Dr. Kirsten Westphal is a researcher at the Global Issues Division of SWP SWP Comments 8
March 2011
1
SWPComments
Stiftung
Wissenschaft und
Politik
German Institute
for International and
Security Affairs
Introduction
The Energy Charter Treaty Revisited
The Russian Proposal for an International Energy Convention and the
Energy Charter Treaty
Kirsten Westphal
The Energy Charter Treaty and the related Energy Charter Process have gone through
difficult times. In July 2009, the Russian government decided to withdraw from the
Energy Charter Treaty. This became official on October 19, 2009. Russia is a crucial
player for the Energy Charter Treaty, mainly because it is the only large energy producer
that had signed the Treaty back in 1994 and had provisionally applied it, albeit
never ratified it. The Energy Charter Treaty seems to be at a dead end. This is also
due to the Treaty having become increasingly insignificant in the EU’s tool box. With
the Rome Declaration, the Energy Charter constituency made a step forward out of the
deadlock on December 9, 2009. At the present stage, the modernization of the Energy
Charter Process is on the table, as is the Russian draft for an International Energy
Convention. The future of both is open, though, and dependent on the added value
attached to each of them.
The Energy Charter Treaty
The European Energy Charter of 1991 and
the legally binding Energy Charter Treaty
(ECT) of 1994 (in force since 1998) constitute
an international set of basic rules for energy
cooperation.
In the Charter and in the Treaty, the
signatories agreed on the following goals
and principles: to build open and efficient
energy markets subject to the laws of the
market; to establish favorable conditions
for foreign and private investments; and to
adhere to the principle of nondiscrimination
in the areas of investment and trade,
as well as the principle of free transit without
regard for country of origin, country of
destination, or ownership. The guiding
principle of sustainable development is
also enshrined in the Treaty.
The Treaty itself rests on the four pillars
of investment protection (Section III), trade
(Section II), transit (Art. 7), and dispute
settlement provisions (Section V). State
sovereignty over natural resources is also
emphasized (Art. 18). Moreover, there is an
additional protocol on energy efficiency
and environmental aspects. Essentially, the
Treaty has introduced rules and principles
of the WTO such as nondiscrimination and
the most-favored nation clause into international
energy cooperation. Section VII
also outlines a conference process that
would enable the contractual partners
to negotiate annexes, changes, and additional
protocols. This process, with its subworking
groups, has already proven itself
as a forum for cooperation—for example, in
the area of energy efficiency. The Protocol
on Energy Efficiency and Related Environmental
Aspects (PEEREA) entered into
force with the ECT. In contrast, the Transit
Protocol is not (yet) in place. It includes a
number of points that had been heavily
disputed by Russia.
Fifty-one countries plus the European
Communities and Euratom are taking part
in the Energy Charter Process. They include
the EU member states, Switzerland, Turkey,
the CIS countries, and Japan. Five countries
(Australia, Iceland, Norway, Belarus, and
Russia) have not ratified the Treaty. Since
Russia did not file any declaration to the
contrary at the time when the Treaty was
signed in 1994, it is subject to provisional
application under Article 45 of the Treaty.
Russia, however, has called this point into
question. Its motives are complex. As a consequence,
the Energy Charter Process is
now composed of countries with different
status, a fact that opens questions about
diverging rights and duties.
Without doubt it is a weakness that the
major North African and Middle Eastern
energy producers, as well as the United
States, Canada, Indonesia, Venezuela, and
Nigeria, are only observers. The main
critique of producer countries like Norway
is that the Treaty favors foreign investors
(and thus the gas-consuming countries),
giving them sweeping rights in particular
under the dispute settlement process, while
the producer countries see their own sovereign
rights as being infringed upon. Thus,
a need for further discussion of these issues
and expansion of the process still exists.
Russia in the Energy Charter Process
Of international significance is Russia’s
clear withdrawal from the Energy Charter
Treaty in 2009, which is evidence that the
country no longer intends to ratify the
Treaty in its existing form. The Russian
cabinet decided on July 30, 2009, to refrain
from participation, and on October 19,
2009, Russia’s withdrawal from the Energy
Charter Treaty went into effect.
As Europe’s most important energy supplier,
Russia has played a key role in the
conference process since the very beginning.
