CELEX: 52014PC0068
Language: en
Date: 2014-02-12 00:00:00
Title: Recommendation for a COUNCIL DECISION authorising the opening of negotiations on an Agreement between the European Union and the Republic of Azerbaijan on a legal framework governing the control of DESFA by SOCAR

RESTREINT UE
                        EUROPEAN
                        COMMISSION
                                                Brussels, 12.2.2014
                                                COM(2014) 68 final
                                Recommendation for a
                               COUNCIL DECISION
authorising the opening of negotiations on an Agreement between the European Union
and the Republic of Azerbaijan on a legal framework governing the control of DESFA
                                      by SOCAR
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                                  EXPLANATORY MEMORANDUM
1.        CONTEXT OF THE RECOMMENDATION
1.1       The immediate reason for the present recommendation
Within the context of the restructuring plan for Greece, the Hellenic Republic Asset
Development Fund ("HRADF") is privatising certain assets currently owned by the Hellenic
Republic ("HR"). These include the shares currently owned by the HR, through HRADF, in
the Hellenic Gas Transmission System Operator S.A. ("DESFA"), the Greek gas transmission
system operator ("TSO").
HRADF has retained as the preferred bidder for DESFA the State Oil Company of the
Azerbaijan Republic ("SOCAR"), an undertaking established in Azerbaijan and controlled by
the Republic of Azerbaijan. HRADF and SOCAR intend to enter into a share purchase
agreement ("SPA") whereby, if and when all conditions precedent1 are met, SOCAR will
acquire 66% of the share capital and voting rights in DESFA upon closing of the SPA ("the
Operation"). Also in view of the rights retained by the HR under the shareholders agreement
("SHA") that will be entered into by SOCAR and HR, SOCAR will acquire sole control of
DESFA subsequent to the closing of the SPA.
1.2        The current regulatory framework
Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009
concerning common rules for the internal market in natural gas and repealing Directive
2003/55/EC2 ("Directive 2009/73/EC") provides for common rules for the internal market in
natural gas. In short, this Directive sets out the regulatory framework enabling the full
 liberalisation of the EU gas markets, in particular as regards gas production and supply. The
 same Directive also sets common rules for certain non-liberalised parts of the value chain in
 order to ensure that competition in the liberalised parts takes place on a level playing field. In
 the latter category fall the common rules applicable to certain types of gas infrastructure,
 including gas transmission systems, and their owners and operators, such as DESFA.
 The common rules regarding gas transmission systems include an unbundling regime pursuant
 to Article 9 of Directive 2009/73/EC, seeking to ensure that TSOs are operated independently
 from the upstream and/or downstream interests of its owners. In order to ensure compliance
 with the common rules applicable to TSOs, Article 10 of Directive 2009/73/EC foresees a so-
 called certification procedure whereby the national energy regulator ("NRA") verifies
 compliance by the TSO with the requirements as laid down in Article 9 of Directive
          Conditions precedent include merger control clearance and certification as meant under Article 10 and
          Article 11 of Directive 2009/73/EC.
          OJL211 of 14.08.2009 p. 94
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2009/73/EC. In case the TSO is or will be controlled by a (legal) person or persons from a
third country, Article 11 of Directive 2009/73/EC foresees that, in addition to compliance
with Article 9 of Directive 2009/73/EC, it must establish during the certification procedure
that granting the certification will not put at risk the security of energy supply of the Member
State concerned and the European Union whilst taking into account, inter alia, rights and
obligations of the European Union arising under international law, including agreements
concluded with one or more third countries to which the European Union is a party and which
addresses issues of security of energy supply.
The Commission provides an opinion on a draft certification decision drawn-up by the
national regulator, who then adopts a final certification decision after which the TSO can be
designated.
1.3        The application of the regulatory framework to the present case
Article 9 of Directive 2009/73/EC lays down the general principles for unbundling implying
 that (legal) persons that control a transmission system cannot at the same time, directly or
 indirectly, exercise control over companies that perform the function of production or supply
 of gas and/or electricity. SOCAR is a company that inter alia produces and supplies natural
 gas.
