Central and Eastern Europe projects and trends
Energy and infrastructure 2016 is the fourth edition of our sector specific guide to the legal markets of Asia-Pacific, Central and Eastern Europe, Latin America, the Nordic and Baltic region and Sub-Saharan Africa.
In the last six months our team of legal journalists in London, Hong Kong and New York have interviewed lawyers, industry figures and in-house counsel active in the relevant sectors to source their opinions on law firm performance and the state of the energy and infrastructure sectors in their jurisdiction and regions, and what they see as the main talking points, challenges and areas of activity.
From these conversations and their extensive research, the IFLR1000 team has summarised, by country or sub-region, the main trends and developments across the CEE region below.
Energy and infrastructure 2016 is the first research project to utilise IFLR1000's new Deal Database, a fully searchable database of significant deal records from over 120 countries. Our London team has selected the most significant CEE energy and infrastructure projects which emerged from this research period, and you can view the data records for these deals below.
Transport and technological development are high on the agenda in Austria. A swathe of large road and rail projects are underway and, in early 2016, the country’s minster for transport and technology pledged Austria would to commit €25 billion to enhancing the country’s roads, rail and communication networks over the next five years.
By scale and value, the largest projects in development in Austria are the construction of three railway base tunnels - Brenner, Koralm and Semmering - and the refurbishment of the lines which the tunnels will be connected to.
Austria’s federal government hopes the three tunnels will ease road congestion in the south and west of the country by improving and increasing the freight capacity on its railways. In the wider European context, the three tunnels are being developed to improve efficiency and connectivity of the Trans-European Rail Network which extends from Scandinavia to Malta. From the EU’s perspective, there is also of course the added boon of economic growth that large-scale infrastructure building typically fosters.
Not only will the tunnel routes shorten the distance of certain routes, the new lines will expedite train travel by introducing high-speed lines in some sections and using alternate routes to circumvent steep sections gradients, which prohibit travel at higher speeds, in others.
Substantial work has been completed on two of the base tunnels, Brenner and Koralm, although the size and complexity of the projects mean both are still remain some way from operational.
Construction of the third and final section of Koralm began in January 2014. The tunnel will form part of a new high-speed line between Graz and Klagenfurt, which went into development in 2008. It has an overall cost of around €5.4 billion and is expected to be functional functioning by 2023.
Work on the Brenner Base Tunnel, which will replace continental Europe’s oldest rail route, the 140-year old Brenner railway which traverses the Alps between Innsbruck to Fortezza, began planning in 2006 and should be completed by 2025. The existing line, which is punctuated by steep inclines and declines so not suited to pulling freight at speed, will be replaced by what will be, at 64km, the world’s longest underground railway.
Development of the third tunnel, Semmering, is less advanced, its progress having been hindered by environmental disputes. Ground was first broken on development of the tunnel in 2012 but contractors were forced to halt construction when the project was challenged by environmental groups. Last year Austria’s federal court repealed a temporary ban imposed on construction and work on the 27km, €3.1 billion base tunnel between Gloggnitz and Mürzzuschlag resumed.
Another milestone for Semmering, which represents part of a wider project to upgrade the Südbahn line, was also reached last year. The $457 million concession to develop the second, 7.4km stretch of three tunnel sections tunnel, which is being built in three stages, was awarded to a consortium of Hochtief, Swiss Implenia and Thyssen Schachtbau. Despite delays caused by the dispute, the project is expected to keep to its original schedule and open in 2026.
On a purely domestic level, a number of regional infrastructure PPP (public-private partnership) projects are being undertaken by local governments in Austria. These include toll roads and bypasses and, in Vienna, a fairly substantial social infrastructure enhancement programme.
For one, the government of Austria’s capital has launched the Vienna school PPP programme. The city has begun the procurement process for 10 new schools, which will be to be built between now and 2023, on a DBFOM (design-build-finance-operate-maintain) basis. A tender for the pilot project - Bildungscampus Attemsgasse - was opened in March 2015, and the EIB (European Investment Bank) is considering investing €300 million in the wider programme.
Vienna has also begun the process of improving its healthcare facilities, with a programme targeting the refurbishment of three hospitals in place. The pilot project – work on Wilhelmine Hospital – will receive €55 million from the EIB.
In energy, Austria was one of the earliest proponents of renewable energy and a notable landmark in 2015 saw its largest state, Lower Austria, reach the stage where all its electricity comes from renewable sources – a mix of solar, hydro, wind and biogas. Upper Austria intends to only consume renewable electricity by 2030.
Ben Naylor – Editor EMEA
The oil and gas sector dominates the Azerbaijani market like few others. In excess of 90% of the country’s exports are from the petroleum industry and the servicing and supply chain elements attached to it mean the country’s economy largely rises and falls with its success.
It is of little surprise, then, that two years of anaemic oil prices have had a material negative impact on the market. According to those on the ground, low prices have had a considerable bearing on the government’s ability to fund new projects – or indeed adequately fund existing ones – and this has led to consequences for the entire industry.
