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Energetic Energy Relations? The Energy Charter Treaty and the European Union

In 1990, at a European Council meeting in Dublin, Ruud Lubbers, the Dutch Prime Minister, who, at the time, presided over the Council, called for more institutionalized relations with the energy-rich economies in Eurasia following their collapse in order to benefit from their consequent opening-up and orientation towards the global market-based economic order. This led to the adoption of the 1991 European Energy Charter, which is a non-legally binding political declaration embodying key principles of international energy cooperation. The 1991 European Energy Charter paved the way for the negotiation and eventual adoption of the Energy Charter Treaty (ECT) and the Energy Charter Process. This article describes two elements: 1) the ECT and its relationship to the European Union (EU) and 2) the EU energy policy and its complications.

I. Introduction

The Energy Charter Treaty (ECT) is an international agreement that aims to provide a “multilateral framework for energy cooperation” based on the principles of “open, competitive markets and sustainable development.” By binding governments to commitments that guarantee open markets, non-discrimination, and access to foreign investment, the ECT aims to strengthen the global rule of law on energy issues and thereby reduce the risks associated with energy-related investments and trade. The ECT itself rests on five primary areas: investment protection; trade; transit; environmental protection; and dispute settlement; while there are optional protocols on various topics, including energy efficiency and the environment.

This article describes two elements: 1) the ECT and its relationship to the EU and 2) the EU energy policy and its complications.

II. THE ENERGY CHARTER TREATY AND ITS RELATIONSHIP TO THE EU

It is well known that the EU has many years of experience in integrating markets. The EU can be seen as a regional model for the judicialization and juridification of energy relations. In this section, we provide an analysis of the EU’s relationship with the ECT.

The ECT’s fundamental purpose was to promote open energy markets, predicated on, chiefly, investment protection, in the energy-significant, yet economically depressed, Eurasian economies following the geopolitical and geo-economic re-shuffle in Eurasia as a result of the collapse of the Soviet Union. A more critical reading of the ECT and the events that led to its adoption would suggest that, beyond the official rhetoric, its actual aim was to enhance the energy security of developed European economies by, amongst other things, laying down norms to promote the eventual opening-up of those economies, and their energy sectors, to external exploitation, and to thus promote access for the industries of the developed European economies to the energy resources in those economies. In that sense, with such ostensible foundational links to the EU, the ECT regime presents an inherent bias towards EU industrial and energy interests. Whilst there is legal equality between ECT parties, the fact that their economies are so disparate means that the benefits of ECT membership—such as investment protection in the energy sectors—are likely to accrue in an asymmetric manner that favors those economies with developed energy exploration (upstream) sectors. The European Communities is a foundational sui juris party to the ECT, as are those EU member states that were part of the European Communities at the time of the ECT’s adoption.

Whilst the ECT expressly asserts state sovereignty over natural resources—itself a truism under international law—it provides robust protection for investor interests in the territories of ECT parties. It does so by entrenching a legal right to compensation in cases where an ECT party carries out an expropriation or otherwise compromises investor interests in some legally significant manner. The ECT does not necessarily obligate its parties to liberalize their energy markets, it does not mandate inward flows of foreign investment, and it does not obligate its parties to provide energy exploitation contracts to all ECT parties on a non-discriminatory basis. However, it does provide disciplines that benefit energy-sector investment interests once these have been welcomed by ECT parties into their territory. In sum, once investments take place within ECT party territories, ECT parties must provide indiscriminate treatment to foreign investors (in other words, they must treat all as if they were investors from their “most favored nation”), and must not discriminate between foreign and domestic investors (in other words, they must provide “national treatment” to foreign investors).

III. EU ENERGY POLICY AND ITS COMPLICATIONS

A number of authors predict that the wars of the future will not be fought over religion or freedom, but over resources and energy (here and here). While these predictions may seem overly drastic, the fact remains that global energy consumption demands are growing at rates that are far from sustainable, given the current sources of energy. A crucial component of this equation is the concept of “energy security,” which deals with the ability of a state to sustainably provide for its energy demands.

This section seeks to describe the case of the EU—a major economic bloc—in the context of the governance frameworks that ostensibly contribute, and are likely to contribute, to its energy security (more on this topic in previous articles here, here, here, here, and here). This discussion assumes significance, given the weak energy position the EU has traditionally possessed and the steps taken by it to mitigate the effects thereof.  The journey towards an energy-secure EU requires the presence and functioning of strong governance mechanisms and structures that are not only able to ensure that internal EU policy be undeterred from its energy security objectives, but that externalities such as the effects of a changing global energy environment be carefully studied and accounted for. It is within such a context that this section describes the existing EU energy governance framework and the effects that are likely to result from developments in global energy trade (further on this topic in previous articles: here and here). It will take a deeper normative look at the existing EU governance frameworks and institutions that exist in relation to energy and energy security in light of recent international developments.

The nature of EU energy policy has previously been examined. The EU energy policy is comprehensive and multifaceted. Multiple EU Commission communications testify to this. EU energy policy extends over a wide range of policy matters that relate to energy, and EU energy policy encompasses inwardly and outwardly facing aspects. For instance, EU energy policy aims at, among other things:

Much of this relates to the internal EU reality and applies to the intra-EU territory. However, the advancement of EU energy interests cannot be, and is clearly not, restricted to introspective EU measures.

