OXFORD INSTITUTE FOR ENERGY STUDIES Work in progress - not for quotation or citation Katja Yafimava, D.Phil. Research Fellow, OIES Natural Gas Research Programme PEEER Conference ‘Governing Energy in Europe and Russia’, Coventry, September 3-4, 2010 The Energy Charter Treaty as a Governance Structure for Gas Transit

OXFORD INSTITUTE FOR ENERGY STUDIES 2 Transit Risks Associated with Western CIS Purchasing and Transit Countries Risk of transit countries’ non-payment for Russian / Central Asian supplies, therefore… Risk of supply cuts by supplier, hence… Risk of transit interference by transit countries (i.e. diversion, reduction, interruption), and as a result… Risk of under-deliveries to EU buyers by supplier whose gas transit the western CIS Risk of technical failure (lack of investment) Transit risks stem from the western CIS countries’ inability / reluctance to pay prices increasing towards European levels and the ability to interfere with transit flows

OXFORD INSTITUTE FOR ENERGY STUDIES 3 Frameworks Within Which Transit Risks Could Be Mitigated 3 Multilateral: Energy Charter Treaty (ECT/TP): EC, Member States, Russia*, Ukraine, Belarus*, Moldova, Central Asian CIS suppliers NB Russia’s withdrawal in late 2009 (!) Energy Community Treaty (EnCT): EC, Member States, the Balkans, Moldova Bilateral: Russia-CIS Contracts & Intergov. Agreements: no legal grounds for the Commission and for the Member States to make legal claims against western CIS gas companies The ECT is the only framework applicable to all parties – Russia, the EU, western CIS

OXFORD INSTITUTE FOR ENERGY STUDIES 4 Energy Charter Treaty: an attempt to put in place an internationally supervised regime for energy transit Transit non-interference provision (Art. 7) Prohibition of transit interference Dispute settlement procedures: transit conciliation procedure (Art.7) Investor-State (Art. 26) for investment disputes State-State (Art. 27) for any dispute concerning ‘application or interpretation’ of the Treaty There are instruments within the ECT but none was used to prevent / resolve Russia – CIS transit disputes

OXFORD INSTITUTE FOR ENERGY STUDIES 5 Transit Conciliation Procedure (art. 7.7) Transit dispute conciliation procedure Conciliation = ‘conciliation’ (90 days) + ‘arbitration’ (binding decision on interim tariffs for 12 months, after which parties are back to ‘square one’) What happens if conciliation is unsuccessful? State-Investor (art. 26) or State-State (art. 27)? Re-commencing the transit conciliation procedure? How arbitration is different from conciliation? Arbitration is always successful, i.e. final & binding May take longer (~24 months) than conciliation (16 months max) The added value of the ECT conciliation procedure is questionable

OXFORD INSTITUTE FOR ENERGY STUDIES 6 Investor-State (art.26) Available procedures ICSID, an ad hoc tribunal under UNCITRAL, the Arbitration Institute of the Stockholm Chamber of Commerce Applicability Resolution of investment disputes, hence also applicable for those transit disputes that are also investment disputes but… Not applicable to ‘pure’ transit disputes Amendments to the Transit Protocol are required to allow for all transit disputes to be arbitrated under art. 26 Investor-State DSM only applicable to some transit disputes, not to all of them

OXFORD INSTITUTE FOR ENERGY STUDIES 7 State-State (art.27) Available procedures Stage 1 – diplomatic channels (art.27.1) Stage 2 – ad hoc tribunal under UNCITRAL (art. 27.2) Applicability Resolution of disputes concerning ‘application or interpretation of the Treaty), and hence for any disputes, including transit disputes Precedent Slovenia-Croatia transit dispute State-State DSM applicable to any dispute, including a transit dispute – most valuable

OXFORD INSTITUTE FOR ENERGY STUDIES 8 The ECT Added Value Dispute prevention mechanism Strong but being based on reputational (!) constraints, quickly decreases once violation is ‘allowed’ and goes unnoticed Dispute resolution mechanism Present, mostly through the possibility of arbitration (art. 26 and art. 27), whereas the transit conciliation (art. 7.7) is weak and marred with uncertainties The ECT is stronger at dispute prevention than at dispute resolution, but this strength has weakened dramatically because of the ECT Parties’ failure to acknowledge publicly the fact of violation of the ECT during Russia- CIS transit crises

OXFORD INSTITUTE FOR ENERGY STUDIES 9 Conclusion & Questions ECT has a potential to become a useful governance structure for gas transit, but whether such potential is realised depends on: Willingness of all Parties to raise the ECT profile in the context of transit The likelihood of the ‘reformed’ ECT Conditions for Russia’s return to the ECT Is any of the above realistic? If not, what could be an alternative gas (energy) transit regime? If no alternative is found, what is the future of transit?

OXFORD INSTITUTE FOR ENERGY STUDIES 10 OIES Natural Gas Research Programme: published and forthcoming research The Transit Dimension of EU Energy Security: Russian gas transit across Ukraine, Belarus and Moldova, Yafimava, OUP, 2010 forthcoming Russian and CIS Gas Markets and their Impact on Europe, Pirani (ed.) OUP 2009 The June 2010 Russian-Belarusian Gas Transit Dispute: a surprise that was to be expected, Yafimava 2010 The April 2010 Russo-Ukrainian Gas Agreement and Its Implications for Europe, Pirani, Stern and Yafimava 2010 The Russo-Ukrainian Gas Crisis of January 2009: a comprehensive assessment, Pirani, Stern, Yafimava 2009 The 2007 Russia- Belarus Gas Agreement, Yafimava and Stern 2007 The January 2006 Russian-Ukrainian Gas Dispute, Stern 2006 Working papers are free to download, and books can be ordered, from