At the end of the 1990s, the question
of transit (both the rules contained in the
Treaty and the Transit Protocol as an annex
to the Treaty) became a crucial point of contention
for Moscow, which made resolution
of this issue a condition for ratification. Particularly
disputed is Article 7 of the Treaty,
which establishes the principle of free transit,
irrespective of country of origin, destination,
or ownership.
The negotiations about the Transit Protocol
centered around Article 10, Article 8.4,
and the Regional Integration Organization
(REIO) clause. The disputes focused on the
questions concerning tariffs, access, and
availability of volumes in transit pipelines.
Russia highlighted the fact that long-term
contracts could be mismatched with transit
contracts under the Transit Protocol’s rules.
Gazprom wanted to push through the
“right of first refusal,” whereby exporters
whose transit contracts are about to expire
would have priority over competitors in
concluding new contracts for the same
transport volume. In the case of the REIO
clause, the controversy revolves around the
EU’s demand to be recognized as an economically
integrated region so as to be able
to choose to implement not the rules of the
Energy Charter Treaty but instead the even
stricter rules of the EU single market for
transport within its territory. This affects
Russia, for example on the Polish section
of the Yamal-Europe Pipeline, to the extent
that transit contracts would be applied for
much shorter intervals than the existing
long-term supply contracts.
Russia had kept negotiations on the
Transit Protocol on hold for more than 10
years, in recent times due to the combination
of a politics of symbolism and substantive
issues. But the fact that Gazprom
SWP Comments 8
March 2011
2
lobbied from the very beginning against
ratification while other Russian energy
firms were strongly in favor of the Treaty is
telling in that respect. The decisive point
here is that Gazprom buys and resells Central
Asian gas instead of simply providing
transit services. The company fears the loss
of its strategically important position as the
narrow gateway to Central Asian gas. Its
strong position as a gas supplier to Europe
has been based on the purchase of Central
Asian gas—at favorable prices and with
variable volumes—depending on actual
European demand. However, the situation
has changed in the Caspian region with the
emergence of China as a purchaser of Central
Asian gas and the EU’s efforts to secure
significant volumes for the Southern Gas
Corridor. As a consequence, Russia’s payments
for Central Asian gas deliveries have
increased, as the pricing mechanism has
become based on petroleum products. So
far, however, Russia has managed to pass
the costs on to European markets and has
forced Turkmenistan into a “swing supplier
position” for the last two years following
decreasing European demand for
Russian gas.
Another reason for the Russian maneuverings
may be found in the Yukos affair, in
which Russia has been the target of international
criticism since 2002. The investorstate
dispute settlement case between
former Yukos shareholders and the Russian
Federation has moved to the forefront.
The background is the pending case on discriminatory
measures against and expropriation
of Yukos shareholders at the Permanent
Court of Arbitration in The Hague
under the Energy Charter Treaty. The
amount in question is between $US28 and
50 billion.
During the gas conflict with Ukraine in
January 2009, Russia occasionally made
use of highly nuanced legal arguments in
justifying the stoppage of gas supplies to
Ukraine based on national law and prevailing
customs regulations, while simultaneously
complaining at length about the
alleged ineffectuality of the Treaty. The
crucial point is that provisional application
of the Energy Charter Treaty is terminated
whenever its provisions violate the prevailing
national law and constitution. Over
time, the Russian argumentation had
shifted to claiming that provisional application
of ECT Article 45 does not apply to
Russia. Thus, the letter with which Russia
formally terminated provisional application
(which the country claims was never
actually practiced) on October 19, 2009,
somehow comes as a paradox. How can
provisional application that has never been
in place be terminated? In any case, the
Permanent Court of Arbitration in The
Hague took the decision in November 2009
that Russia is bound to the Energy Charter
Treaty under provisional application. The
former Yukos shareholders (Group Menatep
Ltd.) can proceed with the merits phase of
their arbitration claim.
For the Energy Charter Treaty and the
Russian engagement in the Process, this
has had—if anything—a detrimental effect.
Russia has kept a very low-key profile in
the meetings in the Energy Charter Process
since 2009 and has not positioned itself in
the modernization process. However, it still
provides the Deputy Secretary General.
Dummy or real concern?
