Gas Act.

(d) Other related infrastructure

Licence to construct the transmission pipeline connecting

the LNG import facility to the IPP gas power plant.

The rationale for a licence to construct the transmission

pipeline in this instance, despite transmission of gas for

own use being exempt from licensing obligations in terms

of the Gas Act, is that the Gas Act strictly defines the term

“transmission” from an operation point of view and not from

the construction perspective.

Operation licence (a) Land based/fixed LNG terminal

Licence for the operation of the LNG storage facility

Licence for the operation of the LNG re-gasification facility

(b) FSRU

Licence for the operation of the storage facility (i.e., the

LNG storage tanks in the FSRU)

Licence for the operation of the LNG re-gasification facility

(i.e., the vapourising unit in the FSRU)

(c) Small-scale LNG operations

Licence for the operation of the LNG storage at the

customer site

Licence for the operation of the re-gasification facility

(d) Other related infrastructure

Licence to operate the transmission pipeline connecting the

LNG import facility to the IPP gas power plant, if the gas

would not be transmitted for own exclusive use.

Transmission of gas (i.e. the operation of the relevant

pipeline to transport gas) for own use is exempt from the

licensing requirements of the Gas Act, but would only

require registration in terms of section 28 of the same Act.

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Trading licence A licence to trade in gas (whether in the form of LNG or re-

gasified LNG) is required in terms of the Gas Act

Important to note

If the LNG is imported for own use, a gas trading is not required

in terms of the Gas Act.

If the LNG importer will on-sell the gas (either in its liquid or re-

gasified form), a gas trading licence is required.

2.3 Key information required for LNG licence applications

2.3.1 Table 2 lists the key information required for LNG licence applications

Table 2: Information requirements for LNG licence applications

(a) Physical location (proof of tenure);

(b) Detailed description of the proposed

facility;

(c) Detailed engineering design;

(d) Design specifications including capacity;

(e) Detailed process description;

(f) Proof of financial viability of the facility

including;

(i) Projected cash flows,

(ii) DCF models with assumptions used;

(iii) Proof of funding from financial backers

or banks, equity funding etc.

(g) Tariffs to be charged for the facility and

details of methodology for calculation;

(h) Customer details (current and potential);

(i) Details of gas /LNG source (firm

commitments);

(j) TPA provisions for the facility

(applicable to transmission and

storage facilities);

(k) Details of the proposed TPA

allocation mechanism (storage and

transmission facilities);

(l) Details about any contracts already

entered into (e.g., Gas

Transportation Agreements, Storage

Agreements, Gas Supply

Agreements);

(m) Details of future capacity expansion

plans for the proposed facility;

(n) Indicate the status of your EIA

application in terms of NEMA;

(o) Period within which the facility will be

operational must be stated; and

(p) Applicant’s financial, technical and

administrative ability to conduct the

proposed activities.

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2.3.2 Further details are provided in the Gas Act Rules, 2009 attached here as Appendix B.

Table 3 below demonstrates how NERSA operationalises some of these requirements.

Table 3: Operationalisation of some of the information requirements

Requirements Acceptable to NERSA

1. Documents

demonstrating

financial ability

Letter of support/intent from credible financial institutions

Evidence of equity support from parent company (ies) for

Greenfield /special purpose vehicle / JV, as well as proof of

funding of the project, and description of how the project will be

financed.

Evidence of internal financial resources (if self-funding)

2. Documents

demonstrating

administrative

capabilities

Company organogram including a list of project team showing

qualifications and relevant experience

Company’s track record in managing similar projects (if

applicable)

3. Documents

demonstrating

technical ability

Previous experience on similar projects

Company’s track records

If Greenfield (track record of counterparties providing technical

support)

4. Details of gas

sources

Copy of gas supply agreement (s)

Copy of an assessment of proven or recoverable reserves and

gas production programme to supply gas to the project

(applicable to project’s own domestic sources)

5. Proof of off-take

agreements

Description of the type of customers to serve including their

details

Letters of firm commitments from potential customers, particularly

from the project anchor customer. The assessment of project

viability is based on the customer offtakes.

Proof of gas sales agreements (GSA) with the entities or

customers who will be buying the gas even if it is for power

generation.

Proof of gas transportation agreement(s)

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6. Evidence of

compliance with other

applicable legislation

Documents showing the EIA status

For LNG imports, TNPA authorisations or proof that you are the

preferred bidder

7. For an FSRU Copy of the agreement between the applicant and the technology

provider (in case of chartered vessels) or

Letters of support from the technology providers pledging to

provide:

o the FSRU technology

o the technical assistance required to make the project a success

2.4 Registration of gas activities (including LNG importation)

2.4.1 Section 28 of the Gas Act requires that owner of an operation involving any of the

following activities must register the operation with the Energy Regulator:

(a) The production of gas;

(b) The importation of gas;

(c) The transmission of gas for own exclusive use.

2.4.2 The importation of LNG via ISO containers, fixed LNG terminal or FSRU should be

registered in terms of section 28 of the Gas Act.

2.4.3 The form and manner for submission of the registration applications is outlined in the

Gas Act Rules, 2009 (see Appendix B).

2.4.4 Subsequent to registration, registrants would be required to submit annual information

regarding their activities to NERSA in terms of Regulation 9 of the Piped Gas

Regulations (see Appendix A).

2.5 Access to the infrastructure

LNG re-gasification facility

2.5.1 There is no mandatory requirement for third party access to LNG re-gasification

facilities in terms of the Gas Act. In this case, third party access can be negotiated

between the LNG terminal owner and users.

