Energy Charter Treaty

European Energy Charter

The beginnings of the Energy Charter date back to a political initiative launched in Europe in the early 1990s. The time at end of the Cold War offered an unprecedented opportunity to overcome previous economic divisions between the nations on both sides of the Iron Curtain. The clearest prospect for mutually co-dependent beneficial cooperation was the energy sector, given Europe's growing energy demand and vast resource availability in post-Soviet nations. Additionally there was a recognised need to ensure that a commonly accepted foundation was established for developing energy cooperation among the states of Eurasia. On the basis of these considerations, the Energy Charter process was born.

The original European Energy Charter declaration was signed in The Hague on 17 December 1991. It was a political declaration of principles for international energy including trade, transit and investment, together with the intention to negotiate a legally binding treaty, setting the beginning of the development of the Energy Charter Treaty. One of the final hurdles was to find language to ensure national sovereignty over natural resources, while enshrining the principle of international cooperation in order to allow outside access to those resources. Negotiators also succeeded in assuring Austria and Switzerland that they would not bear an undue transit burden for energy resources.

Treaty

A Secretariat was set up to accommodate the dialogue amongst the contracting parties, which later transformed into the Energy Charter Secretariat, mandated by the Energy Charter Conference. The legally binding treaty was signed in Lisbon in December 1994, together with a Protocol on Energy Efficiency and Related Environmental Aspects (PEEREA). The treaty and the protocol came into effect in April 1998. An amendment to the trade-related provisions reflecting the change from the General Agreement on Tariffs and Trade to World Trade Organization processes was also agreed at that time.

On 22 March 2010, a Strategy Group was established within the Energy Charter Conference, with a mandate to promote modernisation. While the origin of the Energy Charter Treaty is rooted in Russia-EU relations, the treaty is the only multilateral legal framework of its kind and is expanding beyond its original purposes. Part of this expansion is physical, and a policy on Consolidation/Expansion/Outreach (CONEXO) was formulated to guide the approach of new countries as signatories of the declaration or Treaty. This global focus took a step forward in 2015, when a number of new countries such as China, Nigeria, and Columbia from different regions of the world signed the Intentional Energy Charter in The Hague.

International Energy Charter

On 20 May 2015, a major milestone in modernisation and expansion was reached, as 72 Countries plus the EU, Euratom and ECOWAS signed the International Energy Charter at a Ministerial conference hosted by the government of The Netherlands. The International Energy Charter is a political declaration about principles for international energy cooperation, and is intended as a first step towards accession to the legally binding Energy Charter Treaty. The declaration attempts to reflect the changes in the energy world that have emerged since development of the original Energy Charter Treaty in the early 1990s, and address the following issues:

Legal scope of the Treaty

The Treaty's provisions focus on four broad areas: Energy Trade, Investment, Energy Efficiency, Dispute Settlement, Energy Transit.

Trade

The Energy Charter Treaty's purpose in Energy Trade is to create open and non-discriminatory energy markets throughout its member states. This framework follows the rules of the multilateral trading system as embodied in the General Agreement on Tariffs and Trade, which later became the World Trade Organisation The Energy Charter Treaty extends the GATT and later the WTO rules in the energy sector amongst its members. Additionally the treaty covers the trade of all energy materials (e.g. crude oil, natural gas, wood fuel, etc.) all final energy products (e.g.petroleum, electricity, etc.) and energy related equipment. The rules of trade only cover trade in goods, not trade in services, nor does it concern itself with intellectual property rights.

Investment

As rooted in idea of creating open and non-discriminatory energy markets for energy trade, a form of international accountability for breaching these conditions was necessary to put in place. The treaty is responsible for protection of direct foreign investments. Its provisions protect investors and their investments from political risks involved in investing into a foreign country such as discrimination, expropriation, nationalisation, breach of contract, damages due to war, etc. The legally binding nature of the Energy Charter Treaty make it the only of its kind in the world, setting up the only multilateral framework for matters related with Energy.

Dispute settlement

Whereas Article 27 sets out the provisions for dispute resolution between two contracting states, Article 26 of the Energy Charter Treaty provides express provisions for resolving disputes arising under the Treaty between an investor of a Contracting State and another Contracting State. The choice of arbitration rules are:

The largest claims against Russia, pertaining to the Yukos decision, arise under the provisions of Article 26.

The drafting of the Treaty has raised some difficult questions in the area of Investor-State Disputes by academics and has been called ambiguous at instances by the courts. Some areas of discussion are:

Energy efficiency

The Charter's involvement in matters of energy efficiency and its relation to a cleaner environment was introduced in the 1991 Energy Charter Declaration. The subsequent Energy Charter Treaty, and in particular Article 19 of the Treaty, requires that each Contracting Party "... shall strive to minimise in an economically efficient manner, harmful Environmental Impacts arising from energy use."

Nevertheless, the main provisions are excluded from ECT and the Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects (PEEREA) was negotiated, opened for signature and entered into force at the same time (16 April 1998) as the Energy Charter Treaty. Building on the provisions of the Treaty, PEEREA requires its participating states to formulate clear policy aims for improving energy efficiency and reducing the energy cycle’s negative environmental impact.