The Russian proposal(s) for an
International Energy Convention
During his official visit to Helsinki on April
20, 2009, Russian President Dmitry Medvedev
put forward a document with the
cumbersome title “Conceptual Approach
to the New Legal Foundation for International
Cooperation in Energy (Goals
and Principles).” This happened without
previous announcement or concomitant
diplomacy. The proposal had passed largely
without comment by the international
community. This was partly related to the
2009 Russian-Ukrainian gas conflict, after
which the document had been seen as a
further attempt to undermine the Energy
Charter Treaty. It took more than one-and-ahalf
years for Russia to translate the conSWP
Comments 8
March 2011
3
ceptual approach into legal terms. The
recent “Draft Convention on Ensuring
International Energy Security” was circulated
among major partner countries
and partner organizations, for example
OSCE, UN Economic Commission for
Europe, and the Energy Charter, as a
“non-paper” with the request for comments
by November/December 2010.
For the aforementioned reasons, the
Russian proposals of April 2009 and
November 2010 for a new international
framework can hardly be viewed in isolation
from the Energy Charter Process. It
may seem strange at first that Moscow is
demanding a legally binding framework for
energy cooperation. Medvedev’s concept
(2009) followed a series of similar statements:
Already in January 2009, Vladimir
Putin argued for opening negotiations on
a new framework for international energy
security in his opening address at the
World Economic Forum in Davos. Furthermore,
the speaker of the energy committee
of the Duma, Valery Yazev, was quoted in
the Russian press proposing a corporate
energy forum, the realization of which
would reinforce existing asymmetries
between commercially oriented and statedominated
companies.
There are good reasons why Medvedev’s
proposal has scarcely been discussed in
Europe. Russia has been calling for negotiations
on a new energy treaty since 2000.
These efforts have been viewed mainly as
a tactical maneuver by Moscow aimed at
justifying the country’s rejection of the
Energy Charter Treaty. After all, up to now
Russia has tended to profit from the status
quo and from the state of uncertainty
around the Energy Charter Treaty and its
Transit Protocol.
According to the Russian president, the
document that he presented in April 2009
without prior diplomatic consultations in
Helsinki is intended to “de facto replace the
Energy Charter.” It first describes the goals,
then over two pages details the central principles
of a new legal basis for global energy
cooperation. Annex 1 contains the elements
of a transit agreement (one page) and
Annex 2 a list of raw materials for energy
production and energy products that
should be included in the framework.
Medvedev argues that the current bilateral
and multilateral agreements are inadequate
to prevent and overcome conflict
situations. What is called for at present,
he says, is the “development of a new, universal,
legally binding document” covering
all of the major export, import, and transit
countries. Another notable feature of this
document is the statement that sustainable
energy security is indivisible and that all of
the actors in the energy sector should therefore
share equal responsibility for ensuring
energy security at the global level. If one
reads Medvedev’s proposal favorably, then
one can conclude that the document is in
accord with the basic principles of the
Energy Charter overall and that many of
the points are already formulated in legally
binding terms in the Energy Charter Treaty.
Furthermore, Annex 2 is also a copy of the
Annex EM of the Energy Charter Treaty.
Russia: Critical points revisited
The “Draft Convention on Ensuring International
Energy Security” of 2010 reflects
the most pronounced Russian positions in
regard to international energy security,
trade, investment, and transit:
Energy security as demand security: Russian
energy policy in recent years has attempted
to redefine energy security as
both security of supply and predictability
of demand. Yet, this approach ignores
the asymmetry between demand and
supply regarding policy options available
to steer them. At the end of the day,
demand is the sum of consumer decisions
and can only indirectly be influenced
by the state. The question again
is obviously how to apply this principle
given the uncertainties of demand
trends in Europe.
Balancing of diverse interests: The desire to
search for an optimal balance between
supply and demand is mentioned explicSWP
Comments 8
March 2011
4
itly in the text, which states that each
party should declare whether it is predominantly
a producer or consumer of
energy. Here, the objectives are clearly
to stabilize price levels, earnings, and
revenues from energy exports. This objective
has become predominant: The
year 2008 was a real watershed for
energy trade as prices reached record
levels of $147 per barrel in July and then
decreased by almost $100 per barrel in
November 2008. Both consumers and
producers proved to be sensitive to this
price volatility. Yet, there are ongoing
international discussions on how to
create more transparency and foster a
more intensive exchange of information
between producers and consumers
regarding prognoses and investment
programs in the International Energy
Forum. Against this background, it is
very surprising that the Forum is not
included in the list of institutional
cooperation partners.
