Modernization of the Energy Charter

27 december 2013

International Organizations in the Energy Sector Reconsidered

Ambassador Urban Rusnák is Secretary General of the Energy Charter Secretariat.

Resume: While the Energy Charter has faced its own crises during the last two decades, it is now time to take the opportunity of further strengthening the organization. The Energy Charter is up to the challenge and we are now only beginning to realize its potential of becoming a 21st-century governance power in the energy investment field.

It looks like nothing inspires collective action quite like a crisis. International organizations as we know them today are rarely born purely by accident. In fact it is often changing – political, economic, environmental – circumstances which serve as a catalyst for the establishment of such bodies. Changing political circumstances, in particular, are themselves often associated with either one or another form of international crisis. Furthermore, crisis, when it comes at this level, tends to breed opportunity – the opportunity to recalibrate an existing playing field within the context of relations between states on the one hand, and states and corporations on the other. This is particularly the case when it comes to the establishment of some of the world’s foremost international organizations which have been established in order to provide governance and regulation for the energy sector. Both the Organization of Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) were established as organizations of collective action as a result of crisis, where groupings of states realized that regulatory and governance playing fields required alteration.

OPEC emerged not too long after British Petroleum (BP) took the fateful decision of cutting the posted price of oil by 10 percent in 1959, which led to major revenue losses amongst Arab oil producing states. The Arab Gulf monarchies in particular, many of whom were at the time moving toward independence from the British Empire, were already contemplating achieving ways of greater sovereignty over their oil sectors. They were left incensed by BP’s actions, particularly due to the fact that the company reportedly failed to consult them in advance of its decision to cut the oil price. Following further oil price reductions by Standard Oil of New Jersey, Gulf monarchies Kuwait and Saudi Arabia, together with other oil producer-nations Iran, Iraq and Venezuela, established OPEC in 1960. Historians refer to the establishment of OPEC as the first institutional step taken by the Arabs (as well as other developing world nations) to become masters over their oil economies. OPEC has confirmed its role as the leading international energy organization capable of influencing the global price for oil since that time.

Thirteen years later, with much of the industrialized world dependant on Middle Eastern oil supplies, Arab Gulf monarchies were in a far more confident mood as global actors than was the case in the late 1950s. Displeased with the seemingly uncompromising support of the United States and the Netherlands for Israel in wake of the 1973 Arab-Israeli war, OPEC initiated an oil embargo predominantly against these countries. The politically motivated production cuts, which intended to compel pro-Israeli Western states to rethink their position toward Israel, saw the oil price quadruple between October and December 1973: from $3 to $11.65 per barrel. Western economies were hurt and consumers suffered: petrol supplies ran dry as drivers faced long waiting lines at the petrol stations. While industrial countries managed to ride through the ‘oil shocks’, Western oil consuming countries subsequently established the IEA in order to mitigate the impact of future disruptions and coordinate strategic oil stocks in the event of similar crises repeating themselves again.

AN OPPORTUNITY NOT TO BE MISSED

A similar crisis-opportunity dichotomy underscored the prevailing international climate during the time of the establishment of the Energy Charter, the roots of which date back to a European political initiative launched right at the end of the Cold War. The start of the 1990s brought with them a unique period in European geopolitical history of the 20th Century. It was a time, as America’s elder statesman, Henry Kissinger once remarked, “the coming of a new world order.” On the wider-European continent, which had been politically divided for a good four decades, the period offered unprecedented opportunity to overcome the divisions of yesteryear and engineer audacious projects of international cooperation. From the perspective of high-end European decision makers, it appeared that there was no place better to start than with economic cooperation with former-Cold War adversaries – particularly in the energy sector.

So it was that a concept that we now know as the Energy Charter came into existence. Dutch Prime Minister of the time, Ruud Lubbers, was the driving force, initially proposing to the Council of the European Union (EU) a provisional roadmap for a (so called) European Energy Community in June 1990. Lubbers’ proposal – later coined the ‘Lubbers Plan’ – set of a chain of negotiations between multiple world states which intended to create an institutional framework for the promotion of a wider-European energy trade, including active investment flows between “east and west.” In territorial terms, wider-European (or Eurasian), in the Lubbers mindset, included the newly emerging sovereign states of the declining Soviet Union, many of which were wealthy in energy resources but lacked the necessary legal regimes capable of attracting much needed foreign direct investment (FDI) capable of bringing resources to markets. Given the vast divergence in governance culture which prevailed in Western European and (post-) Soviet economies respectively, European thinking deemed that an effective, broad-based energy trade could only emerge between “east and west” if a movement toward a common rules framework for a Eurasian energy market would begin to emerge.