“There have been some market trends in Azerbaijan due to the lower oil prices,” says Kamil Valiyev, a partner at Baker & McKenzie. “The country is very dependent on the export of oil and the revenue generated by that. There have been two big devaluation hits in the country. [First] the manat, the local currency, was devalued nearly 100%, and this of course had an impact in the market. [Then] government spending in the oil and gas sector was considerably lowered, which had an impact on the entire market. This year, project-wise and new development-wise, is weaker than previous years. We can feel that in the number of transactions and investment impact in the country."
While some major projects, such as second phase of the development of the Shah Deniz gas field and connected Southern Gas Corridor – comprised of the South Caucasus Pipeline, Trans Anatolian Natural Gas Pipeline and Trans Adriatic Pipeline – move forward, many others have been postponed. This has had an impact on both upstream and downstream projects as the State Oil Fund of Azerbaijan (Sofaz), the body in charge of utilising the country’s revenues from oil and gas, has been forced to plug holes in the government’s budget instead of investing in new developments.
“There was a decision by the government to use the funds of Sofaz for these projects,” says Valiyev. “But due to the lower oil prices there is big pressure on Sofaz to fund the state budget, because the state budget has a big deficit which needs to be covered by other funds. So, the government has decided to focus on internal projects, specifically social projects, in order to ensure the state budget deficit is kept as low as possible. They have changed their focus from these big mega-projects of huge significance, which are pretty much future-oriented for the next 10-15 years. Now they are more concerned about the current year’s budget and the budget for next year and that’s why there has been a shift of interest at this level and at the level of Sofaz.”
The purpose of this refocus is to allow the smooth transition to 2018, when the government expects to start seeing operations from Shah Deniz-2 providing income through increased capacity. With that, the government’s gaze is expected to return to oil and gas projects, in turn encouraging increased private investment and a further expansion of the industry.
There is also a longer-term plan to diversify the Azerbaijani economy so it is less reliant on oil and gas. The government have implemented several reforms aimed at easing the licensing process for small operators. Notable among these has been the announced moratorium on government business inspections for two years from November 2015. It is hoped this reduction in administrative red tape will allow entrepreneurs and small businesses to run more efficiently, thus building up other business markets not reliant on the oil and gas sector.
Those working in the market are positive about the future. While there have been, and likely will be, challenges to overcome, the government’s steps to stabilise the market have generally been welcomed. While there remains downward price pressure from oil companies on suppliers to reduce costs, the general feeling is that with an increase in prices toward the end of 2016 or beginning of 2017, the market will recover comfortably. Until that time it may the case than some projects are put on hold and others are made to simply tick along, but by and large the expectation is this is merely a temporary measure, rather than a new way of being.
Jon Moore – Journalist EMEA
Belarus is a country where things change slowly, very slowly. The heavily state-controlled former Soviet Union state has had the same president for the past 22 years, the secret police still go by the name KGB and Russia subsidises the country’s finances and energy. Recently, though, through energy and infrastructure policy and development, there have been signs things may be beginning to change.
The headline infrastructure news in Belarus is the country’ first PPP (public-private partnership). In December 2015 legislation permitting the model was adopted (it will be enacted in June) and in May 2016 the EBRD (European Bank for Reconstruction and Development) announced it will support the government in preparing and tendering the pilot project.
The development in question is the $350 million expansion - in length and width - of the east-west M10 highway. The project itself, which the EBRD has said it may also partly finance, with a loan of around £100 million - is arguably less important than what it indicates: that Alexander Lukashenko’s authoritarian government is finally willing to relinquish absolute control of the country’s economy.
Deemed the least developed of the former Soviet Union states by the EBRD, Belarus has a non-market economy, with the state and its various entities controlling most industry. External circumstances have dictated, however, that the economy needs to be reformed and liberalised. Already weak, it has gone into recession as the country’s largest trading partner, biggest creditor and main supplier of energy, Russia, has struggled amid the global commodity price crash and western economic sanctions. Inadvertently, though, Belarus may benefit from the perilous situation it finds itself in, and not only by taking an enforced stride out the Kremlin’s shadow.
Belarus’ infrastructure - roads, rail and airports included - are in need of refurbishment and modernisation, particularly if the government has genuine ambitions of improving the plight of its steadily declining GDP. But the government is approaching a balance of payments crisis and is scrabbling for cash just to service its substantial debt. In the next 12 months the repayments due from bonds, interest and external liabilities amount to almost $4.5 billion.
Although the government failed to negotiate a $3 billion loan from the IMF, the Eurasian Development has agreed to lend it $2 billion and the state is considering a $1.5 billion Eurobond. But realistically the only way the government can afford to develop infrastructure to the extent it needs to is by securing outside investment. The ministry of finance has said if the M10 is a success, there are a further 63 projects that could potentially be developed using the PPP model.
Prior to the recent PPP development, Belarus has taken a different approach to infrastructure development, fostering close ties with China and securing inbound investment for large scale construction. China’s own economic predicament may be the reason Belarus is now looking at alternative means.
One of the more notable examples of China-Belarus cooperation is the $5 billion Great Stone industrial park. A new city, essentially, being developed outside Minsk near the airport under a joint-venture between the countries. When complete, the high-tech business park should house 150,000 and host Chinese exporters. Forming part of what has been dubbed the new ‘Silk Road’, the industrial park, will act as a hub to the EU, enabling businesses located further east to be in closer proximity to the bloc.
