ENERGY SECURITY: THE ROLE OF INTERNATIONAL LEGAL FRAMEWORK Dr. - PowerPoint PPT Presentation

ENERGY SECURITY: THE ROLE OF INTERNATIONAL LEGAL FRAMEWORK Dr. Andrei Konoplianik Deputy Secretary General Energy Charter Secretariat International Conference «The Role of Governments and International Organisations in Promoting Energy Security» Energy Charter Secretariat, International Energy Agency, Organisation for Security and Cooperation in Europe 25 October 2006, Palais d’Egmont, Brussels

GLOBAL ENERGY TRENDS: WHY NON-OECD IMPORTANT Increase in World Energy Production and Consumption 2001-2030: (Source: IEA WEIO 2003) • Increase in energy 2001-2030 1971-2000 7,000 7,000 production: 6,000 6,000 95% outside of OECD 5,000 5,000 • Increase in energy consumption: 4,000 4,000 Mtoe Mtoe 70% outside of OECD 3,000 3,000 • Cumulative energy 2,000 2,000 investment: 1,000 1,000 - 50% from non-OECD to non-OECD markets, and 0 0 Production Production Consum Consum ption ption Production Production Consum Consum ption ption - 10% from non-OECD to OECD markets OECD OECD Transition econom Transition econom ies ies Developing countries Developing countries Dr. A. Konoplianik, ECS-IEA-OSCE Conference, Brussels, 25.10.2006 - Figure 1 www.encharter.org

ENERGY SECURITY AND DIVERSIFICATION Diversification : - of supply routes (“multiple pipelines”) - of sources of supplies (“multiple suppliers”) - of markets and routes to access them to be based on balance of interests of all players throughout whole energy value chain Dr. A. Konoplianik, ECS-IEA-OSCE Conference, Brussels, 25.10.2006 - Figure 2 www.encharter.org

ECONOMIC “CIRCLE OF LIFE” OF ENERGY PROJECTS INVESTMENT ENERGY REVENUE Dr. A. Konoplianik, ECS-IEA-OSCE Conference, Brussels, 25.10.2006 - Figure 3 www.encharter.org

ENERGY ECONOMY: DEMAND FOR QUALITY OF REGULATORY FRAMEWORK Energy projects (compared to other industries): – Highest capital intensity (absolute & unit CAPEX per project), – Longest project life-cycles, – Longest pay-back periods, – Geology risks (+ immobile infrastructure, etc.), – Highest demand for legal & tax stability, – Role of risk management. => Higher demand for “quality” of legal and regulatory framework compared to other industries Dr. A. Konoplianik, ECS-IEA-OSCE Conference, Brussels, 25.10.2006 - Figure 4 www.encharter.org

ENERGY MARKETS DEVELOPMENT: EVOLUTION OF CONTRACTUAL STRUCTURES “Physical energy” markets = Long-term contracts + Short-term contracts + Spot + Forward + “Paper energy” markets = + Forward + Futures + Options + … Dr. A. Konoplianik, ECS-IEA-OSCE Conference, Brussels, 25.10.2006 - Figure 5 www.encharter.org

DEVELOPMENT OF ENERGY MARKETS AND MECHANISMS FOR INVESTORS PROTECTION / STIMULATION Energy Markets Mechanisms for investors protection / stimulation Local Stability zones in Concessions, unstable environment PSAs (incl. LTCs) Domestic + legislation Increasing of general Tax, investment, Internationalisation level of investment subsoil legislation attractiveness + Regional Bilateral International BITs, DTTs legal mechanisms + End of 2004: Globalisation Multilateral 2392 BITs 2559 DTTs World markets TRIPs Oil of certain WTO/ Trade TRIMs energy GATT GATS + resources Investments ECT + Transit World energy market + Energy + Dispute settlement Efficiency Dr. A. Konoplianik, ECS-IEA-OSCE Conference, Brussels, 25.10.2006 - Figure 6 www.encharter.org

