Contributed by Zaman & Partners.
In terms of oil & gas supplies, Slovenia is highly import-dependent. The majority of natural gas is being imported from Russia through the system of transmission pipelines, whereas oil and oil products are being imported by means of sea and ground transportation. With regard to domestic production, there are certain natural gas and oil resources in northeast Slovenia and according to the National Mining Strategy, the Government sees the possibility for further prospecting and exploration of these capacities. One of the main goals highlighted in the National Mining Strategy is also to optimize administrative procedures for granting the exploitation concessions and to thereby facilitate the investors` access to the natural resources.
As the natural gas resources in northeast Slovenia are being exploited also with hydraulic stimulation (fracking”, there is an ongoing heated debate in public and in the parliament on the potential prohibition of fracking. In February 2022 the Government has prepared a draft amendment of the Mining Act which was sent to the legislative procedure and is currently being discussed in the parliament. The Government`s draft provides for a prohibition of “large-scale” fracking, whereas the opposition on the other hand advocates for a complete prohibition of fracking, regardless of its scope, and is not fond of the government`s proposal to keep the smaller-scale fracking allowed. In the natural gas sector, the members of the Parliament are currently discussing also a proposal to enact a two-month exemption from payment of network charges for households. In the public debate, the proposal is being strongly opposed by the shareholders of the companies operating the network of gas pipelines.
In January 2022 the newly passed Gas Supply Act entered into force. Thereby the natural gas transmission, storage, and supplies have been extracted from the umbrella Energy Act and are now regulated separately.
Regarding the recent trends in the oil sector, it should be noted that in September 2020 the Government deregulated the oil derivatives prices with the effect as of October 1, 2020.
2. OVERVIEW OF THE COUNTRY’S OIL & GAS SECTOR
2.1. Legal framework – a brief outline of Slovenian oil & gas sector
In its upstream segment Slovenian oil & gas sector is governed mainly by the Mining Act (Zakon o rudarstvu, MA-1) and its bylaws, such as the Rules on auctions for the selection of holders of mining rights for the exploration and exploitation of mineral resources (Pravilnik o drazbi za izbiro nosilca rudarske pravice za raziskovanje in izkoriscanje mineralnih surovin).
Midstream, Slovenian gas sector is regulated by the Gas Supply Act (Zakon o oskrbi s plini, GSA) which came into force in January 2022. Regarding the midstream transportation of oil, there is no sector-specific legislation in place.
Downstream, the Slovenian gas market is governed by the GSA and the Decree on the operation of the natural gas market (Uredba o delovanju trga z zemeljskim plinom). As of October 1, 2020, the Slovenian oil sector is downstream (i.e., sales and trading) fully liberalized.
Slovenian legislation governing the gas sector aims to ensure a competitive, secure, and accessible gas supply – taking into account the principles of sustainable development – and to establish comprehensive competitive, flexible, fair, and transparent gas markets – considering the important role of natural gas as a transitory energy source in the envisaged transition to a carbon-free economy. Similarly, the legislation governing the oil sector focuses on sustainable and effective use of this natural resource, with a particular emphasis on economic development and protection of the environment.
Recent legislative trends in the Slovenian oil & gas sector that shall be mentioned already at the outset of this overview, are as follows. First, with effect from February 15, 2022, the field of gas supply was extracted from the umbrella Energy Act (Energetski zakon, EA) and regulated separately in the newly passed GSA. As the legislation in the energy sector is becoming more extensive and is subject to frequent amendments due to the changes of EU law, it was no longer feasible to have all its sectors governed by one umbrella law. Thus, two separate acts have been passed for gas and electricity supplies, respectively. Second, in September 2020, the Government of Slovenia concluded that the regulation of the oil derivatives prices is no longer required and therefore deregulated the market with the effect as of October 1, 2020.
