Cross-Border Pipelines and the Energy Charter Treaty

1. ENERGY INTERDEPENDENCE AND COOPERATION Cross-Border Pipelines and the Energy Charter Treaty Graham Coop General Counsel Graham.Coop@encharter.org Energy Charter Secretariat www.encharter.org Energy in SEE – a must for development Energetika.NET Strategic Conference 010, Portorož, 23 June 2010

2. Cross-Border Pipelines and the Energy Charter Treaty • Cross-border pipelines in international law • The role of the pipeline: merchant, transporter or hybrid • The role of the border: border delivery, integrated cross-border transit or integrated cross-country transit • The Energy Charter Treaty and the transit of oil and gas • Introduction to the Energy Charter Treaty • Transit under the Energy Charter Treaty • The Transit Protocol and the Model Agreements • The Transit Protocol to the Energy Charter Treaty • The Model Agreements for the construction of cross- border pipelines

3. Cross-Border Pipelines and the Energy Charter Treaty • Cross-border pipelines in international law • The role of the pipeline: merchant, transporter or hybrid • The role of the border: border delivery, integrated cross-border transit or integrated cross-country transit • The Energy Charter Treaty and the transit of oil and gas • Introduction to the Energy Charter Treaty • Transit under the Energy Charter Treaty • The Transit Protocol and the Model Agreements • The Transit Protocol to the Energy Charter Treaty • The Model Agreements for the construction of cross- border pipelines

4. Cross-border pipelines in international law • The role of the pipeline • Merchant pipelines • Transportation service pipelines • Hybrid pipelines • The role of the border • Border delivery • Integrated cross-border transit • Integrated cross-country transit

5. Cross-Border Pipelines and the Energy Charter Treaty • Cross-border pipelines in international law • The role of the pipeline: merchant, transporter or hybrid • The role of the border: border delivery, integrated cross-border transit or integrated cross-country transit • The Energy Charter Treaty and the transit of oil and gas • Introduction to the Energy Charter Treaty • Transit under the Energy Charter Treaty • The Transit Protocol and the Model Agreements • The Transit Protocol to the Energy Charter Treaty • The Model Agreements for the construction of cross- border pipelines

6. Historical and political background to the ECT • Common interest in energy cooperation between CIS and western world in post-Cold War era • Inter-governmental framework was needed to provide legal stability for investments and to secure trade and transit of energy • Promote energy market reforms (re-structuring and commercialisation, energy price reforms) • Promote higher energy efficiency

7. Energy Charter key dates

8. Political Declaration EUROPEAN ENERGY CHARTER Legally binding instruments ENERGY CHARTER TREATY TRADE AMENDMENT Energy Efficiency Protocol Transit Protocol Framework of the Energy Charter Process

9. Dispute settlement Investment protection Energy efficiency Transit Trade Energy Charter Treaty • The four pillars of the ECT

10. The ECT – a pioneer in its field • Unique in covering trade, transit, energy efficiency and investment • Offers intermediary step towards WTO membership • Establishes inter-governmental forum to discuss energy cooperation issues

11. Energy Charter Treaty constituency Energy Charter Treaty Signatory States (1994) Observer States Countries of ASEAN (observer status granted to ASEAN, represented by the ASEAN Centre for Energy) 11

12. Investment protection ECT Part III (Articles 10-17) Offers protected investors a wide range of guarantees and protections (FET, CPS, non-discrimination, MFN, umbrella clause, key personnel, expropriation, freedom of transfers)

13. Investor-state dispute resolution ECT Article 26 • Offers protected investors, in the event of alleged violation by host state of Part III obligations, investor-state arbitration under (at investor’s choice): • Arbitration Institute of Stockholm Chamber of Commerce • ICSID or ICSID Additional Facility (subject to nationality requirements) • UNCITRAL Rules

14. Applicable definitions of “Investment” and “Investor” ECT Articles 1 (6) and 1 (7) Investment: Every kind of asset (e.g. shares, claims to money, intellectual property, licences, concessions) owned or controlled directly or indirectly by an Investor Investor:natural persons of a CP (including permanent residents), and companies/organisations organised in accordance with the laws of a CP

15. Mailbox companies ECT Article 17 Each Contracting Party reserves the right to deny the advantages of this Part to: (1) a legal entity if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organised….

16. ▼ continued on next slide▼ The information above was compiled from various public sources; while the Secretariat has made every effort to ensure that this information is reliable, its accuracy and completeness cannot be guaranteed. For more details on the cases, please consult www.encharter.org

17. The information above was compiled from various public sources; while the Secretariat has made every effort to ensure that this information is reliable, its accuracy and completeness cannot be guaranteed. For more details on the cases, please consult www.encharter.org

18. Transit under the Energy Charter Treaty • The Treaty (Art. 7) • Freedom of transit • Non-discrimination • not less favourable than conditions for national import or export transportation • Objectives of the negotiated Transit Protocol • To be legally binding • To clarify and strengthen the ECT Transit provisions • To make the ECT Transit provisions more operational and measurable

