Discussing the Energy Charter Treaty – Q&A with Dr Urban Rusnák, Secretary-General, Energy Charter Treaty Secretariat

What is the Energy Charter Treaty and why is it important?

The Energy Charter Treaty (ECT) is a multilateral investment treaty that establishes a legal framework for energy trade, transit and investment between member states. It, therefore, provides a multilateral framework for energy cooperation, which makes it a unique international agreement and establishes a legal framework to promote long-term cooperation in the energy field. The ECT embraces the whole course of handling energy: from geological prospecting to final consumption in different sectors of the economy, including the activities linked to the energy industry. Negotiated between July 1991 and December 1994, the ECT is the only multilateral agreement for the protection of investments in the energy field that succeeded and is still in force.

What were the driving economic and political reasons behind the Energy Charter Treaty?

The Energy Charter Process was initially driven by mutually complementing interests of groups of countries. For instance, countries that had capital and highly developed technology, interested in exporting investment, and countries rich in resources, but less developed and weaker in governance. The ECT provided a legal level playing field and a framework facilitating long-term energy investments for the benefit of investors and host nations. Over the years some countries have changed from recipients of foreign investments to investors abroad, or from energy exporting countries to net importers. Most recently, many less developed countries in Africa and Asia which are trying to attract investors are considering accession to the ECT for very similar reasons as its original Contracting Parties.

Has the Energy Charter Treaty proved successful in achieving those goals?

I believe that unlocking the oil and gas potential of the Caspian region in mid- 1990’s through foreign direct investment provides one of the best examples that could be directly linked to investment and transit provisions of the ECT.

What are the main misconceptions about the Energy Charter Treaty?

The two main misconceptions about the Energy Charter Treaty are that (1) the ECT is only applicable to a particular geographic area and (2) and that its only function is to provide investment protection. This is simply not the case. In regard to the first, geographical coverage, it is true that the ECT was originally signed by mostly European and Asian countries, however, from the beginning it was designed as a truly global framework without geographical restraints. That is why the International Energy Charter declaration (the updated 1991 political declaration), which paves the way for future accession, has been expanding to states in South and East Asia, Latin America and Africa.

In regard to the second misconception; the ECT is not merely for investment protection. The ECT, while establishing provisions for investor protection through typical standards, was also designed to promote investments in member states. The ECT is structured on three main pillars: trade, transit and investment, it also contains important provisions on competition, transfer of technology, access to capital, environmental protection, energy efficiency and taxation in the energy field. The ECT is technology-neutral and does not prescribe any particular fuel or technology for its members.

What obligations does the Energy Charter Treaty impose on Contracting States, and how do those interact with state sovereignty?

One of the aims of the ECT is to facilitate transactions and investments in the energy field by reducing political and regulatory risks. The obligations of the Contracting Parties to promote and protect Investments of Investors are found in Part III of the ECT. Under these provisions, Contracting Parties shall commit to fair and equitable treatment including constant protection and security in which a Contracting Party shall not in any way impair by unreasonable measures the management, maintenance, use, enjoyment or disposal of such Investments; and shall accord to Investments and their related activities treatment no less favorable than that of their own Investors or of the Investors of any other Contracting Party or third state, whichever is the most favorable.

While these obligations are not out of the ordinary and can be found in virtually all international investment agreements, they are counterbalanced in the ECT by provisions stressing the concept of sovereignty over natural resources. These provisions contemplate state sovereignty and sovereign rights over energy resources and do not prejudice the rules governing the system of property ownership of energy resources. Each Contracting Party continues to hold the rights to decide the geographical areas within its area to be made available for exploration and development of its energy resources, the optimization of their recovery and the rate at which they may be depleted or otherwise exploited, to specify and enjoy any taxes, royalties or other financial payments payable by virtue of such exploration and exploitation, and to regulate the environmental and safety aspects of such exploration, development and reclamation within its area, and to participate in such exploration and exploitation, inter alia, through direct participation by the government or through state enterprises.