2.2. Domestic oil & gas production and imports/exports
Compared to other energy resources, approximately 10% of Slovenian energy requirements are met using gas. According to the data published by the Statistical Office of the Republic of Slovenia, in 2021 domestic gas production amounted to 5,066.119 (1000 standard cubic meters), whereas the import of gas in the same year amounted to 1,116,700.00 (1000 standard cubic meters), which shows a very strong import dependency. Most of the gas is imported from Russia, based on a five-year take-and-pay contract with Gazprom concluded in 2018. Some excessive imported quantities are being also exported to other neighboring import-dependent countries. In 2021 the export of gas from Slovenia amounted to 20,800.00 (1000 standard cubic meters). Transport of gas, including transport for import and export, is mostly carried out via the network of pipelines, whereas only a very modest percentage is transported in the form of LNG – only in rare areas not covered by the gas pipelines.
Oil and oil products satisfy approximately 34 % of Slovenian energy requirements. Domestic production is minimal, amounting to 84,433.00 tons in 2021. In the same year, the quantities of imported oil and oil products amounted to 3,382,124.83 tons, according to the data published by the Statistical Office of the Republic of Slovenia. In the absence of oil pipelines in Slovenia, oil is being transported – including import – via sea and ground transport.
2.3. Foreign investment and participation
With the Act Determining the Intervention Measures to Mitigate and Remedy the Consequences of the COVID-19 Epidemic which came into force in May 2020, Slovenia temporarily (until June 30, 2023) introduced a screening of foreign direct investments in specified critical sectors – energetics being one of them. If foreign investors wish to acquire at least a 10% share in a domestic company, they must notify the Ministry of Economic Development and Technology. The Ministry assesses whether the investment poses a risk to security and public order in Slovenia and can either approve it, determine additional requirements for carrying out the transaction or block it.
2.4. Protection of investment
With regard to international treaties protecting investments, in 1992 Slovenia became the successor to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and in 1994, Slovenia ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. Furthermore, investments in these sectors are enhanced and protected also with bilateral investment treaties. Slovenia is also a signatory to the Energy Charter Treaty.
Indirectly, the legislative goals of sustainability are influenced also by the Paris Agreement of December 12, 2015, which Slovenia has ratified on November 25, 2016.
3. EXPLORATION OF OIL & GAS
3.1. Granting of oil & gas exploration rights
As seen from the domestic production figures listed in Section 2.2., the resources and exploration of oil & gas in Slovenia are relatively scarce. Thus, also the national provisions in this field are in practice not of particular importance – except for certain cases of investments in the development and redevelopment of gas fields in north-east Slovenia.
Exploration of oil & gas reserves is governed by the MA-1 and its bylaws. For the exploration of oil & gas reserves in Slovenia, an exploration approval (dovoljenje za raziskovanje) is required. The approval is granted in a public tender procedure by the Ministry of Infrastructure, for the exploration area, mineral resources, and the time period defined therein.
According to the National Mining Strategy, the Government sees the possibility for further prospecting and exploration of the oil & gas capacities in the Mura depression area (Murska depresija) in northeast Slovenia.
3.2. Foreign exploration
In the public tender procedure (see Section 3.1.) the exploration approval may also be granted to foreign investors from (i) the European Union; (ii) the European Economic Area; (iii) Switzerland; (iv) the members of the Organization for Economic Co-operation and Development (OECD); (v) third countries under the condition of material reciprocity. The legal status of such approval is an administrative decision granted by the Ministry of Infrastructure. The approval, regardless of the holder being a domestic or a foreign investor, is non-transferable and cannot be sold, leased, or anyhow disposed of. Transfers of the exploration approval are thus null and void. The exploration approval is issued for a maximum period of five years.
3.3. Stages of the exploration process
Prospecting of mineral resources is free and not subject to administrative approvals. For exploration, an exploration approval is required (see Section 3.1.), whereas a concession is required for the exploitation of mineral resources (see Section 4.1.).
Within the exploration process, no separate authorizations are required for its different stages.
