Europe piles up ECT pressure in the run-up to G8 summit

27.04.06

Moscow, (Igor Tomberg for RIA Novosti)

Speaking at the Russian Economic Forum in London on Wednesday, Alexander
Medvedev, Gazprom's executive in charge of exports, described the Energy
Charter Treaty as a "stillborn document."

"There was not a single assessment of the Ukrainian events from the Energy
Charter secretariat as the situation was unfolding, which just goes to show
that the document is stillborn and most of its terms fail to reflect the
real market conditions," the Gazprom executive said.

The harsh rhetoric followed a speech by Alan Johnson, British trade and
industry secretary, who called upon Russia to ratify the treaty's transit
protocol.

The bitter London debate comes in the wake of other discussions on a
multilateral mechanism regulating a global energy market, key to finding a
common ground among various - producing, consuming, retail, and transit -
interests that are often simply antithetic. This agreement is in turn
critical for guaranteed global energy security.

As Russia has put energy security high on the agenda of its G8 presidency,
some Western partners insist on Moscow's ratification of the Energy Charter
Treaty as if the status of a top-tier global energy player was locked for
Russia, and the Charter was the only key. Neither is, in fact, necessarily
true.

While Russia's finance minister Alexei Kudrin has sent an encouraging signal
to Europe by confirming the government is basically ready to ratify the
treaty, he has few supporters. Industry and energy minister Viktor
Khristenko, in contrast, has called for major amendments to the transit
protocol, a key part of the package currently on the table.

Since 1991, the Energy Charter has been the only meaningful document
establishing common approaches to energy security and adopted by seven
producing as well as consuming G8 members - all but the United States.

In 1994, 51 states signed the Charter's main legal instrument - the Energy
Charter Treaty. In 1998, it was ratified by and became internationally
binding upon 45 of them. The ECT is truly a viable platform for progressive
international energy cooperation, which has been in place for more than a
decade and establishes long-standing and comprehensive rules for all players
- or so its supporters say.

In reality, the ECT, for all its legal and political advantages, has largely
failed to gather countries into a multilateral energy regulatory system. One
reason is that Russia seeks to have the Charter's many wrongs righted before
it joins in. Kudrin cited numerous blind spots.

"Many current Charter's articles on investor protection are suspended; its
transit clauses are weak and became worse as new countries joined the EU and
therefore saw their transit status changed," he said.

Valery Yazev, head of the State Duma energy, transport and communications
committee, clarified Russia and Gazprom's position on the transit.

"The main goal of the Transit Protocol is to open Gazprom's trunk pipelines
for non-Russian CIS producers. Our Charter partners want us to open our
pipelines to Kazakh, Uzbek, Azerbaijani, and Turkmen exporters at a Russian
domestic price of $0.35 per 1,000 cubic meters. However, this means their
gas will cost by 50% less than ours on arrival at the German border, and
they will simply squeeze us from the market," he said.

At the current gas prices, neither Moscow nor Gazprom will join the existing
transit protocol unless an amendment is introduced on Russia's preferential
access to what should be termed as the "available transit capacity." While
clearly protecting Russia's well-justified interests, this will also be in
line with international gas business practices in which many companies
combine upstream assets with a powerful transport network. What we have been
offered in return for ratification so far - guarantees that ECT-bound
transit nations would not be allowed "unauthorized diversions," a euphemism
for stealing - looks, especially in the wake of the Ukrainian row earlier
this year, not exactly encouraging.

Nonetheless, there is no doubt the Charter and the ECT still proffer a great
deal of innovative ideas and introduce legal and investment regulations. The
bottom line is that the Charter is simply too valuable to be sneezed at.
Many analysts believe it could create a better elaborated and more efficient
energy world than many agreements the World Trade Organization regulates
other global sectors with. Which is yet another reason why Russia, in the
light of its upcoming WTO accession, is reflecting on how to capitalize on
its energy advantages. Novel initiatives on a multilateral energy regulatory
system will not only help it carve up a strong role for itself but will also
shake up the WTO a bit, for this gathering is clearly in need for an
infusion of fresh ideological blood.

Dr. Tomberg is a senior research fellow with the Energy Research Center,
Institute of World Economy and International Relations (IMEMO) of the
Russian Academy of Sciences. -0-