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

Energy Charter Process: multilateral governance for trade, transit and investments. Prof. Dr. Andrey A.Konoplyanik ,

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

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  1. 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 Universityandrey@konoplyanik.ru,a.konoplynik@gazpromexport.com, www.konoplyanik.ru Presentation at the Autumn School “CHANGING POLICIES AND CULTURES IN EUROPE AND RUSSIA: ENVIRONMENT, RESOURCES, ENERGY”jointlyconductedby University of Tartu, Euro College; Freie Universität Berlin, Institute for East European Studies; University of Helsinki, AleksanteriInstitute; September 18 – September 24, 2013, Tartu, Estonia

  2. Table of contents • ECT: multilateral dimension • ECT: its specific role & legal novelty • ECT& project financing • ECT& EU acquiscommunautaire • Energy Charter & other international organisations • ECT: way forward A.Konoplyanik, Tartu, 19.09.2013

  3. Local e.g. RF: Concessions, Free Economic Zones, PSA e.g. RF: Tax Code, subsoil & investment legislation e.g. EU: derogation from mandatory TPA (2nd Gas Directive: Art.21-22; 3rd Gas Directive: Art. 35,36) Internationalisation + Regional BITs, DTTs Globalisation World markets of individual energy resources Global common energy market Development of international energy markets and of mechanisms of investment and trade protection and stimulation Mechanisms of investment protection/stimulation,incl. enforcement mechanisms Energy markets Enclaves of stability & investment stimuli in unstable / non-stimulating legal-economic environment National legislation + Increase of general level of investment attractiveness of domestic legislation Bilateral International law instruments + 01.06.2010:2756BITs2927DTTs Oil Multilateral Energy efficiency Gas !? + ECT EU Acquis WTO Investments + Dispute settlement + Transit Trade + ECT (54) = 1431 BITs [partly]

  4. Growth of number of BITs, 1959-1999 Source: Bilateral Investment Treaties, 1959-1999. UNCTAD/ITE/IIA/2, 2000, p.1 A.Konoplyanik, Tartu, 19.09.2013

  5. Trends in IIAs: 1983 – 2012, according to UNCTAD WIR 2013 Source: UNCTAD World Investment Report 2013. UNCTAD, NY and Geneva, 2013, p. xx.

  6. Table of contents • ECT: multilateral dimension • ECT: its specific role & legal novelty • ECT& project financing • ECT& EU acquiscommunautaire • Energy Charter & other international organisations • ECT: way forward A.Konoplyanik, Tartu, 19.09.2013

  7. Political Declaration EUROPEAN ENERGY CHARTER (1991) Legally Binding Instruments Energy Efficiency Protocol (PEEREA) (1994) Energy Transit Protocol ENERGY CHARTER AND RELATED DOCUMENTS Energy Charter political principles incorporated in the legally-biding ECT and related instruments Protocol on preventing emergencies in transit ENERGY CHARTER TREATY(1994/1998) TRADE AMMENDMENT (1998/2009) INVESTMENT SUPPLEMENTARY TREATY ECT as a modular design legal structure (open-end set of legally binding & non-binding instruments) • in force- negotiations not finished yet • new Protocol which could have been proposed by Russia

  8. ENERGY CHARTER SPECIFIC ROLE • 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) A.Konoplyanik, Tartu, 19.09.2013

  9. ECT = THE FIRST MULTILATERAL INVESTMENTAGREEMENT (1) • Based on: • well-established practice of BITs (about 400 BITs at the beginning of the 1990’s - around 2600 BITs as of today) • investment chapter XI of NAFTA (US, Canada, Mexico) • 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: • hard-law obligations (binding guarantee) of non-discriminatory treatment for post-establishment phase, • soft-law obligations for pre-establishment phase (stage of making investment) A.Konoplyanik, Tartu, 19.09.2013

  10. ECT = THE FIRST MULTILATERAL INVESTMENTAGREEMENT (2) • Protection against key political/regulatory risk: • expropriation and nationalisation, • breach of individual investment contracts, • unjustified restrictions on transfer of funds • Reinforced by access to binding international arbitration in case of dispute: • 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), • 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) A.Konoplyanik, Tartu, 19.09.2013

  11. Source: Joachim Karl, UNCTAD International investment arbitration on the rise NB: ECT-based Investor-State Dispute Settlement cases (Art.26): 33 cases (as of end-2012) ECT DS = 1/4 A.Konoplyanik, Tartu, 19.09.2013 UNCTAD Database

  12. Table of contents • ECT: multilateral dimension • ECT: its specific role & legal novelty • ECT& project financing • ECT& EU acquiscommunautaire • Energy Charter & other international organisations • ECT: way forward A.Konoplyanik, Tartu, 19.09.2013