Another recent transaction between China and Belarus saw the countries sign a 15 year loan, amounting to around $3.5 billion. The cash is intended to fund infrastructure construction, including developing the railway connecting Great Stone with Minsk airport, making more general upgrades to the country’s railway lines and stock, and building a new raw mineral processing plant.
In the energy sector, there is a similar theme of moving away from a dependence on Russia. The country hopes to achieve this by promoting and increasing its capacity for domestic energy production, which is mostly possible through power generation.
The country’s first nuclear power plant, which is set to have a capacity of 2400MW, is in development near Ostrovets. Although one of the means the state hopes to achieve more energy autonomy, it is worth noting that the project is being developed - and will be run - by Atomstroyexport, a subsidiary of Russian state-owned nuclear energy company, Rosatom. Additionally, a Russian export loan of up to $10 billion is being used to finance construction.
Investment in renewables - biogas, hydropower and wind - is another avenue the government has been pursuing for the last few years. While the volume of agreements to build renewable infrastructure signed is reasonably high, there is frustration among investors over how slow the development process is taking, largely down to difficulties securing the relevant permits. Among the more prominent developments which are underway are the Polotsk and Vitebsk hydropower plants, which cumulatively will generate 21.7MW and should be operational by 2018.
Ben Naylor – Editor EMEA
In contrast to other countries in South East Europe (SEE), Bulgarian project development activity is relatively high. The government is pressing ahead with schemes to improve energy security and enhancing transport links within the country and abroad is a clear priority.
Like many of its counterparts in CEE and SEE, particularly those of the ex-soviet variety, Bulgaria has an unhealthy dependence on Russian hydrocarbons. Since the Balkan state, which imports all its gas from Russia at a cost of around $1 billion annually, acceded to the EU in 2008 the European Commission has pushed hard for it to diversity its source and routes for natural gas imports, in particular. In addition to ensuring security of supply, the government - and the US and the Commission – are eager to weaken the influence the Kremlin wields over the poorest country in the trading bloc thanks to its gas supply monopoly.
Unfortunately, pipeline projects that would supply gas to Bulgaria without Russian control, have a history of failing. Nabucco-West - the final incarnation of a pipeline proposal modified twice from the original before being eventually rejected - would have transported gas from the Caspian Sea to Austria via Bulgaria, among other countries, but was unable to secure gas supplies from Azerbaijan. The consortium owning the rights the Shah-Deniz gas field, where the gas for Nabucco was supposed to originate, opted to work with the developer of a rival project, the Trans-Adriatic Pipeline (TAP).
Another, more recent proposed gas pipeline to fail - Southstream (a Russia-backed project) - was intended to bypass Ukraine, eliminating the risk created by the country’s fractious relationship with Russia, to bring gas to Bulgaria. The project was cancelled by Russia after the European Commission refused to sanction Gazprom monopoly over the route, and Russia was not prepared to share it with other gas providers.
Disheartened but not deterred, Bulgaria has perused alternatives to new pipelines, primarily in the form of shorter interconnectors, which would enable it to receive gas from neighbouring countries. The most advanced of these projects is an interconnector between Bulgarian city Ruse and Giurgiu in Romania. The 25 km pipeline is only 2.5 km short of completion, and Austrian company Habau recently signed a contract with gas companies, Transgaz and Bulgartransgaz, to build the final section under the Danube.
A further interconnector in the works, but at a far less advanced stage, is the protracted Interconnector Greece-Bulgaria (IBGB), which recently received non-binding expressions of interest from nine companies considering booking capacity in the line. Bulgaria Energy Holding and IGI Poseidon holds equal, 50% shares in the project.
An additional source Bulgaria is investigating to achieve energy greater independence is deep-sea oil and gas exploration in the Black Sea. In early 2016, the state signed a five-year agreement with Shell to explore off the Balkan coast and, sometime this year, Total, Austria’s OMV and Spain’s Repsol are set to begin drilling in a different block in the sea having signed a similar agreement in 2012.
In infrastructure there is a strong focus at present in Bulgaria on improving the road network. This is being done in two ways: through repairing and renovating domestic routes, for which the government has allocated finance, and through cross-border regional developments backed by EU funding. The largest road projects underway are the expansions of the Struma and Hemus motorways, which are both partially built.
Recently Hemus has hit some hurdles. Two tenders to build the remaining 59km stretch of the highway were cancelled by the government in 2016, with reports saying the state did not have the funds to honour the €387 million contract, and questions surrounding the tender process. The state has insisted it will launch new tenders – and use a more transparent process - when all issues around the current process have been resolved.
The prospects for Struma are more positive. The road, which connects Germany with Greece, forms part of the Pan-European Corridor (which the EU is offering €673 million of grants towards between now and 2020) is 69 km complete in Bulgaria. The design of the final, most complex section between Blagoevgrad and Sandanski, which needs to cross the Kresna gorge, is expected to be complete by the end of the year.
Ben Naylor – Editor EMEA
In Czech Republic - Czechia to use the pithy single syllable name the government is hoping will catch on - there has not been a great deal of new large projects to emerge lately, but several notable transport developments are in the formative stages of planning.