One aspect of the above has been specifically outlined in one recent Energy Charter Conference Decision (CCDEC2017 04), by confirming states’ right to regulate to achieve legitimate policy objectives. Indeed, arbitral tribunals constituted under the ECT have confirmed that it is well established that the host state is entitled to maintain a reasonable degree of regulatory flexibility to respond to changing circumstances in the public interest though subsequent changes should be made fairly, nonretroactively, consistently and predictably, taking into account the circumstances of the investment.

What happens if a Contracting State does not comply with its Energy Charter Treaty obligations?

Multiple tailor-made dispute resolution mechanisms, depending on the type of grievance, are foreseen in the ECT and available as a result of a Contracting State non-compliance with its ECT obligations.

In the event of an alleged breach of the ECT’s investment provisions, and if the dispute cannot be settled amicably within a period of three months, Article 26 allows investors to submit the dispute for its resolution to the courts or administrative tribunals of the Contracting Party to the dispute; in accordance with any applicable, previously agreed dispute settlement procedure; or to international arbitration or conciliation. For disputes between parties to the ECT, Article 27 provides for an arbitration procedure for disputes regarding the interpretation or application thereof (except for competition and environmental issues). For transit disputes, Article 7 provides a specific conciliation mechanism, allowing for a faster and less formal procedure. For trade disputes, Article 29 and Annex D include a mechanism (following the WTO model closely) for settling trade disputes between Energy Charter member countries, provided that at least one of them is not a WTO member. Concerning competition disputes, Article 6 provides for bilateral non-binding consultation mechanism. Finally, regarding environmental disputes, Article 19 provides for disputes to be reviewed by the Energy Charter Conference if no other appropriate international body exists for the consideration of such disputes.

Do you see a role for the Energy Charter Treaty or investor-State arbitration in dealing with climate change issues?

Certainly yes! Given the unprecedented amount of investment needed to replace the existing energy industry with new, low carbon sources and to extend energy use in countries where a substantial Discussing the Energy Charter Treaty Norton Rose Fulbright – October 2018 03 amount of the population do not have access to modern forms of energy, the energy transition will have to rely on private (foreign) investment. Proper investment conditions could become the determining factor in the development of clean energy sources. The ECT and its dispute resolution mechanism could also ensure the orderly change and fair compensation, where necessary, of existing investments which would have to be phased out earlier than planned. Forcibly shortening the investment cycle would create instability and cost economies much more in the longer term.

What function does the Energy Charter Treaty Secretariat serve and what does your role as Secretary-General involve?

The Secretariat supports the Energy Charter Conference and its subsidiary bodies in all their functions. It also provides many services for Contracting Parties and Observers such as training programmes, capacity building, governance monitoring, advice, and preparing Observers for accession to the ECT. Upon the demand of the Members of the Conference or investors, we provide mediation and conciliation in case of disputes in investment and transit. As Secretary-General, on top of my management responsibilities for the Secretariat and its Staff, I can play a specific role in conciliation or early warning mechanism. I report to the Energy Charter Conference.

What have been your greatest challenges and achievements since your appointment in 2012?

Since my appointment, I have been consistently working with delegates in efforts to modernise the Energy Charter Process and to make it attractive for the next generations. In the first phase of modernisation we successfully updated the European Energy Charter of 1991, and today 88 countries and organizations have signed the International Energy Charter declaration of 2015. In the second phase, we revisited all internal procedures, increased transparency, and completed or closed numerous projects we inherited from the past. Today we are facing the biggest challenge to date: to design and implement a process leading to the modernisation of the ECT. I firmly believe in the success and necessity of the modernisation process, and I am convinced we have all the prerequisites to modernise the Treaty in the horizon of two to three years.

From a slightly different perspective, I feel strong satisfaction when every new country joins the ECT and deep disappointment, even frustration, when any of our Members withdraw from the Process.