  13. “NATURAL” VS. “FINAL” COMPETITIVE ADVANTAGES OF ENERGY PROJECTS $/boe $/boe Project in country A Project in country B II Financing costs B Financing costs A Total costs A Total costs B I Technical costs B Technical costs A t t “Natural advantage” of project A over project B (A < B) Final competitive disadvantage of project A over project B (A > B) I II A.Konoplyanik, Lectures EUSP - ENERPO Programme, SPB, 02-03.2013

  14. 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 1 1 1 1 2 3 2 2 2 3 3  Financial costs Cumulative  costs  Technical costs ROLE OF THE ECT FOR PROJECT FINANCING (ECT IS A BUSINESS-ORIENTED TREATY) $/boe $/boe Total costs Financial costs Technical costs t t t Before ECT After ECT

  15. 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. Liberalisation/ facilitation in all sectors Liberalisation/ facilitation in energy sector Restriction/ Regulation in energy sector Restriction/ Regulation in all sectors Policies with regard to FDI in energy • The energy sector is more prone to State intervention than most other economic activities Source: Joachim Karl, UNCTAD A.Konoplyanik, Tartu, 19.09.2013 UNCTAD Database

  17. STANDSTILL (Art.10(5)(a) Non-legally binding (soft law) commitments DISCRIMINATIONS FOR INVESTMENTS/INVESTORS ROLLBACK (Art.10(5)(b) PAST FUTURE t ECT INVESTMENT REGIME: STANDSTILL & ROLLBACK PROVISIONS (ARTICLE 10(5))

  18. Table of contents • ECT: multilateral dimension • ECT: its specific role & legal novelty • ECT& project financing • ECT& EU acquiscommunautaire • Energy Charter & other international organisations • ECT: way forward A.Konoplyanik, Tartu, 19.09.2013

  19. ECT & EU acquis: “minimum standard” within evolving Eurasian common energy space vs. more liberal “general standard” within evolving common European energy space 1-st EU Gas Directive (1998) 2-nd EU Gas Directive(2003) 3-rd EU Gas Directive (2009) (*) ECT = integral part of EU acquiscommunautaire (ECT = minimum standard) Level of “liberalization” - general tendency 3 2 1 1 3 2 Level of “liberalization” Level of “liberalization” (*) ECT ECT Domestic legislation of ECT member-states prior to their participation in ECT EU enlargement EU–15 (prior to 01.05.2004) Rest of ECT = Russia/CIS/Asia/… EU–25 (after 01.05.2004) EU enlargement EU–27 (after 01.01.2007) EFTA =EU-15/25/27+3 Growing gap between EU acquis & ECT Energy Community Treaty EU+SEE (27+7) A.Konoplyanik, Tartu, 19.09.2013 ECT observer-states (23+) ECT member-states (51+2REIO)

  20. Table of contents • ECT: multilateral dimension • ECT: its specific role & legal novelty • ECT& project financing • ECT& EU acquiscommunautaire • Energy Charter & other international organisations • ECT: way forward A.Konoplyanik, Tartu, 19.09.2013

  21. SELECTED INTERNATIONAL INVESTMENT-RELATED AGREEMENTS * application of GATT Art.V to grid-bound transportation systems is under debate Plus 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

  22. UNECE, OSCE Regional, bilateral IFIs IEA Energy Charter IEF Investmentprotection Energy investment protection: complementarity of energy-related international organizations Soft Law (general, incl. energy) Soft & Hard Law (energy specific) BSEC, BASREC, EU-SEE Energy Community Treaty, EU ENP, … Long-term vision - individual states Bilateral (energy) dialogues: Russia => EU, USA, individ. CIS states, …EU => Russia, Norway, Algeria, Turkey, … Invest-ment drivers Laws & policies Summarized quantitative assessments (volumes & CAPEX) World Bank (IBRD+MIGA+ICSID)Regional Development Banks: EBRD,ADB, EIB, …

  23. Table of contents • ECT: multilateral dimension • ECT: its specific role & legal novelty • ECT& project financing • ECT& EU acquiscommunautaire • Energy Charter & other international organisations • ECT: way forward

  24. ENERGY CHARTER PROCESS: GEOGRAPHICAL DEVELOPMENT ECT current expansion trends Source: http://www.encharter.org/index.php?id=61&L=0. 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) 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 A.Konoplyanik, Tartu, 19.09.2013

  25. Thank you for your attention!www.konoplyanik.ruandrey@konoplyanik.rua.konoplyanik@gazpromexport.com A.Konoplyanik, Tartu, 19.09.2013

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