The Energy Charter Treaty and Transit Protocol and Related Issues
Dr. Andrei KonoplianikDeputy Secretary General
The Energy Charter Secretariat
Workshop on “OPEC and Energy Charter Treaty”
23 January 2003, OPEC Secretariat, Vienna
DEVELOPMENT OF ENERGY MARKETS AND MECHANISMS FORINVESTORS PROTECTION / STIMULATION
Figure1 www.encharter.org
Energy Markets Mechanisms for investors protection / stimulation
World energy market
Local
Internationalisation
Regional
Globalisation
World markets of certain
energy resources
International legal mechanisms
Bilateral
Multilateral
Trade
Investments
+
BITs, DTTs
WTO/GATT
ECT
TRIMs
+
Stability zones in unstable environment
Increasing of general level of investment
attractiveness
+Domestic legislation
PSA,Concessions, FEZ
+
Transit
+
Tax Code, investment and
subsoil legislation
Dispute settlement
+
TRIPs
GATS
Figure 2 www.encharter.org
ENERGY CHARTER TREATY: GEOGRAPHY
■ Energy Charter Treaty Signatory States (1994)
■ Observer States that have signed the European Energy Charter (1991)
■ Other Observer States
Figure 3 www.encharter.org
ENERGY CHARTER HISTORY
Russia restarted ratification process.RF State Duma: Russia will ratify ECT, but not yet (depending on Transit Protocol)
January, 2001
• ECT signed by 51 states + European Communities = 52 ECT signatories
• ECT ratified by 46 states + EC (excl. 5 countries: Russia, Belarus, Iceland, Australia, Norway )
• Russia: provisional application, together with Belarus
As of January 1, 2003
ECT enters into force16 April, 1998
Russia started ECT ratification process for the first time (unsuccessfully).
June, 1996
Energy Charter Treaty (ECT) and Protocol on Energy Efficiency and Related Environmental Aspects (PEEREA) signed
December 17, 1994
European Energy Charter signedDecember 17, 1991
Lubbers’ initiative presented to the European CouncilJune 25, 1990
CORRELATION BETWEEN GEOGRAPHICAL SCOPE, ACTIVITY TARGET AND APLICABLE REGIMES OF ECT AND WTO
E C T :51 countries (+EC) signed the ECT, including 46 countries
(+EC) which ratified the ECT(as for 1.09.2002)
Trade in goods and services = non-discrimination:
MFN (Art.1 GATT) and NT (Art.3 GATT)
W T O :144 member-countries plus
32 observer-states
«Trade» chapter of ECT:WTO members, WTO rules
by reference when one or both CP are non-WTO
countries
Energy (Energy Materials and Products) = non-discrimination:
• Investments: the better of MFN * or NT• Trade: WTO rules (MFN and NT)
• Transportation & transit:MFN and NT
Figure 4 www.encharter.org
*) i.e. MFN = preferential regime for FDI
ENERGY CHARTER AND RELATED DOCUMENTS
Political DeclarationEUROPEAN ENERGY CHARTER
Legally Binding Instruments
Ene
rgy
Eff
icie
ncy
Pro
toco
l
Ene
rgy
Tra
nsit
Pro
toco
l
ENERGY CHARTER TREATY
TRADE AMMENDMENT
INVESTMENT SUPPLEMENTARY TREATY
Figure 5 www.encharter.org
ECT MAJOR OPPONENTS IN RUSSIA AND THEIR ARGUMENTS
Figure 6 www.encharter.org
Prior to ECT signing in 1994, RF and EU has agreed to regulate nuclear trade bilaterally (P&CA).
Ministry of Nuclear :
1) Bilateral RF-EU trade in nuclear materials is not regulated by ECT
No such obligation. ECT excludes mandatory TPA (ECT Understanding IV.1(b)(i)).
No such obligations (ECT Article 7(3)). Transit and transportation are different in non-EU.
Not true. ECT documents do not deal with LTC at all. Economic niche for LTCs will become more narrow due to objective reasons, but they will continue to exist as a major instrument of financing greenfield gas projects.