The European Energy Charter Declaration, signed in The Hague, the Netherlands, in December 1991, was the first concrete institutional step taken toward the establishment of the east-west energy trade as envisaged under the Lubbers Plan. Amongst the states that signed the Charter were all of the then European Community countries, Central East European (CEE) countries which would later join the EU, other European countries, the Republics of the former-Soviet Union, as well as advanced industrialized countries such as the United States, Canada, Australia and Japan. By signing up to the Charter, countries expressed their political commitment toward undertaking substantial cooperation in the energy sector by providing legal safeguards in areas such investment, trade and transit.

The states endorsed the need to develop open and efficient energy markets, as well as promoting the conditions that would stimulate FDI flows into such markets on a non-discriminatory basis. A good number of the Charter’s core principles were borrowed from the philosophy underpinning post-World War II global governance institutions such as the GATT, which were heavily endorsed by advanced industrial energy producing countries of the time, particularly the Netherlands and Great Britain. Further, the Charter confirmed the principle of state sovereignty over natural resources, whilst recognizing the importance of environmentally sound and energy-efficient sectoral policies.

The Energy Charter Treaty (ECT) followed. The establishment of the ECT is the result of the willpower shown by a large part of the Charter constituency to deepen what was effectively an initial expression of political intent into a deeper, legally binding commitment. The ECT was signed by 41 states and the European Communities in December 1994 and came into force in April 1998, 90 days after ratification by the 30th signatory. Incorporating the majority of principles contained in the Charter Declaration of 1991, the ECT remains the world’s first and only multilateral, legally binding investment protection framework solely dedicated to the energy sector. During the 1990s, as Eastern Europe and the former-Soviet republics began to open their markets to FDI, the ECT, together with the Charter Conference – the international energy organization created on the basis of the ECT – became a major institutional focal point for eastbound investors in the energy sector.

This applied, in particular, to major energy infrastructure projects, including oil and gas pipelines traversing the borders of multiple ECT member countries. In this sense, the well-known Baku-Tbilisi-Ceyhan oil pipeline, a major cross-border energy infrastructure project conceived back in the 1990s, referred to the ECT in its governance documents. The ECT provisions not only offered a range of investment protection measures through sophisticated arbitration mechanisms, but also purported to guarantee freedom of energy transit as oil, gas and other energy carriages flowing across the territory of its member countries.

During the 1990s, many significant east-west trade and investment agreements mentioned the Energy Charter, endorsing its core principles, as well as referring to the ECT. The EU-Russia Partnership and Cooperation Agreement of 1995 is just one such document. Article 65 of that agreement, which applied to energy, made explicit reference to the principles of the Energy Charter at the very outset of the text. As European companies sought market entry into former-Soviet space during the 1990s, the ECT was increasingly seen as a legal instrument of practical relevance and a factor of confidence building, for its ultimate task was to extend the rule of law into the evolving Eurasian energy markets. A TIME FOR CHANGE

While the ECT remains today as the world’s only legally binding, multilateral energy investment protection framework, the global energy landscape has changed substantially since the 1990s. It is most unlikely that either Lubbers or other top-level European decision makers could have envisaged how the wider-European energy landscape and geopolitical environment has changed during the two decades or so since the Charter was established as an international energy treaty-based organization. The manner in which the text of the Charter and the ECT were written implies substantial vision on the part of the founding fathers of these multilateral instruments. However, no one during the period 1990-94 could foresee that some 20 years later European and international energy markets would become characterized by:

  • the economic and political revival of Russia, Kazakhstan, Azerbaijan, Turkmenistan and Uzbekistan as major oil and gas producers in the global energy markets;
  • Europe’s dependency on Russian gas, the Russia-Ukraine gas supply disruptions of 2006-09 and the geopolitical fallout that this has brought;
  • shifting global power from “the Atlantic to the Pacific,” underscored by massive capital accumulation in Arab oil producing countries; the rise to prominence of vertically integrated national oil companies in terms of access to global hydrocarbons reserves; the emergence of India and China as major focal points of global energy demand, underscoring their newfound political importance; the rise of the BRICS countries and their call for a voice in the processes of global economic governance;
  • the global challenge of climate change and the desired change of course from fossil-based to sustainable economies;
  • the re-emergence of the United States as a leading international energy producer, the ‘shale revolution’ and the implications of looming American energy independence for global energy markets.  

