Charter to fuel energy sector investments

Date: 11/12/1997

By Chris Johnstone

AFTER a long wait, a new framework for encouraging energy investments by western companies in the crumbling infrastructure of the former Soviet Union should take a major step forward next week.

By next Wednesday (17 December), the required 30 countries should have ratified the Energy Charter Treaty, a major initiative encouraged by the EU but independent of Union institutions. The treaty will take effect 90 days after ratification.

The energy charter sets out the rules of the game for western companies wanting to invest in the vast oil and gas resources of the former Soviet Union, and for the states which hope to attract their cash and start to pump up some of the huge potential wealth that lies under their feet.

A broad sweep of countries across the underbelly of the former Soviet Union, including Turkmenistan, Kyrgyzstan, Tajikistan, Kazakhstan, and Uzbekistan, have already ratified the treaty. Azerbaijan and Armenia should follow suit soon.

The charter provides guarantees that the investments which companies make will not be expropriated and that foreign investors can get their profits out of the countries concerned in hard currency. This will result in a major overhaul of the rules of some states where restrictions are still in force, such as Uzbekistan.

Separate clauses in the treaty aim to tackle the problem of transit: transporting oil and gas once it is out of the ground.

Countries which have ratified the accord will not be able to refuse to transport energy across their territory unless there are good reasons, such as a lack of capacity. If that is the case, they should not block any initiative to build new pipelines. The treaty adds that there should be no discrimination against particular companies or countries.

If such a clause had existed earlier, it could have come to the rescue of some firms which have rushed headlong into making investments around the landlocked Caspian and Black Sea oilfields without working out properly how the oil and gas would be transported once it came out of the ground.

Apocryphal stories circulate about US oil giants which sank wells but then found no easy method of getting oil away from the windswept outbacks of Kazakhstan and Turkmenistan. Geographically, one of the simplest options would be for some of the oil to pass through Iran, but that is a non-runner on political grounds for many western countries.

If the transit agreement does work in practice - and that depends on governments in the area being afraid of the consequences of violating an international accord they have signed up to - it will reduce the political risk linked to investment and help avoid companies spending billions of extra ecu on building less direct pipelines.

However, oil industry observers say Russia will probably still insist on building its projected new pipeline from its northern territory bordering the White Sea to western Europe so that it avoids Ukraine.

Ratification of the treaty by Russia is still delayed by discussions between the government and parliament.

Further afield, Japan is expected to ratify and China too has expressed a strong interest in coming on board, according to Peter Schütterle, secretary-general of the Brussels-based Energy Charter Secretariat.

The US has not signed up to the treaty. However, it will be technically possible for American power companies to benefit if their subsidiaries are based in countries which have endorsed the deal. To qualify, they will have to prove that these firms are more than just mailbox addresses. This might be an interesting option for some of the smaller companies which do not have the weight of giants like Mobil.

The treaty will also boost free trade in the multi-billion-ecu market for energy equipment, as discriminatory import duties or other barriers to trade will be banned among countries that have ratified the accord.

“This is a halfway house to acceptance by countries of World Trade Organisation (WTO) rules in the sector,” said a member of the charter secretariat.