THE ENERGY CHARTER PROCESS: ITS LONG-TERM HISTORIC ROLE AND - - PowerPoint PPT Presentation

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THE ENERGY CHARTER PROCESS: ITS LONG-TERM HISTORIC ROLE AND - - PowerPoint PPT Presentation

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THE ENERGY CHARTER PROCESS: ITS LONG-TERM HISTORIC ROLE AND COMPETITIVE NICHE WITHIN THE GLOBAL ENERGY ENVIRONMENT Dr. Andrei Konoplyanik Deputy Secretary General The Energy Charter Secretariat CEPMLP, University of Dundee - 4 May 2005 TABLE

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THE ENERGY CHARTER PROCESS: ITS LONG-TERM HISTORIC ROLE AND COMPETITIVE NICHE WITHIN THE GLOBAL ENERGY ENVIRONMENT

  • Dr. Andrei Konoplyanik

Deputy Secretary General The Energy Charter Secretariat

CEPMLP, University of Dundee - 4 May 2005

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TABLE OF CONTENTS

  • 1. Development of energy markets and mechanisms of

investor’s protection & stimulation

  • 2. General characteristics of the Energy Charter Process
  • 3. Business role of the Energy Charter process
  • 4. Energy Charter competitive niche among other

international organisations

  • 5. Energy Charter emerging geography and expansion

policy

  • 6. Conclusions: Energy Charter process then and now

www.encharter.org

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  • 1. Development of energy markets

and mechanisms of investor’s protection & stimulation

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DEVELOPMENT OF ENERGY MARKETS

Energy Markets

World energy market Local Internationalisation Regional Globalisation World markets

  • f certain

energy resources

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 1
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SLIDE 5

“EVOLUTION CURVE” OF GAS MARKETS DEVELOPMENT AND CURRENT POSITION OF DIFFERENT COUNTRIES AT THAT CURVE

Pricing mechanism development stages:

  • cost +
  • escalation formulas (based on alternative fuels prices)
  • based on futures prices

www.encharter.org

Gas price Scale of market development MONOPOLY COMPETITION Time INITIAL GROWTH INTENSIVE GROWTH MATURE MARKET China, Thailand, India etc. (LNG) Korea, Taiwan (LNG) USA (12:1) UK Japan (LNG) Continental Europe (10:1) Russia (2:1) Middle & Far East, Latin America, Africa, rest of CIS Long-term contracts Short-term contracts Spot deals

+ + 1 2 3

1 2 3

Futures trading

+ t

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 2
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DEVELOPMENT OF ENERGY MARKETS AND MECHANISMS FOR INVESTORS PROTECTION / STIMULATION

www.encharter.org

Energy Markets

World energy market Local Internationalisation Regional Globalisation World markets

  • f certain

energy resources

ECT

End of 2003:

2265 BITs 2316 DTTs

Mechanisms for investors protection / stimulation

International legal mechanisms Bilateral Multilateral Trade Investments

+

BITs, DTTs

WTO/ GATT

TRIMs

+

Stability zones in unstable environment Increasing of general level of investment attractiveness

+

Domestic legislation PSA, Concessions, FEZ

+

Transit

+

Tax Code, investment and subsoil legislation

Dispute settlement

+

TRIPs GATS ECT Energy Efficiency

+

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 3
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SLIDE 7
  • 2. General characteristics of the

Energy Charter Process

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ENERGY CHARTER HISTORY

June 25, 1990 Lubbers’ initiative on common broader European energy space presented to the European Council December 17, 1991 European Energy Charter signed December 17, 1994 Energy Charter Treaty (ECT) and Protocol on Energy Efficiency and Related Environmental Aspects (PEEREA) signed 16 April, 1998 ECT enters into force and became an integral part

  • f international law

As of today

  • ECT signed by 51 states + European Communities

= 52 ECT signatories

  • ECT ratified by 46 states + EC (excl. 5 countries:

Russia, Belarus, Iceland, Australia, Norway )

  • Russia and Belarus : provisional application of

ECT

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 4
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ENERGY CHARTER AND RELATED DOCUMENTS

Political Declaration

EUROPEAN ENERGY CHARTER

Legally Binding Instruments

Energy Efficiency Protocol Energy Transit Protocol

ENERGY CHARTER TREATY TRADE AMMENDMENT INVESTMENT SUPPLEMENTARY TREATY

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 5
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THE ENERGY CHARTER TREATY – A BALANCE OF INTERESTS BETWEEN PRODUCERS AND CONSUMERS OF ENERGY

ECT Article 2 “This Treaty establishes a legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits”

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 6
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MAIN CONTENT OF SELECTED INTERNATIONAL INVESTMENT-RELATED AGREEMENTS

Organisation Legal Status Scope Investment Trade Transit Energy Efficiency Dispute Settlement

ECT LB Energy Yes Yes Yes Yes Yes WTO LB General (Yes) Services Yes Yes/No* No Yes NAFTA LB General Yes Yes No No Yes MERCOSUR LB General Yes Yes No No Yes OECD LB General Yes No No No No APEC Non- LB General Yes Yes No No No