Among the interesting deals are two road projects, which are notable for the fact both (one is for certain) might be developed as PPPs (public-private partnerships).
Despite new PPP legislation being adopted in the country back in 2006, there have been very few successful national projects (smaller regional projects are more common) in the years since.
Several factors have influenced the government’s decision to opt against the use of PPP for developing larger projects. In some cases pilot projects proved unsuitable after tendering. Changes in government saw the cancellation of other projects. On other occasions, the model was not chosen because the state had EU funding it was prohibited from using alongside a PPP concession. Recent developments, however, suggest the state’s stance on PPPs is about to change.
The Ministry of Transport recently tendered a PPP concession to finish development of the partially-built 84 km R4 expressway on a DBFOM (design-build-finance-operate-maintain) basis. The contract for the R4 is for a 25-30 term and relates to the construction of a 32 km stretch which will connect Prague and south-west Bohemia. Procurement of the R4 as a PPP has been approved by the Czech cabinet and a further expressway, the R7, could be developed using this model if the project is deemed a success.
Elsewhere in transport, Czech Railways is investing €274 million in rolling stock and tenders to build new lines, including the development of a route between Kolín and Decín, have been announced.
Ben Naylor – Editor EMEA
The biggest project seen in Georgia for decades is the Anaklia port development on the country’s Black Sea coast. The $2.5 billion deep sea port is part of the wider ‘silk road’ initiative, which looks to connect Europe and China via a trade corridor, the name of the initiative of course evoking thoughts of the loose connection of settlements and trading posts that used to link the two continents up until the early modern period.
The Anaklia port is being backed by a $100 million investment from the Georgian government and in early 2016 the contract for its construction was handed to the Anaklia Development Consortium. Alongside the container port itself a new town and free industrial zone is also expected to be created to support the development.
Away from this, hydropower remains the most active area for energy and infrastructure lawyers, with most of the country’s firms involved in the development or redevelopment of numerous projects. The country’s geography and the privatisation of energy generation and distribution in the 2000s led to a boom in small hydropower projects and the country has even developed an energy export market with Turkey due to its generating capacity.
What Turkey takes in energy it gives back in investment and Turkish companies are one of the most important parts of the investment picture across a range of sectors.
Elsewhere, the future of natural gas supply remains a talking point, the country is situated at a crossroads in regard to supply, with Azerbaijan, Iran and Russia all looking to provide imports for the country or run pipelines through its territory. Last year and 2016 saw Tbilisi court both Azerbaijan and Iran as it looked to diversify its energy supply. But Russia has hardly been left out in the cold, with the country also meeting and negotiating with Gazprom over potential commercial gas supply, though this is unlikely to meet more than 10-15% of the market.
Other notable projects include the improvement of the country’s East-West Highway, which is part of a wider initiative to improve the country’s road network.
Sam Duke – Editor
New infrastructure development on a large scale is scarce at present in Hungary but there are energy and transport developments in conception.
Easily Hungary’s most significant recent project in the last few years is the expansion of the country’s sole nuclear power plant, Paks. A deal was signed with Russia to finance - at a cost of around $12 billion - and build two new reactors in late 2014, and construction is expected to begin in 2018. The plant’s developers hope the new facilities will be online by 2025.
In infrastructure, possible improvements to country’s road network are being planned as it looks to develop into a more competitive jurisdiction for industry. Last year the European Commission pledged to invest €152 million, through the European Regional Development Fund, to improve roads in the country’s road in the southern great plain region. More recently, the European Investment Bank (EIB) agreed to lend Hungary €140 million under a €500 million facility to renovate priority sections of road. The bank said the target is to improve transport efficiency and remove bottlenecks on trans-European routes.
In the energy sector more generally the main trend is one which began several years ago of the state acquiring energy assets from the private sector. Having taken over a hefty proportion of the country’s energy utility providers, the government has incorporated a new state-owned company, ENKSZ (First National Public Utility Services) to take over and expand the activities of Főgáz, a Budapest gas supplier it acquired control of last year.
The target is for ENKSZ to supply the entire country with subsidised power and heating. On the surface an admirable gesture by the Fidesz party; beneath it, perhaps a more calculating attempt to ensure utility prices are kept artificially low (it has reduced household bills on average by around 20%) to ensure it retains voters’ support.
Ben Naylor – Editor EMEA
There is no doubt that the slump in commodity prices have had an adverse effect on Kazakhstan, a leading energy exporter in the CIS with abundant reserves in oil, gas, uranium and coal. The mining industry has been afflicted by a down cycle that doesn’t look like it’s going to end anytime soon as demand continues to drop alongside increasing stakeholder expectations and a lack of financing.
It is not just the depressed prices on the international markets that have been causing problems, but also the recurring and systemic crises within Central Asia. Independent producers are running out of working capital and are facing insolvency issues as domestic banks prove reluctant to refinance or provide short-term loans. Moreover, the depreciation of the tenge—Kazakhstan’s currency—has also affected contracts from foreign suppliers for equipment or service. As a result, energy companies are cutting expenses and in some cases failing to meet the investment requirements established by subsoil use contracts risking termination by the Kazakh Ministry of Energy.
