9. International oil and gas pipelines: Legal, tax, and tariff issues

Michael Keen, and Victor Thuronyi
Published Date:
September 2016
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1 Introduction

International transportation of oil and gas is a major element of international trade. Oil-producing areas are often located at a distance from growing petroleum markets; transportation occurs via ships, rail, or increasingly, pipelines. These extend beyond the territory of a producing country and frequently cross several countries before reaching final destinations.

Cross-border petroleum pipeline projects encompass technical, economic, contractual, regulatory, and tax issues. Differing approaches to these diverse issues stem from diverging objectives of neighboring countries, as well as of sponsor pipeline companies (Stevens et al., 2003, 2009; Vinogradov, 2001). Each single project is specific to a geopolitical context. The differences extend to corporate structure, taxation regime, transportation tariffs, and other terms and conditions. International law provisions concerning cross-border petroleum pipelines remain relatively limited. Several international conventions helped landlocked countries2 to gradually obtain basic rights, allowing for transit of their natural resources to ports. However, the enforceability and implementation of such rights are problematic for countries, investors, and lenders.

This chapter focuses on the main issues regarding cross-border pipelines:

  • Importance of international pipeline transportation

  • Categories of cross-border petroleum pipelines and examples of existing projects

  • Applicability of international law to pipeline projects

  • Legal and contractual solutions generally adopted and how to streamline the corporate, contractual, and tax structures of such projects

  • Tax issues

  • Determination of international pipeline tariffs, and the differences between tariffs and transit fees, as well as the main principles and methods of designing pipeline tariffs

  • Recommendations on structuring and fostering development of new international petroleum pipelines.

2 Importance of international oil and gas transport

Having access to transportation infrastructure and minimizing international transport risk and cost are primary objectives for both petroleum producers and consumers.

Large volumes of crude oil and natural gas are internationally traded from producing to consuming countries – 64 and 29 percent of world’s production, respectively. In the case of crude oil, where most of the trade is shipped by sea, reliance on international pipelines is less pronounced, although not insignificant. Internationally traded natural gas, however, is largely transported by international pipelines (69 percent); the remaining 31 percent is transported by ships as liquefied natural gas (LNG).

Petroleum exploration in basins located on shore far from the coast is often at a disadvantage in the absence of pipeline facilities. Such a disadvantage stems from the distance to an export port in another country and results in higher costs for the petroleum companies and lower revenues for the countries. A lengthy and complex process of negotiation with the transit country to allow the construction and operation of a pipeline across its territory adds to these costs.

3 Categories and objectives of cross-border pipelines

The two main categories of cross-border pipelines are the export pipelines from landlocked countries and the transit pipelines that cross borders. Each category has its own distinct objectives and legal basis. Accordingly, identifying the proper category of a cross-border project when analyzing international pipeline legal frameworks is critical. Unfortunately, many publications dealing with international pipelines do not consider or delineate these essential differences.

Each category is subject to a specific body of international law, rights, and obligations. The general expressions “transit pipelines,” “transnational pipelines,” or “international pipelines” and often used without qualification. Their application to a specific category of cross-border pipeline remains vague. “Transmission pipelines” is primarily used for domestic pipelines, including those in federal states. “Transit” is a well-known concept in international law and refers to the freedom of transit of goods by authorized means of transport in other countries.

3.1 Export pipelines from landlocked countries

The first category is designed to cover oil or gas production exported from a landlocked state to a coastal port by crossing the territory of one or more transit states. In most cases, the pipeline transportation system is built and operated by a special- purpose pipeline company or by a consortium of companies, generally majority owned by the companies holding an exploration and production interest in the initial petroleum discoveries and fields in a landlocked country and willing to continue exploration activities to identify additional resources in that country.

Several options may exist in terms of ownership and exploitation of a pipeline transportation system. The simplest option is that in which only one company owns and operates the entire multi-country system; the more complex option is one in which distinct companies are established in each state for the ownership or operation of the pipeline in each country segment, though managed as an integrated project. In all cases, each country segment is subject to the jurisdiction of that country, under the umbrella of an interstate governmental agreement or treaty for coordinating the integrated transnational project between and among the concerned states.

When commencing exploration in a landlocked country, oil and gas companies assume that, when necessary, they will be able to negotiate arrangements for an international pipeline with both the landlocked country and the transit country. They further assume that a minimum threshold of reserves is reached to justify the costs of construction and operation of a pipeline.

A cross-border pipeline project can be mutually beneficial to landlocked and transit countries. Identifying and developing mutually beneficial interests can facilitate the negotiation of the project; in the long term, doing so can mitigate political risks by aligning the respective interests of the states. Creating a balance of interests helps establish long-term stability that supplements the general rights and obligations derived from international law.

A transit country has at least three major goals in hosting an export pipeline from a landlocked country, in addition to complying with its obligations of cooperation under international law. The first is to boost its domestic economic activity, since the project is capital intensive during its construction and generates local employment. Moreover, the pipeline company will be liable to corporate taxes and other taxes in relation to its activity in the transit state during the project’s life. The second goal is to obtain an equity participation in the project, since the transit state may negotiate a right to acquire a minority participating interest in the pipeline, at least in the segment crossing the country. The third goal is to stimulate petroleum exploration and production in its own acreage located along the pipeline route by negotiating the right for its upstream contract holders to access a part of the available transportation capacity of the export pipeline on attractive commercial terms.

Another goal of the transit state is the possible right to purchase part of the production transported by the export pipeline to cover its domestic requirements. Generally speaking, this is not necessarily a significant advantage for oil or gas, which are traded at international market prices adjusted to the point of delivery; exceptions may arise in those cases in which the transit country bears high costs for importing its energy.

3.2 Cross-border transit pipelines

The second category of cross-border pipelines consists of international oil or gas pipelines other than those originating from a landlocked state. Their objective is the transit in one or more countries of oil and gas for export from a producing country. This category differs from the first with respect to the international law applicable to each category and the degree of flexibility in selecting among several routes. In most cases, several alternative routes for transit at relatively comparable costs may exist for this second category; the alternative routes for exporting petroleum from a landlocked country, if any, may be significantly more expensive than the shortest or more cost-effective export routes, strongly limiting the bargaining power of the landlocked country. This geographical disadvantage explains why international law has provided special transit rights to landlocked countries.

The simplest cross-border transit scheme of the second category of cross-border pipelines corresponds to a pipeline built between two countries. It may involve onshore or offshore systems, for example, transit pipelines from the Norwegian offshore fields to the British or continental European coasts. More complex international projects link several countries. They may be located on the same continent, such as the long intra-continent oil and gas transportation systems from Russia to Western Europe, or between two continents. The pipeline transit systems may be entirely onshore or constitute onshore and offshore segments. For example, several gas pipeline systems connect the Algerian fields to Europe, with the objectives of diversifying gas clients and minimizing transportation costs.

3.3 Cases of export pipelines from landlocked countries

There are few cases of export pipelines from landlocked countries. Out of 44 landlocked countries, only 7 currently export oil or gas: Azerbaijan, Bolivia, Chad, Kazakhstan, South Sudan, Turkmenistan, and Uzbekistan. Two African countries – Niger and Uganda – may soon join this group. Other landlocked countries produce for domestic consumption only.