In contrast to other activities in the Charter process, the emphasis in the work on energy efficiency is not legally binding, but rather on practical implementation of a political commitment to improve energy efficiency. This is promoted through policy discussions based on analysis and exchange of experience between the member countries, invited independent experts and other international organisations.

The implementation of PEEREA, provides its member countries with a range of good practices and a forum in which to share experiences and policy advice on energy efficiency issues. Within this forum, particular attention is paid to such aspects of a national energy efficiency strategy as taxation, pricing policy in the energy sector, environmentally related subsidies and other mechanisms for financing energy efficiency objectives.

Energy transit

The Energy Charter Treaty is that it provides a set of rules that covers the entire energy chain, including not only investments in production and generation but also the terms under which energy can be traded and transported across various national jurisdictions to international markets. As such, the agreement is intended to prevent disruption of fuel passing between countries.

Transit Protocol

The Energy Charter Transit Protocol is a draft protocol which negotiations are not finalized yet. The protocol would amplify and strengthen ECT provisions on energy transit issues in order to mitigate some specific operational risks that continue to affect energy transit flows. Negotiations on the text of the Transit Protocol began in early 2000 and a compromise text reflecting a continued discussion between the European Union and Russia was tabled for adoption at the meeting of the Energy Charter Conference on 10 December 2003. However, it became clear at this meeting that a unanimous decision could not be achieved on the basis of the compromise text; a complicating factor was that energy issues, including transit, were also a subject on the bilateral agenda for the European Union and Russia in the context of Russian negotiations for accession to the World Trade Organisation. The Protocol negotiations were temporarily suspended.

In December 2007, the Energy Charter Conference reaffirmed its support for the finalisation of negotiations and adoption of the Energy Charter Protocol on Transit in order to expand the existing provisions of the treaty. This work proceeded until October 2011, when the European Union argued that, in view of current developments in the international energy situation and the lack of progress in negotiations and consultations, it appeared no longer opportune to continue the negotiations. A review of the issue at the end of 2015 noted the continued demand for a multilateral legally-binding framework for energy transit, and recommended further exploring the basis for negotiations of such an agreement, which could address various aspects of oil, gas and electricity transportation and transit.

The Energy Charter Treaty includes an obligation of member countries to facilitate energy transit across their territory, in line with the principle of freedom of transit, and to secure established transit flows. At the same time, the treaty provisions do not oblige any country to introduce mandatory third party access.

Principle of national sovereignty

While the Energy Charter is based on the idea that international flows of investments and technologies in the energy sector are mutually beneficial, national sovereignty over energy resources is a core principle of the treaty (ECT Article 18). An objective of the treaty is to promote transparency and efficiency in the operation of energy markets, but it is for governments to define the structure of their national energy sector. Each country is free to decide whether and how its national energy resources are developed, and also the extent to which its energy sector is open to foreign investors. The treaty does not deal with the ownership issues of the energy companies–there is no obligation to privatise state-owned energy companies, or to break up vertically integrated energy companies.

Membership

The treaty has been signed or acceded to by fifty-two countries and the European Union and Euratom. All members have ratified the Treaty except for Australia, Belarus, Norway, and the Russian Federation. Belarus has accepted provisional application of the Treaty, which means that it applies the Treaty to the extent that it is consistent with its own constitutions, laws and regulations.

There are four levels of participation that a state could have, depending on the instruments applied (marking noted in brackets):

1. Organization of the Energy Charter Conference member or observer that is not yet party to the 1991 Energy Charter (O)
2. some of these states have begun, but not yet finished the process of adopting the 1991 Charter (O+)
3. 1991 Energy Charter signatory state (OC)
4. some of these states have begun, but not yet finished the process of ratifying the 1994 Treaty and Protocol (OC+)
5. 1994 Energy Charter Treaty and Protocol ratifier state (OCT)
6. some of these states have begun, but not yet finished the process of ratifying the 1998 Amendment (OCT+)
7. 1998 Trade Amendment ratifier state (OCTA)

Members of the Energy Charter Conference

Note: * – denotes state provisionally applying signed, but not yet ratified instruments

Observers

Thirty-seven states and twelve international organisations have the status of observers to the Energy Charter. Observers have the right to attend all Charter meetings and to receive all related documentation, reports and analysis, and to participate in the working debates taking place within the Energy Charter. The intention is that observer status should provide the chance for a country to familiarise itself with the Charter and its functions, in order to facilitate its assessment of the benefits of accession to the Energy Charter Treaty.

There are three categories of observers:

1. States who have signed the 1991 European Energy Charter (O)
2. States who have signed the 2015 International Energy Charter (I)
3. Observers By Invitation (B)

Russian participation

The Russian Federation signed the treaty and applied it provisionally but did not ratify it. It linked the ratification of the ECT to negotiations on an Energy Charter Transit Protocol. In October 2006, German chancellor Angela Merkel and French president Jacques Chirac proposed the creation of a balanced energy partnership between France and Germany, representing the European Union, and Russia. Under the agreement, Russia would have to sign the European Energy Charter, something President Vladimir V. Putin, has said impinges on Russia's national interests.

