Energy Charter Treaty

The beginnings of the Energy Charter date back to a political initiative launched in Europe in the early 1990s. The end of the Cold War offered an unprecedented opportunity to overcome previous economic divisions between the nations on both sides of the Iron Curtain. The brightest prospect for mutually co-dependent beneficial cooperation was the energy sector, given Europe's growing energy demand and vast resource availability in post-Soviet nations. Additionally, there was a recognised need to establish a commonly accepted foundation for energy cooperation among the states of Eurasia. By these considerations, the Energy Charter process was born.[3]

The original European Energy Charter declaration was signed in The Hague on 17 December 1991. It was a political declaration of principles for international energy cooperation in trade, transit and investment, together with the intention to negotiate a legally binding Treaty, setting the beginning of the development of the Energy Charter Treaty. One of the final hurdles was to find language to ensure national sovereignty over natural resources while enshrining the principle of international cooperation to allow outside access to those resources. Negotiators also succeeded in assuring Austria and Switzerland that they would not bear an undue transit burden for energy resources.[4]

The treaty is a legally binding multilateral agreement covering investment promotion and protection, trade, transit, energy efficiency and dispute resolution. The treaty was signed in Lisbon in December 1994, together with a "protocol on energy efficiency and related environmental aspects" (PEEREA[5]). The treaty and the protocol came into effect in April 1998. An amendment to the trade-related provisions reflecting the change from the General Agreement on Tariffs and Trade to World Trade Organization processes was also agreed at that time.[3]

The International Energy Charter is a non-binding political declaration underpinning key principles for international energy cooperation. The declaration attempts to reflect the changes in the energy world that have emerged since the development of the original Energy Charter Treaty in the early 1990s. The International Energy Charter was signed on 20 May 2015, by 72 Countries plus the EU, Euratom and ECOWAS at a Ministerial conference hosted by the government of The Netherlands.[6]

The Energy Charter Treaty's purpose in Energy Trade is to create open and non-discriminatory energy markets throughout its member states. This framework follows the rules of the multilateral trading system as embodied in the General Agreement on Tariffs and Trade (GATT), which later became the World Trade Organization (WTO). The Energy Charter Treaty extends the GATT and later the WTO rules in the energy sector amongst its members. Additionally, the treaty covers the trade of all energy materials (e.g. crude oil, natural gas, wood fuel, etc.), all final energy products (e.g. petroleum, electricity, etc.) and energy-related equipment. The rules of trade only cover trade in goods, not trade in services, nor does it concern itself with intellectual property rights.

The treaty is responsible for the protection of foreign direct investment. Its provisions protect investors and their investments from political risks involved in investing into a foreign country such as discrimination, expropriation, nationalisation, breach of contract, damages due to war, etc. The legally binding nature of the Energy Charter Treaty makes it the world's only multilateral framework for matters specifically related to Energy.

Whereas Article 27 sets out the provisions for dispute resolution between two contracting states, Article 26 of the Energy Charter Treaty provides express provisions for resolving disputes arising under the treaty between an investor of a Contracting State and another Contracting State. This process is generally known as Investor State Dispute Settlement or ISDS. The choices of arbitration rules are:

• ICSID Rules
• ICSID Additional Facilities Rules
• UNCITRAL Ad hoc Rules
• The Arbitration Rules of the Stockholm Chamber of Commerce

The most significant claims against Russia, pertaining to the Yukos decision, arose under the provisions of Article 26.

The drafting of the treaty has raised some difficult questions in the area of Investor-State Disputes by academics[9] and has been called ambiguous at instances by the courts.[10] Some areas of discussion are:

• the standards of protection granted by the treaty;
• the international responsibility of States for breaches of the treaty;
• the various procedures available for the vindication of rights under the treaty;
• the conditions to be satisfied before a claimant's complaint may be considered on the merits;
• the impact of EU law on claims under the treaty;
• the treaty's provisions concerning taxation;
• possible effects of the ECT on climate; [11][12][13]
• possible geopolitical, climate and financial impacts[14] [15] and
• allegedly deleterious effects on states' budgets.[16]