3.4. Obligatory state participation
All mineral resources, including oil & gas, are owned by the Republic of Slovenia. Its direct pecuniary benefits are the compensations and fees imposed on the holders of exploration and/or exploitation rights.
3.5. Compensation for Exploration
If there are at least two applicants in the public tender for the exploration approval, an auction between these bidders is carried out by the Ministry of Infrastructure, in which the bidders compete who will offer the highest compensation for the exploration of mineral resources. The compensation paid by the successful bidder is then shared by the state and the local community in which the exploration takes place.
3.6 Concession fee
For exploitation of mineral resources, the concession holder has to pay the concession fee determined in the concession act and in the concession contract. The fee is calculated depending on the size of the mining area and on the average price of the mineral resource being exploited.
3.7. State`s ownership interest
The state holds a 100% share in the company Nafta Lendava, d.o.o. According to the annual report of this company for 2020, its activities are also exploration and exploitation of crude oil and natural gas resources in northeast Slovenia.
3.8. Geological data
Geological data obtained in the exploration process must be shared with the Ministry of Infrastructure. The Ministry is obliged to consider and keep this data as a business secret throughout the period of validity of the respective exploration approval. Besides this, the holder of the exploration approval is also obliged to allow the Geological Survey of Slovenia (a 100% state-owned institution) to take samples from the exploration area.
3.9. Risks to be considered
When applying to the public tender for exploration rights, the bidder has to submit the project documentation for the envisaged exploration. This project documentation has to be prepared in line with environmental and spatial planning requirements applicable to the exploration area. As the practice shows, it is of particular importance to have these legal requirements diligently examined before applying.
4. PRODUCTION OF OIL & GAS
4.1. Granting of oil & gas production rights
Production of oil & gas is governed by the MA-1 and its bylaws. For the production of oil & gas in Slovenia, a concession for exploitation of mineral resources (koncesija za izkoriscanje mineralnih surovin) is required. The concession is granted in a public tender procedure by the Ministry of Infrastructure, for the exploitation area, mineral resources, and the time period defined therein.
Regarding the government initiatives in this field, it should be noted that the government has recently prepared a draft of the MA-1 amendment which was sent to the legislative procedure and is being discussed in the parliament. The draft amendment provides for a prohibition of “large-scale” fracking. On the other hand, the opposition would like to entirely forbid fracking, regardless of its scope, and is not fond of the government`s proposal to keep smaller-scale fracking allowed. A heated parliamentary debate is expected.
It should also be added that according to the National Mining Strategy, one of the main goals is to optimize administrative procedures for granting the exploitation concessions and to thereby facilitate the investors` access to natural resources.
4.2. Foreign production
Exploitation concession may also be granted to foreign investors from: (i) the European Union; (ii) the European Economic Area; (iii) Switzerland; (iv) the members of the OECD; (v) third countries under the condition of material reciprocity.
Granting of the concession is first foreseen in the concession act issued by the Government. Based on the concession act, a public tender is carried out by the Ministry of Infrastructure. The selected bidder then signs a concession contract with the Ministry of Infrastructure. In legal terms, a concession is thus a contract with the ministry, based on an administrative decision on the selection of the best bidder. The concession, regardless of whether the holder is a domestic or a foreign investor, may be transferred only with the approval of the Ministry of Infrastructure and only if the statutory conditions for such transfer are fulfilled – e.g. the new holder should meet all the conditions for obtaining the concession, which have been set in the concession act and in the public tender. The exploitation concession may be issued for a maximum period of fifty years.
4.3. Stages of the production process
See Section 3.3. Also within the production process, there are no different concession procedures envisaged for different stages of the production. The stage and method of exploitation are described in the concession contract.
4.4. Obligatory state participation
The concession holder is obliged to pay an annual concession fee and the reserve funds for the remediation. The concession fee is calculated in line with the decree determining the mining site reclamation payment (Uredba o rudarski koncesnini in sredstvih za sanacijo), depending on the size of the exploitation area and on the average price of the mineral resource being exploited.