Over 80% of Kazakhstan’s electricity comes from coal-fired plants and close to 10% from hydroelectric sources. The coal fired plants are located in the northern coal producing regions, while the hydroelectric facilities are located mostly along the Irtysh River. However, the country has taken steps to transition to a green economy and aims to get 3% of electricity from cleaner sources by 2020 and cut carbon emissions by 40% in 2050 from 2012 levels. The country’s solar and wind markets are expected to grow in the next few years, particularly with the newly approved feed-in-tariff in June 2014. “Kazakhstan is trying to diversify under the leadership of the environmental minister by launching a green economy initiative,” one practitioner says. “It revised legislation to make it more attractive and we’ve seen fairly strong interest in alternative energy as the state promoted the feed-in-tariff and subsidies”.
When all things are considered, the government may need to privatise and this could generate a lot of opportunity for the country’s lawyers. There is also huge scope for infrastructure work as the government has been trying to engender stability through its Nurly Zhol (Bright Path) programme that plans to develop roads, rail and bridges. However, despite PPP (public-private partnership) projects such as the Big Almaty Ring Road (BAKAD) project and the Tashkent-Shymkent Highway, it remains to be seen how involved the private sector will be even with a pipeline of projects in prisons, roads and airports. “Generally the economic climate is not great for PPP projects which have stalled, but the state does not have much appetite to finance infrastructure projects,” says one partner. “The government is determined in getting that money to finance its budget-deficit and so the prospects of privatisation is hot. This could potentially be a big thing in areas such as railways and aviation.”
Adam Majeed – Editor Asia-Pacific
Although Moldova is not awash with new energy or infrastructure projects there are still topics of debate in the country.
There has been increasing unrest about electricity supply in recent years following notable and sharp increases in energy costs. The country is heavily reliant on hydropower and in particular the supply from the generation plants in Transnistria, specifically the Cuciurgan plant, and questions have been raised about its ownership and efficiency with more transparency called for in terms of the agreements the generators have with the government.
Other developments include the advancement of interconnectors for both electricity and gas between the country and its neighbour Romania. As well as providing stability to the network, interconnectors will also reduce Moldova’s reliance on Russian gas, something both it and a number of EU states in the CEE are looking to pursue.
On the infrastructure side the country is great need of transport rehabilitation and like many countries in the region has looked to Chinese or EU investment to assist. Whether this is forthcoming remains to be seen.
Sam Duke – Editor
The most controversial developments in Poland in the energy sector in the past year were the changes and proposed changes to the regulations around renewable energy generation.
The key change is a switch from a system of green certificates to an auction process, whereby successful bidders will be granted a revenue guarantee for the electricity they generate. Originally the cut-off point for the new system was January 1 2016, meaning that all projects brought online before this deadline would still qualify for the old system of green certificates, whereas new projects would go to auction.
This deadline was delayed till mid-2016 by the country’s new government, a decision which ultimately had limited impact on the market as most renewable energy investors - knowing that the changes would be implemented in 2016 - had ensured that their projects would be complete by January 1 and thus would qualify for the old system (seen as offering better returns). Market observers also point to a distinct reduction in the numbers of new renewable energy projects proposed for 2016 as a result of the new system. This has also led to a rise in energy disputes cases.
The second major change - and one which caused a lot more disquiet - came in the form of a draft law proposing strict limits on wind farm developments. The proposal drawing the most ire is the requirement that wind farms must be located 2 km from any settlement or woodland, dramatically reducing the number of potential sites for new developments. In addition, operators would also have the additional admin burden of reapplying for their license every two years. Many market observers believe the bill to be an attempt to slow the growth of the wind farm sector, in part to protect Poland’s coal industry which supplies the country’s thermal power plants.
Both developments are unlikely to help Poland reach its carbon reduction targets, especially considering that the country’s has one of the smallest percentages of renewable energy generation in the EU.
Linked to this, the country’s coal industry, a sizeable employer, has been a topic of debate for several years. The country’s recent governments have all wrestled with the issue of maintaining job security in the sector while also attempting to reduce the country’s emissions and reliance on dirty energy. The current government is intent on keeping coal as a main energy source until at least 2030 and is looking to secure EU concessions as the body enacts stricter carbon reduction targets following the Paris climate conference of 2015. However there is also a standoff between Poland and the European Commission in regard to its support for the industry and whether it raises issues of state aid, particularly in regards to measures put in place to ensure power generators buy their coal from Polish mines.
Elsewhere, notable infrastructure projects include the Świnoujście LNG terminal, which officially opened in October 2015. The terminal will supply Poland and its neighbours and is a key part of the EU’s broader strategy to reduce its gas dependence on Russia. The initial supply of gas will come from Qatar.
Poland has also looked to shore up interconnections with its neighbours in the Baltic region. Most notably this has resulted in the LitPol Link, an electricity interconnection between the country and Lithuania, and the Rail Baltica project, another EU priority, which looks to link Finland, the Baltic States and Poland via a new rail link expected to be completed between 2025 and 2030.
Sam Duke - Editor
One of the big stories in the past few years in the Romanian energy sector has been the attempted privatisation of energy company Hidroelectrica. As well as bringing in private sector investment into the energy space, the project, if successful, could also restart Romania’s wider privatisation programme. The last notable sale in this area saw shares in Electrica offered via an IPO in 2014.