The EU also directs efforts outwardly by engaging with third-party states in order to encourage, outside its borders, a range of practices such as more efficient and sustainable energy use, energy sector liberalization and investment protection, and pro-market processes that, arguably, contribute towards the promotion of EU energy interests by enhancing the volume of energy commodities that eventually reach global markets and/or protect EU energy investments abroad (also here and here). We could call such efforts directed outside the EU, and principally concerned with energy, the EU’s external energy policy.

Although the EU faces challenges (be they inherent, systemic, or incidental) in going about addressing its energy interests in the manner that, say, China, India, Japan, or the US may, it makes full and effective use of whatever competences it is afforded. For instance, the EU (or, to be more accurate, its predecessor, i.e., the European Communities (EC)) had been the prime mover behind the ECT. Moreover, the EU played a major role in setting up the Energy Community (EnC), which draws in surrounding energy-significant states (significant in terms of their energy-related natural resource endowments and/or their significance to the transit of energy flows into the EU). For example, through the EnC, a once isolated Greece—at the most southeastern extremity of the EU—had finally been territorially linked to the rest of the EU, thus territorially integrating the entire IEM into one cohesive area. Article 7 ECT, for its part, creates, among other things, important energy transit rights for ECT parties, which, crucially, also extend to fixed energy-related infrastructure, thus enhancing energy trade flows between ECT parties and flows into the EU.

It is also the case that institutions such as the EnC allow the EU to maximize its interests in cases where it is perhaps politically challenging (or naïve to expect the EU) to attract energy-significant neighboring states with EU membership. In the immediate aftermath of the collapse of the bureaucratic regimes across Eurasia—in what had been lauded as the end of history—it may have been more realistic to think that those economies on the brink of collapse might have been willing to join on whatever terms the developed Western European states may have imposed. This may have changed significantly nowadays what with the protracted global economic slump. Market failure may have given rise to skepticism towards globalized markets and economic integration as being unquestionably safer paths towards modernization and economic development. Consequently, those states may be less willing to seek EU membership proper.

Within this context, we could perhaps understand a realization on the part of EU members’ polities that it is best to focus on the core economic relations per se and to draw in third-party states, particularly energy-significant states, into EU membership-lite arrangements. In that respect, while it is politically naïve for the EU to expect states such as Moldova and Ukraine to be joining the EU as fully-fledged EU members any time soon, drawing these states into more institutionalized energy relations is a less maximalist way of achieving EU energy security ends.

IV. Conclusion

The EU engages with the world outside the territory of its constituent Member States in a diverse manner in order to promote its energy security. For instance, the EU does this in various fora where it co-exists with third-party states, including through special regimes relating to energy, such as the ECT and the EnC. We have seen how the EU has been the prime mover behind both the ECT and the EnC. The ECT was a timely response to significant geostrategic events—namely the collapse of the bureaucratic regimes in the eastern and central part of Europe and the re-casting of machtpolitik regionally—that had enhanced opportunities for the industries of the developed Western states to access energy resources in those regions, whilst the EnC came a few years later to place the EU energy interests in those regions on a more institutionalized footing by promoting the integration of energy markets—chiefly gas and oil—through regulatory convergence across EnC members.

The EU’s pursuit of closer energy relations with its neighbors along single-sector lines—as is the case with the EnC—could also be understood as a less maximalist approach of EU Member States’ polities to promoting their interests with neighboring energy-significant states (without the conditionality of EU membership) with terms that are politically acceptable to the polities in those neighboring states.  

While within the modern international legal system, there is fragmentation along law fields across various cleavages—namely between public and private law, between different themes (e.g., humanitarian, environmental, and economic), and between public and private law within each theme—the modern international legal system generally possesses the juridical tools to help unlock normative conflicts arising within or between legal orders. (For instance, ‘international’ ‘investment’ law, ‘international’ ‘energy’ law, which, in our view—particularly, in relation to interstate and supra-state law relating to interstate economic matters—are essentially ad hoc artifacts coming into existence in the eye of the beholder (in our case, that of jurists, legal analysts, and practitioners). This is certainly so at the level of general international law, considering the interpretative principles that exist at the universal level. However, it is not a lack of juridical tools that is an issue; rather, it is the implausibility for normative conflicts to be addressed by a competent adjudicative omniscient agency.

Returning to the ECT and how it relates to the EU legal order, we note that fragmentation per se and normative conflict are actually less of an issue, given the high degree of kinship and provenance between the legal orders involved. In relation to the ECT, the Electrabel v. Hungary arbitration case—albeit an arbitration case binding on the parties concerned and with very limited normative effect for the purposes of international law—illustrates how conflicts may be resolved when the EU legal order is focused upon. This is not to say that the EU and/or states burdened by EU-related obligations have a free hand to renege on ECT obligations; rather, it is to say that the EU is taken as one entity and that ECT breach allegations between EU member states are deferred to the EU’s legal order for resolution. We witness this preference to defer a dispute to a more specific or chronologically recent order in how the International Tribunal for the Law of the Sea has deferred disputes between EU Member States to the Court of Justice of the EU on the basis that a more appropriate forum seems to exist, to whose jurisdiction both parties were subject due to their common EU membership and, crucially, due to the fact that the subject-matter of the dispute fell within the scope of their EU relationship.

                       


Rafael Leal-Arcas is Professor of Law and Public Policy at KAPSARC School of Public Policy (Riyadh, Kingdom of Saudi Arabia). He was Jean Monnet Chaired Professor in EU International Economic Law, awarded by the European Commission. He is a member of the Madrid Bar. Ph.D., European University Institute; M. Res., European University Institute; J.S.M., Stanford Law School; LL.M., Columbia Law School; M.Phil., London School of Economics and Political Science. Email: r.leal-arcas@outlook.com

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