The most representative examples of export pipelines from landlocked countries are the Chad/Cameroon oil pipeline system and all the oil or gas export pipelines from Azerbaijan to Turkey across Georgia (in particular, the oil Baku/ Tbilisi/Ceyhan pipeline, or BTC, and the South Caucasus gas pipeline, or SCP). The export gas pipelines to Argentina and Brazil are different because the transported gas is entirely purchased by the transit countries. Details on existing landlocked export projects are summarized in Box 9.1.

Box 9.1Examples of existing landlocked export pipelines


  • Chad/Cameroon export oil pipeline. Its main original objective is to export oil from the landlocked Chadian Doba basin to the port of Kribi located on the Atlantic coast of Cameroon; this is a distance of 1,070 km, of which 170 km are in Chad and 900 km are in Cameroon. The pipeline has been in operation since 2003.The pipeline is owned by two companies: COTCO incorporated in Cameroon and TOTCO in Chad. The investment for the pipeline system amounted to US$2.2 billion. The bilateral agreement was signed in 1996, followed by the signing of the other arrangements, including those for financing, until 2000. Pipeline tariffs are paid to COTCO and TOTCO.

  • New projects in East Africa related to South Sudan and Uganda. Since its independence, South Sudan has been looking for a new oil export pipeline alternative to supplement the two existing pipelines crossing Sudan to the Red Sea. Landlocked Uganda is considering an oil export pipeline project to the Indian Ocean crossing Tanzania.

Latin America

  • Bolivia/Argentina pipelines. A first pipeline was built in the 1970s to export gas from Bolivia to Argentina. The exported gas is purchased by Argentina to cover its internal demand.

  • Bolivia/Brazil gas pipeline. This 3,000-km gas system is owned and operated by two companies: GTB SA in Bolivia and TBG BA in Brazil. Brazil purchases all of the gas transported for its internal consumption.

Central Asia

  • Kazakhstan/Russia. The Caspian Pipeline Consortium (CPC), consisting of 11 companies or states, is involved in a 1,510-km oil pipeline from Kazakhstan to the Russian Black Sea. CPC was established in 1992; after several changes to the CPC structure, the system was built and put into operation at the end of 2001 and is operated by Chevron. Two separate pipeline companies, one for each country, were established, both incorporated in Bermuda: CPC Kazakhstan and CPC Russia.

  • Azerbaijan to Black Sea terminals. There are two oil export systems: the 1,330-km Northern Route Export Pipeline (NREP) from Baku to the Russian Novorossiysk terminal, and the 883-km Western Route Export Pipeline (WREP) from Baku to the Georgian Supsa terminal.

  • Azerbaijan/Georgia/Turkey. The two pipelines from Baku were supplemented by the new and larger 1,768-km Baku/Tbilisi/Ceyhan (BTC) oil pipeline. This major US$3.6 billion investment was put into operation in June 2006. The BTC consortium consisted originally of 11 companies that owned the transportation system; BP manages the pipeline. The intergovernmental arrangements related to the project were made under the umbrella of the European Energy Charter Treaty of 1994.

  • Azerbaijan/Georgia/Turkey. The South Caucasus Pipeline (SCP) is a project similar to BTC and uses the same corridor, but it does so to export gas instead of oil from the Baku area to the Turkish border. Seven companies originally constituted the SCP consortium. SCP exports began in September 2006. The SCP consortium agreed to an expansion project called SCPX in December 2013, and construction is underway.

  • Other pipelines from Kazakhstan, Turkmenistan, Uzbekistan, etc.

The major challenge of the Chad/Cameroon oil pipeline project was the negotiation of all of the arrangements and authorizations that commenced in 1993. The negotiation of many operational and funding agreements and the award of the pipeline licenses followed these agreements. At the time, the project arrangements represented one of the most advanced legal, contractual, and financing schemes for an export pipeline from a landlocked country. The project came into operation in 2003. The pipeline exported more than 500 million barrels of Chadian oil from 2003 to 2013. Extensions to the main pipeline have been built to connect new fields and operators located in Chad; a possible extension to Niger is under consideration. The original bilateral agreement envisaged such potential extensions.

The BTC oil pipeline came into operation in June 2006, allowing exports from Azerbaijan and some from Kazakhstan through two transit countries, Georgia and Turkey. As with the Chad/Cameroon project, it took nearly 10 years to move from the first studies to pipeline operation. The intergovernmental agreement was signed in 1999 under the umbrella of the Energy Charter Treaty of 1994. The system transported 2 billion barrels from 2006 to mid-2014.

3.4 Cases of cross-border transit pipelines

In contrast to the limited number of export pipelines from landlocked countries, numerous cross-border transit pipelines exist, built for transporting oil or gas between two or more countries or adjacent continents. The most significant ones are listed in Box 9.2.

Box 9.2Selected cross-border transit pipelines


  • From Algeria to Italy across Tunisia and the Mediterranean Sea: the gas Trans-Mediterranean Pipeline

  • From Algeria to Spain across Morocco and the Mediterranean Sea: the gas Europe-Maghreb Pipeline

  • From Algeria to Spain across the Mediterranean Sea: the MedGas Pipeline

  • From Libya to Italy across the Mediterranean Sea: for gas exports

  • From Mozambique to South Africa: for gas exports

  • From Nigeria to Ghana across Benin and Togo: the offshore West African Gas Pipeline

Latin America

  • From Argentina to Chile: for gas exports

  • From Colombia to Venezuela: for gas exports

North America

  • From Canada to the United States: many oil and gas export pipelines

  • From Mexico to the United States, and from the United States to Mexico: for gas exports


  • From Russia to eastern and western Europe: many oil and gas export pipelines, on shore and recently off shore, the Blue Stream crossing the Caspian Sea, and the Nord Stream in the Baltic Sea

  • From offshore Norway to the United Kingdom and continental Europe (Belgium, France, and Germany): several oil and gas export pipelines from Norwegian offshore fields

  • European connectors and inter-country pipelines: several gas inter- connector systems

  • From Central Asia/Turkey to European countries: several gas transmission lines under consideration, in addition to the Trans Adriatic Pipeline under construction

Middle East

  • From Iraq to Turkey, from Iraq to Saudi Arabia: several oil export pipelines

Asia and Australia

  • From Myanmar to Thailand, or China: several gas export pipelines

  • From Russia, Kazakhstan, Turkmenistan, or Uzbekistan to China: several recent gas or oil export pipelines

  • From Timor-Leste (offshore JPDA) to Australia: a gas export pipeline to an LNG plant

Several examples of long-distance transit pipelines demonstrate their growing economic and geopolitical importance for increasing gas export capacities from large producing countries, supplying gas-importing countries at lower costs than the LNG alternative, or minimizing the potential political risk posed by transit countries by preferring lines laid in international waters when feasible. Algeria progressively built three intercontinental offshore gas lines linking Algeria to southern Europe across the Mediterranean Sea, the third one direct to Europe. The first one transits across Tunisia for the Trans-Mediterranean Pipeline to Italy and has been in operation since 1983; the second one crosses Morocco for the Maghreb-Europe Gas Pipeline and has been in service since 1996. The third one goes offshore from Algeria to Spain for the MedGas Pipeline and was commissioned in 2011.3

Several trans-Europe pipeline systems were developed in the past four decades by Russia to increase its oil and gas exports. Russia initially selected only onshore routes, but in recent years it built several new offshore lines to supply gas to Europe. First was the Blue Stream pipeline to Turkey via the Black Sea, in operation since 2003, built in a joint venture with ENI; second were the Nord Stream lines across the Baltic Sea, in service since 2011 and owned and operated by Gazprom and four European companies.