Source: J.Karl, Senior Expert, DEI, Energy Charter Secretariat

* - application of GATT Art.V to grid-bound transportation systems is under debate Plus specialised energy-related organisations: OPEC, IEA, IEF, UN ECE Plus specialised “regional” organisations: BSEC, BASREC, …

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 7
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ECT: THE FIRST MULTILATERAL INVESTMENT AGREEMENT

  • Binding guarantee of non-discriminatory treatment

for post-establishment phase

  • Protection against key political/regulatory risks:
  • expropriation and nationalisation,
  • breach of individual investment contracts,
  • unjustified restrictions on the transfer of funds
  • Reinforced by access to binding international

arbitration in case of dispute

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 8
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  • 3. Business role of the Energy

Charter process

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GLOBAL ENERGY TRENDS

Increase in World Energy Production and Consumption

(Source: IEA WEIO 2003)

2001-2030:

  • Increase in energy

production: 95% outside of OECD

  • Increase in energy

consumption: 70% outside of OECD

  • Cumulative energy

investment:

  • 50% from non-OECD to

non-OECD markets, and

  • 10% from non-OECD to

OECD markets

1,000 2,000 3,000 4,000 5,000 6,000 7,000 Production Consum ption Production Consum ption Mtoe OECD Transition econom ies Developing countries 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Production Consum ption Production Consum ption Mtoe OECD Transition econom ies Developing countries

1971-2000 2001-2030 www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 9
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ENERGY CHARTER WORLD AND MAJOR ENERGY FLOWS IN THE EASTERN HEMISPHERE

Major energy flows: existing future

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 10
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FINANCING ENERGY PROJECTS: FROM EQUITY TO DEBT FINANCING

Equity/debt financing ratio: Pre-1970’s = ~ 100 / ~ 0 Nowadays = ~ 20-40 / ~ 60-80, f.i. most recent: BTC pipeline = 30 / 70 Sakhalin-2 (PSA) = 20 / 80 (2 fields+pipeline+LNG plant) Increased role of financial costs (cost of financing)

  • f the energy projects

Availability and cost of raising capital = one of major factors of competitiveness with growing importance in time

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 11
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“NATURAL” VS. FINAL COMPETITIVE ADVANTAGES OF ENERGY PROJECTS

$/boe $/boe

Country A Country B

“Natural advantage” of country A over country B Final competitive disadvantage of country A over country B

t t Technical costs A Financing costs A Technical costs B Financing costs B Total costs A Total costs B I

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 12

www.encharter.org

II I II

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ECT IS BUSINESS-ORIENTED TREATY (how it works)

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 2 1 2 3

Cumulative ∆ costs

1 2 3

∆ Financial costs ∆ Technical costs

$/boe After ECT

t

1 2

Total costs $/boe Before ECT

t

Technical costs Financial costs

3

∆ t

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 13
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NON-RATIFICATION OF ECT BY RUSSIA = ITS COMPETITIVE DISADVANTAGE

www.encharter.org

Russia’s objective competitive disadvantages: longest distances to markets + falling production at major fields + more complex geology (from Senoman gas of W.Siberia to Valanzhin, Achimov,

  • ffshore and Yamal gas) + harsh natural conditions of producing

areas Russia: Highest stimuli to diminish technical and financial costs of production and transportation: (a) technical costs investments legal environment in host and transit countries (b) financial costs cost of capital credit ratings (sovereign, corporate, project) legal environment in host and transit countries ECT and related documents (when ratified) = common legal environment minimizing risks and technical & financial costs

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 14
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  • 4. Energy Charter competitive

niche among other international organisations

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ENERGY CHARTER PROCESS IN A GLOBAL FRAMEWORK

  • General vs. specific risks,
  • Global vs. regional scope

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 15
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ENERGY CHARTER PROCESS IN A GLOBAL FRAMEWORK: GENERAL VS. SPECIFIC RISKS

Q.: Are there any specific risks in energy to be addressed in a special forum / documents? A.: Yes. Energy projects (compared to other industries):

– Highest capital intensity (absolute & unit CAPEX per project), – Longest project life-cycle, – Longest pay-back periods, – Geology risks (+ immobile infrastructure, etc.), – Highest demand for legal & tax stability, – Role of risk management.

So, a competitive niche exists for energy-related multilateral international organisations – at least to address specific character of energy risks. Are these organisations complimentary or competitive to each other? What is their optimal correlation?

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 16
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ENERGY CHARTER PROCESS IN A GLOBAL FRAMEWORK: GLOBAL VS. REGIONAL SCOPE

  • Investment = global (BITs, DTTs, [MAI?])
  • Energy Efficiency = global (partly IEA and UNECE)
  • Trade = global (WTO)
  • Dispute settlement = global (ECT covers all available

DS types/procedures):

  • State-to-State
  • Investor-to-State
  • Transit = regional (no other international
  • rganization deals with transit except ECT)

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 17
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MULTILATERAL ENERGY-RELATED ORGANISATIONS: OPEC, IEF, IEA, UN ECE, ENERGY CHARTER

  • Organisation of Petroleum Exporting Countries (Vienna):

– Formal (government oil export policies), but deals only with one – oil – market, – Crude oil export quotas mechanism, – Oil market research & analysis, etc.