The outlook for renewable energy generally is mixed with market sources mentioning little appetite for new projects. Nevertheless existing projects mean that generation statistics are encouraging with hydropower averaging around 25-30% of the energy mix and wind power 20-23%.
In the nuclear sector November 2015 saw a memorandum of understanding signed between the Romanian Nuclearelectrica and China General Nuclear (CGN) for the development of units 3 and 4 at the Cernavoda nuclear plant (originally constructed in the 1970s). The expansion has been on the cards since 2013 but the wheels seem finally to be turning on its development.
In the oil and gas sector, there remains interest in exploring potential deepwater natural gas deposits in the Black Sea. In May 2016 the country’s energy minister Victor Grigorescu stated the importance that Romania takes a lead both in exploration attempts and putting the required infrastructure in place for potential exploitation.
In infrastructure, the most significant projects in the past few years have been in the roads sector, specifically the Bucharest Ring Road - coming in at a length of 48km and connecting the A1 and A2 highways and the A3 Comarnic-Brasov ‘Transylvania Highway’, which has come in for fierce criticism due to delays (it was originally proposed in 2003) and spiralling costs.
Sam Duke - Editor
A perfect storm of the global commodity price collapse and western sanctions have conspired to send Russia into its longest recession in two decades. Since the Kremlin’s decision to annex Crimea, resulting in the US and EU imposing economic sanctions, the rouble has almost halved in value sending inflation up to almost 17% in 2015. With revenue from oil and gas accounting for around 44% of the budget in 2015, low commodity prices - crude in particular - have seen GDP fall to 3.7%.
This conflation of events - the sanctions particularly, having prohibited western majors and lenders from involvement in new arctic drilling - has curtailed oil exploration in Russia. The outlook in other sectors is not quite as grim. Russia, never a country which could be described as unresourceful, has found the means to maintain some important energy and infrastructure projects.
For priority gas project, Yamal (the substantial LNG project looking to tap reserves in Siberia), Russia has turned east for investment. In April 2016, Novatek secured $12 billion of the reported £27 billion it needs for the project from a syndicate of Chinese banks, and Total, which holds a 20% stake in Yamal, agreed a $4 billion facility through Russian lenders. According to Total, production is planned for 2017 and 95% of the expected LNG Yamal will produce has already been sold – predominantly to Asia.
In mining, Russian company and the world’s biggest nickel producer, Norilsk Nickel, has also negotiated Asian investment. It received Chinese backing for its biggest new project, the Bystrinsky copper mine, in what was the first occasion investors from the country took an equity stake in a Russian mining protect.
The Gazprom-sponsored Turkish Stream pipeline appeared to be another priority for Russia. Having cancelled the Southstream project over unresolvable differences with the European Commission, and keen to maintain its importance as the one of the Europe’s main gas providers, something which the European Commission and the US have been actively seeking to negate, Turkish Stream seemed likely to succeed. The proposed pipeline was intended to cross the Black Sea, carrying Russian gas to the Greek and Turkish border.
However, as is often the case with Russian cross-border projects, geo-politics has caused problems. Late last year, Russia suspended discussions and development of the pipeline after Turkey shot down a Russian jet on the Syrian border. The project has been shelved. In the meantime, construction has begun on the Trans-Adriatic Pipeline (TAP), which will connect ill Azerbaijan's Shah Deniz II field with Italy, and cross through Turkey.
In infrastructure, Russia has long been a proponent of the PPP (public-private partnership) model as a means to implement and manage large scale construction. This has meant that the extensive construction programme underway in the country - with new highways, toll roads, hospitals, airports and special economic zones all planned - has not been encumbered to the extent energy projects have. Nevertheless, with around 130 planned PPPs requiring around $30 billion investment, Russia has given a clear indication that it wants to entice further private infrastructure investment.
To further this aim, in January 2016 Russia adopted its first PPP law. Previously PPP agreements were concluded under the concession law, which will remain in place. One of the key reasons for implementing the new law was to give greater protection to investors and enable them to acquire ownership of a project facility, which is not possible under a PPP concluded using the concession law. Among other notable features of the new legislation are: it applies nationally and bondholders are granted security rights in PPPs.
Looking ahead, the question for Russia and its heavily oil-revenue dependent economy is becoming one of supply and demand. With new oil exploration projects on hold, how will it ensure it maintains the levels production it requires to meet demand? With greater competition now Iran’s oil is back on the European market, the prospect of being superseded is a genuine concern.
Ben Naylor – Editor EMEA
New energy and infrastructure projects have been relatively thin on the ground in the Slovak Republic in recent years, though there has been plenty of related activity, for example acquisitions of companies in the relevant sectors.
Certainly the biggest project in recent years has been the D4/R7 Highway. The project consists of the construction of new sections of the D4 Highway, part of the wider European Transport Network (TEN-T), and the construction of the R7 Expressway around Bratislava, the aim of which is to reduce congestion in the city. The projects are supported by the European Bank of Reconstruction and Development (EBRD) and are a rare example of a PPP (public-private partnership) project in the country.