4 International law applicable to cross-border pipelines

4.1 The principle of freedom of transit

Although domestic law applies to the section of a transnational pipeline located in a specific country, provisions of international law are also applicable. This is important for ensuring the principle of freedom of transit provided in several international conventions, some dealing specifically with the rights of landlocked countries or submarine pipelines. However, international law does not govern the determination of the pipeline tariff scheme; the transit fee, if any; or the tax regime applicable to the segment of an international pipeline under the jurisdiction of a state. Exceptions exist when bilateral tax treaties for the avoidance of double taxation and the prevention of fiscal evasion or ad hoc bilateral treaties concerning the project may apply.

The basic international conventions applicable to cross-border pipelines are the General Agreement on Tariffs and Trade (GATT) of 1947 and the related 1994 World Trade Organization (WTO) Agreement, which contains an article dealing with the principle of freedom of transit for goods and means of transport that is applicable in most countries.

Transit rules for energy apply to the 52 member countries of the Energy Charter Treaty (ECT) of 1994.4 Article 7 focuses on the freedom of transit in those countries, as follows:

ECT Article 7 Transit:

  • (1) Each Contracting Party shall take the necessary measures to facilitate the Transit of Energy Materials and Products consistent with the principle of freedom of transit without distinction as to the origin, destination, or ownership of such Energy Materials and Products or discrimination as to pricing on the basis of such distinction, and without imposing any unreasonable delays, restrictions or charges.5 [Emphasis added.]

4.2 Specific rights of access to the sea for landlocked countries

The issue of protecting the rights of export and access to the sea for landlocked countries is specifically addressed in two conventions: the New York Convention on Transit Trade of Landlocked States of 1965 and Part X of the Right of Access of Landlocked States to the Sea of the United Nations Convention on the Law of the Sea (UNCLOS) of 1982. The New York Convention was important because it affirmed, for the first time, the specific rights awarded to landlocked countries: the principles of the free right of access to the seas; the freedom of transit without restriction; and the right of concerned states to consider oil and gas pipelines in the definition of the “means of transport.” Part X of UNCLOS dealing with the right of access of landlocked countries to and from the seas reinforced the principles of the New York Convention with the same right to include by mutual agreement “pipelines and gas lines” in the definition of “means of transport.” UNCLOS provides that “landlocked States shall enjoy freedom of transit through the territory of transit States by all means of transport” (Article 125.1) and that “traffic in transit shall not be subject to any customs duties, taxes or other charges except charges levied for specific services rendered in connection with such traffic” (Article 127.1). This wording does not refer to any transit fee due in relation to the transit. Moreover, Article 129 of UNCLOS implies an established obligation for cooperation between transit states and landlocked states regarding the construction of the means of transport, including pipelines.

4.3 Right to lay pipelines on the continental shelf or high seas

UNCLOS stipulates the right and freedom to lay and operate a pipeline on the continental shelf in Part IV and on the high seas beyond the continental shelf in Part VII. Coastal states may not impede a pipeline project on the continental shelf and may not impose fees or charges on the transit pipeline other than any applicable income taxes.

5 Legal, corporate, and tax framework of cross-border pipelines

Cross-border pipeline systems raise more complex legal, regulatory, corporate, and tax issues than pipelines under a single jurisdiction.6 Different national laws apply to the transportation system laid over several countries, and they are complemented by international law. International law, however, remains limited in this domain. The corporate structure, tax framework, and agreements related to cross-border projects are still designed and negotiated largely on a case-by-case basis, both for the intergovernmental agreements and the agreements among individual countries and investors, shippers, and lenders. The European Union, under the umbrella of the Energy Charter Treaty and with a view to facilitating energy supplies to Europe, has developed model agreements since 2001 for cross-border pipeline projects, but these model agreements have met with limited success.7

5.1 Intergovernmental agreement

A cross-border pipeline is generally governed by a bilateral or multilateral inter-governmental agreement (IGA) signed between the concerned countries as a foundation for the transportation project. Investors, however, are not signatories of such an agreement.8

The IGA defines countries’ commitments to authorize planning, design, construction, and operation of the project; transit countries have a key obligation that they shall “not interrupt or impede the freedom of transit of petroleum.” The signed IGA is then ratified by each national parliament to become effective as an international treaty with a status above domestic laws. Such a treaty mitigates the perception of political risk by investors, shippers, and lenders.9 IGAs give the support of international law to the project’s legal and commercial terms negotiated separately with each country. IGAs generally have long duration, recognizing the operational life of the project – sometimes more than 50 years.10 The end of operations more usually results from the exhaustion of the petroleum reserves to be transported by the specific project than for technical reasons.

When an IGA deals with a landlocked export project, its preamble refers explicitly to the main international conventions protecting the rights of land-locked states and awarding specific rights of access to the sea for the export of their natural resources. That category of IGA also deals with the characterization of petroleum resources that are the subject matter of the export pipeline from the landlocked country, especially in terms of the location of the resources to be transported. The objective of a pipeline may either concern all of the resources of a landlocked state11 or only those produced from one or more identified basins.

The rules of priority and conditions of access to the pipeline, depending on the origin of the petroleum extracted within the producing country, may be agreed to under an IGA.12 The IGA may define special rights of access to the pipeline project, within the agreed priority rules, in favor of existing or future petroleum producers active in the transit country, when such rights are part of the negotiation. The potential to extend the pipeline to other landlocked countries may be included.

In principle, an IGA also addresses tax issues. In most cases, each country involved in the project decides the pipeline taxation of the section crossing its territory and under its jurisdiction, with the requirement that such a tax regime may not impede the freedom of transit. The IGA may clarify or amend any tax treaties in effect between the concerned states. The IGA deals also with the main principles for tax liabilities in each country.

When countries agree under an IGA that a transit fee is payable in the transit country, which is not obligatory, the IGA must stipulate the principles and conditions for imposing such a fee; the fee has to be negotiated so that it cannot be interpreted under international law as an impediment to the freedom of transit. Pipeline tariffs are not addressed in the IGA; they are subject to commercial transportation agreements designed under the applicable host government agreements or regulations and approved by the respective states.

5.2 Host government agreement

An IGA is supplemented by a series of agreements signed separately between each country involved in the project and its pipeline investors. Figure 9.1 illustrates an example of the main agreements required on the assumptions that a pipeline project crosses three countries (Country 1, 2, and 3), and the pipeline project involves three pipeline companies (PipeCo 1, 2, and 3), each one owning and operating the related country pipeline segment. The corporate structure has to be agreed on in each case.

Figure 9.1Schematic arrangements of cross-border pipeline projects

Source: the author.

Note: The example is illustrative only, assuming three countries involved in the project and one company per country. It shows the three levels of arrangements: the multi-country agreement, the separate country agreements, and the commercial transportation agreements.