 However, Article 9 also foresees the possibility of applying alternative unbundling models
 provided the conditions set out in Article 9(8) are met, as they are in the case of DESFA.
 Consequently, DESFA foresees the application of the unbundling conditions set out in
 Chapter IV of Directive 209/73/EC i.e. it envisages the application of the so-called
 Independent Transmission Operator or "ITO" model. The application of this model means that
 SOCAR, despite being active in the production and supply of gas, can acquire control over
 DESFA provided that during the certification procedure it is established that it complies with
 all conditions of the ITO model and continues to do so as long as it owns DESFA.
 Article 10(3) of Directive 2009/73/EC requires TSOs to notify to the NRA any planned
  transaction which may require a reassessment of its compliance with the requirements of
  Article 9 of the same Directive. Consequently, the projected operation whereby SOCAR
  acquires control over DESFA requires a reassessment of DESFA's compliance with, in
  particular, all conditions related to the ITO model.
  SOCAR is established in and owned by the Republic of Azerbaijan. In such cases, Article 11
  of Directive 2009/73/EC foresees that the NRA (Article 11(4)) and the Commission (Article
  11(7)), in addition to the TSOs compliance with Article 9, also assess whether granting
  certification will put at risk the security of energy supply of the Member State concerned and
  the European Union.
  Article 11 stipulates that the certification shall be refused if it has not been demonstrated that
  the control by a third country person will not put at risk the security of energy supply of the
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Member State concerned and the European Union. In considering that question, the NRA and
the Commission shall take into account the rights and obligations of the European Union with
respect to that third country arising under international law, including any agreement
concluded with one or more third countries to which the European Union is a party and which
addresses the issues of security of energy supply.
Recital 22 of Directive 2009/73/EC further clarifies that "The security of energy supply is an
essential element of public security and is therefore inherently connected to the efficient
functioning of the internal market in gas [...]. Functioning open gas markets and, in
particular, the networks and other assets associated with gas supply are essential for public
security [...]. Persons from third countries should therefore only be allowed to control a
transmission system or a transmission system operator if they comply with the requirements of
effective separation that apply inside the Community. Without prejudice to the international
obligations of the Community, the Community considers that the gas transmission system
sector is of high importance to the Community and therefore additional safeguards are
necessary regarding the preservation of the security of supply of energy to the Community to
avoid any threats to public order and public security in the Community and the welfare of the
citizens of the Union. The security of supply of energy to the Community requires, in
particular, an assessment of the independence of network operation, the level of the
Community's and individual Member States' dependence on energy supply from third
 countries, and the treatment of both domestic and foreign trade and investment in energy in a
 particular third country. Security of supply should therefore be assessed in the light of the
 factual circumstances of each case as well as the rights and obligations arising under
 international law, in particular the international agreements between the Community and the
 third country concerned. Where appropriate the Commission is encouraged to submit
 recommendations to negotiate relevant agreements with third countries addressing the
 security of supply of energy to the Community or to include the necessary issues in other
 negotiations with those third countries."
 Currently, no agreement exists between the Republic of Azerbaijan on the one hand and the
 European Union and/or Greece on the other hand addressing issues of security of energy
 supply.3
         Currently existing legal instruments are (i) Agreement between the government of the Hellenic
         Republic and the government of the republic of Azerbaijan on the promotion and reciprocal protection
         of investments (Signed 21 June 2004, entry into force 3/9/2006) (ii) Partnership and Cooperation
         Agreement between the European Communities and their Member States, of the one part, and the
         Republic of Azerbaijan, of the other part (Signed 18/05/2004, entry into force 01/11/2005). None of
         these instruments cover the projected subject matter of the ĪGA.