  • International Energy Forum (Er-Ryadh):

– Purely informal minister-to-minister dialogue (?), – No legal consequences (?), – Strong intention of IEF leadership to prevent potential bureaucratisation, etc.

  • International Energy Agency (Paris):

– Partly formal – related to oil market (common IEA governments oil stocks policy), – Mostly informal (energy markets research & analysis, energy policy recommendations), – Quantitative assessments of future energy markets, etc.

  • United Nations Economic Commission for Europe (UN ECE) (Geneva):

– Policy debate, technical issues, coordinated policies (?), – The only “transatlantic” organisation that historically has been uniting both OECD and former USSR/COMECON states.

  • Energy Charter (Brussels):

– Formal (negotiations on legally-binding documents + their implementation), – Expanding and deepening the scope of international law in energy-related sphere –

  • Add. Policy debate

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 18
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FOCUS OF INTERNATIONAL ORGANISATIONS (approximation)

www.encharter.org

ECT EU IEF OPEC IEA GCC

Political cooperation Nature of Cooperation Legally binding

  • bligations

Membership profile Producers / Net exporters Transit / Transportation Consumers / Net importers

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 19
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CHAIN OF ACTIVITIES SUPPORTIVE TO ENERGY MARKETS DEVELOPMENT PROCESS AND PROSPECTIVE ROLE/PLACE IN IT OF DIFFERENT INTERNATIONAL ENERGY-RELATED ORGANISATIONS

  • International Energy Forum (IEF):
  • Indication of issues of interest/concern, “raising the questions”
  • International Energy Agency (IEA):
  • In-depth analysis, quantitative assessments, scenarios-forecasts
  • Energy Charter:

– Policy debate – development of common approach to identified challenges and risks of future energy markets development, – Negotiations & implementation – establishing new legal instruments that would address newly identified risks, and/or amendments to (revisions of) existing legal instruments to update them (when/if necessary) to the new state of the energy markets developments

  • International Financial Institutions (IFIs = EBRD, ADB, …):
  • Lead-financiers in FDI inflows in transition economies (pilot actors), lower cost
  • f capital (debt financing),
  • Possibility (?): ECT based policy chapters in IFIs energy loans structure
  • Regional organisations (BSEC, BASREC), bilateral processes

(RF-EU energy dialogue):

  • Incremental political, economic (?), financial (?) support to the “projects of

common interest”

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 20
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CHAIN OF ACTIVITIES SUPPORTIVE TO ENERGY MARKETS DEVELOPMENT PROCESS AND PROSPECTIVE ROLE/PLACE IN IT OF DIFFERENT INTERNATIONAL ENERGY-RELATED ORGANISATIONS (II)

www.encharter.org

IEA >>> for consumers OPEC >>> for producers “Central banks in oil” Policy: interventions (supply/demand regulation) Influence on prices: OPEC – up/down IEA - down

Oil price protection

O P E C

Investor protection

I E A E C S I F I s R e g i

  • n

a l , b i l a t e r a l I E F

JODI

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 21
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SLIDE 28
  • 5. Energy Charter emerging

geography and expansion policy

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ENERGY CHARTER PROCESS: GEOGRAPHICAL DEVELOPMENT

■ Energy Charter Treaty Signatory States (1994) ■ Observer States that have signed the European Energy Charter (1991) ■ Other Observer States

1. From trans-Atlantic political declaration to broader Eurasian single energy market 2. ECT expansion is an objective and logical process based on economic and financial reasons

ECT current expansion move

www.encharter.org

A prospective area of broader Eurasian single energy market

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 22
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CORRELATION BETWEEN EU AND ECT EXPANSION PROCESSES

Level of liberalisation EU - 15 TP / ECT EU – RUF WTO accession demands EU AC ECT expansion ECT Area (52) ECT Area (52+) CIS / RUF / EE / … EU - 25 Level of liberalisation www.encharter.org EEA - 28 SEE

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 23
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SLIDE 31
  • 6. Conclusions: Energy Charter

process then and now

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SLIDE 32

ENERGY CHARTER PROCESS: THEN & NOW

INITIALLY CURRENTLY Driving force

Motivated & dominated by interests of consumers Consumer-producer balance of interests

Policy vs. economy dominance

Politically initiated Economically driven

Approach to energy security

Physical security of supplies from economies in transition Security of supplies + security of demand by economic and legal (business supportive legislation) and not administrative means

Geography

(1) “Trans-Atlantic” Europe (i.e. in political / OSCE terms) (2) OECD+CIS+EE (1) Broader Eurasia, incl. North Africa, Australasia (i.e. in energy & economic terms) (2) OECD+CIS+EE+others

Competitiveness

To decrease final energy prices to consumers even by diminishing producer’s ROR To decrease full investment-cycle risks → to diminish both technical & financial costs → to increase competitiveness and protect adequate ROR at each step of energy & investment cycle

www.encharter.org

  • Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 24