the energy charter treaty and transit protocol and related...

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


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


*) 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


ECT MAJOR OPPONENTS IN RUSSIA AND THEIR ARGUMENTS


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


MOST RECENT PUBLICATIONS ON ECT:

RUSSIAN OIL EXPORT INFRASTRUCTURE TO EUROPE AND ROLE OF TRANSIT


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


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


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 $


Source: J.V.Genova/Exxon Mobil

RUSSIAN GAS FOR EUROPE


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


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


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).


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)



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)


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)



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.


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


ARE THERE ANY BENEFITS FOR RUSSIA IN REIO CLAUSE?


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


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


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

the energy charter treaty and transit protocol and related...

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