Threats to energy security in Western Europe

Recent developments in the discussion between Russia and the Energy Charter Secretariat indicate that there is a growing consensus that the market is not sufficient to ensure energy security. Discuss

Introduction

Since the Cold War, the relationship between the EU and Russia with regards to energy has been beset by insecurity and has evolved into bitter controversy. Significantly, Russia’s persistent condemnation of the Energy Charter Treaty (ECT) and the Energy Charter Process (ECP) has posed a major threat to energy security in Western Europe. In July 2009, Russia’s negative attitude peaked following its dramatic exit from the ECT, rendering the Secretariat paralysed in upholding the Charter’s multilateral governance of energy cooperation. Russia’s presence in the ECT is essential despite the absence of ratification, because it provides the largest supply of energy to the EU, producing ten per cent of energy exports globally[1]. Accordingly, the relationship between the two entities is one of interdependence underlined by the ‘asymmetry between energy production and consumption’[2]. Regardless, Russia has created ‘pseudo-political monopolies’[3] by playing strategically in the energy community. Recent developments confirm that the Energy Charter Secretariat sought to appease Russia by establishing the ‘Road Map for the Modernisation of the Energy Charter Process’, to incorporate Russia’s proposals in the Draft Convention on Ensuring International Energy Security but was only mildly successful. Ultimately, the discord between the two documents highlights the hopelessness of discovering an international legal instrument to ensure energy security. The premise of this essay lies in the ambit of transit provisions and dispute mechanisms.

The Energy Charter Treaty and Russia: An Ill-fated Venture

The ECT constitutes a unique multilateral instrument for energy cooperation, involving investment protection, trade, transit and dispute settlement provisions[4]. It acknowledges the importance of state sovereignty whilst affirming transparency and non-discrimination for international cooperation. To bolster this initiative, Section VII enables ‘contractual partners to negotiate annexes, changes and additional protocols’[5]. However, the Transit Protocol is yet to be implemented.

Fifty-one states, including the European Union have acceded to the ECT, Russia was one of the five states that refused to ratify the treaty. By failing to register a Declaration of Non-Application (Art 45(2))[6], Russia was still bound by Art 45(1) to provisionally apply it so far as ‘national Russian laws and regulations [did] not prohibit the provisional application of the entire Treaty or certain clauses of it’[7]. Thus, Article 15(4) of the Russian Constitution conveniently reiterates that international treaties, such as the ECT, are enshrined in its legal system. This enables Russia to manoeuvre around ECT provisions by declaring incompatibility with its domestic law where necessary. With the Russo-Ukrainian crisis exacerbating its position, Russia informed the Energy Charter Depository of its intentions to not ratify the ECT and terminate its provisional application. However, formal withdrawal from the ECT has yet to be made, with Russia maintaining its position in its preferred ‘grey area’[8]. As such, there is a discrepancy about whether Article 47(3) ECT concerning the protection of investments is ensured for the period of 20 years.

Transit Dilemma in the Energy Charter Process

Increasing reliance on Russian gas and decarbonisation efforts means that Russia plays a dominant role; therefore it cannot easily be ignored irrespective of its vague participation. Russian gas leader Gazprom reprimanded the Treaty for inadequate concern of Russia’s interests. A crucial point of contention was the question of transit: ‘How to ensure a reliable gas transit through Belarus and Ukraine… while preserving a monopoly on the gas transit from central Asia…?’[9]

Article 7 ECT governs the transit of gas from Russia through Eastern Europe to Western Europe. Based on Article V of GATT, ‘Member states are required to facilitate, and refrain from impeding, the transport of natural gas through pipeline systems passing through their territory’[10] buttressed on a non-discriminatory basis pertaining to ‘access to the pipeline network and rights to construct new capacities’[11]. Secure transit is fundamental to the international energy market and therefore, energy security. Attempts to strengthen and resolve issues raised mainly by Gazprom were made by Russian and European negotiators on the draft Transit Protocol (TP). However, after numerous and fruitless negotiations, compromise has not been reached on three issues: the EU’s proposed Regional Economic Integration clause (REIO clause); the methodology for setting transit tariffs; and Russia’s concern about contractual mismatches under the Transit Protocol rules[12].