SELECTED INTERNATIONAL INVESTMENT-RELATED AGREEMENTS Organisation Legal Scope Investment Trade Transit Energy Dispute (member- Status Efficiency Settlement states/CPs) ECT (51/52) LB Energy Yes Yes Yes Yes Yes WTO (149) LB General (Yes?) Yes Yes/No* No Yes (Services) NAFTA (3) LB General Yes Yes No No Yes MERCOSUR LB General Yes Yes No No Yes (4) OECD (30) LB General Yes No No No No APEC (21) Non- General Yes Yes No No No LB * 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, … Dr. A. Konoplianik, ECS-IEA-OSCE Conference, Brussels, 25.10.2006 - Figure 7 www.encharter.org

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 (52CPs) + 19 observer-states + 10 observer organisations – First and only one multilateral investment agreement with high standard of investment protection, incl. dispute settlement Energy Charter process : • 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. Dr. A. Konoplianik, ECS-IEA-OSCE Conference, Brussels, 25.10.2006 - Figure 8 www.encharter.org

ECT = THE FIRST MULTILATERAL INVESTMENT AGREEMENT (1) • Based on: o well-established practice of BITs (about 500 BITs as of early 1990’s - around 2400 BITs as of today) o investment chapter XI of NAFTA (US, Canada, Mexico) o some interaction with then proposed “Multilateral Agreement for Investment” (MAI – aborted in 1998) • Within 51 ECT member-states equal to 1275 BITs • MFN and National Treatment for investors: o binding guarantee of non-discriminatory treatment for post - establishment phase, o soft-law obligations for pre -establishment phase (stage of making investment) Dr. A. Konoplianik, ECS-IEA-OSCE Conference, Brussels, 25.10.2006 - Figure 9 www.encharter.org

ECT = THE FIRST MULTILATERAL INVESTMENT AGREEMENT (2) • Protection against key political/regulatory risk: o expropriation and nationalisation, o breach of individual investment contracts, o unjustified restrictions on transfer of funds • Reinforced by access to binding international arbitration in case of dispute: o State-to-state, and (NOVELTY!) investor-to-state => direct dispute settlement at investor’s choice at ICSID, UNCITRAL or ICC Stockholm, o Awards: � final and enforceable under NY 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) Dr. A. Konoplianik, ECS-IEA-OSCE Conference, Brussels, 25.10.2006 - Figure 10 www.encharter.org

ECT EXPANSION PROCESS: ASIAN DIMENSION DOMINATES • New ECT members: Mongolia - 1999 • New ECT observers: China – 2001 Korea Rep. – 2002 Iran – 2002 Nigeria – 2003 ASEAN – 2003 Pakistan – 2005 Afganistan – 2006 Dr. A. Konoplianik, ECS-IEA-OSCE Conference, Brussels, 25.10.2006 - Figure 11 www.encharter.org

ENERGY CHARTER PROCESS: GEOGRAPHICAL DEVELOPMENT ■ Energy Charter Treaty Signatory States ■ Other Observer States ECT current expansion trends 1. From trans-Atlantic political declaration to broader Eurasian single energy market 2. ECT expansion - objective and logical process based on clear economic and financial reasoning Dr. A. Konoplianik, ECS-IEA-OSCE Conference, Brussels, 25.10.2006 - Figure 12 www.encharter.org

SOME ENERGY-RELATED INTERNATIONAL ORGANISATIONS (approximation) Nature of Cooperation EU Legally binding obligations ECT OPEC IEA GCC IEF Membership Political profile cooperation Producers / Transit / Consumers / Net exporters Transportation Net importers Dr. A. Konoplianik, ECS-IEA-OSCE Conference, Brussels, 25.10.2006 - Figure 13 www.encharter.org

COMPLIMENTARITY OF ENERGY-RELATED INTERNATIONAL ORGANISATIONS (IN PROTECTING ENERGY INVESTMENTS) BSEC, BASREC, EU-SEE Energy Community Treaty, EU ENP, … , F l S a E C n l s a I o E I Investor r F i e g I t protection e a R A l i b E I World Bank (IBRD+MIGA+ICSID) Bilateral (energy) dialogues: Regional Development Banks: EBRD, Russia => EU, USA, individ. CIS states, … EU => Russia, Norway, Algeria, Turkey, … ADB, EIB, … Dr. A. Konoplianik, ECS-IEA-OSCE Conference, Brussels, 25.10.2006 - Figure 14 www.encharter.org

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