Regarding the state`s ownership interest, see Section 3.4.
As for the export of production, no specific statutory restrictions or significant infrastructure challenges (except for the scarce resources and the absence of oil pipelines) have been identified.
4.5. Risks to be considered
When applying to the public tender for the exploitation concession, the bidder has to submit the project documentation for the envisaged production. This project documentation has to be prepared in line with environmental and spatial planning requirements applicable to the exploitation area. As the practice shows, it is of particular importance to have these legal requirements diligently examined before applying.
For any potential investors in fracking, it would also be advisable to monitor the legislative process concerning the recent MA-1 draft amendment.
5. TERMINATION OF PRODUCTION OF OIL & GAS
5.1. Abandonment and decommissioning
Abandonment and decommissioning of infrastructure used in oil & gas production are governed by the MA-1. If the concession holder intends to terminate the exploitation of oil or gas, it has to notify this in advance to the mining inspection and at the same time request permission of the Ministry of Infrastructure for the termination of mining works. The ministry then appoints a commission for the technical inspection which inspects the mining site and checks whether the conditions for safe termination of mining works are fulfilled. Based on the commission`s protocol the ministry issues a permit for termination of mining works in which it also defines the content and scope of the required termination and decommissioning works. After the concession holder carries out these works, it provides the Ministry of Infrastructure with evidence thereof (e.g., audited decommissioning project and the geodetic plan of the area after the completed decommissioning) and applies for a decision on the termination of the exploitation right. After receiving such an application, the ministry again appoints a commission that examines whether the required termination and decommissioning works have been done adequately. If the commission`s findings are positive, the Ministry of Infrastructure issues the decision on the termination of the exploitation right.
5.2. Environmental and HSE consideration
The commission appointed by the Ministry of Infrastructure (see Section 5.1.) is composed of the representatives of ministries responsible for mining (including its health and safety aspects), spatial planning, environmental protection, and of the local commune representatives. Considering its composition, the commission examines also the environmental, health and safety issues of the abandonment, and decommissioning process.
6. SAFETY OF OIL & GAS EXPLORATION AND PRODUCTION
6.1. International treaties to which the jurisdiction is a party
Slovenia is a party to the Energy Charter Treaty and to the Protocol on Energy Efficiency and Related Environmental Aspects.
6.2. Offshore Safety Directive
With the amendment of the MA-1 in 2013, Slovenia partially implemented the OSD. In article 1 of the MA-1, it is explicitly stated that the prospecting, exploration, and exploitation of oil and gas at sea (offshore) is forbidden.
7. IMPORT, EXPORT, AND SALES OF OIL & GAS
7.1. Import and Export of oil & gas
Cross-border sales and deliveries of natural gas have to be entered into the Virtual Trading Point established by the Slovene Transmission System Operator (TSO) – Plinovodi d.o.o. For such transactions, the parties have to acquire sufficient cross-border capacities at the transmission systems connecting points. The primary allocation of capacities is carried out by the TSO through electronic auctions on an online reservation platform – in line with the Slovenian rules on terms and conditions for capacity allocation mechanisms at interconnection points of the transmission system through auction, congestion management procedure, and capacity trading on the secondary market and with Commission Regulation (EU) 2017/459.
In the absence of oil pipelines, there are no sector-specific rules governing the import and export of oil. Cross-border sales are agreed bilaterally between the parties and there is no particular state governed system for carrying out these transactions. In the unlikely event of disruptions and instability of oil supplies, certain limitations may be imposed on the export of oil pursuant to the decree on emergency procedures in the event of disruptions and instability in the supply of oil and petroleum products.