In December 2006, Russia indicated that the ratification of the ECT was unlikely due to the provisions requiring third-party access to Russia's pipelines. On 20 August 2009, it officially informed the depository of the treaty (Government of Portugal) that it did not intend to become a contracting party to the treaty and the related protocol terminating the provisional application of the ECT and the PEEREA starting from 18 October 2009.

Notwithstanding the termination of provisional application of the ECT by Russia, the provisions regarding dispute settlements and investment protection are still in force for additional twenty years. On 30 November 2009, the Permanent Court of Arbitration in The Hague, which had been considering this case since 2005 under the UNCITRAL Rules, ruled that former Yukos shareholders can move on to the merits phase of their arbitration claim against the Russian government. GML, previously known as Menatep, the main shareholder in Yukos, is suing Russia for more than $100 billion in an international arbitration case under the ECT. The hearings took place in October 2012. In July 2014, the international arbitration panel in The Hague unanimously ruled in favor of the shareholders, awarding $50 billion damages for the seizure of assets and dismantling of Yukos. The Russian government has vowed not to comply with the ruling, setting off an international legal squabble which has resulted in France and Belgium seizing Russian assets for possible use as restitution for the claimants. However, a French court ruled against the seizure by the French authorities, and a Dutch court later overturned the $50 billion ruling, arguing Russia had not ratified the Energy Charter Treaty and so was not bound by it.

Energy Charter Conference

All members are represented in the Energy Charter Conference and its subsidiary bodies. The conference is the organisation's governing and decision-making body which meets on a regular basis to discuss issues affecting energy cooperation among the Treaty members, to review the implementation of ECT and PEEREA provisions, and to consider possible new instruments and joint activities within the Energy Charter framework. Since 1 January 2016, the Chairman of the Energy Charter Conference is Mr. Fumio Kishida, the Japanese Minister of Foreign Affairs. The vice-chairpersons are Mariam Valishvili, Deputy Minister of Energy of Georgia, Keiichi Katakami, Ambassador of Japan to the European Union, and Myratgeldy Meredov, Deputy Minister of Oil and Gas Industry and Mineral Resources for Turkmenistan. The Energy Charter Conference has following subsidiary bodies:

Additionally, a consultative board – the Industry Advisory Panel – presents the private sector's views on relevant issues related to energy investments, cross-border flows and energy efficiency to the Conference and its groups.

The Legal Advisory Task Force was set up by the Energy Charter Secretariat in 2001 to assist in the drafting of balanced and legally coherent Model Agreements for cross-border oil and gas pipelines.

Secretariat

Since 1 January 2012, the Secretary General is Dr. Urban Rusnák, and since December 2014, the Deputy Secretary General is Mr. Selim Küneralp. The Energy Charter Conference is served by a Secretariat based in Brussels. The Secretariat's functions are promotion, organisation and legal support for the Conference, carried out in conference and meeting spaces at the Secretariat. In addition the Secretariat has a representative role to the Energy Charter Treaty and its related instruments.

Organisation

One of the primary mandates given by the Energy Charter Conference to the Secretariat is to organise and administer meetings of the Conference and its subsidiary bodies. In addition, the Secretariat organizes conferences and energy forums related to the global ongoing energy dialogues, such as the Rabat Energy Forum.

Monitor ECT and PEEREA obligations

Article 19 of the Treaty, requires that each Contracting Party minimise, in an economically efficient manner, harmful environmental impacts arising from energy use. The Secretariat monitors the enforcement of these obligations in the contracting parties of the treaty and creates various publicly available reports on each of the contracting parties such as energy efficiency [1] and the investment [2] climate.

Legal support

The Energy Charter Treaty contains a comprehensive system for settling disputes on matters covered by the Treaty. The two basic forms of binding dispute settlement are state-state arbitration on the interpretation or application of almost all aspects of the Treaty (except for competition and environmental issues), and investor-state arbitration (Article 26) for investment disputes. There are special provisions, based on the WTO model, for the resolution of inter-state trade issues and the Treaty also offers a conciliation procedure for transit disputes. The Secretariat maintains legal advice to these arbitrations as well as has responsibility for maintaining the Travaux préparatoires used to clarify the intentions of the treaty by Article 32 of the Vienna Convention on the Law of Treaties.

The Secretariat is currently aware of over eighty cases that have been brought by investors to international arbitration. These cases have been litigated under the arbitration regulations of the ICSID, Arbitration Institute of the SCC, and UNCITRAL. The Arbitration Awards or Settlements are sometimes in the hundred of millions of dollars. Disputes concerning competition (Article 6) and environmental issues (Article 19) the Secretariat provides for bilateral (in the case of competition) or multilateral (in the case of environmental protection) non-binding consultation mechanisms.