Gazprom:
1) ECT demands mandatory TPA to Gazprom’s pipelines for cheap gas from Central Asia
2) Obligation to transit Central Asian gas at low (subsidised) domestic transportation tariffs
3) ECT will “kill” LTCs
CommentsArguments against ECT ratification
Other debate – see publications
Major Russia’s concern regarding ECT ratification relates to gas transit issues
Figure 7 www.encharter.org
MOST RECENT PUBLICATIONS ON ECT:
RUSSIAN OIL EXPORT INFRASTRUCTURE TO EUROPE AND ROLE OF TRANSIT
Figure 8 www.encharter.org
FINLAND
SWEDEN
NORWAY
GERMANY
ITALY
AUSTRIA
TURKEY
ROMANIA
UKRAINE
RUSSIA
MOLDOVA
BELARUS
LITHUANIA
LATVIA
ESTONIA
POLAND
CZECH REP. SLOVAKIA
HUNGARY
BULGARIA
GREECE
ALBANIA
DENMARK
YUGOSLAVIA
BOSNIA-HERZEGOVINA
CROATIA
FYROM
BalticSea
Black Sea
Adriatic Sea
Tuapse (10)
Yuzh. Ozerevka (28-67)Novorossiysk (34-42)
Pivolenny (9)
Ventspils (30)
Butinge (8-12)
Omisalj
Primorsk (12-30)
Druz Br nchh oba hN art ern
Druzh
ba Souther
n B r
anch
Druzhba
10
10
10
10
11
14
24
18
16
40
12-30
14
8
8
11
28 34
34
56
5
27-36
4
6
20 35
25
82
69
85
14.5
60
90
75
40
110
110
115
107
Oil traffic throughthe Turkish Straits
in 2000
Baltic Pipeline System (BPS):on stream in 2002. Initial Capacity:
12 mt/y. Subsequentupgrade to 30 mt/y planned
Odessa-Brody Pipeline: on stream
in early 2002
Planned Reversalof Adria pipeline
for export of up to10 mt/y of Russiancrude to Omisalj
CPC pipeline:Mainly Kazakhcrude in 2001
SukhodolnayaRodionovka
Ukraine Bypass pipeline:Initial Capacity: 27 mt/y to
be upgraded later to 36 mt/y
Existing Pipeline
10
60
Pipeline Under Construction
Capacity in 2000 (mt/y)
Capacity Utilisation in 2000 (in %)
Operating Oil Terminal
Oil Terminal Under Construction
Refinery
Northern Gateway
Current capacity 1mt/yto be upgraded to 5-15 mt/y
Varandey
Odessa (10-12)
Krasnodar
Source:IEA/ECS “Russia EnergySurvey 2002”
RUSSIAN GAS EXPORT TO EUROPE IN 2000 ANDROLE OF TRANSIT
Figure 9 www.encharter.org
12.9
34.1
21.8
0.45.1
6.1
0.71.7 0.3
1.5
0.1
1.6
3.2
10.3
3.2
2.4
59.6
16.6
2.61.4
0.8
4.3
FINLANDSWEDEN
NORWAY
GERMANY
FRANCE
ITALY
AUSTRIA
TURKEY
ROMANIA
UKRAINE
RUSSIA
MOLDOVA
BELARUS
LITHUANIA
LATVIA
ESTONIA
POLAND
CZECH REP.
SLOVAKIA
HUNGARY
BULGARIA
GREECE
SWITZERLAND
DENMARK
BELGIUM
NETHERLANDS
YUGOSLAVIA
BOSNIA-HERZEGOVINA
CROATIASLOVENIA
FYROM
Production: 584 bcm
North Sea
BalticSea
BlackSea
Mediterranean Sea
Exportsto Western
Europe129 bcm
Exportsto CIS
89 bcm
DomesticSupply
366 bcm
7.8
7.97.5
Source:IEA/ECS “Russia EnergySurvey 2002”
RUSSIAN GAS IN EUROPE
68.7
110117.4
126.8 130
200
0
50
100
150
200
1985 1990 1995 1999 2000 2010*
Years
BCM
* Forecast
(c) Gazprom sales in Europe
(b) European importers of Russian gas
• Austria
• Belarus
• Bulgaria
• Bosnia
• Hungary
• Germany
• Greece
• Italy
• Latvia
• Lithuania
• Macedonia
• Moldova
• Poland
• Romania
• Slovakia
• Slovenia
• Turkey
• Ukraine
• Finland
• France
• Croatia
• Czech Republic
• Switzerland
• Estonia
• Yugoslavia
Figure 10 www.encharter.org
Source: OAO Gazprom
(a) Share of Russia in gas consumption: All Europe >25%Central & Eastern Europe 40%Eastern Europe >90%
TOTAL: 25
EUROPEAN GAS MARKET OUTLOOK
By 2020:
• Demand up 200-300 BCM/yr
• Imports up250-350 BCM/yr
• New investments250-300 billion $
Figure 11 www.encharter.org
Source: J.V.Genova/Exxon Mobil
RUSSIAN GAS FOR EUROPE
Figure 12 www.encharter.org
Competitive disadvantages (distances, natural conditions of producing areas)
➨ Highest stimuli to diminish technical and financialcosts of production and transportation
(a) technical costs ���� investments ����legal environmentin host and transit countries
(b) financial costs ���� cost of capital ���� credit (sovereign,corporate, project) ratings ���� legal environment
