Reform of the Spanish gas sector (III): Bill modifying the Spanish Hydrocarbons Sector Act 34/1998, of 7 October

On 18 September 2014 Spanish Congress received a Bill (the "Bill") that, after it has been approved by Parliament, will modify the current Spanish Hydrocarbons Act 34/1998, of 7 October (the "LSH") and will modify a number of tax and non-tax measures connected to the exploration, research and exploitation of hydrocarbons.
 

The Bill has the following objectives, among others:

• To create a gas hub that can start to operate in 2015. 
• To implement measures in relation to minimum security stocks to offer greater flexibility and lower costs to traders. 

Main new elements:

In relation to the first objective (i.e. wholesale natural gas market)

• A wholesale natural gas hub is created and terms are established on designating the gas market operator. 
• The gas hub will cover the entire Iberian Peninsula, including both Spanish and Portuguese gas systems. 
• Terms are established for creating the gas hub around a company sponsored by the electricity market operator. This company will have a diverse shareholding among agents and financial investors. The rules that would affect Portuguese entities have yet to be finalised, pending the implementation in Portugal of equivalent regulations in accordance with the reciprocity principle or the potential signing of an international treaty or accord. 
• Shareholding limitations have been established to prevent significant influence being exerted over the management of the company that affects the services with which it has been entrusted. 

In relation to the second objective (i.e. minimum security stocks)

• The Government is authorised to distinguish between strategic stocks and operational stocks. 
• Corporación de Reservas Estratégicas de Productos Petrolíferos ("CORES") is entrusted with creating, maintaining and managing strategic liquefied natural gas (LNG) stocks, enabling new agents or any existing agent to comply with obligations regarding the security of supply. 
• The Spanish Government is authorised to establish how and under what conditions agents in Spain and, as applicable, CORES are able to meet their obligations by creating reserves in European Union member States. The Government may also establish how and under what conditions agents in those countries are able to create minimum security stocks in Spain. 

We set out below a brief analysis of the highlights of the planned reform of the LSH in relation to the creation of a wholesale natural gas market, minimum security stocks and other obligations imposed on natural gas traders.

1. THE CREATION OF A WHOLESALE GAS HUB AND THE MARKET OPERATOR

Activities connected to the supply of natural gas by pipeline will from now on be carried out, among other entities, by the gas hub operator, in accordance with the provisions of article 65 ter of the LSH and any other conditions established by regulations.

The joint functions of the System Technical Manager and the hub operator

The natural gas System Technical Manager must, together with the hub operator, carry out the functions entrusted to it by regulations to ensure that the market operates properly.

Gas hub

The gas hub will operate by gas purchases and sales at the virtual balancing point of the transmission and distribution network, by means of short-term trades with physical gas delivery. Short-term trades will include products whose delivery horizon will be the last day of the following month.

The hub will also include any gas purchases and sales determined by applicable regulations.

Trading on the hub will be anonymous, free and voluntary, according to the terms established in the LSH and implementing regulations.

The Spanish Government will approve regulations to govern the agents that can operate in the market, the conditions under which they can do so, the features of the products traded, the virtual balancing point of the transmission and distribution system and the information that should be reported to the hub operator and the System Technical Manager, all to ensure that the gas system operates correctly.

The hub is established in the form of a "Trading Platform", as defined in article 10 of Commission Regulation (EU) no. 312/2014, of 26 March 2014, on conditions for access to the natural gas transmission networks.

Entities qualified to participate in the hub

The following entities are able to participate in the gas hub:

• The hub operator, which will be the company responsible for managing the system of offers to buy and sell gas at the natural gas hub. 
• Traders and direct consumers may participate by making offers to buy and sell gas. 
• The System Technical Manager, to acquire operating gas or check gas for facilities or the gas necessary to ensure that the transaction balancing system operates in accordance with prevailing regulations. 
• Transmission companies and distributors in order to carry out the functions with which they have been entrusted. 
• CORES, to fulfil its duty to create, maintain and manage strategic natural gas stocks. 
• Any other entity that buys or sells gas with other market participants without accessing the facilities belonging to third parties. 

In this case, the entity's balance at the end of the trading period must be zero. These entities need not qualify as a trader as long as they meet the requirements established in regulations for market participation. The activities of those agents will be limited to buying gas from and selling gas to the participants in the market.

The gas owned by those agents can only be used for sale and purchase and can in no event be assigned or leased to traders for them to meet their security stock obligations.

Gas market operator

The market operator will manage the system of offers to buy and sell natural gas on the hub according to the terms to be established by regulations.

Functions of the hub operator

The hub operator will have the following functions:

• It will receive offers to buy and sell gas made by participants in the hub. The hub operator will publish offer prices and volumes on the hub's trading platform on an anonymous basis. 
• It will receive any guarantees that must be provided, if any. It is able to manage those guarantees directly or outsource that service to authorised third parties. 
• It will match and determine prices for the different products as a result of prices matched at the hub. 
• It will notify participants of the results of matching offers. 
• It will publish the prices and volumes traded for each product. 
• It will settle and notify payments, which it may do directly or through a third party. 
• In accordance with applicable regulations, it will notify the System Technical Operator of the transactions performed by the different hub participants. 
• It will provide periodic information on the evolution of the market. The frequency has yet to be determined. 
• It will also perform all other functions entrusted to it by applicable regulations. 

The hub operator will perform its functions in the Spanish gas market while observing the principles of transparency, objectivity, non-discrimination and independence.

