Powering up EU-Russia energy links

Date: 17/05/01

Within 20 years, Russia could be supplying up to 40% of the EU's gas needs. Ria Kemper, secretary-general of the Energy Charter Secretariat, says this week's EU-Russia summit should focus on a legal framework to build a lasting strategic partnership

LAST summer's upheavals over fuel prices placed the issue of Europe's long-term energy supplies firmly on the political agenda. And although the issue has since faded somewhat from newspaper headlines, its importance as a priority for policy-makers is unquestionable.

Figures from the Green Paper issued by the European Commission last November on a strategy for the security of energy supplies illustrate the point - by 2020, 67% of the EU's demand for gas and 90% for oil will have to be met from external sources.

One of the most important of these external sources is Russia, already a major oil exporter to the Union and, more significantly, the world's largest gas producer. Some estimates forecast that within 20 years up to 40% of the EU's gas supplies could be sourced from Russia.

There is therefore an obvious Union interest in ensuring that energy imports from Russia take place on a stable, predictable basis. For its part, Russia has an acute need for capital investments in its ailing oil and gas industries to maintain and increase production levels in the medium-term.

The mutual interest between the EU and Russia in cooperation in this area is clear. But what should be the role of governments in this cooperation? After all, the actual investments in Russia's energy sector that are needed to develop oil and gas fields and build the pipelines to transport their output to western Europe will have to be made not by governments, but by companies.

The answer is that the Union needs to work together with President Vladimir Putin's administration in order to improve the legal climate for the protection of energy investments in Russia. It was on this basis that a dialogue was launched, amidst much publicity, at the last

EU-Russia Summit in Paris in October 2000 on the creation of a 'strategic energy partnership' between the EU and Russia.

This is not the first time that the Union has launched an initiative aimed at improving the long-term conditions for energy imports from Russia. In the early 1990s, the EU was the driving force behind the creation of an inter-governmental organisation devoted to promoting energy cooperation across the whole of Europe, including the newly-emerging states of the former USSR, based on a shared commitment to the principles of non-discrimination and transparency.

This organisation is called the Energy Charter, and its founding document, the 1994 Energy Charter Treaty (ECT), enshrines these principles in a legally binding form as the basis for energy cooperation among its signatories. The Treaty sets out rules of behaviour for governments to observe in relation to the protection of foreign energy investments and international energy trade, and also offers mechanisms for the resolution of energy-related disputes.

Perhaps most significantly in the context of Russia, it also contains provisions governing energy transit flows, which are being enhanced through the negotiation of an Energy Charter Transit Protocol. Clearly, if a long-term strategic partnership for Russian gas supplies to Europe is to be developed, it needs to be based on commonly accepted legal rules concerning the transit of such supplies through third countries, which the Energy Charter's transit regime provides.

Fifty-one states have signed the Treaty, including all EU member states. Russia was one of the original signatories of the ECT in 1994 but has not yet ratified it, thus depriving the Treaty's provisions of full legal force as a basis for cooperation between the EU and Moscow. Russia is one of only two former Soviet states that have yet to ratify the ECT, the other being Belarus.

At the EU-Russia Summit in Paris last October, the Joint Declaration adopted by Presidents Jacques Chirac, Romano Prodi and Vladimir Putin underlined the importance of Russian ratification of the ECT in the context of the proposed EU-Russia energy dialogue. Following this high-level affirmation of the treaty's relevance as a foundation for cooperation, parliamentary hearings subsequently took place in Moscow in January 2001 on its ratification - the first time that the Russian parliament has considered approving the accord formally since 1996.

However, the hearings revealed that there is still no consensus in Russia on the benefits offered by the ECT, with the Russian gas monopoly Gazprom in particular claiming that ratification would be damaging to the country's economic interests. As a result, the Duma, Russia's lower house, has recommended that further analysis of the Treaty be carried out by President Putin's Security Council before resuming its consideration of the ratification issue.

The proposed analysis by the Security Council should help to demonstrate that Gazprom's fears are unfounded. The group's claims that the ECT would undercut its position on European markets by forcing Russia to open its network to transport cheaper gas from Central Asia. But this claim is based on an incorrect reading of the Treaty's provisions, which specifically exclude mandatory Third Party Access to pipeline systems.

Gazprom also appears to believe that the ECT imposes an obligation on states to limit the transit tariffs they impose on energy resources from third countries to the level of tariffs charged for internal transportation of energy within the country. Again, this view stems from an incorrect reading of the corresponding provisions in the Treaty.

It is important that the Union uses the EU-Russia summit in Moscow today (17 May) to maintain its high-level focus on the ECT ratification issue. If the strategic partnership on energy between the EU and Russia is to be translated into a reality - meaning increased flows of European investments into the Russian energy sector - then the establishment of a clear, non-discriminatory legal framework in Russia is an essential starting-point.

In the short term, the interest of many western energy companies is, understandably, focused on improvements to Russia's Production Sharing Agreement (PSA) legislation, which carves out a favourable legal regime for foreign investors in relation to individual energy projects. But in the long-term, a stable investment environment in Russia has to be based on a more comprehensive legal foundation, and it is important that the Union continues to underline that ratification of the ECT is a key step for Russia to take in this regard.

This issue should also be placed in the context of promoting Russia's integration into the global economic community more generally. President Putin has made it clear that he wants Russia to be a full participant in an international trading system based on transparency and competition, and has highlighted this by his declared intention to achieve Russian membership of the World Trade Organisation as early as possible.

Ratification of the ECT, the provisions of which replicate many of the rules of the WTO with specific reference to energy, should be viewed as a 'litmus test' of the Russian government's readiness to move in this direction.

Nobody would suggest that the ECT offers the answer to all the problems facing Russia in the energy sector. The Treaty will not bring about an overnight change in the view of the Russian market taken by foreign energy investors. It will, however, help to provide a solid legal foundation for a long-term future of energy cooperation between Moscow and Brussels. The EU needs stable imports of oil and gas, while Russia needs major investments in its energy sector: the ECT provides a legal framework within which both sides can pursue these interests to mutual benefit.

Achieving Russian ratification of the Treaty should therefore form one of the main components of the EU's strategy for the development of an energy dialogue with Russia.