The Energy Charter, signed in 1991 in The Hague in the post-cold War period mainly to harmonise energy relations between Europe and the former Soviet Union, is on the point of being transformed into a global instrument. Secretary-General Urban Rusnak hopes that next year, again in The Hague, a second high-level meeting will establish a new International or Global Energy Charter, adapted to the globalised economy and suited to the needs of energy producers and consumers across the world. As an added bonus, the modernisation of the Energy Charter process should make it easier for governments and investors to settle disputes amicably, says Rusnak in an exclusive interview with Energy Post.
If the Energy Charter was ever in need of publicity, it certainly got that in July, when the Ad Hoc arbitration tribunal in The Hague ordered the Russian State to pay no less than $50 billion in damages to former shareholders of expropriated oil company Yukos. This ruling was based on the Energy Charter Treaty, which came out of the Energy Charter declaration and was agreed upon by some 50 countries in 1994, coming into force in 1998. Ironically, Russia signed the Treaty, but did not ratify it. However, it withdrew from the provisional application of the Treaty only in 2009, four years after the Yukos case was accepted by the arbitration tribunal, hence the arbitrators decided the Treaty did apply.
So was this sensational award good or bad publicity for the Treaty? Urban Rusnak, Secretary-General of the Energy Charter Secretariat since 1 January 2012, smiles. “It depends on your perspective”, he answers diplomatically. “From the viewpoint of an investor, it shows how strong an instrument the Treaty is to protect your investments. From a government’s perspective, it shows the limits of what a government can do when dealing with foreign investors.”
Won’t this make governments want to run from the Treaty then? “I hope they will see that in the long term it is good for the overall stability of the investment climate that such a Treaty is in place.”
Mission to modernize
As the Yukos case shows, where the Energy Charter Treaty is in force, it can be a powerful instrument. But it has not been used that much. In the 15 years from 1998-2014 just under sixty publicly known cases were brought by claimants under the Treaty. Most of those claims were started by European companies initiating proceedings against European governments, such as Swedish Vattenfall against the German government (in connection with the nuclear phaseout) and renewable energy producers against Spain and the Czech Republic (in connection with changes in solar power support). Some 20 cases led to an award, others ended in settlement and some 10 cases are still pending.
The large number of European cases reflects the history of the Energy Charter Treaty, which was born in the post-Soviet period with the aim of stimulating western investment in the energy sector in the former Soviet Union. But the Charter and the Treaty were never intended to be limited to Europe, says Rusnak, who graduated as engineer from the Moscow Institute of Oil and Gas in 1990 and served as Slovak Ambassador to Ukraine from 2005-2009, where he was involved in the mitigation of the impact of previous Russian-Ukrainian gas disputes. “It was always intended to be a global agreement.”
However, the Energy Charter never quite managed to escape from its history. A number of the 63 countries (plus the EU and Euratom) that signed the Charter never signed the legally binding Treaty (notably the US and Canada) and some countries that signed the Treaty did not ratify it (including Russia, Norway and Australia). China is also not part of the Treaty (yet). But the Treaty was ratified by all the major countries in the Caucasus and Central Asia, including Azerbaijan, Georgia, Kazakhstan and Turkmenistan as well as Turkey. And some 26 countries from across the world have become Obervers to the Charter, including China, the US, Qatar, Saudi Arabia, Iran and Nigeria.
“Energy security in the 21st Century has to reflect the concerns of all countries along the value chain”
So there is a lot of interest in the Charter, says Rusnak. “We now have to translate that into concrete commitments.” Rusnak has been on a mission to ‘modernize’ the Energy Charter since he arrived as Secretary-General in 2012. Actually, the Charter’s modernization process was started in 2009, when Russia formally withdrew from provisional application, but it has accelerated in the last year or so. Intense talks are being held among the members, observers and new partner countries, which, Rusnak hopes, will lead to the drawing up of a new Charter before the end of this year, and a big convention next year that will see the members and many observers signing on to a new Charter.
What will be the differences between the old and the new Charter? “One of the main differences”, says Rusnak, “is that it will not be linked geographically to Europe anymore. It will be rid of the political framework of the 1990s”. What this means in particular is that the new Charter will reflect a new vision of energy security. “In the old charter energy security equated to security of supply – for energy consumers. But if you want to be a universal organisation in the 21st Century, you need to take a broader view. Energy security should also reflect security – or predictability – of demand, safety of transit, and absence of energy poverty. So the new charter will redefine energy security to reflect these various perspectives.”
The modernization of the Charter will not have an immediate effect on the Treaty, says Rusnak. But, he adds, “this is just the first step in a process. Although the Treaty will not be amended any time soon, we do want to improve the way it works. Right now it is a rather blunt instrument. It has very clear procedures. But it has no procedures for the amicable solving of disputes. Arbitration should be a last resort. It is also time-consuming. We want to develop procedures that will make it easier for parties to settle their differences prior to arbitration.”
Rusnak says he also wants to create “more transparency” about the awards issued under the Treaty. “The Treaty must work as a deterrent, it must tell governments where the red line is between legitimate policymaking and the legitimate rights of investors, so that the government can make well-informed policy choices and avoid arbitration. For this we need more transparency.”
Rusnak sees the Energy Charter secretariat even taking on the function of an Ombudsman in some ways. Is this part of a charm offensive to get governments, frightened by the Yukos ruling, to sign the Charter? Rusnak: “We have not received any complaints from governments, but we feel the mood. We see there is a need for this type of service.”
Rusnak notes that the Charter and the Treaty are not directed against governments, but, on the contrary, will help them attract investment. “There is a great need for investment in the energy sector everywhere. There is a massive need for replacing ageing infrastructure – and, as a result of the renewables revolution and climate policy, there is massive uncertainty in where to invest. So it is very important for countries to create the right investment climate if they want to attract private money. Countries that have joined the Treaty will be able to attract investment at a lower cost than those who are not part of it and where, as a result, the risk will be higher.”
Rusnak has visited China three times in the past 12 months and has noticed growing interest of the Chinese government in the Energy Charter
China is a case in point. Rusnak has visited China three times in the past 12 months and has noticed growing interest of the Chinese government in the Energy Charter. There are three reasons for this, he says. “First, the principles of the Energy Charter – non-discrimination, respect for private ownership, and so on – are very much in line with the overall reform process in China. Chinese society is moving in that direction anyway. Second, China is getting more and more linked by pipelines to energy suppliers in Central Asia – all of whom are members of the Treaty. So they see the Treaty as a possible way to protect their investments. Third, they have invested in energy assets across the world, in countries that may not be members of the Treaty now, but may become so in the future.”
The greatest challenge for Rusnak will probably be to get big energy producers on board, like Russia, Norway, Canada, Australia and Saudi Arabia. Hence the stress on security or predictability of demand in the new Charter. “If you make a big investment in an oil or gas field or in an LNG terminal or pipeline, you need to be able to have long-term arrangements in place. I hope that the updated Charter will recognize this It will bring us closer to the energy producing countries.”
“We have to realize”, Rusnak concludes, that “energy security in the 21st Century has to reflect the concerns of all countries along the value chain. That is why we need a unifying governance approach more than ever.”