Under Article 20 TP, the REIO clause proposes that energy would flow across the EU as a whole as opposed to individual states whereby ‘transit’ within the EU would be replaced by ‘transportation’. Unsurprisingly, Russia condemns the REIO clause because it imposes more demands on Russia whilst ‘exempting the EU from the application of the ECT’[13]. Paradoxically, this rattles the ‘consistency between the ECT and the acquis within the EU’[14]. The EU’s aspiration to appear as an economically integrated region is debated; it has freedom to ignore the Energy Charter instrument and impose a strict EU market system for internal transportation. Thus, Russia has no desire for further integration with the EU.

For setting transit tariffs, Article 10 proposes that tariffs should be ‘objective, reasonable, transparent and non-discriminatory…incorporating the principle of cost-reflectiveness’[15] as ECT Article 7(3) may produce staggered monetary results. Consequently, Russia has complained of a potential slippery slope whereby demands for transit tariffs, in conjunction with third party access, would skew the balance in favour of Russian competitors. The black-letter law of Article 7(3) does create interpretive uncertainty: ‘originating in or destined for its own Area’ can be read disjunctively or conjunctively. However, in keeping with the spirit of the ECT, a conjunctive interpretation is preferable as it is non-discriminatory, lowering the risk for the security of demand. Moreover, jurisprudence of the ECT indicates its desire to neutralise the monopoly of Russia. Even so, considering the murky grounds of Russia’s position in the ECT, to what extent should these instruments protect them?

Russian allegation of a possible ‘contractual mismatch’ between long and short-term contracts is underlined by the Secretariat’s goals for open and competitive markets instead of long-term contracts[16]. For instance, Russia would experience a negative impact on the Yamail-Europe pipeline, whereby ‘transit contracts would be applied for shorter intervals than the existing long-term supply contracts’[17]. Article 8 TP requires that contracting parties must ‘negotiate in good faith…requesting access to and use of available capacity for transit’[18] where principles of transparency and non-discrimination apply. The changing locus of access to capacities is unwelcomed by Gazprom, as ‘auctions’ are not cost-reflective and hinder potential capital-intensive investments. Evidently, the Charter seeks to undermine Russian influence masked by anti-hoarding movements and congestion mechanisms. Thus, the instruction to negotiate in ‘good faith’ is downgraded by Russia’s strategic approach to maintaining supremacy in the energy regime.

Political affiliations and artificial claims by Russia resulted in a stalemate for the Transit Protocol. The 2001 announcement in the Russia State Duma and 2006 G8 Summit in St Petersburg confirmed that ratification of TP would not happen until Russian considerations were met[19]. More so, antagonism has been provoked by flawed interpretations of the ECT by Western but mostly Russian politicians, magnified under the lens of the media: for instance the deputy chairman of the Russian State Duma often claimed that ‘the ECT provides third party access to the energy infrastructure’[20]. This common fallacy is indebted to the incorrect interpretation of Article 7(1). Critics suggest that Russia’s refusal to ratify the TP is not only due to the concerns detailed above but also to political contempt for ‘an EU-sponsored Treaty’[21]. Gazprom fears the floodgates would open if additional transits were allowed, jeopardizing its current monopoly on Central Asian gas with existing economic and political advantage to imposing higher transit fees. However, not only did the Russo-Ukrainian crisis enhance the search for non-controlled Russian pipelines[22], but also the recent project on the Aktau-Baku-Tbilisi-Ceyhan oil export route is expected to reduce dependency on Russia resources, marginalizing its influence in the energy market.

In January 2009, The Energy Charter Secretariat hit rock bottom after the Russo-Ukrainian crisis, when Prime Minister Vladmir Putin criticised the ECT for inadequate dispute settlement mechanisms. The primary obligation of the ECT is to ensure the flow of energy regardless of any disputes. As experienced in 2009, the consequences for failed dispute resolutions can be severe with widespread effects on Europe. Article 7(7) provides a transit dispute mechanism, proposing that once dispute resolution remedies have been exhausted, the contracting party may resort to a conciliation procedure[23]. Criticisms of the process have to do with the lengthy procedure and the disproportionate authority bestowed on the conciliator. The conciliator is given six months to arrive at a decision and the entire procedure can take 91–121 days[24]. As such, the ‘conciliation procedure has not yet been invoked although there have been several transit disputes that might have triggered its application’[25]. Urgent reform is vital, particularly to attract Russian ratification of the ECT. However, the TP contribution was particularly disappointing as it merely reverted back to ECT Article 27(3), which previously resulted in confusion with Article 7(7). Essentially, the failure of the ECT pivots on the diminished force and value of the conciliation process and the inability to prevent transit interruption.