The main agreement in each country is the one between the country and the pipeline company, often called a host government agreement (HGA). The agreement is governed by the IGA and the national laws of the country. It defines the rights and obligations of each party, as well as the tax regime applicable to the pipeline company and its shareholders in the country of activity; the tax regime is consistent with the general tax code, except for any justified tax exemptions or specific tax rules for determining the taxable income.

The HGA determines the conditions for obtaining the necessary “pipeline licence” and permits in the country, prior to beginning construction and operation. The conditions include the procedures for carrying out the relevant environmental and social impact assessments (ESIAs) and obtaining the right- of-way for laying the pipeline in the agreed corridor. It also specifies the rights and conditions of use by the pipeline company, its shareholders, and third parties.

5.3 Corporate structure of the transnational pipeline project

Several alternatives exist for establishing the structure of a special-purpose pipeline company or companies responsible for the integrated transportation project.13 The first solution, which corresponds to the simplest corporate structure of the multi-country project, is to establish a single corporate entity or joint venture to design, finance, build, own, and operate the entire transnational pipeline system and register the entity or joint venture in each country. This option is rarely used; this should nevertheless be a preferred option since it would considerably simplify the number of arrangements required for implementation, accounting, taxation, and financing.

The second solution is to constitute a separate legal entity, for each country, that is responsible for all of these activities: this solution is more common. The third solution increases the complexity by creating distinct companies in each country, each one in charge of a specific activity, for example, one owns the segment and another operates14 the transportation system in the country.

The business structure of a pipeline project may also be established as an unincorporated joint venture between the co-owners, where one entity is designated as the operating company. Each entity constituting a joint venture is, in general, individually liable to income taxation in the country of activity. This structure is commonly used in upstream exploration and production activities to facilitate the transfer and assignments of rights by each co-owner; it is rarely selected for pipeline projects.

The place of incorporation of each company participating in the project has to be decided, preferably in the country of its main activity, or in a country not related to the project. This decision is often made to benefit from a low taxation regime or a favorable network of double taxation treaties. It is generally not politically acceptable to all government participants, even for establishing the operator of the system; however, many cases of this scheme exist for transit pipelines. For example, the company established for the offshore and onshore Nord Stream project is based at Zug in Switzerland. The places of incorporation of the entities involved in the project are generally subject to the prior approval of the governments under the IGA or HGA. When one company only is established for a multi-country project, the selection of the place of its incorporation is sensitive, because each country involved is interested in being selected for incorporation. A compromise is needed, keeping in mind that whatever the place of incorporation, the company must be registered in each country of activity.

5.4 Transportation Agreements

The “transportation agreement” is a commercial contract entered into under the IGA and the HGAs, between the pipeline company (the “carrier”) and each of the users (the “shippers”) of the transportation system. It deals with the terms and conditions of transportation, including the committed volumes, quality, and specifications of the petroleum to be transported, and the determination and payment of tariffs and any other applicable fees. Often, the agreement covers only the transportation services for a country segment of the project, but other options may be applied for reducing the number of agreements to be entered into by a shipper using the entire pipeline. The transportation agreement has to be consistent with the relevant HGA and the other transportation agreements entered into for the other country segments of the project. Transportation agreements are signed for long periods and frequently contain a “ship or pay” commitment”; this commitment specifies the annual capacity of the pipeline reserved by the shipper and the obligation to pay even when the shipper does not fully use the reserved capacity during a year. Lenders often require such a commitment by shippers as a guarantee for financing the pipeline.

5.5 Other agreements

Depending on the pipeline project structure, shareholders and lenders may require other agreements for such issues as project management, operation, and financing before the pipeline company makes a final investment decision. In most cases, the period for negotiating the structure of the project, agreements, and financing is considerably longer than the construction period.

This timeline explains why a key objective for all interested parties should be the streamlining of the business structure and arrangements, ideally through a single pipeline company. The common objective should be limiting the number of entities created for the integrated project to prevent the multiplication of requisite agreements, reduce the total length of the agreements (in words), and facilitate their implementation. Harmonizing the fiscal and regulatory regimes applicable to the transnational pipeline and defining appropriate tax rules for allocating revenues and costs may limit the customary need for a pipeline company per country.

5.6 Transparency in agreements, tariffs, and revenues

Generally, the IGA agreement is public when it becomes a treaty. By contrast, many HGAs are not public, except when they are promulgated as law or for other reasons.15

Transportation agreements, which detail the tariff provisions, often contain a confidentiality clause preventing publication. Detailed information on pipeline tariff schemes is not easily available unless the country regulations so provide. There is, however, a trend to publish at least the government revenues obtained from the pipeline construction and operation through the payments of taxes, fees, and participation in the project. An excellent example is the Chad/Cameroon pipeline, for which the revenues collected by each host country, including the transit country, have been published annually.16 As part of its policy of encouraging energy transit and nondiscrimination, the European Union is willing to promote voluntary transparency for all pipeline tariffs and transit fees, but it does not create any binding obligation to publish details.

6 Tax issues related to cross-border pipeline projects

6.1 Guiding principles for taxation of cross-border pipelines

Cross-border pipelines are international infrastructure for transporting petroleum across several countries from producers to consumers. This fact explains why their tax regime is not comparable to the taxation of extractive industries, where high rents may occur. An international pipeline should be liable to the customary taxation of any infrastructure project in a country. Sometimes, specific tax benefits or exemptions may be awarded, when fully justified, to encourage the project and reduce the tariff payable by the users.

The respective right of each country regarding taxation of international pipelines is often addressed in bilateral tax treaties in a manner similar to the treatment of transnational cables, as provided for under the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital. In other cases, the IGA may specify tax provisions, applicable bilateral treaties, and any ad hoc bilateral treaty dealing with the pipeline project.17 Differences between bilateral treaties may exist, particularly regarding whether a pipeline in a country, territory, or offshore is a permanent establishment for tax purposes; tax rules may differ between the submarine pipelines laid in the continental shelf or the high seas and on-shore lines. In all cases, each country must comply with the key principles of international law not to impede the transportation of petroleum when designing its pipeline fiscal regime within the framework of its general tax regime. This compliance includes not imposing unfair, non-transparent, or discriminatory charges on cross-border pipelines.

The principles for the determination and apportionment of the total revenues and costs between each of the countries and entities are treated in the IGA and approved by the governments. These principles should be consistent with the principles and guidelines of the OECD on application of the arm’s length principle to transfer pricing within a legal entity or related entities. In some cases, priority is given to simplicity when determining appropriate allocation rules, for example, using a formulary apportionment for revenues and costs based on distance, volume shipped, or capacity,18 when the characteristics of the project, facts, and circumstances justify doing so in a fair and equitable manner. The exchange of information between countries is always stipulated for two reasons: first, to mitigate the risks of taxable base erosion and profit shifting to third countries and second, to efficiently coordinate cost control and tax audits by the states.

6.2 Implementation of tax principles for cross-border pipelines

Whatever the business structure and place of incorporation, the pipeline company or entity is liable to taxation of each segment of the pipeline in the country of location, even when the entity is incorporated abroad. This liability applies because the ownership or operation of a pipeline usually creates a permanent establishment in the country of location or offshore.