National sovereignty: This is obviously
one of the major issues for the Russian
Federation. Revising the text gives the
strong impression that the “renationalization
of Yukos” and the TNK-BP case
seem not to be exemptions, but are
rather cases in point: Although “most
favored nation treatment” as a WTO
principle is explicitly mentioned in the
text, the fact that expropriation is possible
and that there are several exemptions
foreseen—such as preservation of
depleting resources and upholding of
public order and morality—illustrates
that the Russian proposal differs fundamentally
from how the EU interprets
investment protection and national
sovereignty in the ECT.
Dispute settlement: The Russian proposal
foresees a state-to-state dispute settlement
either at a state court of the state
where the investment is made, or under
the UN Commission on International
Trade Law or the International Centre for
Settlement of Investment Disputes. The
proposal to engage in dispute settlement
primarily on a diplomatic level (and
optionally with reference to UN trade
regulations) is significantly weaker than
the comparable, although—on the point
of investment —still disputed provisions
of the Energy Charter Treaty. This demonstrates
the sovereign and far-reaching
role that Russia designates to the state in
the energy sector.
Asset swaps: The proposal envisions the
exchange of assets between companies
as a means of ensuring access to markets
and infrastructure. This reflects the
rational business strategy of Gazprom to
become active along the entire supply
chain. What is lacking here, however, is
any indication of the reciprocity of the
rules, that is, their applicability to the
Russian market as well as, for example,
access to Russian transit pipelines, which
would be obligatory under the principle
of universal applicability. Moreover, it is
a means to counteract the EU idea(l) of a
“functioning internal market.” These
exclusive package deals contradict the
spirit of a level playing field. Accordingly,
as a final consequence, short-term
logics of spot markets and gas-to-gas
competition correspond to the EU’s competition
paradigm much better. Asset
swaps with their package deals on different
segments of the gas supply chain
set up long-term relations and vertical
cooperation, thereby paying tribute to
the challenges of huge investments to be
undertaken and the “old mechanisms”
of gas procurement.
Long-term contracts and transport: The
Convention reflects the plea to properly
allocate risks among the parties involved.
This is influenced by the rapidly
changing European gas markets and the
oil-indexed long-term contracts with
take-or-pay clauses under pressure. The
background also involves Russia’s fierce
opposition to the EU Third Liberalization
Package, which demands a separation
of electricity and gas production from
supply provision. Russia has been constantly
and fiercely arguing for exempSWP
Comments 8
March 2011
5
tions for import pipelines in order to not
just be able to sell the gas at EU borders
and to avoid a “contractual mismatch.”
First, the concern is that long-term contracts
do not correspond with shipping
arrangements in their time frame.
Second, Russia aims to control and make
money from the supply chain, thereby
limiting the opportunities for newcomers
in the gas supply.
Transit provisions: Given the fact that
transit issues were at the heart of Russia’s
longstanding non-ratification
policy, it is quite astonishing that the
proposal does not go into more detail
on this point, as the negotiations on the
Transit Protocol of the ECT have shaped
Russia’s opposition to it. Under the Transit
Protocol, EU law would be applied
(REIO clause) in the realm of the EU. The
Russian proposal is diametrically opposed
to this and envisions the application
of the Convention within REIO and
its member states. The environment has
changed since the negotiations of the
Transit Protocol under the ECT. On the
one hand, Nord Stream will soon start to
transport gas directly into Western European
markets. On the other hand, the
European Energy Community, which
foresees the implementation of the
energy-related acquis communautaire in
the participating countries, has been
expanded to Ukraine. Ukraine still is the
major transit country for Russian gas.
Against this background, the provisions
for transit are surprisingly very vague in
the Russian draft.
Global outreach: According to the draft,
the Convention enters into force after
ratification in three countries. This is far
removed from the European understanding
of multinational institutions and
legally binding treaties.
In sum, there are no surprises from
Russia, but rather there is a proposal on
the table that reflects the major topics
addressed in the last years, though it leaves
the question open as to where and whether
the draft should be discussed under an
existing framework.