➨➨➨➨ ECT and related documents == common legal environment, minimizing risks andtechnical and financial costs
TRANSIT PROTOCOL
Figure 13 www.encharter.org
The Transit Protocol deals with the following issues:1. The obligation to observe Transit Agreements2. Prohibition of unauthorized taking of Energy Materials and Products in Transit3. Negotiated access of third parties to Available Capacity in Energy Transport
Facilities used for Transit (mandatory access is excluded)4. Facilitation of construction, expansion or operation of Energy Transport
Facilities used for Transit 5. Transit Tariffs shall be non-discriminating, objective, reasonable and
transparent, not affected by market distortions, and cost-based6. Technical and accounting standards harmonized by use of internationally
accepted standards7. Energy metering and measuring strengthened at international borders8. Co-ordination in the event of accidental interruption, reduction or stoppage of
Transit9. Protection of International Energy Swap Agreements10. Implementation and compliance11. Dispute settlement
ENERGY CHARTER AND RELATED DOCUMENTS:
TRANSIT PROTOCOL - FINALISATION
Figure 14 www.encharter.org
December 2002 meeting of the Energy Charter Conference agreed that, in view of the very wide measure of agreement reached on the Protocol on Transit, its text, in order to facilitate a rapid conclusion of the negotiations, should not be open for further negotiations with the exception of the following three interrelated issues:
• Right of First Refusal;
• Application of REIO clause; and
• Transit Tariffs (the text of which was provisionallyagreed, subject to reserve).
Figure 15 www.encharter.org
1. Each Contracting Party shall take all necessary measures to ensure that Transit Tariffs and other conditions are objective, reasonable, transparent and do not discriminate on the basis of origin, destination or ownership of Energy Materials and Products in Transit
2. Each Contracting Party shall ensure that Transit Tariffs and other conditions are not affected by market distortions, in particular those resulting from abuse of a dominant position by any owner or operator of Energy Transport Facilities used for Transit
3. (a) Transit Tariffs shall be based on operational and investment costs, including a reasonable rate of return.
(b) Subject to sub-paragraph (a), Transit Tariffs may be determined by appropriate means, including regulation, commercial negotiations or congestion management mechanisms.
TRANSIT PROTOCOL – DRAFT ARTICLE 10: TRANSIT TARIFFS
TRANSIT TARIFFS AND AUCTIONS:“EXCESSIVE PROFITS RECYCLING” MACHINERY ( EU PROPOSAL)
Further increase in demand for
pipeline capacities
Further increase in oil and gas production
Regulatory or negotiatoryaccess to pipeline
No need in auctions
No pipeline capacity deficit
Increased pipeline capacity
Deficit of pipeline capacity
Auctions for access to pipeline
Transit tariffs with excessive profits
Excessive profits are obligatory to be invested into
pipeline capacity increase
Key element of the “excessive profits
recycling” machinery
Transit tariffconsists of 2 elements:
(1) payment for transportation services;
(2) if deficit of pipeline capacities –payment for access to the pipe
(TPA)
Figure 16 www.encharter.org
Figure 17 www.encharter.org
TRANSIT TARIFFS – HOW TO ACHIEVE REASONABLE RATE OF RETURN? (EU PROPOSAL)
Time
Total physical operating pipeline capacity
Investments
Available capacity is less then demand for the capacity
Commercial negotiations or auction
Increase in capacity
Commercial negotiations or auction
Demand for the capacity Increase in capacity
No need in auction
Investments
CAPEX
OPEX
Reasonable ROR
Excessive Profits?
CAPEX
OPEX
Reasonable ROR
Excessive Profits?
