Energy Charter Process: multilateral governance for trade, transit and investments

Putting a Price on

ENERGY

InternationalPricing Mechanisms

for Oil and Gas

Energy Charter Secretariat

Energy Charter Process: multilateral governance

for trade, transit and investments

Prof. Dr. Andrey A.Konoplyanik, Adviser to Director General, Gazprom export LLC,

Professor, Chair “International Oil & Gas Business”, Russian State Gubkin Oil & Gas University

[email protected],[email protected],

www.konoplyanik.ru

Presentation at the Autumn School “CHANGING POLICIES AND CULTURES IN EUROPE AND RUSSIA: ENVIRONMENT, RESOURCES, ENERGY” jointly conducted by University of Tartu, Euro College;

Freie Universität Berlin, Institute for East European Studies; University of Helsinki, Aleksanteri Institute;

September 18 – September 24, 2013, Tartu, Estonia

mailto:[email protected]

mailto:[email protected]

http://www.konoplyanik.ru/

Table of contents

• ECT: multilateral dimension• ECT: its specific role & legal novelty• ECT & project financing• ECT & EU acquis communautaire• Energy Charter & other international

organisations• ECT: way forward

2A.Konoplyanik, Tartu, 19.09.2013

01.06.2010:2756 BITs2927 DTTs

Development of international energy markets and of mechanisms of investment and trade protection and stimulation

Energy markets Mechanisms of investment protection/stimulation,incl. enforcement mechanisms

Global common energy market

Local

Internationalisation

Regional

Globalisation

World markets of individual

energy resources

International law instruments

Bilateral

Multilateral

Energy efficiency

Investments

+BITs, DTTs

ECT+

Enclaves of stability & investment stimuli in unstable / non-stimulating

legal-economic environment

Increase of general level of investment attractiveness of

domestic legislation

+National

legislation

e.g. RF: Concessions, Free Economic Zones,

PSA

+

Transit

+

e.g. RF: Tax Code, subsoil & investment

legislation

Dispute settlement

+Trade+

Oil

EU Acquis WTO!?

e.g. EU: derogation from mandatory TPA (2nd Gas

Directive: Art.21-22; 3rd Gas Directive: Art. 35,36)

ECT (54) = 1431 BITs [partly]

Gas

Growth of number of BITs, 1959-1999

Source: Bilateral Investment Treaties, 1959-1999. UNCTAD/ITE/IIA/2, 2000, p.1


Trends in IIAs: 1983 – 2012, according to UNCTAD WIR 2013

Source: UNCTAD World Investment Report 2013. UNCTAD, NY and Geneva, 2013, p. xx.

Table of contents




ENERGY CHARTER AND RELATED DOCUMENTS

Political DeclarationEUROPEAN ENERGY CHARTER (1991)

Legally Binding Instruments

Ene

rgy

Eff

i cie

n cy

P rot

oco l

(P

EE

RE

A) (

199 4

)

Ene

rgy

Tra n

sit P

roto

col

ENERGY CHARTER TREATY (1994/1998)

TRADE AMMENDMENT (1998/2009)

INVESTMENT SUPPLEMENTARY TREATY

- in force- negotiations not finished yet- new Protocol which could have been proposed by Russia

Energy Charter political

principles incorporated in

the legally-biding ECT and

related instruments

Prot

ocol

on

prev

entin

g em

erge

ncie

s in

tran

sit

ECT as a modular design legal structure

(open-end set of legally binding & non-binding

instruments)

• Energy Charter Treaty:- Unique coverage of different areas for energy cooperation:

• investment, trade, transit, energy efficiency, dispute settlement,• energy materials & products + energy-related equipment,• 51 member-states (52 CPs) + 23 observer-states + 10 observer

international organisations - First and only one multilateral investment agreement with high standard of investment protection, incl. dispute settlement

• Energy Charter process:

- Implementation of ECT,

- Specialized forum for “advanced” discussion of the issues of energy markets evolution that might create new risks for development of energy projects in ECT member-states,