Europe itself has also changed substantially. Change has come from both an institutional and geopolitical perspective, with former-Soviet ‘satellite states’ in CEE and three former-republics of the USSR becoming EU member states since the end of the Cold War. Many CEE countries which were also original ECT signatories are now part of the EU internal energy market, which the European Commission has been seeking to build with substantial enthusiasm in recent years. The EU has likewise been advocating the extension of internal market rules into the neighborhood, particularly into the Mediterranean, the Balkans and the wider-Black Sea region. This has led to the emergence of a number of EU-driven legal instruments relevant to regional energy cooperation, such as the Energy Community Treaty. Constituting a legal dimension of EU external energy policy, the Energy Community is a reflection of EU desires to extend the Bloc’s internal market legislation for energy into the Balkans in order to prepare a number of the regional states for eventual EU membership.

IMPLICATIONS FOR THE CLASS OF ‘94

It would be highly myopic to imagine that all of these developments and game breaking changes in the global energy landscape would not have significant implications for the Energy Charter Process – the formal term used for describing the international policy forum which has been built up around the ECT. Bullet points one and two above imply at Russia as a more assertive international actor than may have been the case when the Charter Treaty and Conference were being conceived during the first half of the 1990s. Similarly, the third bullet point suggests that no shortage of developing countries, which were largely left out of the 1991-94 negotiations on the mainstream Charter documents, now have both the desire and capability to defend their interest in the international energy governance processes. This clearly implies that the original Energy Charter Process which was founded upon documents produced during 1991-94, cannot remain idle if it is to retain its relevance in the prevailing global energy governance landscape at the start of the 21st century, lest it remain a product frozen in those of the late 20th.

Clearly, when considering the onward evolution of the Energy Charter process, it is high time to appreciate that the imperfections of the past need to be absorbed within new strategies. The 1990s can be looked upon as years of substantial hope and optimism with respect to the thriving east-west energy trade that the Energy Charter aimed to bring. More recent years, however, have brought gridlock and failings in quarters of the ECT constituency to agree upon methods of improving the Charter Process in wake of an ever changing international energy environment. Negotiations on a Supplementary Treaty to the ECT were put on hold at the end of the 1990s, while negotiations (largely between the EU and Russia) on a new Energy Charter Protocol on Transit all but collapsed a decade later.

In January 2009, during the peak of the high-profile Russia-Ukraine gas dispute, Moscow publically announced its displeasure with the ECT, given that the Treaty was unable to ensure Ukraine “guaranteeing freedom of transit” for EU-bound Russian gas. By October of that year, Russia terminated its provisional application of the ECT and proposed its own conceptual approach for a “new legal framework for energy cooperation.” As the world around it was changing so rapidly, it now appeared to the Energy Charter constituency that it was also high time to change.

A ROADMAP FOR CHANGE

At the 20th meeting of the Energy Charter Conference in Rome in December 2009, in light of what was widely perceived as “Russia’s withdrawal” from the ECT, the Charter constituency finally agreed that change to the way in which this international energy organization works was necessary, if not gravely overdue. The Rome Conference mandated the “modernization” of the Energy Charter Process, a roadmap for which was developed shortly thereafter. In the most practical terms, the modernization strategy originally mandated by the Rome Charter Conference now endorses practical steps aiming to correct the shortcomings out of the past years, namely to:

  • strengthen the existing relationships within the core ECT constituency and thereby increase the level of political ownership of the constituency over the Charter Process;
  • introduce greater transparency and accountability into the Charter Process, thereby making it more open, visible internationally, and hence attractive for cooperation with interested third parties;
  • make the Charter Process and the 1991-94 Energy Charter documents more open and attractive particularly for developing countries and rising energy powers, thereby enhancing the scope to increase the geographical base of the ECT. This was to be developed by strategies of active expansion and outreach;
  • explore the possibility of updating some of the language and terminology employed in select Energy Charter documents of 1991-94, with the intent of more equally balancing out the interests of energy consuming and producing nations. This would make the Charter more universal in application and strengthen its legitimacy within the context of the prevailing global energy governance landscape of the early 21st Century.    