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1.4       The concerns that need to be remedied by the IGA
DESFA owns and operates the gas transmission network in Greece, the interconnections of
this transmission network with neighbouring countries, including Turkey and Bulgaria, as
well as the Revithoussa LNG terminal. Moreover, the DESFA gas transmission network can
in the future and is currently already projected to be connected with other infrastructure
pertinent for the transportation of gas to Greece as well as other EU Member States and
members of the Energy Community. Reference can be made in this context to the projected
Trans Adriatic Pipeline ("TAP") that will connect the DESFA transmission network with Italy
and Albania and will reinforce its interconnection with Turkey as well as interconnectors at
earlier planning stages, such as the Interconnector Greece Bulgaria ("IGB") that will increase
the gas transmission capacity from Greece with Bulgaria. These interconnections affect the
EU Member States and members of the Energy Community immediately interconnected with
the DESFA network, but also those countries that are or can be provided with natural gas
through these countries, such as EU Member States Romania and Hungary, and Members of
the Energy Community.
DESFA therefore plays a pivotal role for the importation of gas into the EU and its
 transportation to other EU and Energy Community Member States and, hence, constitutes a
 strategic asset affecting the security of energy supplies of the European Union.
 Greece, through its connection to Turkey, is currently the sole entry point into the EU for gas
 produced in Azerbaijan, including gas produced by SOCAR. The projected TAP pipeline and
 upstream connections will significantly increase the volumes of Azeri gas that can be
 imported into the EU. The DESFA network, however, enables the import of gas from other
 sources as well, including Russian gas (through Bulgaria), LNG (through the Revithoussa
 LNG terminal) and in the future gas from different sources available in Italy (through the TAP
 pipeline on which commercial and physical reverse flows are due to be offered).
 Whereas the unbundling rules in Directive 2009/73/EC should ensure that the transmission
 system is operated independently from production and supply interests of related
 undertakings, the third country clause prescribes an additional test in case a TSO is controlled
 by a person or persons from a third country. That test is meant to ensure that the security of
 supply of the Member State concerned and of the EU is not put at risk.
 In the present case, such a risk could inter alia result from:
  (1)      The adoption by the Republic of Azerbaijan of governmental acts that render it
           impossible or difficult for SOCAR or DESFA to comply with the Third Package
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          requirements, other relevant EU law4 and Treaty obligations by creating legal
          uncertainty or conflicts of law between Azeri and EU law;
(2)       Creation of legal uncertainty or conflicting laws rendering actual enforcement in case
          of non-compliance, inter alia by EU energy regulators or EU Courts, difficult or
          impossible;
(3)       The exercise by the Republic of Azerbaijan of its ownership rights in SOCAR
           resulting in SOCAR or DESFA acting contrary to Third Package requirements, other
           relevant EU law and Treaty obligations;
(4)        Acts by the Republic of Azerbaijan, or threats thereof, that directly or indirectly
           sanction the enforcement of EU law against SOCAR or DESFA, including measures
           regarding the supply of natural gas to the EU or conditions thereof.
1.5        The need for an intergovernmental agreement ("IGA")
In view of the potential risks identified above, the conclusion of an intergovernmental
agreement ("IGA") is considered necessary with a view to enable a possible certification of
DESFA as an ITO controlled, via SOCAR, by the Republic of Azerbaijan, pursuant to Article
11 of Directive 2009/73/EC. The IGA should ensure by means of a legally enforceable
agreement under international law that DESFA's ultimate owner, the Republic of Azerbaijan,
 will act in its capacity as sovereign state as well as in the exercise of its ownership rights in
 SOCAR in full compliance with the EU regulatory framework.5
 The present proposed Council Decision seeks to take measures "regarding the preservation of
 the security of supply of energy to the Community to avoid any threats to public order and
 public security in the Community and the welfare of the citizens of the Union.6" Consequently,
 the proposed measure seeks to prevent any possible negative impacts of the projected
 acquisition of DESFA by SOCAR.
 2.         LEGAL ELEMENTS OF THE RECOMMENDATION
 2.1        European Union competence for concluding an IGA
 The subject matter of the proposed IGA falls entirely within the scope of internal common
 rules:
 (1)        Directive 2009/73/EC is part of the Third Energy Package. It lays down common
            rules for the gas markets in general and TSOs in particular.