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Storage and transmission facilities

2.5.2 The Gas Act only recognises the regime for third party access to uncommitted capacity

in gas transmission and storage facilities. Third party access is regulated and access

to the transmission and storage infrastructure is given on the basis of published tariffs

approved by NERSA.

2.5.3 The principles and grounds within which third party access to uncommitted capacity in

transmission pipelines should be granted are set out in Regulation 6 of the Piped Gas

Regulations of 2007 (see Appendix A).

2.5.4 The principles and grounds within which third party access to uncommitted capacity in

storage facilities should be granted are set out in Regulation 7 of the Piped Gas

Regulations of 2007 (see Appendix A).

2.5.5 Further, storage tanks that are part of the process and within a re-gasification plant are

exempt from the mandatory third party access regulations in terms of Regulation 7(15).

However, the storage tanks would still be licensed in line with the licensing

requirements for storage facilities articulated in Table 1 above, and the tariff provisions

related to storage in terms of the Gas Act would apply if the terminal user provides

storage services to third parties.

Determination of uncommitted capacity

2.5.6 The Piped Gas Regulations, particularly Regulations 6 and 7 make provision for

NERSA to deal with disputes relating to uncommitted capacity in transmission pipelines

and storage facilities. NERSA may determine uncommitted capacity in transmission

and storage facilities, upon receipt of a complaint from a third party regarding a refusal

for third party access to the transmission or storage facility.

2.6 Gas/LNG specifications

Determination of gas specifications

2.6.1 Regulation 13 of the Piped Gas Regulations gives NERSA a mandate to set a range

of gas specifications that could be comingled in all gas facilities. This includes LNG

import facilities.

2.6.2 NERSA generally imposes the gas specifications submitted by the applicants as a

licence condition for the facility concerned. It is NERSA’s view that for LNG import

facilities –

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(a) LNG specifications should not be a barrier to market entry. The range of LNG

specifications should be wide enough to encompass the different sources of LNG

available globally.

(b) LNG spefications should not be a limiting factor for the successful bidders (from

the Gas IPP Programme) to source LNG at competitive prices and favourable

terms as the LNG market dynamics change.

2.7 Participation by Historically Disadvantaged South Africans

2.7.1 Section 2(d) of the Gas Act seeks to promote companies in the gas industry that are

owned or controlled by historically disadvantaged South Africans (HDSAs) by means

of licence conditions so as to enable them to become competitive. Although there are

no explicit requirements for the submission of information regarding the participation of

HDSAs in licence applications, section 21(1)(b) empowers NERSA to request

companies licensed in terms of the Gas Act to submit information relating to HDSA

participation in their licensed activities. Regulation 5 of the Piped Gas Regulations

outlines the type of information regarding HDSAs to be provided by the licensee to the

Energy Regulator annually (see Appendix A).

3. REGULATION OF TARIFFS IN TERMS OF THE GAS ACT

3.1. Scope for the regulation of tariffs

3.1.1 As shown in paragraph 1.6, the Gas Act differentiates between a price and a tariff. A

tariff is a charge for the infrastructure services provided for the transmission of gas via

pipeline or storage of gas in various forms including LNG storage tanks and

compressed natural gas storage facilities.

3.1.2 The Gas Act makes no provisions for the approval or regulation of tariffs for the LNG

re-gasification facility. Further, the regulation of tariffs is not subject to an inadequate

competition finding, which is a requirement for the regulation of gas prices as discussed

in section 4 below.

3.2 Guidelines to monitor and approve gas transmission and storage tariffs

3.2.1 The Guidelines provide for a menu of six methodologies as follows:

(a) Rate of return regulation;

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(b) Incentive regulation:

(i) Price Caps;

(ii) Revenue Caps;

(c) Hybrids of the abovementioned approaches;

(d) Profit sharing or sliding scales; and

(e) Tariffs based on a discounted cash flow model of allowable revenue.

3.2.2 Rate of return and discounted cash flow methodologies used for approving tariffs since

2009. These encourage entry and investments because they allow investors to recover

costs and make a fair return on investments.

3.2.3 More detailed information on the Guidelines is provided in Appendix C.

4. REGULATION OF GAS PRICES IN TERMS OF THE GAS ACT

4.1 Scope for regulation of gas prices

4.1.1 A price is used to determine the price for the gas molecule only.

4.1.2 Section 21 of the Gas Act provides that NERSA should regulate prices if there is

inadequate competition as contemplated in chapters 2 and 3 of the Competition Act.

Therefore a competition assessment ought to be conducted before regulation of prices

in terms of the Gas Act.

4.1.3 NERSA has developed a new methodology to approve maximum prices for gas in

South Africa (see Appendix D). The methodologies used to determine the gas energy

price involve the use of competitive benchmarks or the ‘pass-through’ approach.

4.2 Methodology for approving maximum prices for gas

4.2.1 The Methodology provides for two approaches as follows:

(a) Use of Competitive benchmarks to determine the maximum price

This is the price of the gas energy at the point of its first entry into the

transmission / distribution system.

Competitive benchmarks used are US Henry Hub, UK National Balancing

Point and Dutch TTF.

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(b) Pass- through (or cost-build up) to cater for -

New entrants. e.g., importers of LNG

Traders along the value chain after gas’ first entry into the transmission,

distribution system

The relevant maximum price benchmark will be the Japan/Korea Marker

(JKM)

4.3 Non-discrimination provision

4.3.1 The Gas Act further requires NERSA to monitor that licensees are not unfairly

discriminating when they charge prices to their customers except for objectively

justifiable and identifiable differences. The section further states that the prohibition of

discrimination applies to actions by licensees in favour of their related undertakings in

particular. This provision may be interpreted to mean that if the LNG supplier sells gas

to the market, it may have to sell using an objective mechanism.

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