• Nathalie Bernasconi-Osterwalder, a lawyer at the International Institute for Sustainable Development (IISD), criticises the ECT for not having "more precise definitions of investment protection standards, [for not] set[ting] out responsibilities for investors and [for not] integrat[ing] innovations with respect to dispute settlement to ensure transparency and independence," unlike more modern approaches. Moreover, she claims it is following expansionist ambitions.[17]

• Tania Voon, a Professor in Law at the University of Melbourne, analyses the so-called modernization of the ECT for not including ISDS, and several other deficits such as failing to introduce "a distinction between investments based on fossil fuels and those based on renewable energy".[18]

• Cross-party members of the European Parliament advised the Commission to withdraw if modernization is not adequate.[19]

The Energy Charter's involvement in matters of energy efficiency and its relation to a cleaner environment was introduced in the 1991 European Energy Charter. The subsequent Energy Charter Treaty, and in particular Article 19 of the treaty, requires that each Contracting Party "... shall strive to minimise in an economically efficient manner, harmful Environmental Impacts arising from energy use."[20]

Building on article 19 of the Energy Charter Treaty, the Protocol on Energy Efficiency and Related Environmental Aspects (PEEREA) defines in more detail the policy principles that can promote energy efficiency and provides guidance on the development of energy efficiency programmes. PEEREA was negotiated, opened for signature and entered into force at the same time (16 April 1998) as the Energy Charter Treaty.

In contrast to other activities in the Charter process, the emphasis in the work on energy efficiency is not legally binding, but rather on practical implementation of a political commitment to improve energy efficiency. This is promoted through policy discussions based on analysis and exchange of experience between the member countries, invited independent experts and other international organisations.

The implementation of PEEREA provides its member countries with a range of best practices and a forum in which to share experiences and policy advice on energy efficiency issues. Within this forum, particular attention is paid to national energy efficiency strategy, taxation, pricing policy in the energy sector, environmentally related subsidies and other mechanisms for financing energy efficiency objectives.[21]

The Energy Charter Treaty provides a set of rules that covers the entire energy chain, including not only investments in production and generation but also the terms under which energy can be traded and transported across various national jurisdictions to international markets. As such, the agreement is intended to prevent disruption of fuel passing between countries.[22]

The Energy Charter Transit Protocol is a draft protocol which negotiations are not finalised yet. The Protocol would amplify and strengthen the treaty provisions on energy transit issues to mitigate some specific operational risks that continue to affect energy transit flows. Negotiations on the text of the Transit Protocol began in early 2000 and a compromise text reflecting an extended discussion between the European Union and Russia was tabled for adoption at the meeting of the Energy Charter Conference on 10 December 2003. It became clear during the meeting that a unanimous decision could not be reached on the basis of the compromise text; a complicating factor was that energy issues, including transit, were a subject on the bilateral agenda for the European Union and Russia in the context of Russian negotiations for accession to the World Trade Organization. The Protocol negotiations were then temporarily suspended.

In December 2007, the Energy Charter Conference reaffirmed its support for the finalisation of negotiations and adoption of the Energy Charter Protocol on Transit to expand the existing provisions of the treaty.[23] This work proceeded until October 2011, when the European Union argued that, given current developments in the international energy situation and the lack of progress in negotiations and consultations, it appeared no longer opportune to continue talks. A review of the issue at the end of 2015 noted the continued demand for a multilateral legally-binding framework for energy transit, and recommended further exploring the basis for negotiations of such an agreement, which could address various aspects of oil, gas and electricity transportation and transit.[24]

The Energy Charter Treaty includes an obligation of member countries to facilitate energy transit across their territory, in line with the principle of freedom of transit, and to secure established transit flows. At the same time, the treaty provisions do not oblige any country to introduce mandatory third-party access.[25]

The principles of the Energy Charter are based on the idea that international flows of investments and technologies in the energy sector are mutually beneficial. But at the same time, national sovereignty over energy resources is a core principle of the treaty (ECT Article 18). An objective of the treaty is to promote transparency and efficiency in the operation of energy markets, but it is for governments to define the structure of their domestic energy sector. Each country is free to decide whether and how its national energy resources are developed, and the extent to which its energy sector is open to foreign investors. The treaty does not deal with the ownership issues of the energy companies–there is no obligation to privatise state-owned energy companies, or to break up vertically integrated energy companies.[25]

