fbpx

Derek Brower: The inconvenient, but necessary, treaty

The Energy Charter Treaty could resolve the impasse between Europe and Russia. So why won’t the Commission endorse it? By Derek Brower, journalist EUROPE’s muddle on energy policy gets worse by the month. After two years of steadily declining relations with its most important energy supplier, Russia, things reached a new low with the Commission’s recent proposal for “reciprocity” between supplier and consumer. On the face of it, it seems like a sound policy. If Gazprom wants to invest in the EU’s liberalised energy sector, it should allow European firms to do the same in Russia’s. But it has problems. The first, according to international lawyers, is that it has no legal basis. The second is that Russia will not accept it, and Moscow has interpreted it as a thinly-veiled means of protectionism.

That might sound rich, given that the Kremlin has rewritten the rule book on energy nationalism and protectionism in the last five years. But looked at in an historical context, points out Oxford academic Dieter Helm, and Russia’s policy of state control in its energy sector uses the same logic as that applied by Western countries when they, too, once had gas to produce and sell. When the UK began to develop the North Sea, says Helm, it forced developers to land all gas in the UK and sell all gas to British Gas, which then sold it to customers on long-term take-or-pay contracts.“It isn’t sensible, then, to bang the table and expect Russia to pass laws we didn’t pass when we were developing our own assets,” he says.It is a good point. But with European demand for gas imports forecast yesterday by Italy’s Edison to double to around 500bn cubic metres a year by 2020, the reality on the ground is that Europe will need more, not less, Russian gas. For the energy security of its citizens, then, the Commission would do well to find some common ground with Russia and start plotting a way forward.Officials responsible for the progress of the Energy Charter Secretariat say that a treaty between consumers and suppliers, the Energy Charter Treaty, provides the answer. Russia is a signatory to the treaty, but has not ratified it. Critics of Moscow say its reluctance to sign the treaty is more evidence of its aggressive intentions towards Europe.However, the truth is that it is not Russia that is holding up the treaty, it is the European Commission. Andrei Konoplyanik, the deputy general secretary of the secretariat, told me yesterday that sherpas from Russia and the Commission had agreed on the wording of the new draft transit protocol – up till now, the sticking point between Russia and the EU. Ratification of the protocol will not happen before the Russian elections are out of the way, he says. But after that, he believes Russia will agree to it.The Commission, however, won’t. That is because the draft protocol does not prohibit long-term contracts for the supply of gas into the EU. If the Commission accepted the protocol and it became law, that would mean that Russia could use it to appeal to international arbitration if the EU sought to prevent a long-term contract in any of Gazprom’s sales agreements into the continent.The prohibition of long-term contracts and the related guarantee of third-party access to energy infrastructure is a key component of the Commission’s liberalisation drive. Brussels says those terms guarantee competition. But suppliers say they undermine the security of their demand.Unfortunately for the Commission, it seems to be the only body in Europe that remains convinced of the need to guarantee third-party access or to prohibit long-term contracts in supply deals. Long-term contracts are key to building infrastructure: without them, companies will not invest the often-enormous up front costs of building pipelines and LNG terminals. Given Europe’s need for more infrastructure, they could be essential in guaranteeing security of supply.The Commission’s position, says Jonathan Stern of the Oxford Institute for Energy Studies, “has had its day”. Energy Charter officials agree – and say that, in any case, there could be a way for supply agreements to be made on long-term conditions, while at the same time offtake distribution agreements reflect the Commission’s third-party access desire.With the forecasts for growth in gas demand, Europe needs to secure more supply agreements now. It needs to find a way out of its rhetorical war with Russia. And it needs a legal framework that all the sides can agree on. The transit protocol of the Energy Charter Treaty can offer the basis for all three. The Commission should swallow its pride, drop its fetish about third-party access and take-or-pay contracts, and give the Russian treaty negotiators an opportunity to sell the treaty to their masters in Moscow. It is the only pragmatic way forward.