Draft Convention: not an alternative to ECT

A direct consequence of the 2009 gas crisis was that the Russian President, Dmitry Medvedev announced a ‘Conceptual Approach to the New Legal Foundation for International Cooperation in Energy’ which was subsequently revised to the ‘Draft Convention on Ensuring International Energy Security’. Russian advocates condemned the ECT for being unbalanced, professing that the new document would offer ‘a new fully-fledged legal base for future energy cooperation’[26] that would ‘de facto replace the Energy Charter’[27]. Yet, critics call this a strategic ploy to justify its condemnation of the ECT, and that it will act as a revolving door for possible entry into the ECT. The negative consequences of Russia’s formal withdrawal are obvious: ‘Europe enables Russia to get its “revenue fix”; Russia gives Europe its “energy fix”’[28].

The goals and principles in the Draft Convention are championed in the ECT and ECP; however, its novelty lies in the transit provisions. Unlike the ECT, the Draft Convention focuses exclusively on ‘security’ to stabilize energy markets and advance energy governance. Accordingly, stability is ‘an antipode to the competition-oriented approach’[29]. Nevertheless, the Draft Convention lacks innovative solutions and proposes feeble approaches. For example, with reference to transit regulations, REIO clauses are not exempted as prescribed in Article V.4[30]. The rigidity of this provision renders it unworkable and the recent ‘equal treatment’ provision in TP develops ECT rules, benefiting the aggrieved party. Significantly, the so-called inadequate dispute settlement mechanism of the ECT was mostly duplicated in the Draft Convention. The irony is blatant as it provides that ‘the tribunal shall independently determine its own procedure’[31]. So, along with the insignificant changes on as a momentous an issue as transit, and attention only on energy investments and trade regimes, the Draft Convention cannot rival the ECT, regardless of the Russian political stance. Its framework is broadly written and lacks clarity. Further, persuading 50-odd member states to accept this proposal would be a tall order.

Road Map: Resurgence of the Energy Charter Process?

Recent political and economic realities have placed the ECT and its concurrent process in danger of extinction. Russia’s negativity and steady digression by the EU on ECT provisions have been potent. In 2010, the introduction of the ‘Road Map for the Modernisation of the Energy Charter Process’ by the Energy Charter Secretariat represented a desperate attempt to revive the ECT and its processes. At first glance, it indicates an appeasement of Russia by affirming objectives in the Draft Convention Road Map as ‘one important contribution in relation to possible enhanced legal frameworks for energy cooperation’. Like the Draft Convention, the Road Map pursues the opening of energy markets[32] and safeguarding energy security. However, in reality the practicalities of implementing these are mutually incompatible. For instance, the Road Map proposes solidifying TP and subsequently revamping the ECT by clarifying the dispute settlement mechanism forcefully contended by Russia. Meanwhile, the Draft Convention advocates ‘stricter domestic regulation of the energy-chain operation with very limited interference from the outside’[33] challenging the spirit of the ECT. Thus, it is evident that the Secretariat’s efforts to adapt Russia’s proposal are merely illusory as fundamental concerns by Russia are not effectively resolved.

Conclusion

It is evident that positive deliberations between Russia and the Energy Charter Secretariat have barely progressed. The profound interdependent relationship between Russia and the EU means that it would be constructive to pursue a ‘consensus oriented approach’[34]. Significantly, the transit regime offered by the ECT has the potential to successfully govern the uninterrupted flow of energy from middle Asia to Europe[35]. However, the Russian perspective does not recognise any real advantage in supporting this initiative, particularly the perceived risk of losing its monopoly. However, the global recession and decarbonisation efforts emphasise that Russia’s monopoly is best protected by the ECT and its processes. Thus, Russian proposals represent the need for energy cooperation and are a signal for continued discussions. However, the recent development of the Road Map highlights the impossibility of merging both initiatives. In conclusion, whilst reform of the ECT is essential, it remains a unique common denominator for international consensus in the energy community.