The Energy Charter Process: Lost?
Or new momentum?
Without doubt the Energy Charter Treaty is
a “child” of the 1990s, when the consumer
countries had made significant inroads into
producing countries, and the oil prices had
been comparatively low—due to a relaxed
supply situation and new independent suppliers
in the Former Soviet Union entering
the scene.
Since then, the market and producerconsumer
relations have changed profoundly.
Since the turn of the century, the
OECD world has been losing relative consumer
weight: Demand has been driven by
China and India. It is also increasing in the
Middle East and North Africa. Energy trade
is related to enormous financial transfer
but also to power shifts, and the strong demand
between 2002 and 2008 had favored
producing countries in that respect. However,
the economic crisis and the gas glut
(due to decreased demand, a shale gas
revolution in the United States, and the
freed liquid natural gas volumes available)
have turned the gas markets around,
especially in Europe. Climate change has
become a pressing issue and the energy
sector is at the heart of the problem. Energy
savings, energy efficiency, and a rising
share of renewable energy are more important
than ever.
The Energy Charter Conference adopted
the Road Map for Modernisation of the
Energy Charter Process on November 24,
2010, thereby acknowledging the new
developments. This was the first visible output
by the Strategy Group established at
the previous conference in Rome, which
had paved the way for the modernization
of the Process with the Rome Declaration.
The Road Map for the Modernisation of the
Energy Charter Treaty, which makes reference
to seven crucial areas (among them
promotion of the Energy Charter and the
Energy Charter Treaty; transit and crossSWP
Comments 8
March 2011
6
border trade; investment promotion and
protection; energy efficiency, etc.), reflects
the new environment pretty well.
The key issues in EU energy supply still
relate to natural gas and the imports from
countries of the Former Soviet Union. However,
electricity supply may soon follow
when the share of renewable energy in the
electricity mix increases, as will be necessary
by 2020 and thereafter. Cross-border
electricity lines, off-shore wind-farms, and
concentrated solar power plants outside
the EU will become pillars of the electricity
supply to the continent. The promotion of
energy efficiency and renewable energy
technology is a prerequisite for addressing
climate change and transitioning from a
conventional energy system into a lowcarbon
energy system in the future. All this
requires multinational fora to discuss the
relevant and related issues.
Nonetheless, the Energy Charter Process
is currently at a difficult stage. The Russian
attitude toward the Treaty has contributed
to that, but the EU has also favored its own
instruments and mechanisms to deal with
energy in the region, for example the
Energy Community or the European Neighbourhood
Policy, Partnership and Cooperation
agreements, etc. Moreover, in a number
of EU countries the ECT is seen as
“sacrosanct” and not subject to modernization,
which is denounced as renegotiation
with Russia—a position that could perpetuate
the deadlock. Moreover, the gas glut
and the North Stream pipeline diminish
the pressure in respect to the transit issues
at first glance. However, policymakers
should not be led astray by these develop-
ments.
The Energy Charter Treaty:
Stranded costs or added value?
To be very blunt, the ECT is in danger of
becoming insignificant on the political
scene and the conference process in danger
of being downgraded. However, this would
amount to high stranded institutional,
financial, and political costs. What is
needed is a new impetus. The ECT and the
related Process are quite unique in the tool
set of the EU and in international governance.
The Energy Charter Treaty can contribute
an added value.
Complement to the EU architecture. Each
instrument has its own target. The ECT
aims to establish a level playing field for
energy trade, transit, and investment on
the international level. It introduces WTO
principles. The Energy Community, the
Neighborhood Policy, and other instruments
build upon convergence and coherence
with the EU internal market and
foresee an expansion of the energy-related
acquis communautaire within the respective
countries. This is a very ambitious goal—
without a clear perspective on enlargement,
the EU is stripped of its strongest
tool regarding its repertoire of positive and
negative sanctions. Expanding the EU
internal market has its limits and Russia is
certainly out of reach for the foreseeable
future. Thus, these instruments are complementary,
not supplementary, to the
Energy Charter Process and the related
Treaty.