Each country decides the tax regime on profits, capital gains, and property applicable to the pipeline within its boundaries, but it does so in conformity with relevant IGA provisions. The tax regime may vary from one country to another involved in the project, as long as the result is not considered an impediment to the freedom of transit or discriminatory. The tax regime for the pipeline company, its shareholders, personnel, subcontractors, and lenders should be generally applicable to any economic activity related to an infrastructure project. However, when provided for in the HGA, such a regime may contain tax incentives and/or exemptions, but only when the tax or pipeline legislation so provides.19 Thus, the shipper using a cross-border pipeline is not liable for petroleum export duties and taxes.

Taxable income for the pipeline activity in the country is determined by the rules generally applicable in defining the assessable income of an entity subject to corporate income tax at the relevant rate, except for specific rules related to pipelines, such as the eligibility for deductions and for depreciation of capital costs. Any other taxes, including property tax on the assets, withholding taxes on dividends, interest, royalties, or service fees, as well as import duties on goods and the value-added tax (VAT), may apply under an individual country’s laws, unless the legislation or the IGA/HGA provide for specific exemptions regarding the project. Transfers and assignments of rights by entities holding interests in the pipeline company may be subject to taxes on gains, unless an exemption is granted.20 For some projects, tax incentives may be negotiated for minimizing taxes and indirectly transportation costs, but there is no such requirement under international law. The BTC project benefits from several exemptions reducing the effective tax rate.21 Some submarine pipelines are subject to lower taxes.22 The 2007 ECT model IGA contains in Part III on Taxes (Article 13.1 to 13.10) and in Non-discrimination (Article 14) a long series of tax exemptions and benefits regarding, among other things, the VAT, customs duties and other levies, and payment of interest or dividends. Some HGAs may provide a tax stabilization clause or a larger contract stabilization clause, implying compensation by the state to the pipeline company should the “economic equilibrium” of the agreement be modified by a “change in law.” Any tax benefit, exemption, or holiday should only be granted after a detailed examination of the reasons to grant it; any stabilization clause should be properly drafted to ensure balance and to limit any potential impact on state revenues.

The allocation of the revenues and costs between the countries involved in the integrated project is of paramount importance to achieve a fair, reasonable, and transparent allocation of the revenues and costs generated by the project in each country – especially when the applicable income tax rates differ from one country to another. Unless a formulary apportionment rule is adopted, the “functionally separate entity” approach and OECD transfer pricing guidelines are generally followed, supplemented by any specific pipeline tax provisions in the IGA and HGA. The main principles retained for revenue and cost allocation are the following:

  • Allocation of the revenues of the project, when they are not directly identified by country, in a fair and reasonable manner, and ensuring that the total of those revenues allocated to each country for a year in a proportionate share is equal to the overall revenues of the project;

  • Allocation of the costs and expenses of the project under the same principle;

  • Allocation of the costs and expenses not identified for each country by consistently applying methods generally accepted in the pipeline transportation industry.23

Even if a pipeline may be considered as “immovable property,” debates on whether a transnational pipeline creates separate permanent establishments in each country, each one liable to national taxation, continue to exist.24 The reason is that Article 5 of the OECD Model Double Tax Convention on Income and Capital and its Commentaries does not deal definitively with cables and pipelines on all these issues. For example, the tax treatment of submarine pipelines may be different. Accordingly, under specific bilateral treaties dealing with pipelines, Belgium, France, and Germany have granted to Norway the exclusive taxation rights on all the pipeline activities originating from that country, up to and including the land terminals at destination countries. In contrast, in similar cases, the United Kingdom may tax the profits and capital gains related to the segment in its territory, considering the segment to be a permanent establishment subject to taxation. Therefore, it is recommended that the IGA and the respective HGAs address in detail the tax treatment of the project segment per country. Possible tax risks include the following (Olsen, 2012):

  • The OECD Commentaries are inconsistent in this regard, as they suggest in one paragraph that a pipeline might be of preparatory or auxiliary character according to Art. 5(4), but then in the next sentence suggest that a pipeline creates a PE or an immovable property without giving a clear guideline or recommendation, which creates uncertainty, inconsistent characterization, possible taxation in the wrong jurisdiction, disputes and even double taxation or less than a single taxation.25

The main source of revenues for the transit country, while relatively low in absolute amounts due to the nature and profits of transportation activities, is often derived from corporate income tax payments. Rare exceptions arise when a transit fee is payable or when the state is a participating investor in the project.

7 Determination of cross-border pipeline tariffs and transit fees

Cross-border pipeline tariffs are provided for under the transportation agreements, negotiated and entered into between the pipeline company and the shippers, unless the national law or regulations applied to the concerned pipeline segment, and the IGA or HGA impose rules for the determination of such tariffs. Often, the tariffs or transportation agreements are subject to the prior approval of the government, because such tariffs have an indirect economic impact on the upstream sector and the determination of the assessable income of the pipeline company. Moreover, the interests of the countries involved in a cross-border pipeline may not be aligned; an exporting country seeks lower tariffs, while the transit country prefers higher tariffs. In accordance with international law, the tariffs in all cases must remain reasonable so as not to be considered as impeding transit.

The transport tariff due by each shipper under the transportation agreement or regulations may consist of two components: the “pipeline tariff” itself, which is payable to the pipeline company; and the “transit fee,” which is payable to the government when such a fee is agreed under the applicable IGA or HGA. When a transit fee is payable, its amount in most cases is significantly lower than the tariff; otherwise, such a payment could be considered an impediment to the freedom of transit. The expression “transit tariffs” is sometimes used; this can be misleading in the absence of a definition clarifying whether the amount is a pipeline tariff only or whether it includes a transit fee element.26

7.1 Differences between pipeline tariffs and transit fees

By definition, the pipeline tariff is designed to give the company the revenues required for (1) the recovery of all expenses incurred and paid during construction, financing, and operation and (2) an element of profit to achieve a post-tax return on capital during a given period; this profit should be seen as a fair remuneration on the invested capital, calculated as either an agreed rate of return on equity capital only (ROE) or a rate of return on investment (ROI), aggregating equity and debt.27

Several methodologies may be applied to comply with these two objectives assigned to tariffs.28 Whatever methodology is followed, a tariff includes compensation for the actual taxes paid by the pipeline company under the applicable tax regime, such as the corporate tax on its profits and any other taxes or fees, to achieve the agreed post-tax rate of return for the period of determination. The higher are the taxes payable, then the higher the tariff charged is likely to be. The level of taxation of a transit pipeline project should remain reasonable so as not to impede transit, at a rate lower than the effective tax rate applied to an upstream project.

In contrast, a transit fee, when applicable, is a payment charged by the government of the transit country. It may be justified on different grounds that do not include the need to provide a pipeline company with a minimum return on investment. Its applicability and amount mainly depend on the category of export pipeline, the political context, and the negotiation.

  • First, the transit fee may be justified as compensation for the costs directly borne by the transit country in relation to the pipeline project, such as those for the right of way on the pipeline corridor when the state directly provides access to land or those for the provision of safety and protection services to the project by the state or as compensation for any environmental disruption.

  • Second, the transit fee may be justified in the IGA as compensation for any specific tax exemptions or benefits granted to the pipeline company, or, in rare cases, designed as an advance payment of corporate income tax or a minimum income tax, as with the BTC project.

