Article from: OGEL 5 (2004), in Editorial
With this OGEL issue we focus on the Energy Charter Treaty. We are most grateful to the ECT secretariat for having provided a substantively and technically outstanding presentation of the Energy Charter Treaty and its process in all its ramifications.
My acknowledgement go in particular to Dr Ria Kemper, the Secretary General, Dr. Andrei Konoplyanik, its Deputy Secretary General (with an influential early role in the Energy Charter process as then Russian Deputy Minister for International Energy Relations), but also to Tim Gould, Pascal Laffont and their colleagues in the Secretariat who did the hard work to get this issue out in time for the 10th Anniversary of the ECT signing ceremony in Lisbon. My thanks go also to the many other authors and institutions which have contributed in one form or another, including OPEC, Herbert Smith, MEES and in particular a highly competent group of lawyers (not team - we were not all on the same side) - including Dr Richard Happ of Luther Menold, Kaj Hobér of Mannheimer Swartling, Fred Wennerholm of Setterwalls, Jonas Wetterfors of Hellstrøm & partners plus the arbitral tribunal in the Nykomb v. Latvia case (Bjørn Haug, Rolf Schütze and Johan Gernandt) who all worked very hard and with great ingenuity to get this first case right. My personal thanks go also to a team of lawyers and energy economists that supported my own contribution to this case.
This treaty, negotiated since 1991, finalised in 1994, and effective in 1998, with over 50 member countries in Europe and Asia is the major, if not the only significant, energy-related multilateral treaty, following up on the much more confrontational creation of OPEC in the 1960s and the IEA in the 1970s.
It was meant as a treaty to bring the former Communist countries into the Western fold, encourage investment from the West to re-invigorate and modernise energy investment in the East, and thereby encourage supplies of energy from the East to Europe. It is based on a free-trade regime, for energy only which constitutes a proto-GATT for those countries which are not yet members of the GATT (mainly now Russia). This feature is of declining importance. The second, and currently probably the major pillar, of the ECT is its investment regime. It is largely modelled on the then prevalent US-UK BIT model (since then, substantial changes take place with the US model) and introduces arguably the most extensive investment promotion regime with direct investor-state arbitration. The third pillar is, in my view, the transit obligation which provides opportunity for some mixed legal-persuasive pressure on governments to facilitate transit and thus allows to use the instrument of formal procedures and multilateral and intergovernmental discussion to add to the leverage of transit requests. The ECT also has other soft-law obligations - to provide non-discriminatory access (pre-investment), on competition law, environment, energy efficiency. Their main function is to act as a legitimating basis for intergovernmental and multilateral discussion.
The US (and Canada in its tow) did not sign the Energy Charter Treaty for reasons that are hard to understand properly except perhaps that the US has been for a while in a anti-multilateral direction, in particular opposed to anything it does not dominate. Russia (and Norway in its tow) signed, but did not ratify. The main reason is the dispute between Gazprom on one hand and the EU Commission on the other on liberalisation of gas exports to the EU. With Energy Charter Treaty investment arbitration now acquiring speed this is likely to put another brake on Russian (and Norwegian) ratification. The Treaty has a provisional application rule (Art. 45) that is unique (in terms of applying to a treaty creating private-investor arbitration rights) and not tested - but likely to be tested now.
Russia has always been the (stony) pivot for the Energy Charter Treaty - and is likely to remain so. At present, given the - possibly only relative and transient - relapse into its "old ways", the ECT as a signal of and symbol for modern, internationalised market capitalism would not seem to be a priority for Russia that is currently on course towards a new form of state absolutism and obsession about control of the not very controllable market processes. But that can be explained partly by the role of oil and gas in Russia. As in all producing (mostly developing) countries heavily dependent on oil, political power can not and will not be separate from the control over the oil industry and its income which is both a pillar for political power and a way to exercise it by patronage. Since and to the extent that the high oil price currently sustains political power in Russia, the relapse into statism could well be maintained for quite a while. The now emerging ECT-based disputes against Russia are therefore a preparatory procedure that will only be relevant if it is in the interest of the then Russian government and power structure to settle such disputes again. I am reminded of the Lena Goldfields case in the 1930s and wonder if are currently experiencing a replay of the end of the "New Economic Policy" of the 1920s Soviet Union. But history rarely repeats itself fully, and restoration usually is temporary and diluted.
