THE ENERGY CHARTER TREATY AND THE
TRANSIT PROTOCOL
162. The belief that the Russians would adopt
and apply liberal rules in their energy sector underlies the two
main instruments available to the EU for managing its energy relationship
with Russia: the Energy Charter Treaty and its Transit Protocol.
Patrick Child (Head of Cabinet of the External Relations Commissioner)
told us that the European Union has a "fairly clear understanding"
of what it would like from Russia as a partner in energy: "reliable
supplies which are not influenced by political considerations,
but are based on sound and reliable commercial relationships";
and for European firms to have the same opportunities to get involved
in Russian markets as foreign firms have in European markets (Q 358).
BOX 12
Energy Charter Treaty and Transit Protocol
The Energy Charter Treaty (ECT) dates back to a European initiative of the early 1990s, when energy appeared to be an obvious area for mutually beneficial cooperation between East and West. An "Energy Charter" was signed in 1991 between a number of countries including Russia. This was "a concise expression of the principles that should underpin international energy cooperation, based on a shared interest in secure energy supply and sustainable economic development."[84]
A Treaty was then negotiated, based on these principles, and expanded beyond Europe to include other states with a significant interest in energy matters.[85] The Treaty was signed in December 1994, and entered into force in April 1998 after being ratified by 51 states in Europe, America, and Asia, and by the European Union. It has not yet been ratified by Russia or Belarus (though both apply it provisionally) or by Iceland, Norway and Australia.
The ECT, like the Partnership and Cooperation Agreement, is intended as a legally binding multilateral agreement designed "to strengthen the rule of law on energy issues, by creating a level playing field of rules to be observed by all participating governments, thus minimising the risks associated with energy-related investments and trade". It focuses on five broad areas: protection of foreign investments; free trade in energy materials, products and equipment; freedom of transit through pipelines and grids; dispute resolution; energy efficiency and environmental protection.
The "Energy Charter Conference", which consists of all signatories, meets regularly to monitor progress (in Istanbul in December 2007, the Conference discussed energy security in the Black and Caspian Seas). There is a small independent Secretariat based in Brussels. Experts meet to discuss technical matters such as energy market restructuring, regional energy markets, and regional gas markets.[86]
Negotiations on a detailed Transit Protocol began in 2000 but have so far not been completed. The aim of the Protocol is "to develop a regime of commonly-accepted operative principles covering transit flows of energy resources, both hydrocarbons and electricity, crossing at least two national boundaries, designed to ensure the security and non-interruption of transit."[87]
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163. Attempts to design an effective policy to
manage and reduce Europe's dependence on Russian energy have,
however, been undermined in part by a failure to assess Russian
objectives realistically, and to accept that they differ substantially
from those of the EU. The EU—driven by a combination of
free market principle, commercial self interest, and wishful thinking—has
proceeded on the basis that the Russians would open their markets
and their pipelines, in part because they needed Western know-how
and capital. However, for the time being at least the Russian
determination to maintain a firm control over their energy sector
(see above) means that they have no interest in ratifying the
Energy Charter Treaty and the Transit Protocol, which they believe
are intended to weaken that control. The Russian Ambassador in
London maintained that the Treaty was being implemented, but on
a temporary basis (Q 426), but Professor Helm thought
that Europeans should not have illusions that Russia would suddenly
say "Let's liberalise our market and give third party access",
selling the oil and gas to anyone. In his view this was an illusion
which had cost the Europeans several years in putting a strategy
together and it would have very serious consequences in the next
decade (Q 368).
164. The view of the British Government is nevertheless
that "the Charter is the only multilateral agreement in play"
(Q 400). Russian concerns about the Charter Treaty and the
Transit Protocol have not been clearly articulated which, say
the British, makes it hard to envisage what mutually acceptable
changes might be introduced. The scope of the Treaty goes, in
any case, much wider than the EU and Russia: it embraces other
countries formerly in the Soviet Union, Japan, and North America.
The British view is therefore that "the best way forward
is to remain with the Charter, willingly renegotiated if necessary,
but only in principle entering into renegotiation if there is
something worthwhile on the other side" (Q 400).
165. This approach does not explain why the Russians
should offer "something worthwhile" to secure even an
improved version of a Treaty they do not like. Indeed Patrick
Child (Head of Cabinet of the Commissioner for External Relations)
said to us that he did not know whether the Charter was the right
vehicle to achieve the European Union's objectives, because of
the negative political baggage it had acquired on the Russian
side (Q 358). Professor Helm thought it was hopeless
to use political and diplomatic capital on the idea that the Russians
could be persuaded to admit third party access to their gas network.
The Europeans were wasting a great deal of time and effort to
no net benefit (Q 383).
166. Negotiations on the Transit Protocol (Box
12 above) are currently hanging fire. The Russians consider that
the Protocol discriminates against their interests and gives unfair
advantages to the European Union. They object particularly to
the provision for third party access to their pipelines, which
remain a state monopoly under Transneft. They claim that allowing
foreigners to buy into the Russian pipeline network, as demanded
by the European Union, "would create huge risks for the Russian
exporters working on the basis of long-term contracts. Losses
on such risks could amount to many hundreds of millions of dollars."
The Russian position is therefore that "We are ready to ratify
it if the transit negotiations see a successful completion to
the mutual satisfaction of the parties."[88]
The Russian Ambassador in London told us that Russia was interested
in a lasting instrument that would effectively regulate transit,
particularly since 95% of Russian gas and 40% of oil are supplied
to trade markets by means of transit through other countries (Q 426).
The Russian State Duma had decided some time ago that the Treaty
could be ratified only when Russian proposals for the Transit
Protocol and the Energy Charter were taken into account, and Mr Putin
confirmed this during the EU-Russia Summit in Helsinki in 2006.[89]
167. We doubt whether the ECT and the Transit
Protocol are the right vehicles to achieve the EU's objectives
because of Russian objections. There seems little point in expending
further political capital on trying to persuade the Russians to
ratify the Energy Charter Treaty and the Transit Protocol as they
stand: they are not going to do so.
168. If negotiations get under way later this
year for a new PCA the EU should be prepared to explore with Russia
whether that instrument could provide a legally binding framework
for incorporating energy provisions such as those contained in
the ECT.
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