Why the European Energy Charter Needs Revision edit

April 2, 2006

Russia has chosen energy security as the dominant theme for the summit of the G-8 in St. Petersburg in mid-June. This is a good choice. At present, world demand of oil is almost at 85 million barrells a day. Pessimists argue that world oil production is at its peak, while optimists suggest that in 2020 global output can rise to 105 million barrells a day, but that is only slightly more.

-->As the supplier of one-fifth of the world's production of natural gas and one-ninth of its crude oil, Russia does play a key role. Its position is all the more important in Europe, where it is the dominant energy supplier. Both because of energy efficiency and environmental reasons, Europe is increasingly turning to natural gas, rendering Russia even more significant.

Therefore, it is vital that Russia can prove itself a reliable energy supplier to Europe, and the partial interruption of Russian gas supplies to Ukraine during the first two days of this year rang shrieking warning bells all over Europe. The point is not who was right or wrong in this specific conflict but that a secure system of energy deliveries must be created so that such a calamity does not arise again. International energy trade must not be left unregulated.

What is needed is a Eurasian trade system for energy, corresponding to the World Trade Organization, with its multiple conventions. Such an energy trade system should set the rules for free trade in energy, access to transportation systems, and rules for investment as well as taxation. Naturally, such a system should contain clear rules for when delivery may or may not be interrupted.

The good news is that such an rule book exists. It is called the Energy Charter and was signed by 49 Eurasian countries, including Russia, in 1991, and it entered into force in 1998 after 13 signatories had ratified it. It is a legal document of about 200 pages.

The problem, however, is that none of the big energy suppliers in Europe, neither Russia nor Norway, have ratified the Charter. The US and Canada participated in the negotiations in 1991, but neither signed it. Thus, although the Energy Charter has come into force, it is not very relevant. Whenever Russia and the European Union hold a summit, the EU leaders urge Russia to ratify the Energy Charter, which it is clearly not going to do.

Today, energy supplies are far too important to be left unregulated by multilateral international agreements. Therefore, the Energy Charter needs to be revised so that it complies with the wishes not only of the consumers but also of the suppliers of energy. Otherwise it will be meaningless.

The objections by Norway, the US and Canada are all of legal nature. Norway does not accept international arbitration on Norwegian territory, which the Charter prescribes. Both the US and Canada claim that the Charter exceeds the powers of the Federal government in relation to the states. These legal challenges must be faced head on and resolved. None of these countries has any problems with the actual substance of the Energy Charter.

Russia's objections are of a completely different nature. They are many and concern the very substance. The greatest hurdle is problably third-party access to pipelines and grids as well as transit rules. Nor is Russia prepared to subscribe to all the rules for energy investment and their taxation. Russia stands rather far from the others signatories of the Energy Charter on quite a few points.

Today it is no longer enough to notice that differences exist or futily demand that Russia should ratify the Energy Charter. At the G-8 ministers of finance meeting in Moscow in February, French Minister of Finance Thierry Breton sensibly proposed that the Energy Charter should be revised to make acceptable to all countries involved.

In a speech in Moscow on March 20, Russia's sherpa Igor Shuvalov concurred that Russia would like to see a revision of the Energy Charter so that it can ratify it.

Thus, in principle, a Russian-European agreement appears to be emerging that the Energy Charter is needed, but first it must be revised so that it becomes mutually acceptable, and that the G-8 summit should aim at this accomplishment.

Europe cannot continue increasing its energy purchases from Russia without a commonly agreed framework for trade and transportation of energy. For Europe, no question is more important than free access to Russian pipelines, naturally for reasonable commercial compensation, and secure deliveries.

Naturally, such a mutual confidence is also in Russia's interest, because if Europe does not consider energy deliveries from Russia secure, the continent will scramble to utilize alternative sources of energy. For natural gas, liquified natural gas (LNG) can replace pipeline deliveries. Coal and nuclear energy can be given a boost, and of course so can energy conservation and alternative energy.

It would be desirable to engage the US and Canada in the Energy Charter as well, because these countries harbor many important energy companies that invest heavily abroad. Neither the US nor Canada had anything but legal problems with the Energy Charter.

Therefore, there are all reasons to make not only energy security but the revision of the All-European Energy Charter the focal point of the G-8 summit in St. Petersburg July 15-17. The summit could make no greater contribution.