Although it took some time to start moving the machinery of the sizeable and highly diverse country-constituency of the Charter Process toward implementing the modernization roadmap, as the Energy Charter starts to enter another new year, it now appears that we are finally making headway. During the first year or two after the Charter Rome meeting, trust levels between core members of the ECT constituency were at an all time low. This state of affairs severely undermined any genuine reform efforts. Despite the existence of the modernization road map, Russia continued to offer its “conceptual approach” to international energy security as the way forward for energy cooperation, existing members of the ECT constituency such as Ukraine joined the Energy Community Treaty in 2011, while few developing countries showed a desire to become more active in the Charter Process. This applied in particular to oil producers in the Middle East and North Africa, which continued to look at the Charter’s instruments as biased toward the interests of energy consuming states of the EU.  AND THE TIMES “ARE A CHANGING”

As we begin to enter 2014, however, some of these drawbacks are starting to fall behind us. Formal adoption of the Consolidation, Expansion and Outreach Strategy (CONEXO) in August 2012 has seen the Energy Charter take substantial steps toward strengthening the Charter Process. The ‘consolidation dimension’ of CONEXO has involved top Charter officials conducting active, bilateral consultations with the ECT’s five non-ratifying signatories: Russia, Norway, Australia, Iceland and Belarus. Much work remains to be done in this respect and with the exception of Iceland, it must be admitted that ratification of the ECT by these countries is hardly around the corner. However, the most tangible achievement of the CONEXO Strategy is that Russia and the Energy Charter are once again moving closer toward an effective working relationship.

Russia remains a member of the Energy Charter Conference, never having left the body, while the current Russian deputy-Minister for Energy is the Conference vice-Chairman. Russia’s proposals for strengthening international energy security are very similar to the core Energy Charter provisions and we are working on finding stronger common ground between them. Much of the trust between Russia and other members of the ECT constituency has been restored and despite the changing global energy landscape, all parties understand that the east-west component of the Energy Charter cannot be disregarded.

That said, it is equally evident that world energy markets are changing in a manner where the conditions now exist for the Energy Charter to become a far more global process than has ever been the case in the past. This is not just wishful thinking. CONEXO is achieving tangible results in terms of its ‘expansion and outreach dimension’. Afghanistan acceded to the ECT in 2013, becoming the first country to join the Treaty since Japan’s ratification back in 2002. Montenegro’s accession to the ECT now appears imminent. The formal requests of Yemen and Lebanon to sign the Charter were both approved at the 24th Meeting of the Charter Conference in Nicosia, Republic of Cyprus, on December 5, 2013.  Signature of the Charter is the first step in the process of ECT accession. It is now firmly expected that both countries will sign the Charter in the following months.

Other countries in the Middle East and North Africa (MENA), most notably the Kingdom of Jordan, are widely deemed to be nearing accession. As is the case with Montenegro, Jordan is expected to internally approve the instrument of accession to the ECT shortly and thereby accede to the Treaty in the highly foreseeable future. The accession of MENA states to the ECT will help erode the perception that Arab oil producers retain suspicion toward the Treaty. Furthermore, closer contact between MENA and the Energy Charter is also facilitated by a Memorandum of Understanding between the Energy Charter Secretariat and the League of Arab States headquartered in Cairo, Egypt. While such developments are all welcomed by the ECT constituency, they may yet prove to be only the tip of the iceberg in relation to the onward evolution and overall relevance of the Energy Charter as a global energy governance organization.

During an opening statement at the World Energy Congress held in the Republic of Korea in October 2013, the country’s president, Park Guen Hye, explicitly referred to the ECT and endorsed the Treaty’s suitability as a multilateral legal framework which could encourage energy investments from both private and public sectors. India’s oil ministry has recently made statements in favor of joining the ECT, asserting that the Treaty will help protect Indian investments, allow free trade in equipment based on WTO rules, assist Indian cross border pipeline projects with energy transit and provide more transparent dispute resolution mechanisms. India’s neighbor, Pakistan, a long-term observer of the Energy Charter Conference, now appears close to finalising its internal approval of the instrument of accession to the Treaty and lies in a similar accession category to Jordan and Montenegro.