19. Definition of Transit Art. 7(10) ECT “For the purposes of this article : (a) “Transit” means • the carriage through the Area of a CP, or to or from port facilities in its Area for loading or unloading, of EMP originating in the Area of another state and destined for the Area of a third state, so long as either the other state or the third state is a CP; or • the carriage through the Area of a CP of EMP originating in the Area of another CP and destined for the Area of that other CP (…)”

20. Definition of TransitArt. 7(10) ECT G Sea B CP2 Area H E D F A CP3 Area C CP1 Area • Possible energy transport routes constituting “transit” within the meaning of art. 7(10) ECT: • A to B via C and D (the classic land transit case) • A to G via C and H • A to sea via C and E • Sea to B via F and D

21. ECT Article 7: Transit • No mandatory third party access • Freedom of energy transit • no unreasonable delays, restrictions or charges • Non-discrimination • as to origin, destination or ownership • as to pricing • Non-interruption of flow • Obligation not to obstruct the establishment of new capacity, in case of: • Lack of infrastructure • Insufficient available capacity • National treatment • Transit treated no less favourably than energy originating in or destined for transit country itself

22. Cross-Border Pipelines and the Energy Charter Treaty • Cross-border pipelines in international law • The role of the pipeline: merchant, transporter or hybrid • The role of the border: border delivery, integrated cross-border transit or integrated cross-country transit • The Energy Charter Treaty and the transit of oil and gas • Introduction to the Energy Charter Treaty • Transit under the Energy Charter Treaty • The Transit Protocol and the Model Agreements • The Transit Protocol to the Energy Charter Treaty • The Model Agreements for the construction of cross- border pipelines

23. The Transit Protocol and the Model Agreements • The Transit Protocol to the Energy Charter Treaty • A multilateral international legal instrument in the course of negotiation • Potentially legally binding on all Contracting Parties to the ECT which elect to join the TP • The Model Agreements for the construction of cross-border pipelines • Available, but not obligatory, for use by States, investors and other parties to cross-border pipeline projects

24. Draft Transit Protocol Objectives • To be legally binding • To clarify and strengthen the ECT Transit provisions • To make the ECT Transit provisions more operational and measurable

25. Draft Transit Protocol Key provisions • Definition of “Available Capacity for Transit” • Conditions for access to available capacity • Criteria for setting transit tariffs

26. Capacity Operating margin Total physical operating capacity Available capacity Infrastructure owner’s own transportation needs Any other binding obligations pursuant to laws and regulations 2 1 4 3 Fulfillment of obligations under any valid and legally binding agreements Time Definition of “Available Capacity”

27. Access to “Available Capacity” Negotiated access : • On the basis of transparent procedures • On commercial terms • Non-discriminatory as to origin, destination or ownership No mandatory TPA

28. Transit tariffs • Cost–based • operational and investment costs, including a reasonable rate of return • Transparent • Non–discriminatory • Objective • Reasonable

29. Other provisions • Prohibition of unauthorised taking of energy • Measures to prevent / mitigate accidental interruption, reduction or stoppage of transit • Protection of environment • Metering and measuring at borders • Standards (technical, environmental, health, safety, social, accounting)

30. Outstanding issues • ‘Mismatch’ issue • Long-term supply contracts and shorter-term transit contracts • Regional Economic Integration Organization (REIO) clause • Transit tariffs

31. Model Agreements for cross-border pipelines • Model Agreements (MA) – a guide to best practice • Model IGA and HGA – a package approach • Basis of the package approach: • IGA and HGAs are interdependent and linked • IGA is an international treaty • HGAs are State contracts • Entry into force of HGAs is conditional on that of the IGA • All agreements refer to one identified project with identified project investors

32. Structure of MA package • Treaty model – agreement among States, either signatories or parties to Energy Charter Treaty • Applies not only to transit state, but also to producer and consumer states (at least 2 state parties) • Umbrella agreement to Host Government Agreements (“HGAs”) and to project agreements • Deals with horizontal issues Intergovernmental Agreement (“IGA”)

33. Structure of MA package • Agreement between host state and project investor (= State contract) • Covers commercial terms of the project insofar as these concern the relevant host government • Deals with vertical issues Host Government Agreement (“HGA”)

34. Structure of MA package • Outside scope of the Energy Charter Secretariat’s Model Agreements mandate • Defined in IGA and in HGAs Project Agreements

35. IGAStates A, B & C HGA HGA HGA State B And Investor State A And Investor State C And Investor Project Agreements Project Agreements

36. Conclusions • Energy interdependence and cooperation require a stable legal regime for cross-border transport of energy • ECT investment protection regime, Transit Protocol and Model Agreements offer the best multilateral framework of rules on transit • Strategic objective for energy interdependence and cooperation in SEE: the Energy Charter’s Transit rules finalised, entered into force and observed in practice

37. ENERGY INTERDEPENDENCE AND COOPERATION Cross-Border Pipelines and the Energy Charter Treaty Graham Coop General Counsel Graham.Coop@encharter.org Energy Charter Secretariat www.encharter.org Energy in SEE – a must for development Energetika.NET Strategic Conference 010, Portorož, 23 June 2010