          Such as regarding data processing and the protection of critical infrastructure.
          To the extent pertinent, similar conditions may be imposed upon SOCAR as a condition for certification
          by means of other legal instruments.
          Recital 22 of Directive 2009/73/EC                                    _
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         In general, Directive 2009/73/EC lays down the regulatory framework for the
          operation of the EU gas markets, including public service obligations, authorisation
          of market access, unbundling of TSOs and DSOs, new infrastructure, market
          opening, regulatory oversight and rights and obligation of market participants and for
          TSOs such as related to unbundling, third party access and network investments.
          More specifically as regards the unbundling of TSOs, Article 9, Articles 14 to 16 and
          Chapter IV (Articles 17 to 23) of Directive 209/73/EC provide for detailed
          conditions for the application of the unbundling rules. In addition, Article 10 of
          Directive 2009/73/EC lays down the procedure for certification that ensures
          compliance with the unbundling rules. Article 11 foresees an additional procedure
          applicable if the owner of the network stems from a third country and imposes the
          need to assess whether certification puts at risk the security of supply;
(2)       Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13
          July 2009 on conditions for access to the natural gas transmission networks and
          repealing Regulation (EC) No 1775/2005 ("Gas Regulation")7 provides in Article
          8(6) for the adoption of network codes that regulate in detail many matters related to
          TSO's operations as well as in Article 3 the certification procedure;
(3)       Council Directive 2008/114/EC of 8 December 2008 on the identification and
          designation of European critical infrastructures and the assessment of the need to
          improve their protection8 ("Directive 2008/114") lays down common rules regarding
          measures to protect critical energy infrastructure exists.
Since the subject matter of the envisaged IGA fall within the scope of internal common rules -
the criterion that ensures exclusive competence for the European Union for the conclusion of
an international agreement under Article 3(2) TFEU as also interpreted by the Court of Justice
in the ERTA case law9 -, the European Union has sole competence in concluding an IGA with
the Republic of Azerbaijan aimed at ensuring that the latter will act in its capacity as
sovereign state as well as in the exercise of its ownership rights in SOCAR in full compliance
with the EU regulatory framework for gas markets.
Furthermore, the suggested content of the IGA in essence seeks to ensure that the EU
 regulatory framework is properly applied and enforceable within the EU. Consequently, the
conclusion of the international agreement can be considered necessary to enable the European
         OJL211 θί 14.08.2009 p.36
         OJ L 345, 23.12.2008, p. 75-82
         Case 22/70 Commission v Council [1971] ECR 263, concerning a European Road Transport Agreement
         (ERTA).See also Case C-471/98, Commission v. Belgium (Open Skies'); Opinion 1/03 [2006] ECR
         1150, on the Lugano Convention, paragraphs 116 and following; Case C-45/07, Commission v Greece,
         Judgment of 12 February 2009, paragraphs 16 and 17.
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Union to exercise its internal competence, providing additional justification under Article 3(2)
TFEU for the exclusive competence for the European Union for the conclusion of an
international agreement.
2.2      Content of the recommended IGA
The IGA should include guarantees by the Republic of Azerbaijan on the following points:
(1)      SOCAR's ownership of DESFA is exclusively governed by EU law and Greek law;
(2)      The Republic of Azerbaijan accepts the sole jurisdiction of EU courts related to the
          application of the unbundling rules and other regulatory rights and obligations
          resulting from Greek and EU law upon DESFA;
(3)       There can be no adoption of legislative measures by the Republic of Azerbaijan
          affecting SOCAR and/or exercise of control of the Republic of Azerbaijan in
          SOCAR that results in non-compliance by SOCAR or DESFA with their obligations
          under EU law, notably the exercise of powers of the national regulator as defined
          under EU law in order to monitor and enforce the legal obligations on DESFA and
          SOCAR;
(4)       The Republic of Azerbaijan will not render, allow SOCAR to render or seek to
          render, the delivery of natural gas to the EU or the conditions thereof dependent upon
          matters concerning the application of Greek or EU law to DESFA;
(5)       The Republic of Azerbaijan will fully respect and ensure full compliance with EU
          and Greek law applicable to DESFA, including EU internal market rules and EU
          legislation regarding data processing and the protection of critical infrastructure.