In the energy sector, despite the country’s embracing of nuclear energy (it has five operational plants), in the latest figures released the Slovak Republic’s carbon emissions were seen to have risen 9.5% between 2014 and 2015. With the EU intent on implementing stricter controls on emission following the Paris climate talks, the statistics do not make good reading.
In the nuclear sector itself there was a notable development with the country signing a fuel supply agreement with China in November 2015 to ensure its civil supplies.
Sam Duke – Editor
Across the Balkans, two Europe wide initiatives have dominated energy policy in the past few years. The most significant of these is the process of bringing legislation in line with the EU’s Third Energy Package. For those countries not currently in the union this is another vital step on the road to future membership.
The wider aim of the package is, like all EU legislative projects, to bring all national level legislation in line to make cross border cooperation and trading easier and more synchronised. Cooperation between regulators will also allow for more gas and electricity interconnectors between member states. In the gas sector specifically the EU has a clear aim to reduce its dependence on Russia and cross border cooperation between member states is vital to that. This has been brought more sharply into focus in the Balkans following the cancellation of the South Stream gas project.
The clearest sign of the impact of this process on the ground in the Balkans has been the requirement to separate energy generation from distribution in a process called unbundling. The splitting up of Serbia’s national gas supplier Srbijagas is one such example. The process also, in theory, allows for greater competition and private sector involvement.
Interconnector projects are also underway or being discussed in various locations, most notably a natural gas link between Serbia and Bulgaria and an electricity connector between Albania and Macedonia (the 400 kV Bitola-Elbasan link).
The other initiative which has produced work for law firms is the Western Balkans Regional Energy Efficiency Programme. Begun in 2013 and supported by the European Bank for Reconstruction and Development (EBRD), the aim of the programme is to reduce the region’s energy use by improving buildings and infrastructure to reduce waste. Standard contracts and frameworks are being rolled out to support this and several law firms have assisted the development bank and other parties during this process.
Like most of Europe, countries in the region have also made various attempts or statements about improving the percentage of renewable sources in their energy mix. In some countries with favourable geography like Albania and Macedonia, hydropower has been a simple way to achieve this, but elsewhere it has been more of a struggle.
To take one case, in Bosnia and Herzegovina more than 50% of the country’s energy is currently generated by traditional sources and though a national emission reduction plan has been looked at, plans are still in place - backed by Chinese investment - for future coal power plants to be constructed in the next few years as well the rehabilitation of older ones. The country thus finds itself caught between a need for investment (as offered by China) and a desire to stay in line with EU emissions targets with one eye on future membership.
All countries in the region are also struggling to justify incentives schemes. With feed-in-tariffs having fallen from favour it is becoming increasingly difficult to persuade energy suppliers to commit to new renewable energy projects, especially with persistent problems like access to the grid and guaranteed pricing being unresolved in a number of countries.
One country which has grasped the nettle to a certain extent is Croatia, which has a proposal in place to forego feed in tariffs in favour of German style market premium system which encourages producers to market their energy and compete with traditional producers. If a producer sells the electricity directly they get a bonus (premium) from the Government.
In the area of oil and gas, there have been various attempts at exploration across the region in the past few years, most notably a site offshore of Croatia and Montenegro and onshore projects in Albania, Croatia and the Republic of Srpska. However the global oil price crash linked to the relatively small potential finds have curtailed interest at least in the short term. In the case of the offshore discovery there was also a territorial dispute between Croatia and Montenegro to contend with.
In infrastructure, transport improvements have been the main focus for the past few years, with broader regional initiatives like the Corridor 5-C Highway and Albania-Kosovo Highway drawing the most attention. Such projects have also helped to spread and establish models like public-private partnerships (PPP) in a region where specific legislation for such cooperation is rare.
Other projects if note include the Island of Krk LNG terminal in Croatia; the Belgrade Waste Management PPP; and the redevelopment of the Port of Dubrovnik.
Sam Duke – Editor
It has been a challenging year for Turkey. Politically, geopolitically and economically the country has faced a number of serious obstacles.
According to partners, the first half of the year was relatively strong but from July the problems began to mount. A hung parliament crippled the Grand National Assembly for several months, and forced a second election in November. The fragile peace with the Kurdish minority fell apart, while the conflict with Daesh continued to rage on its south-eastern border. Then there was the downing of a Russian fighter jet and subsequent damaging sanctions, worries over whether government bonds would be downgraded to junk status and concerns over a sluggish growth rate in the economy.
Despite all this, energy and infrastructure work managed to hold up relatively well. Gone were the privatisations, thanks to the political situation, and a number of major projects were postponed until the situation was resolved. Otherwise, though, there was still a solid amount of work for all parties.
“In many of the sectors we continue to see activity and energy and infrastructure remains one of them,” says Kemal Serdengeçti, a partner at Pekin & Pekin. “Turkey is a very energy dependent country and is also in need of a lot of infrastructure projects as well, so in both sectors we have seen continued activity. During the election period, and especially the aftermath where there was an uncertainty between the months of June and November, some of the work was put on hold but there were also projects that kicked off during that same period. So, in that sense, there was a kind of give and take between those that were on hold and those that were starting. It wasn’t as bad as one might have feared initially, given there was some uncertainty about the election and then the consequences of it, but it has not had the dreaded impact it might have. There has been some uncertainty about the Syrian crisis which has strongly impacted Turkey, especially with the unrest between Turkey and Russia. On a wider scale that instability has had some effect, especially for our international and global clients.”