Pursuant to Article 19 of the GSA, the transmission of natural gas is performed as an obligatory public service by virtue of a concession. The TSO is the company Plinovodi d.o.o., owned by the holding company Plinhold d.o.o. in which the state is one of the shareholders. The operation of the system is governed by the network code for the natural gas transmission system (Network Code), whereas the network fees are calculated in line with the act on the methodology for determining network charges for the natural gas transmission system.
For the construction and operation of the natural gas transmission system (besides the building permit and other administrative permits pertaining to construction), a concession issued by the Government is required. Pursuant to Article 24 of the GSA, the transmission system pipelines have to be owned by the TSO.
7.3. Land rights
For the construction of pipelines, a building permit is required. After the construction and before the start of operations it is obligatory to obtain the operating permit – confirming that the pipeline and the accompanying infrastructure have been built in accordance with the building permit. Depending on the scale and specifics of the pipeline, several other administrative approvals may be required, such as the environmental permit or allowances under the Water Act or under the decree on waste management.
Pursuant to the Spatial Management Act, the state or a municipality may, for adequate compensation, expropriate the landowners or limit their ownership rights in the interest of the public good, under the condition that such measures are necessary and proportionate. If the construction of pipelines is in the interest of the public good and if these conditions are met, the land necessary for the construction of pipelines may be expropriated.
7.4. Access and integration
The GSA provides for regulated third-party access to the transmission system. Conditions for the access are further defined in the network code in which the TSO sets out clear and efficient procedures and tariffs for non-discriminatory access of producers, storage facilities, LNG plants, and industrial customers to the transmission system.
The transmission network consists of four major pipelines, with a joint length of 1,121 kilometers. Through connection points, these pipelines are connected to distribution systems of 16 distribution system operators (DSO) which distribute gas to 85 local communities and to more than 136,000 end customers. Cooperation between the TSO and the DSOs is governed by the GSA and the network code. The latter sets out the conditions for the connection of the distribution system to the transmission network (i.e., technical conditions, conditions pertaining to the stability of the system and criteria for the economic viability of the connection) and duties of the TSO and DSOs regarding the balancing of the transmission network.
Slovenian natural gas transmission system is connected to the transmission systems of Italy, Austria, and Croatia and is an integral part of the European gas transmission system. For the import and export of natural gas through connecting points between these transmission systems see Section 7.1.
7.5. Gas transmission and distribution
The natural gas transmission network is owned by the company Plinovodi d.o.o. The sole shareholder in this company is the holding company Plinhold d.o.o. with dispersed ownership – the state, state-owned companies, and several other companies being among the shareholders. The owner of the transmission network is also the TSO. The operation of the transmission system is governed by the GSA and the network code.
Pursuant to Article 58 of the GSA, the distribution of natural gas is performed as an optional local commercial public service. The DSO is appointed by the Slovenian Energy Agency. The DSO has to be either the owner or a tenant of the distribution pipelines. For the construction and operation of the pipelines, depending on their scale and specifics, several other administrative approvals may be required, such as the environmental permit or allowances under the Water Act or under the decree on waste management. Among the 16 DSOs are state-owned as well as entirely private-owned companies. To the DSOs with less than 100,000 end customers, the unbundling provisions of the GSA do not apply.
The GSA provides for regulated third-party access to the distribution system. The DSO has to grant access to the network on an objective and non-discriminatory basis. Fees for accessing the distribution network are regulated and calculated in line with the methodology set out in Article 110 of the GSA.
8.1. Trading license
In line with the decree on the operation of the natural gas market (Uredba o delovanju trga z zemeljskim plinom), natural gas is traded on the balancing market and on the open market. On the open market, the participants can freely negotiate the conditions of the contract. For the trading itself, no particular license is required, but as the transactions are done through the Virtual Trading Point (VTP), the traders have to register with the TSO before starting trading on the VTP. TSO charges the traders an annual cost of registering and a cost for every transaction with natural gas. The price list of services in the VTP is published on the TSO’s website. The market is monitored by the Slovenian Energy Agency.