The Energy Charter Treaty has served the EU as a kind of pre-accession "waiting room" for the East European accession countries helping to prepare them for accession. That function is now largely gone. It can, however, also serve the EU to intensify its institutional links with countries that are not likely to accede within the next 10 years - the Mediterranean, Central Asian and possibly Russia. The ECT, however, is here in a complex relationship of competition and complementarity with the other instruments the EU uses for that purpose: Economic cooperation agreement, the Partnership and Cooperation agreement with Russia in particular. The EU has, there is no doubt, originally godfathered the ECT as part of its strategy towards the ex-Communist countries and its energy security needs. With membership increasing from non-EU countries, this de-facto "ownership" of the ECT by the EU - an energy-import country - is to some extent in doubt. There is now some institutional rivalry on energy policy matters in Brussels; the EU has several times promoted competing (and not very successful) intitiatives - the energy dialogue with Russia, the it seems now aborted Inogate programme for pipeline promotion. It is in the EU interest to develop effective dialogue and institutional cooperation mechanisms with its main energy suppliers - mainly the OPEC countries, but also in Central Asia. The Energy Charter Treaty is probably an excellent institutional vehicle for such intensified relationship-building, but the in-built dilemma is: The more such countries eventually accede, the more the balance between importing and exporting countries would have to shift away from the original energy-import and EU-energy security focus. I have examined in-depth the implications of ECT accession for oil and gas producers. My conclusion is that for some countries now under the shadow of US blacklisting (Iran in particular, but perhaps even Saudi Arabia) accession to the ECT makes a lot of general political and energy policy sense: An institutionalised dialogue with consumers and other producers; facilitation of transit; de-politicisation of transit, trade and investment disputes through procedural, legal and multilateral discussion tools, anchoring (but also support to and signalling) domestic economic reform in an international setting with enforceable disciplines. The problem, however, is the accountability for investment disciplines that comes through Art. 26 investor-state arbitration. Similar considerations apply to Asian countries: They would all benefit from an institutionalised system for investment, trade and transit promotion. They have so far been unable, in the APEC or ASEAN context, to create something comparable to the ECT. Accession to the ECT would provide a ready-made, pre-negotiated system that is probably workable outside the EU-Eastern Europe/Asia context as well. Should such accessions occur in the next 10-15 years, the ECT would come closer to a universal energy institution which is sorely missing. It could even absorb OPEC and the IEA.
The most interesting development in ECT matters is that Art. 26 investment arbitration has now taken off. The first case - Nykomb v Latvia - dealt, perhaps fortunately, with a situation that is hard to assail from the usual NGO perspective picturing (mostly factually wrongly) an innocent country with its democratic sovereignty undermined by a vicious and all-powerful multinational company. It was essentially about protecting the promise of an incentive for environment-friendly co-generation made to a small Swedish company which got reluctantly dragged from supply of know how to capital investment exposed to risk. The tribunal made in my view the right decision - not just legally, but also in the wider political and commercial context. Latvia was equally right, well advised and sophisticated in negotiating a settlement in conformity with the award. This approach is in considerable contrast with Russia which so far is in steadfast refusal to comply with international arbitral awards rendered against it (though it consented to arbitration in the first place). One can naturally theorise about the reasons, but it is essentially a reflection (and symbol and signal) that Latvia (as other new EU members such as the Czech Republic) place themselves firmly within the tradition, culture and rules of a European concept of the rule of law.
The case therefore provides an excellent example of the dispute resolution potential inherent in the Energy Charter Treaty. I can not comment on the other, now pending cases: Plama v. Bulgaria, Petrobart v. Kirgizstan nor on cases that are currently in the offing. But they all will raise, as most BIT-based cases, unresolved interpretative challenges due to the open-ended, rarely legally tested nature of much of the ECT's language. The result will create tribunal-made case law in close interaction with general BIT- and ICSID-based investment arbitration.
 They are mentioned, to the extent this makes sense, in the joint case comment by Prof Hober and myself published in OGEL.