Following the resounding election success of the ruling Justice and Development Party the mood seemed to improve. The final quarter of 2015 saw a strong resurgence in activity, exceeding market expectations, and in no area was this more clearly seen than in energy and infrastructure work.
Turkey’s unquenchable desire for new sources of generation means there is always support, and finance, for new projects. That is generally spread across the full spectrum of the market and various developments can be found in nuclear, coal, hydro, wind, geothermal and gas power plants.
However, the big shift in the market this year has been towards solar power. Most significantly this saw the awarding of the first ever solar licence to Solentegre Enerji Yatırımları Ticaret for an 8MW production facility in Elazığ. In total, Emra (Energy Market Regulatory Authority) is in the process of awarding licences for up to 600MW of capacity throughout the various regions in the country. Such is the potential of the solar market in Turkey, applications for licences amounted to almost 9GW of capacity.
Legislation also allows for the unlicensed production of up to 1MW of solar power, with a guaranteed feed-in tariff for 10 years, providing certain requirements related to the construction and ownership are met.
“The main cause behind [the solar energy boom] is that the projects below 1MW are exempt from the licence and that’s created a significant appetite for the investors to have projects below 1MW,” says Moroğlu Arseven partner Benan Arseven. “Although the projects are below 1MW there are a significant number of projects where the investment comes from the same investors, so that the total investment becomes much bigger.”
Emra made amendments to these regulations in early 2016, with a view to allowing the regulator to effectively manage the entry of new generation to the grid. They appear designed to prevent large-scale investment in multiple projects by single investors, and consequently are seen by many as likely to have a negative effect on the market.
Despite the Emra amendments, however, the solar market remains buoyant, with foreign investors keenly interested in both generation and the production of components locally, as they are subject to an additional cash incentive. It is expected at least 1GW of extra power will be added to the grid by the end of 2016 through solar power alone.
Outside of solar, the market remains relatively stable. Hydro projects have suffered somewhat from droughts in 2014, while the strong interest in wind has waned somewhat with the switch of interest to solar at the end of 2015.
On the infrastructure side, there remain a number of major projects ongoing. These include significant road building projects such as the Yavuz Sultan Selim Bridge and Gebze-Izmir Motorway, as well as other large-scale constructions like the Istanbul New Airport.
On top of the initial success of Turkey’s PPP (public-private partnership) programme for the construction of a series of healthcare campuses, there are now a number of motorway PPP projects in the pipeline as well.
While Turkey had to weather a number of storms in 2015, there are strong indications that 2016 will see an improvement in fortunes. For energy and infrastructure in particular it seems likely this positive direction will be stronger than most.
Jon Moore – Journalist EMEA
Ukraine’s recent social and political turmoil is showing no sign of abating. The conflict with Russia, which annexed Ukriane's Crimea region in 2014, continues despite peace talks in Minsk, and a new prime minister had to be elected in April 2016 after the incumbent, Arseniy Yatsenyuk, resigned.
The Minsk talks culminated in an agreement that Ukraine's contested Donbass region would hold elections to resolve whether it would remain part of Ukraine, which was not received well by domestic nationalists. Vexed by what they perceive to be a weak stance against Russian antagonism, thousands protested in Kiev, and certain groups have threatened to oust President Petro Porshenko’s regime should the referendum in Donbass go ahead.
Ukraine’s new prime minister, the previous parliamentary speaker and an ally of Porshenko, Volodymyr Groysman, has the tough task of attempting to form a government from a parliament where fighting is sometimes physical as well as verbal.
Unsurprisingly, given the social and political dissidence and economic instability Ukraine is contending with, there has not been much in the way of new project development activity. In the area of legislation, however, reforms have been made which should foster a better environment for investment in energy and infrastructure in future.
Ukraine took steps towards reforming its energy sector in 2015. Having signed an association agreement with the EU, and committing to the third energy package, Ukraine, with the assistance of the EBRD (European Bank for Reconstruction and Development), set about improving transparency within its state-owned energy companies. Naftogaz, for example, for the first time introduced an independent board and established a formal procedure for tendering services.
A further positive energy reform was the governments’ repeal of its increase to royalties for oil and gas extraction, which had threatened to halt all exploration and production activity within the country.
The next phase of implementation of the EU’s third energy package requires further reform of the energy sector through the establishment of an independent regulator and the complete demonopolisation of the gas market through unbundling and privatisation.
In infrastructure, legislation has been passed that should increase the appeal of Ukrainian projects for foreign investors in fututre. A new PPP (public-private partnership) law was adopted in February 2016 (entering into effect on May 24) to improve on the existing framework.
Fundamentally, the new PPP law provides clearer definitions of the parameters for projects, expands the acceptable funding methods and provides greater protection for private parties. There are still issues which persist from the previous law, such as currency fluctuation risks for private parties and a lack of protection relating to changes in law.
Ben Naylor - Editor EMEA