  • Third, the transit fee may result solely from negotiation without direct reference to any other principles when the countries involved in the project so agree.

Payment of a transit fee remains, however, relatively uncommon; no standard principles, rules, practices, or methodologies exist for its determination.

When the transit fee for a cross-border pipeline is negotiated, the main reason is often that the transit country desires to execute a natural monopoly power against the exporting country; by accepting a transit fee, the exporting country seeks to mitigate the risk to transit rights for its petroleum in future. In the absence of sufficiently clear international law, the initial negotiating strategy of the transit country is often to obtain a share in the additional benefits received by the exporting country as a result of using the route across that transit country instead of an alternative route that would be more costly to investors, shippers, and the exporting country.

In very specific cases only, a comparative cost/benefit analysis of several alternative routes may be conducted to assess the relative bargaining power of the transit country. The most prominent case in which such an approach can be justified is for a gas project in which the gas can be exported either via a pipeline crossing a third transit country or directly from the producing country to the purchasing country by ships as LNG. The major difference between the two alternatives, when both are economically justified, results from the value of the energy savings realized during the entire life of the transportation project because higher consumption of gas during processing and transportation under the LNG solution than with a pipeline. The sharing of such savings between the parties explains, for example, the level of the transit fee paid to Morocco or Tunisia, assessed as a percentage of the volume shipped (see Box 9.3).29

Box 9.3Examples of pipeline transit fees

Export pipelines from landlocked countries

  • Chad/Cameroon oil pipeline: a fixed negotiated unit fee of US$0.41 per barrel [increased to US$1.40 per barrel in October 2013 following renegotiation] paid to Cameroon, in part for compensation of services. The transit fee is only one of the revenue sources derived by Cameroon. From 2004 to 2013, the country received total revenues amounting to US$410 million, or US$0.82 per barrel transported; of this amount, US$203 million (50 percent of the total revenues) was for transit fees, US$50 million (12 percent) was for corporate income tax, US$42 million (10 percent) was for other taxes and fees, and US$115 million (28 percent) was for dividends as a return on its equity in the pipeline company.

Source: Chad/Cameroon Development Project, Update N° 34 (update end 2013).

  • BTC oil pipeline via Georgia: a unit fee, indexed, from US$0.125 per barrel the first year. The fee is payable as a compensation for services and tax benefits. It is treated as an advance payment for corporate income tax and other taxes, corresponding to a minimum amount of income tax. Each participant is responsible for its corporate income tax.

  • SCP gas pipeline via Georgia: a unit fee, indexed, from US$2.5 per 1,000 m3 (or 5 percent of the contractual gas price under the HGA) for the first year. The fee is payable in cash, with an option to take 5 percent of the gas transported in kind. The fee is payable as compensation for services and tax benefits. It corresponds in the HGA to a minimum tax and is treated as an advance payment for corporate income tax and other taxes.

  • Oil pipelines from South Sudan to Sudan: a transit fee has become payable since the creation of South Sudan.

  • Gas pipeline from Bolivia to Brazil: no transit fee.

Other cross-border pipelines projects, onshore or offshore

  • Gas intercontinental pipelines from Algeria to Europe: a transit fee negotiated as a percentage between 5 and 7 percent of the quantities transported payable in kind or in cash to the concerned transit country, respectively Tunisia and Morocco; it is primarily based on the sharing of the cost benefit of the pipeline route versus the LNG alternative. In contrast, no transit fee applies to the latest offshore pipeline direct to Europe.

  • Gas pipeline from Timor-Leste to Australia: no transit fee.

  • WAGP project, offshore West Africa: no transit fee.

  • Oil and gas pipelines from Canada to the United States: no transit fee.

  • Oil and gas pipelines from Norway to the United Kingdom or continental Europe: no transit fee.

  • Gas and oil pipelines in European Union countries: no transit fee.

  • Gas and oil pipelines from Russia to European Union countries: the tariff may include the equivalent of a transit fee or special benefits to the transit country. However, no transit fees apply to the recent offshore Nord Stream and Blue Stream lines.

7.2 Specific right of landlocked countries regarding transit fees

Absolute rights for export and access to the sea are given to those countries by international law, and those rights should be the basis for the negotiation of an IGA with the transit country. Because of the intrinsic geographic disadvantage of a landlocked country and the possible monopoly power of a transit country, the approach of comparing alternate export route to justify the rationale and amount of a transit fee would be detrimental to this category of countries because there is often no cost-effective export alternative.

The purpose of a transit fee when countries agree to negotiate it should not be to allocate to the transit country any share in the upstream petroleum economic rent generated in the exporting landlocked country by the domestic production of petroleum.30 The sharing of the upstream rent should be an issue between the sovereign producing country and its producers only. This is not to say that a transit fee has no impact on the producing country. Clearly, payments of pipeline tariffs and any transit fee, as any other cost legitimately borne by the producers, reduce the size of the producing country’s upstream rent and revenues.

7.3 Impact of international law on transit fee liability

There is no international law imposing transit fees. Considering the key objective of the freedom of transit, international law limits the situations in which a transit fee is due. This principle is particularly clear for landlocked countries seeking access to the sea and for pipelines laid on continental shelf. Interpretation of Article 127 of UNCLOS stating that “traffic in transit shall not be subject to any customs duties or other charges except charges devised for specific services” [emphasis added] could be that a transit fee not justified as a compensation for costs of services is not allowed in the specific case of an export pipeline from a landlocked country. In contrast, for pipelines other than export lines from landlocked countries, offshore lines, and those subject to regional treaties dealing with the freedom of transit by pipelines, a transit fee may be negotiated – but only when so agreed.

Despite the intent of international law, some transit pipelines have been liable to payments of transit fees resulting from long negotiations, while many others are not liable. There is a need for international law to clarify the situations in which a transit fee is due and how it is determined, exempting from such payments the export pipelines originating in landlocked countries. Box 9.3 summarizes information on transit fees for each category of cross-border pipeline system. It highlights the fact that transit fees are not always applied, particularly for transit pipelines, and that when applicable, their amounts and rationale vary. It also shows that when transit fees are payable in relation to a landlocked export project, they are mainly designed as a compensation for services or for special tax benefits from the transit country.

7.4 Main principles and methodologies for designing pipeline tariffs

The principles adopted for the determination of domestic pipeline tariffs generally apply to the design of international cross-border pipeline tariff schemes. The existence of a pipeline in a region may create a situation of natural monopoly, because the construction of additional pipelines to increase competition in transport is generally not economically justified. Both the pipeline tariffs and the terms and conditions governing transport system access by third parties are regulated and subject to the approval of a relevant authority that controls and monitors whether the rates are “fair and reasonable” to the shippers. Thus, the rate of return on the equity capital employed for the project, or alternatively, the rate of return on the investment (total funds outlaid), is often limited to the low rate generally applicable to utility companies. This rate is increased by a risk element, when appropriate, and is one of the most critical factors to be regulated or agreed to in the design of the tariffs.