- Platform for preparation of new legally binding instruments to diminish such risks within ECT member-states (e.g. broadening & deepening of ECT & upgrading its “minimum standard” of protection)

ENERGY CHARTER SPECIFIC ROLE


• Based on:o well-established practice of BITs (about 400 BITs at the

beginning of the 1990’s - around 2600 BITs as of today)o investment chapter XI of NAFTA (US, Canada, Mexico)o some interaction with then OECD proposed “Multilateral

Agreement for Investment” (MAI – aborted in 1998)• Within 54 member-states ECT is equivalent to 1431

BITs • MFN and National Treatment for investors:

o hard-law obligations (binding guarantee) of non-discriminatory treatment for post-establishment phase,

o soft-law obligations for pre-establishment phase (stage of making investment)

ECT = THE FIRST MULTILATERAL INVESTMENTAGREEMENT (1)


• Protection against key political/regulatory risk:o expropriation and nationalisation,o breach of individual investment contracts,o unjustified restrictions on transfer of funds

• Reinforced by access to binding international arbitration in case of dispute:

o State-to-state, and (NOVELTY!) investor-to-state => direct dispute settlement at investor’s choice at ICSID, UNCITRAL or ICC Stockholm (competence: appr.50% of new ICSID submissions & appr.20% of ICC cases relates to energy),

o Awards: final and enforceable under New York convention,usually as entitlement to payment (no risk of vicious circle for

retaliating measures),retroactive to start of dispute, may include interest (no incentive to

delay process)

ECT = THE FIRST MULTILATERAL INVESTMENTAGREEMENT (2)


11

International investment arbitration on the rise

0

5

10

15

20

25

30

35

40

45

50

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

50

100

150

200

250

300

350

400

450

500

Energy Disputes Other Disputes

Cumulative Energy Disputes Cumulative Number of Disputes

UNCTAD Database

Source: Joachim Karl, UNCTAD

NB: ECT-based Investor-State Dispute Settlement cases (Art.26): 33 cases (as of end-2012)

A.Konoplyanik, Tartu, 19.09.2013

ECT DS = 1/4

Table of contents




“Natural advantage” of project A over project B (A < B)Final competitive disadvantage of project A over project B (A > B)

$/boe $/boe

Project in country A

Project in country B

t t

Technical costs A

Financing costs A

Technical costs B

Financing costs B

Tota

l cos

ts A

Tota

l cos

ts B

II

“NATURAL” VS. “FINAL” COMPETITIVE ADVANTAGES OF ENERGY PROJECTS

I

III

13A.Konoplyanik, Lectures EUSP - ENERPO Programme, SPB, 02-03.2013

ROLE OF THE ECT FOR PROJECT FINANCING (ECT IS A BUSINESS-ORIENTED TREATY)

ECT/Legislation risks financial costs (cost of capital) = inflow of investments (i.e. FDI, capital flight) CAPEX technical costs = + = pre-tax profit IRR (if adequate tax system) competitiveness market share sales volumes revenue volumes

ECT provides multiplier legal effect in diminishing risks with consequential economic results in cost reduction and increase of revenues and profits

12

1 2 3

Cumulative costs1 2 3 Financial costs Technical costs

$/boe

After ECT t

1

2

Total costs

$/boe

Before ECT t

Technical costs

Financial costs 3

t

National regulatory changes for DFI, 1992-2009: correlation between

liberalization/promotion (more favourable) &

regulations/restrictions (less favourable) changes, %

Источник: World Development Report 2010. UNCTAD, 2010, p.76-77.