Natural gas is being traded on the VTP that was established by the TSO in 2015. As the traders may trade only virtually and are not considered as users of the transmission or distribution system (Article 2 of the decree on the operation of the natural gas market), it is our understanding that natural gas can be traded as an unbundled commodity, separate from trading with network capacities.
The authority responsible for the regulation of competition aspects in the oil & gas sector is the Slovenian Competition Protection Agency (CPA). Criteria for determining whether conduct is anti-competitive is set out in Articles 6 (anti-competitive agreements) and 9 (abuse of a dominant position) of the Prevention of Restriction of Competition Act (PRCA) which are Slovenian equivalents of Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU). Pursuant to Article 11 of the PRCA, the CPA also has authority to assess concentrations and to disapprove mergers or other changes in control over businesses if they significantly impede effective competition on the Slovenian market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position.
9.2. Anti-competitive actions
The CPA may ex officio commence procedures to examine alleged restrictive agreements and abuses of a dominant position. When price rigidity or other circumstances indicate the possibility of a restriction or distortion of competition on the territory of the Republic of Slovenia, the agency may also conduct a study of an individual sector of the economy or certain types of agreements.
After carrying out the assessment procedure, the agency may issue a decision establishing the existence of an infringement of Article 6 or Article 9 of the PRCA or of Article 101 or Article 102 of the TFEU, and require the undertaking concerned to bring such infringement to an end. With the same decision, it may impose on the undertaking the obligation to take reasonable measures to bring an infringement and its consequences to an end, in particular through the disposal of a business or part of the undertaking’s business, division of an undertaking, or disposal of shares in undertakings, transfer of industrial property rights and other rights, the conclusion of license and other contracts which may be concluded in the course of operations between undertakings, or ensuring access to infrastructure. Within its authorities, the CPA may also impose fines in case of CPA violations.
In merger clearance procedures the agency shall within 25 working days (Phase 1) examine the merger notification and decide that either (i) the concentration does not fall within the scope of the PRCA; or (ii) the concentration does not raise serious doubts as to its compatibility with competition rules and is thus allowed; or (iii) the concentration raises serious anti-competitive doubts and shall thus be further assessed in Phase 2. After carrying out the assessment in Phase 2, the PCA either issues a decision declaring the concentration compatible with competition rules or issues a decision declaring the concentration incompatible with competition rules and prohibits it. The criterion for the assessment is aligned with Council Regulation (EC) No. 139/2004. A decision in Phase 1 shall be issued within 25 working days, whereas a decision in Phase 2 shall be issued within 60 working days.
10. STABILITY CLAUSE AND DISPUTE RESOLUTION
10.1 Stability clause
No particular stability clauses for oil & gas companies have been identified.
10.2. Compulsory dispute resolution procedure
The Energy Agency is competent to decide disputes between the users of the natural gas pipelines, natural gas suppliers, TSO, and DSOs regarding the (i) access to the network; (ii) network fees; (iii) breaches of the network code; (iv) balancing obligations; (v) self-sufficiency provisions. Other than that, no compulsory dispute resolution procedures applying to the oil & gas sectors have been identified.
10.3. International treaty protection
In 1992, Slovenia became the successor to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and in 1994 Slovenia ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. Furthermore, the investments in these sectors are enhanced and protected also with bilateral investment treaties.
According to our experience and the publicly available data, there are no special difficulties in litigating or seeking to enforce judgments or awards against government authorities or state organs. According to unofficial information from the media, the British company Ascent Resources PLC has in 2021 initiated an arbitration proceeding against Slovenia over a dispute regarding the permits for the extraction of gas by means of hydraulic fracturing in Petisovci, claiming that Slovenia has breached its obligations under the UK – Slovenia bilateral treaty and the Energy Charter Treaty. Allegedly, the claimant claims compensation in the amount of EUR 120 million. Further details of the proceeding and on its current stage are not published.