The determination of the tariff has two main components. The first element is the recovery of all eligible costs, interest, taxes, and charges borne by the pipeline company; this recovery is made at cost and depends on the definition of the allowable costs and expenses. The second element is the return on investment or on equity generating the profit. Since the required return on equity is significantly higher than the effective post-tax interest on debt, pipelines are generally funded using a high debt-to-equity ratio – approximately three to one; the debt covers 75 percent of the investment, allowing a lower weighted average cost of capital (WACC) on the investment to minimize the unit tariffs. This approach requires prior approval of the financing plan and its terms, particularly to ensure that financing by debt is intended for minimizing the tariff and not for profit shifting. Another supplementary way to minimize the unit tariff is to increase the effective throughput of a transport system by having third parties use the transportation system when spare capacity is available. Such a third-party access (TPA) rule should provide for nondiscriminatory tariffs, encouraging third parties to use the existing pipeline instead of building another one.

There are a number of different detailed methodologies for determining pipeline unit tariffs used. The most traditional one is the cost of service (COS) methodology initially developed in Canada and the United States to regulate the tariffs of pipeline networks. The computation of the annual required COS amount follows two objectives:

  • To recover all reasonable incurred costs and taxes, such as (1) the operating, maintenance, administrative, and general costs; (2) the depreciation of the investment, often on a straight-line basis over a relative long period (for example, 20 years);31 and (3) the corporate income tax and other taxes and fees payable to the host country.

  • To get a return on the remaining non-depreciated asset rate base, using the relevant WACC percentage on investment derived from the effective equity-debt structure.

The annual COS amount is then converted into a unit tariff constituted of two parts, as defined in the relevant regulations or transportation agreements:

  • A “capacity reservation charge,” representing fixed costs. The transportation agreements often provide for a ship-or-pay commitment; this refers to the reserved capacity contracted by the shipper, under which it undertakes to pay that charge even if the reserved capacity is not entirely used.

  • A “commodity charge” per effective volume transported, representing the variable usage costs only.

The standard COS tariff model, initially designed for companies owning and operating multiple pipeline networks in a country and subject to regulated tariffs periodically revised, may be improved when dealing with a new pipeline transportation project funded under a specific financing plan by considering the following:

  • First, by using the actual terms of the approved financing plan for interest, financial charges, and reimbursements of the principal for the determination of the tariffs, and by agreeing on the rate of return on equity for the investors in lieu of using the traditional WACC approach on the total asset base of the pipeline company.

  • Second, by determining a fixed unit amount, subject to indexation, computed as a constant capital cost allowance (excluding variable costs) under a discounted cash flow (DCF) analysis, using as discount rate the targeted rate of return on equity.32 The objective of this approach for a new project is to level the annual unit tariffs during the period for which the DCF analysis is performed. The traditional COS approach would lead to tariffs decreasing each year, relatively high in the first years, while the shippers prefer to pay a relatively constant unit tariff over time,33 with lower tariffs in the first years and higher amounts later. In the same fashion, a unit tariff ceiling may be agreed to, with a carry-forward of costs not recovered during a year.

  • Third, by differentiating or not differentiating the tariffs between the initial shippers having undertaken the ship-or-pay obligation for facilitating the financing of the project and the new third-party access users.

8 Conclusions

Cross-border pipelines are critical to increase international trade of oil and gas to meet growing world demand. They are also necessary to continue to develop petroleum resources in new basins. However, many specific legal, contractual, tax, and economic issues have to be addressed before concerned investors, states, and financial institutions decide on new transnational pipeline projects.

Not many transnational pipelines allow landlocked countries access to the sea. Those pipelines raise specific issues when the landlocked country and the pipeline company negotiate with transit countries, and these issues are imperfectly addressed by international law. In particular, international law should clarify the respective rights of landlocked and transit countries, and, if a transit fee is payable in special circumstances, should stipulate how it may be determined without impeding the freedom of transit. Such improvements would reduce the perceived risks by investors and lenders and shorten the negotiations of the multiple agreements needed for a new project.

For any pipeline system, the transport tariffs should remain fair, reasonable, transparent, and nondiscriminatory. Encouraging more shippers to use the system and funding such projects by an appropriate ratio of debt to minimize tariffs – provided that such leverage is not intended for profit-shifting reasons – are key objectives to reduce unit tariffs.

Another key objective to shorten the protracted negotiation period is a common effort to streamline the corporate, contractual, and tax structures of an integrated cross-border pipeline project and render loan agreements less complex. Finally, it is essential to clarify the tax regime applicable to each segment of a pipeline under the jurisdiction of a country or offshore, as well as the interaction of the regime with international taxation and tax treaties, to prevent tax uncertainties and profit shifting to third countries.


    Energy Charter Secretariat. (2003) Model Intergovernmental and Host Government Agreement for Cross-Border Pipelines1st edition (Brussels: The Energy Charter Secretariat).

    Energy Charter Secretariat. (2006) “Gas Transit Tariffs in Selected Energy Charter Treaty Countries” Study prepared by the Directorate for Trade Transit and Relations with Non- Signatories of the Energy Charter Secretariat. Brussels: The Energy Charter Secretariat.

    Energy Charter Secretariat. (2007) Model Intergovernmental and Host Government Agreement for Cross-Border Pipelines2nd edition (Brussels: The Energy Charter Secretariat).

    OlsenKnut. (2012) Characterisation and Taxation of Cross-Border Pipelines (Amsterdam: IBFD).

    StevensPaul. (2009) Transit Troubles: Pipelines as a Source of Conflict. A Chatham House Report (London: Royal Institute of International Affairs).

    StevensPaulRobertBacon and RalfDickel. (2003) “Cross-Border Oil and Gas Pipelines: Problems and ProspectsESMAP Report World Bank and United Nations Development Programme.

    VinogradovSergei. (2001) “Cross-Border Oil and Gas Pipelines: International Legal and Regulatory RegimesResearch paper prepared for the Association of International Petroleum Negotiators University of Dundee Scotland United Kingdom.


The author acknowledges helpful comments on an initial draft from Philip Daniel and Artur Świstak.

There are 44 landlocked countries, of which 32 are developing countries without direct access to the sea. Sixteen are located in Africa (including South Sudan), 19 are in Europe (including Central Asia), 7 are in Asia, and 2 are in South America.

The transit countries involved in the two first pipelines receive a transit fee in the form of a royalty. Under the third pipeline, no fee is applicable because the line is entirely off-shore; this solution was rendered possible by the technological progress allowing a direct pipeline in ultra-deep waters over 2,000 meters.

As of January 2015, 47 countries have ratified the treaty. Russia provisionally applied the treaty until October 18, 2009, when it notified its withdrawal from the treaty. The treaty contains favorable provisions on investment protection, such as the “fair and equitable treatment” clause, frequently used by investors in investment disputes not related to energy transit issues.

Those principles are reinforced in the Energy Charter Draft Transit Protocol, which has been under negotiation since 2003 without success. Negotiation on a new draft Transit Protocol prepared in 2010 has been suspended. Its draft Article 10 deals with transit tariffs based only on “on operational and investment costs, including a reasonable rate of return,” and excluding any transit fee.

In federal countries, such as Canada or the United States, special domestic rules may apply differently to intrastate pipelines and interstate pipelines, particularly with respect to the regulations of tariffs and approvals of activities.