16

Policies with regard to FDI in energy The energy sector is more prone to State intervention

than most other economic activities

0%

20%

40%

60%

80%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Liberalisation/facilitation in energy sector

Restriction/Regulation in energy sector

Liberalisation/facilitation in all

sectors

Restriction/Regulation in all

sectors

UNCTAD Database

Source: Joachim Karl, UNCTAD


ECT INVESTMENT REGIME: STANDSTILL & ROLLBACK PROVISIONS (ARTICLE 10(5))

DIS

CR

IMIN

ATIO

NS

FOR

IN

VE

STM

EN

TS/

INV

EST

OR

S

t

STANDSTILL (Art.10(5)(a)

ROLLBACK (Art.10(5)(b)

Non-legally binding (soft law)

commitments

PAST FUTURE

Table of contents




Level of “liberalization”

EU–15 (prior to 01.05.2004)

ECT

ECT member-states (51+2 REIO)

Rest of ECT = Russia/CIS/Asia/…EU–25 (after 01.05.2004)

Level of “liberalization”

ECT & EU acquis: “minimum standard” within evolving Eurasian common energy space vs. more liberal “general

standard” within evolving common European energy space

EU–27 (after 01.01.2007)

ECT1

(*)

Domestic legislation of ECT member-states prior to their

participation in ECT

Legal norms (key examples) ECT EU Acquis (1-st Gas Directives) EU Acquis (2-nd & 3-rd Gas Directives)

Mandatory TPA No No YesUnbundling No No Yes

2 2-nd EU Gas Directive (2003)

EFTA = EU-15/25/27+3Energy Community Treaty EU+SEE (27+7)

3

ECT observer-states (23+)

1 1-st EU Gas Directive (1998)

3 3-rd EU Gas Directive (2009)

(*) ECT = integral part of EU acquis communautaire (ECT = minimum standard)

Level of “liberalization” - general tendency

2

EU enlargement

EU enlargement

Growing gap between EU acquis & ECT


Table of contents




SELECTED INTERNATIONAL INVESTMENT-RELATED AGREEMENTS

Organisation(member-

states/CPs)

Legal Status

Scope Investment Trade Transit Energy Efficiency

Dispute Settlement

ECT (51/52) LB Energy Yes Yes Yes Yes YesWTO (149) LB General (Yes?)

(Services) Yes Yes/No* No Yes

NAFTA (3) LB General Yes Yes No No Yes

MERCOSUR(4)

LB General Yes Yes No No Yes

OECD (30) LB General Yes No No No No

APEC (21) Non-LB

General Yes Yes No No No

* application of GATT Art.V to grid-bound transportation systems is under debatePlus specialised energy-related organisations: OPEC, IEA, IEF, UN ECE (partly), IAEA, …Plus specialised “regional” organisations: BSEC, BASREC, …Compiled by Dr. Joachim Karl, former Senior Expert of the Energy Charter Secretariat, Brussels, and currently Legal Affairs Officer, UNCTAD, Geneva, and has been presented with his kind permission since then by the author

InvestmentprotectionIF

Is

World Bank (IBRD+MIGA+ICSID)Regional Development Banks: EBRD, ADB, EIB, …

Energy investment protection: complementarity of energy-related international organizations

IEF

IEA

Ener

gy C

harte

r

Region

al,

bilat

eral

BSEC, BASREC, EU-SEE Energy Community Treaty, EU ENP, …

Bilateral (energy) dialogues: Russia => EU, USA, individ. CIS states, …EU => Russia, Norway, Algeria, Turkey, …

UNECE,

OSC

E

Laws & policies

Soft Law (general, incl. energy)

Soft & Hard Law (energy specific)

Long-term vision -

individual states Summarized

quantitative assessments (volumes

& CAPEX)

Invest-ment

drivers

Table of contents



ENERGY CHARTER PROCESS: GEOGRAPHICAL DEVELOPMENT

24

ECT current expansion trends

1. From trans-Atlantic political declaration to broader Eurasian single energy market2. ECT expansion - objective and logical process based on clear economic and financial reasoning

Dark blue: signatories to the 1994 Energy Charter Treaty, and members of the Energy Charter Conference Blue: signatories to the 1991 Energy Charter, and observers to the Energy Charter Conference Light blue: observers to the Energy Charter Conference by invitation of the Conference (without signing the 1991 Charter)

Source: http://www.encharter.org/index.php?id=61&L=0 .


Thank you for your attention!

www.konoplyanik.ru

[email protected]

[email protected]

A.Konoplyanik, Tartu, 19.09.2013 25

Energy Charter Process: multilateral governance for trade, transit and investments

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