 3.       BUDGETARY IMPLICATION
 The recommended course of action has no budgetary implications.
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                                      Recommendation for a
                                     COUNCIL DECISION
 authorising the opening of negotiations on an Agreement between the European Union
  and the Republic of Azerbaijan on a legal framework governing the control of DESFA
                                           by SOCAR
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the Functioning of the European Union, and in particular
Article 218(3) and (4) thereof,
Having regard to the recommendation from the European Commission
Whereas:
(1)      It is the intention of the State Oil Company of the Azerbaijan Republic ("SOCAR"),
         an undertaking established in Azerbaijan and controlled by the Republic of
         Azerbaijan, to acquire control of Hellenic Gas Transmission System Operator S.A.
         ("DESFA"), the Greek gas transmission system operator.
(2)      Article 11 of Directive 73/2009 stipulates that in such cases it needs to be ascertained
         that the control by a person or persons from a third country or third countries of a
         transmission system owner or operator will not put at risk the security of energy
         supplies to the European Union.
(3)      The facts in the present case imply that (i) the network as operated by DESFA
         constitutes a strategic asset affecting the security of energy supplies of the European
         Union (ii) the Republic of Azerbaijan and SOCAR have strategic interests that are
         not necessarily aligned with the objective of EU legislation applicable to gas
         transmission networks. This raises concerns with regard to security of energy
         supplies that need to be remedied.
(4)      DESFA will, via SOCAR, ultimately be controlled by the Republic of Azerbaijan
          and, hence, the appropriate legal instrument to remedy concerns in the present case is
          an intergovernmental agreement.
 (5)      The subject matter of the intergovernmental agreement is fully covered by the scope
          of EU legislation. Moreover, the international agreement is necessary to enable the
          European Union to exercise its internal competence. Consequently, it falls within the
          sole competence of the European Union to conclude such an intergovernmental
          agreement.
 (6)      Negotiations should therefore be opened with a view to concluding an
          intergovernmental agreement between the European Union and the Republic of
          Azerbaijan on a legal framework governing the control of DESFA by SOCAR aimed
          at ensuring that the intended acquisition does not put at risk the security of energy
          supplies to the European Union.                                lÆCLASSlFIE
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 HAS ADOPTED THIS DECISION
                                            Article 1
The Commission is hereby authorised to negotiate, on behalf of the European Union, an
Agreement between the European Union and the Republic of Azerbaijan on a legal
framework governing the control of DESFA by SOCAR.
                                             Article 2
The negotiating directives are set out in the Annex.
                                             Article 3
The negotiations shall be conducted in consultation with the [to be inserted by the Council]
acting as special committee.
                                             Article 4
This Decision is addressed to the Commission.
Done at Brussels,
                                              For the Council
                                               [•••]
                                              The President
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                     EUROPEAN
                     COMMISSION
                                             Brussels, 12.2.2014
                                             COM(2014) 68 final
                                             ANNEX 1
                                    ANNEX
                                     to the
Recommendation for a Council Decision authorising the opening of negotiations on an
 Agreement between the European Union and the Republic of Azerbaijan on a legal
             framework governing the control of DESFA by SOCAR
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DIRECTIVES FOR THE NEGOTIATION OF AN AGREEMENT BETWEEN THE EUROPEAN UNION
AND THE REPUBLIC OF AZERBAIJAN ON A LEGAL FRAMEWORK GOVERNING THE CONTROL
OF DESFA BY SOCAR.
The Agreement should ensure:
That the control by SOCAR and the Republic of Azerbaijan, over DESFA will not put at risk the
security of energy supplies to the European Union by:
(1)       ensuring that EU and Greek law applicable to DESFA as well as any possible future
          modifications thereof, apply in full; and,
(2)       are fully enforceable on DESFA, SOCAR and the Republic of Azerbaijan.
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