The Energy Charter Secretariat published two versions of a model IGA and a model HGA (see Energy Charter Secretariat, 2003 and Energy Charter Secretariat, 2007). Both models were designed within the framework of the Energy Charter Treaty. The first one, in 2003, appears relatively close to the two BTC agreements signed in 1999 and 2001. The second version, in 2007, is more original and addresses in detail the pipeline tax issues, with a policy objective to (1) largely limit the tax liabilities for the project investors, subcontractors, and lenders and (2) provide for tax exemptions beyond the applicable general tax legislation. This special and favorable tax scheme under those models cannot be easily transposed in other environments.

In parallel with the negotiation of the IGA, a preliminary framework agreement may be entered into by all the parties, including the project investors, to deal with the principles applicable to the project.

Under the theory of “obsolescing bargain” applied by several authors to international pipelines, when the pipeline transportation system is built, the power of the country of transit becomes high due to the economics of a pipeline project characterized by large up-front capital costs and small operating costs. There is a possible risk that the transit country may decide to unilaterally change the terms agreed for the transit, as with pipelines in the Middle East or Ukraine for the gas transit from Russia to supply Europe. Landlocked countries have limited alternative routes in case of a conflict initiated by the transit country. Therefore, the policy is to mitigate these possible risks by obtaining satisfactory protection rights under international law and by designing appropriate inter-governmental agreements to align the interests of concerned countries.

As an example, the IGA between Azerbaijan/Georgia/Turkey concerning the Baku/Tbilisi/Ceyhan pipeline project is entered into for the duration of the project, while the respective pipeline licenses under the HGAs are awarded for a primary term of 40 years, with two possible 10-year extensions for the continuation of the exploitation.

Such as for the Baku/Tbilisi/Ceyhan pipeline project, where the project is defined as the transportation of any petroleum extracted in Azerbaijan or abroad from the city of Baku to the city of Ceyhan.

Such as for the Chad/Cameroon pipeline project.

The following examples illustrate possible corporate structures of recent projects. For the Chad/Cameroon oil pipeline project, two separate related companies have been constituted for the ownership and operation, each one subject to a distinct HGA: COTCO under the law of Cameroon, responsible for the Cameroonian section, and TOTCO under the law of Chad, responsible for the Chadian section. Each company is liable to tax in the relevant country. For the Baku/Tbilisi/Ceyhan project across Azerbaijan/ Georgia/Turkey, a single company, the BTC Company, was originally constituted for the entire project by 11 participants, mostly incorporated outside of the project countries. Each individual participant is a party to the HGAs and remains individually liable to profit tax under the HGA applicable in a country for the activities in that country. The main participant (BP, with an interest of 30.1 percent) is also the operator of the entire pipeline on behalf of the company. The international Nord Stream gas pipeline across the Baltic Sea between Russia and Germany, mostly laid down in the offshore economic exclusive zones of five countries, is owned and operated by a single company, Nord Stream AG, incorporated in Switzerland, a country not directly involved in the project, except by the location of the control room at Zug in Switzerland, where it has offices. The company is subject to a 10.1 percent income tax only.

The duties of an operating company are to manage, coordinate, and conduct the day-to-day activities on behalf of the pipeline company. By design, this operating company generates very low profits, its costs being reimbursed by the pipeline company.

The texts of the non-executed HGAs related to the BTC or SCP project have been published because they are annexed to the executed IGA made public. This process was followed to give more legal security to the investors and lenders, each country recognizing the provisions of the applicable HGAs so annexed.

See Chad/Cameroon Development Project, Project Update N° 34, year-end report 2013, available at

Thus, the Framework Agreement between the United Kingdom and Norway Concerning Cross-Boundary Petroleum Co-operation of 2005 contains tax provisions empowering each respective country to tax profits and capital gains related to offshore pipelines, under the obligation of not impeding petroleum transportation.

Such a simplified approach was selected for the WAGP transit pipeline project linking four countries offshore West Africa, where an ad hoc “agreed fiscal regime,” defined at length under the IGA, applies to each of the four countries for determining the income tax payable by the single company responsible for the project. An apportionment percentage based on distance and reserved capacity in each state is defined to allocate revenues and costs.

Some HGAs, however, contain tax exemptions not provided for in the law, as well as a clause giving precedence to the HGA, which may raise an issue of enforceability when the HGA does not have the force of law.

In most countries, the taxation of capital gains related to the sale or transfer of an interest in a pipeline project is not clarified. For details on taxation of gains, see Burns, Le Leuch and Sunley (2016), Chapter 7 in this volume.

Thus, the HGAs related to the BTC project provide that the co-owners of the pipeline are only subject to a specific list of taxes (namely, corporate income tax at a fixed rate), benefit from a list of tax exemptions (including on dividends, interest, withholding tax on foreign subcontractors, property, and transfers), and are exempt from other taxes. They also benefit from a tax stabilization clause.

According to a document of Nord Stream AG (“General Background Paper on Nord Stream,” November 2013, available at, the project is “subject to fewer taxes and transit fees as most of its route is . . . beyond territorial waters.”

The IGA of the BTC project provides for the following: “any costs and expenses which are related to the entirety of the applicable Transportation System are to be allocated among the States in accordance with any reasonable allocation method which is selected by the Project Investor and applied consistently by the Project Investor from year to year, in a manner such that the aggregate amount of such costs and expenses reportable to the States for a calendar year is equal to the aggregate actual amount of such costs and expenses associated with the . . . Project for such calendar year. Any such allocation method selected by a Project Investor shall be based upon the relative length of the Transportation System located in the Territory of each of the States, the relative amount of capital expenditures or expected capital expenditures incurred or to be incurred with respect to the portion of the Transportation System located in the Territory of each of the States or any other method consistent with practices which are generally accepted in the international Petroleum transportation industry.”

For example, the SCP’s HGA states that the pipeline does not create a permanent establishment; however, the participants to the project are individually liable under the HGA to a special tax regime.

Olsen (2012), “Characterization and Taxation of Cross-Border Pipelines,” pp. 119–120, IBFD.

For example, see Energy Charter Secretariat (2006). The use of the expression “transit tariffs” is explained by the purpose of the study willing to assess the full transit tariffs, which in some studied countries includes a transit fee not disaggregated under the study.

An ROE is always greater than an ROI, the latter determined on the basis of a weighted average capital cost (WACC) combining the respective rates for equity and debt, or another methodology.

For further discussion on tariff design, see Bell and Chauvin (2016), Chapter 8 in this volume.

The difference in internal energy consumption between the two technical alternatives may reach 10 percent, depending on the distance. The last pipeline from Algeria to Europe is a direct offshore pipeline, eliminating any transit fee.

In the same fashion, when a transit fee is payable, the unit amount is often escalated using an inflation index and not an index based on the variations of oil or gas prices.

The depreciation rules for tariff determination are often different from those that apply to tax depreciation (which may provide for a shorter depreciation period) or to company financial reporting.

By an iterative process, the discounted cash flow analysis performed over a given period allows the determination of the constant capital cost allowance necessary to grant to the investors the agreed after-tax rate of return on equity, after taking into account the assumed throughput as well as the estimated investment, financing plan, equity, and taxes and fees. Variable costs are then added to the constant allowance to obtain the tariff.

Subject, however, to an indexation formula to reflect inflation.

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