Further, the Republic of Indonesia became the first Asian country to host the annual Energy Charter Policy Conference, when it took place in Bali, in September 2013. This event contributed greatly to raising awareness and increasing the visibility of the Energy Charter in East Asia in a pro-active manner, endorsing President Park’s comments in the most practical sense by “road-showing” the Charter in this dynamic global region. Indonesia itself is currently in the process of preparing its ECT accession report, which is to be presented to the Energy Charter Conference once approved by the government, thus paving the way for the country’s eventual accession to the Treaty. Morocco is presently in a similar category, with accession reports likewise being drafted, as is Serbia.

China, the new focal point in global energy consumption, is becoming far more active in the Energy Charter Process right at the time of this very writing. High level meetings are now being exchanged between Beijing officials and Energy Charter counterparts, whilst the China National Petroleum Corporation (CNPC) likewise participates in Energy Charter associated bodies such as the Industry Advisory Panel. However, neither China, nor Korea or India, have yet undertaken any formal steps which would pave the road for their eventual incorporation into the Energy Charter Process. A number of other countries have also expressed interest in exploring the prospect of more active contacts with the Energy Charter, including the possibility of acceding to the ECT. These include Tunisia, Libya, Israel and Sri Lanka, although it is still very early days with respect to such states joining the ECT constituency.

EXPANDING THE APPLICABILITY OF THE RULE OF LAW

None of these achievements should be taken lightly. In this rapidly changing world where challenge often outweighs opportunity, it is becoming ever clear that an increasing number of international stakeholders want to see the expansion of the applicability of the rule of law in energy cooperation. Rule of law and good governance is what the Energy Charter stood for when it was first established as a treaty-based international energy organization and this very much remains to be the case today. However, it is equally clear that the Charter Process needed to be modernized in order to make it stronger and capable of effectively responding to the needs of its existing constituency. Furthermore, in order to make the Charter stronger, the organization also needs to become more appealing to interested third parties outside the original ECT constituency – predominantly observers and other interested non-members in MENA, Asia and Africa. 

Substantial steps in this direction have already been taken in the last months of 2013. Political ownership of the constituency over the Energy Charter is being strengthened by the introduction of a new system of rotating Chairmanship of the Charter Conference. Kazakhstan, a foremost Caspian energy producer, assumes this position for one year as of January 1, 2014, to be followed by Georgia and Japan in 2015 and 2016 respectively. Greater transparency and accountability of the Charter as an international energy organization is being facilitated by the recent decision to de-restrict decisions of the Energy Charter Conference. De-restriction will not only make the Charter into a more open and accountable international organization, but will also offer interested third parties better access to information about the Charter Process, allowing them to make more timely decisions vis-à-vis future cooperation and eventual ECT membership. This will undoubtedly assist with the ongoing expansion and outreach strategy of the Energy Charter Secretariat, as will the newly established system of Energy Charter Liaison Embassies and Special Envoys.

It is clear that the Energy Charter is going through a process of reform and modernization. In fact it is the only bona fide organization of global energy governance which has embarked upon the path of fully fledged reform, where the reform process has been mandated by the organization’s constituency. This, in itself, is no small achievement, taking into account the diversity and geographical breadth of the ECT constituency of 53 members. We should also take into account that there is not much scope for wholesale reform of other international energy organizations, particularly OPEC and the IEA, at the present time.  In the context of adoption of the CONEXO strategy, the last 18 months have allowed us to create both the tools and conditions necessary in order to begin delivering on genuine modernization of an international energy organization that came into existence during times of tumultuous expectation and hope for change in wider-Europe resulting from the end of the Cold War. This will keep us in good stead for 2014, when the Energy Charter Treaty comes under its five-year review, which will also see CONEXO updated and refined further in strategic terms. 

While the Energy Charter has faced its own crises during the last two decades, it is now time to take the opportunity of further strengthening the organization in order for it to be – as spelled out in Article 2 of the ECT – truly “based on complementarities and mutual benefits in accordance with its objectives and principle.” It should also be taken into account that complementarities and benefits should serve the interests of the entire constituency and well beyond. Rule of law, after all, should apply equally to all parties and at all times. Modern, democratic international organizations will only work effectively if they inspire the confidence and trust of all of their members, spreading benefits amongst them in a proportional manner. The task of delivering on energy security to all ECT members is no mean feat. I firmly believe the Energy Charter is up to the challenge, however, and we are now only beginning to realize its potential of becoming a 21st-century governance power in the energy investment field. 

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