The market operator will be a company in which any individual or entity is able to hold a shareholding interest. Operador del Mercado Ibérico de Energía, Polo Español, S.A. and, as appropriate, the Operador do Mercado Ibérico (Portugal), SGPS, S.A will have an aggregate direct shareholding in the operator of 30%. The respective weighting of their direct or indirect shareholdings in the hub operator will be 2/3 and 1/3.

The Spanish and Portuguese Gas System Technical Managers will hold an aggregate direct shareholding in the hub operator of 20%. The respective weighting of their direct or indirect shareholdings in the hub operator will be 2/3 and 1/3.

If a participant performs activities in the energy sector, the sum of its direct or indirect shareholding in the hub operator cannot exceed 3%. Likewise, the sum of the shareholdings held by those participants in the hub operator cannot exceed 30%, and those shares cannot be pooled.

In the case of any other persons or entities with shareholdings in the hub operator, their stakes will be limited to 5%, thus preventing them from having a significant impact or influence on the company's activities.

If any individual or entity brings it to the hub operator's attention that it wishes to acquire a shareholding interest in that company, the application will be referred to the general meeting of shareholders together with a certification indicating whether or not the applicant performs activities in the natural gas sector.

The general meeting of shareholders will accept applications submitted for a maximum stake equivalent to the average of the equity interests held by the same type of shareholder as would correspond to the applicant and would be carried out by one or both of the following procedures:

• The company or any of its shareholders expresses at a general meeting of shareholders its intention to sell its shares. 
• The company's share capital is increased by issuing new shares, provided that it observes the limit of 30% being subscribed by entities that perform activities in the energy sector. 

When applicants wishing to acquire a shareholding interest in the hub operator perform activities in the energy sector, with the aim of observing the stipulated percentage, a larger than necessary share capital increase can be agreed provided that any of the shareholders that do not perform such activities express at the general meeting of shareholders their wish to subscribe those shares.

In any event, shareholders will not have a subscription privilege over shares issued to cover new shareholding applications.

Payment of the hub operator will be borne by all hub participants. The conditions of those payments will be established by the Spanish Minister for Industry, Energy and Tourism.

Market makers

The Government and the Minister for Industry, Energy and Tourism will, within the scope of their respective authority, adopt provisions aimed at ensuring the liquidity of the gas hub.

The Spanish Markets and Competition Commission (the Comisión Nacional de los Mercados y la Competencia, or "CNMC") will publish an annual report analysing the hub's liquidity. The report will make recommendations of the measures necessary to foster liquidity, including the possibility of natural gas traders that qualify as dominant operators – in accordance with third additional provision of Royal Decree-Law 6/2000, of 23 June, on urgent measures to boost competition in the goods and services markets – having the obligation to buy and sell gas in the hub according to the conditions and in the form of products established by regulations.

2. THE ROLE OF CORES

In its capacity as Central Storage Entity, the purpose of CORES is to acquire, create, maintain and manage hydrocarbon reserves, including natural gas, in the form and in the volume established by regulations. It will also control compliance with minimum security stocks as provided in the law, and will have the obligation to diversify the natural gas supply.

In order to fulfil its obligations, CORES will be able to acquire and lease crude and oil products, natural gas and liquefied natural gas and enter into contracts subject to the limits and the conditions established by applicable regulations. The reserves at its disposal under lease agreements cannot be assigned or leased on to third parties.

It will also have access to natural gas regasification, transmission and storage facilities and to the gas hub according to the terms established the new law and its implementing regulations for other market participants.

CORES will require the prior authorisation of the Spanish Ministry for Industry, Energy and Tourism ("MIET") to dispose of strategic stocks. Furthermore, any disposal must be made at a price equal to the average weighted acquisition cost, or to the market price if higher, except in the circumstances set out in implementing regulations. CORES will also account for its stocks at the average weighted cost of acquisition from the moment it is created.

The Spanish Government will pass regulations to elaborate on CORES' functions, establishing how it will be organised and will operate. The management bodies of CORES will have sufficient representation by the wholesale operators referred to in articles 42 and 45 LSH and natural gas traders, as well as representatives of the MIET, who must be appointed from among public officials with proven experience in the energy sector.

The representatives of the above entities will be members of CORES and its Assembly and their votes will be graduated on the basis of the volume of their annual financial contribution.

The Minister for Industry, Energy and Tourism will appoint the President of CORES and a certain number of members of its management body as determined by regulations. The Minister for Industry, Energy and Tourism is able to veto any resolutions passed by CORES that breach the LSH and its implementing provisions.

CORES, among others, will from now on carry out activities aimed at gas supply by pipeline. CORES will also be responsible for creating, maintaining and managing strategic natural gas stocks to the degree established by applicable regulations.

CORES may also inject natural gas into the system in the performance of its obligation to create, maintain and manage strategic natural gas stocks.

With regard to access to the transmission installations, the owners of the installations must allow CORES to use them in the fulfilment of its obligation to create, maintain and manage strategic natural gas stocks.

The Government will pass regulations governing third party access to the installations, the rights and obligations of the installations' owners related to third party access, as well as the rights and obligations of direct market consumers, traders, CORES and the System Technical Manager. They will also define the minimum content that contracts must have and, as appropriate, will regulate the terms of operation of the secondary capacity market.

Furthermore, CORES cannot be denied or limited in its access to the network, and it will have preferential access over any other agent, in the event of emergency or in carrying out the measures approved by the Government for emergency scenarios.

The System Technical Manager will provide CORES with the information that it may require to maintain strategic natural gas stocks.