CAPEX
OPEX
Reasonable ROR
DRAFT DECISION WITH RESPECT TO THE TRANSIT PROTOCOL (RIGHT OF FIRST REFUSAL)
Figure 18 www.encharter.org
1. Where the duration of a Transit Agreement relating to Transit ofhydrocarbons does not match the duration of a supply contract, the Contracting Party through whose Area the hydrocarbons transit …shall ensure that the owners or operators of Energy Transport Facilities under its jurisdiction who are in negotiations on access to Available Capacity consider in good faith and under competitive conditions the renewal of such Transit Agreements. This means that the existing user upon the expiry of the Transit Agreement shall be treated neither better nor worse than other potential users at that time, except that the existing user shall be given the first opportunity to accept the conditions offered for any new Transit Agreement for that Available Capacity. (…)
3. The application of this Decision becomes effective when the Russian Federation deposits its instruments of ratification of the Energy Charter Protocol on Transit. (…)
RIGHT OF FIRST REFUSAL: TWO ASPECTSCurrently In the future
Time
Quantity
1991
Gas Sales Agreement
USSR - Germany
Transit Agreement(s)
1991
Russia - Ukraine
Pipeline capacity
Time
? ?
Russia - GermanyQuantity
Time
?
Gas Sales Agreements
2020
Transit Agreements
Russia - UkrainePipeline capacity
Time2020
?
(Russia – Germany)
Figure 19 www.encharter.org
Figure 20 www.encharter.org
TRANSIT PROTOCOL – DRAFT ARTICLE 20:REGIONAL ECONOMIC INTEGRATION CLAUSE
For the purposes of this Protocol, the “Area” of a Contracting Party referred to in Article 7(10)(a)of the Treaty shall, as regards Contracting Parties which are members of a Regional Economic Integration Organisation, mean the area to which the Treaty establishing such a Regional Economic Integration Organisation applies.
Figure 21 www.encharter.org
REIO CLAUSE: GEOGRAPHICAL ASPECTS
REIO CLAUSE: LEGAL ASPECTS
Destination
(b) After REIO:
(a) Before REIO:European Union
Destination
Source
Either transportation in accordance with domestic legislation and with the ECT and/or the Transit ProtocolTransportation
under EU legislation + WTO + ECT
Transit under Transit Protocol
European Union
Either transportation in accordance with domestic legislation and with the ECT and/or the Transit Protocol
Transportation under EU legislation + WTO + ECT
Source
Figure 22 www.encharter.org
ARE THERE ANY BENEFITS FOR RUSSIA IN REIO CLAUSE?
Figure 23 www.encharter.org
ECT Article 7(3):“Each Contracting Party … shall treat Energy Materials and Products in Transit
in no less favourable manner than its provisions treat such materials and products originating in or destined for its own Area …”
AREA
ECT Art. 7(3)
ECT Art. 7(3)
TRANSIT
Domestic T
ranspor tationImpor t
(“destined for … Area” )
ECT Art. 7(3)
Export (“originated in … Area” )
In EU countr ies (with or without REIO):ECT Ar t. 7(3) shall apply to all means of transpor tation (free movement of goods)
In non-EU countr ies:ECT Ar t. 7(3) shall apply to:
- transit vs. expor t / impor tECT Ar t. 7(3) shall NOT (?) apply to:
- transit vs. domestic transpor tation
Figure 24 www.encharter.org
REIO CLAUSE: TRANSIT VS. TRANSPORTATION (EU/non-EU)
TR
AN
SP
OR
TA
TIO
N: N
T /
MF
NRussia
1
2
3
4
5
6
TRANSIT: NT / MFN
DOMESTIC TRANSPORTATION: NT / MFN
EXPORT & IMPORT:NT / MFN
3
4
56
12
EU
EU: Transit= Domestic Transportation= Export & Import= Transportation=Free Movement
ForeignNational
Russia: Transit≠≠≠≠Domestic Transportation ≠≠≠≠Export & Import ≠≠≠≠ Free Movement
$/ B
TU
/ km
, all
othe
r co
nditi
ons
bein
g eq
ual
ECT Art. 7(3)
ECT Art. 7(3)
?
?
ECT & LEGISLATIVE PRIORITIES OF PRESIDENT PUTIN
Figure 25 www.encharter.org
Reform of natural monopolies
3 legislative priorities in President Putin’s 2002 Message
to the Federal Assembly
Accession to WTO
Privatisation of farmland
ECT = legal background for
electricity and natural gas industry reform
Reform of gas industry to be discussed by the
RF Government in Jan.2003
WTO rules = integral part of the ECT (trade section)
To take place before 2004?
ECT