Note: * – denotes state provisionally applying signed, but not yet ratified instruments

Observers status is granted to countries and Regional Economic Integration Organisations that have signed either the European Energy Charter or the International Energy Charter. Observers have the right to attend all Charter meetings and to receive all related documentation, reports and analysis, and to participate in the working debates taking place within the Energy Charter. Also, International Organisations can be granted Observer status by decision of the Energy Charter Conference. The intention is that Observer status should provide the chance for a country to familiarise itself with the Charter and its functions, to facilitate its assessment of the benefits of accession to the Energy Charter Treaty.[29]

•  Italy (signed 1991, withdrawn 2016)[32]

The Russian Federation signed the treaty and applied it provisionally but did not ratify it. It linked the ratification of the treaty to negotiations on an Energy Charter Transit Protocol. In October 2006, German chancellor Angela Merkel and French president Jacques Chirac proposed the creation of a balanced energy partnership between France and Germany, representing the European Union, and Russia. Under the agreement, Russia would have to sign the European Energy Charter, something President Vladimir V. Putin, has said impinges on Russia's national interests.[33]

In December 2006, Russia indicated that the ratification of the treaty was unlikely due to the provisions requiring third-party access to Russia's pipelines.[34] On 20 August 2009, it officially informed the depository of the treaty (Government of Portugal) that it did not intend to become a contracting party to the treaty and the related protocol terminating the provisional application of the treaty and the PEEREA starting from 18 October 2009.[35]

Notwithstanding the termination of provisional application of the treaty by Russia, the provisions regarding dispute settlements and investment protection are still in force for additional twenty years. On 30 November 2009, the Permanent Court of Arbitration in The Hague, which had been considering this case since 2005 under the UNCITRAL Rules, ruled that former Yukos shareholders can move on to the merits phase of their arbitration claim against the Russian government.[35] GML, previously known as Menatep, the principle shareholder in Yukos, is suing Russia for more than $100 billion in an international arbitration case under the treaty. The hearings took place in October 2012.[36]

In July 2014, the international arbitration panel in The Hague unanimously ruled in favour of the shareholders, awarding $50 billion damages for the seizure of assets and dismantling of Yukos.[37] The Russian government has vowed not to comply with the ruling, setting off an international legal dispute which has resulted in France and Belgium seizing Russian assets for possible use as restitution for the claimants.[38] However, a French court ruled against the seizure by the French authorities,[39] and a Dutch court later overturned the $50 billion ruling, arguing Russia had not ratified the Energy Charter Treaty and so was not bound by it.[40]

One of the primary mandates given by the Energy Charter Conference to the Secretariat is to organise and administer meetings of the Conference and its subsidiary bodies. In addition, the Secretariat organises conferences and energy forums related to the global ongoing energy dialogues.

Article 19 of the treaty, requires that each Contracting Party minimise, in an economically efficient manner, harmful environmental impacts arising from energy use.[41] The Secretariat monitors the enforcement of these obligations in the contracting parties of the treaty and creates various publicly available reports on each of the contracting parties such as energy efficiency[42] and the investment[43] climate.[44]

The Energy Charter Treaty contains a comprehensive system for settling disputes on matters covered by the treaty. The two primary forms of binding dispute settlement are state-state arbitration on the interpretation or application of almost all aspects of the treaty (except for competition and environmental issues), and investor-state arbitration (Article 26) for investment disputes. There are special provisions, based on the WTO model, for the resolution of inter-state trade issues and the treaty also offers a conciliation procedure for transit disputes. The Secretariat maintains legal advice to these arbitrations as well as has responsibility for maintaining the Travaux préparatoires used to clarify the intentions of the treaty by Article 32 of the Vienna Convention on the Law of Treaties.

The Secretariat maintains a publicly available list of cases that have been brought by investors to international arbitration. These cases have been litigated under the arbitration regulations of the ICSID, Arbitration Institute of the SCC, and UNCITRAL. The Arbitration Awards or Settlements are sometimes in the hundred of millions of dollars.[45][46] Disputes concerning competition (Article 6) and environmental issues (Article 19) the Secretariat provides for bilateral (in the case of competition) or multilateral (in the case of environmental protection) non-binding consultation mechanisms.