BIBLIOGRAPHY

Materials Cited

Articles

• Azaria D, ‘Energy Transit under the Energy Charter Treaty and the General Agreement on Tariffs and Trade’ (2009) 27(4) JERL 559

• Belyi AV and Nappert S, ‘A New Energy Charter: Myth or Reality’ (2009) 7(2) OGEL 1

• Belyi AV, ‘International Energy Security viewed by Russia’ (2007) 5(4) OGEL 1
• Belyi AV, Nappert S and Pogoretskyy V, ‘Modernizing the Energy Charter Process? The Energy Charter Conference Road Map and the Russian Draft Convention on Energy Security’ (2011) 9(5) OGEL 1
• Cameron F, ‘The Politics of EU-Russia Energy Relations’ (2009) 7(2) OGEL 1
• Doeh D, Nappert S and Papov A, ‘Russia and the Energy Charter Treaty: common interests or irreconcilable differences?’ [2006] IELTR 189

• Filis C, ‘Current Stay of Play in EU-Russian Energy Relations’ (2009) 7(2) OGEL 1

• Flynn C, ‘Russian roulette: the ECT, transit and Western European energy security’ (2007) 1 IELTR 12
• Konoplyanik A, ‘Energy security: the role of business, governments, international organisations and international legal framework’ [2007] IELTR 85

• Konoplyanik A, ‘A Common Russia-EU energy space (The new EU-Russia Partnership Agreement, acquis communautaire, the Energy Charter and the new Russian initiative)’ (2009) 7(2) OGEL 1
• Seliverstov S S, ‘Energy Security of Russia and the EU: Current Legal Problems (2009) 7(2) OGEL 1

• Simonet L, ‘Looking for an Energy Community Through an International Legal Instrument: Mission Impossible?’ (2012) 10(3) OGEL 1

• Svedberg M, ‘Energy in Eurasia: the Dependency Game’ (2007) 14(1) TSR 195

• Szlagowski P, ‘Review of the “new legal framework for energy cooperation” and dispute resolution mechanisms in energy transit’ [2010] IELR 147
• Turksen U and Wojcik J, ‘The European Union and Russia energy trade- thickening of legality and solidarity?’ [2012] IELR 21
• Westphal K, ‘The Energy Charter Treaty Revisited’ [2011] SWP 1

Materials Consulted

Articles

• Cameron F, ‘The Politics of EU-Russia Energy Relations’ (2009) 7(2) OGEL 1
• Hober K and Nappert S, ‘Provisional Application and the Energy Charter Treaty: the Russian doll provision’ [2007] Int ALR 53
• Nappert S, ‘EU-Russia Relations in the Energy Field: The Continuing Role of International Law’ (2009) 7(2) OGEL 1

Books

• Piebalgs A, ‘EU-Russia Energy Relations: Common Goals and Concerns’ (2009) 7(2) OGEL 1
• Redgwell C, ‘International Energy Security’ in Redwell et al (eds), Energy Security: Managing Risk in a Dynamic Legal and Regulatory Environment (OUP 2004)
• Usenmez E, ‘The UK’s Energy Security’ in Gordon G, Paterson J and Usenmez E (eds), Oil and Gas Law: Current Practice and Emerging Trends (2^nd edn DUP 2011)

[1] Fraser Cameron, ‘The Politics of EU-Russia Energy Relations’ (2009) 7(2) OGEL 1, 4.

[2] A Konoplyanik, ‘Energy security: the role of business, governments, international organisations and international legal framework’ [2007] IELTR 85.

[3] Chris Flynn, ‘Russian roulette: the ECT, transit and Western European energy security’ (2007) 1 IELTR 12, 13.

[4] Kirsten Westphal, ‘The Energy Charter Treaty Revisited’ [2011] SWP 1.

[5] Konoplyanik (n 2) 2.

[6] Doran Doeh, Sophie Nappert and Alexander Papov, ‘Russia and the Energy Charter Treaty: common interests or irreconcilable differences?’ [2006] IELTR 189, 190.

[7] Umut Turksen and Jacek Wojcik, ‘The European Union and Russia energy trade- thickening of legality and solidarity?’ [2012] IELR 21, 30.