Outreach and scope. Gas is still the major
focus of regional energy governance in
Europe. If gas supplies are to become more
diversified and gas markets are to become
more global, then the reach of a treaty has
to go beyond neighboring regions, and
new transnational pipelines have to be
built. This is equally relevant and all the
more true for a developing green electricity
market on the wider continent, with
SEATEC or DESERTEC as important pillars.
The envisaged regional cooperation may
serve as a model for other regions in the
world. Thinking through the new “bottomup
approach” in the UN climate process
and diplomacy to the end, we will soon witness
more integrated energy and climate
partnerships and North-South cooperation
to achieve envisaged greenhouse gas
emission reductions. The ECT provides
the essential tools. Common rules favor
and facilitate investments and efficient
markets. The modernization process opens
SWP Comments 8
March 2011
7
To sum up, now more than ever, the
Russian proposal should be used as a
catalyst to flesh out the details of a global
energy treaty that goes beyond existing
documents such as the 2006 G8 Declaration
on Global Energy Security. The right forum
is the Energy Charter Process.
the possibility to adapt to new challenges
presented by renewable energy and technology
promotion.
Liquid markets. Moreover, the EU’s supply
security—with its energy market based on
the structural principles of competition
and solidarity with unbundled companies—
depends on transparent and liquid energy
markets. Liquidity is necessary both regarding
finance and volumes—a level playing
field is fundamental and hardly achievable
with an exclusively bilateral approach
but rather demands a multilateral design.
Although the safeguarding provisions for
investments will still apply under provisional
application to investments made
beforehand for another 20 years, the lack
of an international, legally binding framework
for investments will become a matter
of paramount concern.
Russia’s initiative illustrates an important
point, though: The key countries need
to come to the table. The timing is auspicious
since public sentiment seems to have
shifted in favor of more intense regulation
in the energy sector and greater cooperation
in the field of technology and knowhow
transfer as well as on the question of
price volatility and the aim of increased
compliance with the climate regime. In
order to win over important producer and
consumer countries, intensive diplomatic
efforts are necessary and could be undertaken,
for example, in the framework of
the G8 and G20. Now is the time to make
renewed efforts with Norway consolidating
(“inreach”) and engaging North Africa (“outreach”)
in the Energy Charter Process. The
developments on the gas markets may present
a window of opportunity: Gas supply
security is under heavy scrutiny by consumers
as is gas demand by producers.
Reputation and confidence need to be
restored.
© Stiftung Wissenschaft und
Politik, 2011
All rights reserved
These Comments reflect
solely the author’s views.
SWP
Stiftung Wissenschaft und
Politik
German Institute for
International and
Security Affairs
Ludwigkirchplatz 3−4
10719 Berlin
Telephone +49 30 880 07-0
Fax +49 30 880 07-100
www.swp-berlin.org
swp@swp-berlin.org
ISSN 1861-1761
These SWP Comments are an
expanded and updated version
of Comments 24/2009, which
originally appeared in German
as SWP-Aktuell 42/2009.
Politics. First and foremost, it is a political
issue to preserve and revitalize the Energy
Charter Process. It is the only standing
forum that deals multilaterally with the
mentioned issues and brings producing,
transit, and consuming countries to the
table. The political message to the Russian
side should be clear: The proposal will be
discussed in the Energy Charter Process.
The argumentation is that forum-hopping
bears the risk of problem-shifting. Besides,
Russian participation in the modernization
process can help to restore its reputation:
It may contribute to confidence-building if
the Russian side comes back to the table.
Regaining confidence can be seen as a prerequisite
for Russia to maintain its position
as a major supplier to the EU. The Russian
attitude toward the Energy Charter Treaty
should be contrasted with new initiatives
for cooperation and partnership, as envisioned
by Premier Putin in Berlin in
November 2010, when he proposed an
“economic community from Lisbon to
Vladivostok,” with energy relations being
one of the pillars. How can such an initiative
be taken seriously as long as Russia
abides by its decision not to ratify the ECT
and sidesteps the modernization of the
Energy Charter Process?
The result should be an international,
legally binding framework, an “Energy
Charter Plus” that takes the interests of
the energy producers and transit countries
more strongly into account in a number of
areas and includes modifications of several
points that are already under discussion.
However, this implies a commitment to
the ECT as well as the will to modernize
and revise the Treaty. This ball is now in the
court of the EU and its member countries.
SWP Comments 8
March 2011
8