[8] Andrei Belyi, Sophie Nappert and Vitaliy Pogoretskyy, ‘Modernizing the Energy Charter Process? The Energy Charter Conference Road Map and the Russian Draft Convention on Energy Security’ (2011) 9(5) OGEL 1, 6.

[9] Andrei Belyi and Sophie Nappert, ‘A New Energy Charter: Myth or Reality’ (2009) 7(2) OGEL 1.

[10] Chris Flynn, ‘Russian roulette: the ECT, transit and Western European energy security’ (2007) 1 IELTR 12, 14.

[11] Umut Turksen and Jacek Wojcik, ‘The European Union and Russia energy trade- thickening of legality and solidarity?’ [2012] IELR 21, 30-31.

[12] Turksen and Wojcik (n 11) 31.

[13] Andrei Belyi, Sophie Nappert and Vitaliy Pogoretskyy, ‘Modernizing the Energy Charter Process? The Energy Charter Conference Road Map and the Russian Draft Convention on Energy Security’ (2011) 9(5) OGEL 1, 9.

[14] Andrey Konoplyanik, ‘A Common Russia-EU energy space (The new EU-Russia Partnership Agreement, acquis communautaire, the Energy Charter and the new Russian initiative)’ (2009) 7(2) OGEL 1, 21.

[15] Danae Azaria, ‘Energy Transit under the Energy Charter Treaty and the General Agreement on Tariffs and Trade’ (2009) 27(4) JERL 559, 581.

[16] Umut Turksen and Jacek Wojcik, ‘The European Union and Russia energy trade- thickening of legality and solidarity?’ [2012] IELR 21, 32.

[17] Kirsten Westphal, ‘The Energy Charter Treaty Revisited’ [2011] SWP 1, 2.

[18] Danae Azaria, ‘Energy Transit under the Energy Charter Treaty and the General Agreement on Tariffs and Trade’ (2009) 27(4) JERL 559, 582.

[19] Andrey Konoplyanik, ‘A Common Russia-EU energy space (The new EU-Russia Partnership Agreement, acquis communautaire, the Energy Charter and the new Russian initiative)’ (2009) 7(2) OGEL 1, 18.

[20] Konoplyanik (n 19) 18.

[21] Andrei Belyi and Sophie Nappert, ‘A New Energy Charter: Myth or Reality’ (2009) 7(2) OGEL 1, 2.

[22] Constantinos Filis, ‘Current Stay of Play in EU-Russian Energy Relations’ (2009) 7(2) OGEL 1, 3.

[23] Chris Flynn, ‘Russian roulette: the ECT, transit and Western European energy security’ (2007) 1 IELTR 12, 14.

[24] Piotr Szlagowski, ‘Review of the “new legal framework for energy cooperation” and dispute resolution mechanisms in energy transit’ [2010] IELR 147, 149.

[25] Danae Azaria, ‘Energy Transit under the Energy Charter Treaty and the General Agreement on Tariffs and Trade’ (2009) 27(4) JERL 559, 582-83.

[26] Loic Simonet, ‘Looking for an Energy Community Through an International Legal Instrument: Mission Impossible?’ (2012) 10(3) OGEL 1, 3.

[27] Kirsten Westphal, ‘The Energy Charter Treaty Revisited’ [2011] SWP 1.

[28] Marcus Svedberg, ‘Energy in Eurasia: the Dependency Game’ (2007) 14(1) TSR 195, 196.

[29] Andrei Belyi, Sophie Nappert and Vitaliy Pogoretskyy, ‘Modernizing the Energy Charter Process? The Energy Charter Conference Road Map and the Russian Draft Convention on Energy Security’ (2011) 9(5) OGEL 1, 8.

[30] Belyi, Nappert and Pogoretskyy (n 29) 9.

[31] Belyi, Nappert and Pogoretskyy (n 29) 9.

[32] Belyi, Nappert and Pogoretskyy (n 29) 3.

[33] Belyi, Nappert and Pogoretskyy (n 29) 3.

[34] Constantinos Filis, ‘Current Stay of Play in EU-Russian Energy Relations’ (2009) 7(2) OGEL 1, 7.

[35] Sergey Seliverstov, ‘Energy Security of Russia and the EU: Current Legal Problems (2009) 7(2) OGEL 1, 8.