Overview

The Energy Charter Treaty evolved from the 1991 European Energy Charter. The charter formed the political and legal foundation of East-West cooperation for the energy sector. The Energy Charter Treaty (ECT) was adopted in 1994 and came into force in 1998. It is one of the few global treaties on energy – with 58 signatories, and has been adopted de facto as part of the governing elements of the WTO.

The ECT covers all forms of international energy cooperation – investment, trade, transportation and energy efficiency. The ECT covers protections for international investment, including dispute settlement, as well as establishes a discussion forum concerning all aspects of international energy cooperation.

The ECT confirms the principle of national sovereignty over energy resources. Members are expected to do so within the framework of the ECT treaty obligations. This includes allowing the nations to determine for themselves if foreign investment will be allowed.  If it is, then the treaty provides a stable interface for those interactions. The ECT offers binding protection for foreign energy investors against key non-commercial risks, such as direct or indirect expropriation or breach of contract.

The treaty also provides for reliable international transit flows of energy – particularly oil and gas pipelines. Under the treaty, members are required to facilitate the energy transit in line with the principle of freedom of transit. Additionally, the ECT requires that member states act to minimize the harmful impacts of energy related activities.

Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects (PEEREA)

While the ECT provides general protections for the environment and a desire for sustainable energy, PEEREA strengthens the parties commitment to sustainable energy use. PEEREA requires that signatories formulate clear policy aims and outcomes for energy efficiency and reduction of the energy cycle’s environmental impacts. It declares that energy efficiency cannot be solely left to the private sector.

Investment Protections

The ECT provides investor protections in both the pre- and post-investment stages. The treaty, since a 1998 amendment aligning it to the WTO investment standards, includes both energy materials and products, as well as electricity and energy related equipment.

The ECT requires prompt, adequate and effective compensation for the expropriation of energy investments. Expropriation under the ECT must be:

  • Based on law
  • Nondiscriminatory
  • In the public interest
  • Accompanied by compensation – which must be
    • Prompt, adequate and effective
    • Amount to the fair market value of the investment at the time immediately before expropriation
    • Paid, if requested, in freely convertible currency including interest at a commercial rate until payment
    • Available for review by the courts of the host country

The treaty requires that parties encourage stable, equitable and transparent conditions for making investments, and make sure investors receive fair treatment.

The treaty provides for “Most Favored Nation” provisions, and requires freedom to transfer funds with respect to the investment. the host state may protect creditor rights, ensure compliance with local laws on securities, satisfaction of judgments.

Transit Rules

Energy goods that transit through a state party must not discriminate in the access to the transit facilities of an onshore pipeline network, and not discriminate when according rights to construct new onshore transit capabilities. Each party must take steps to facilitate the transit through their territory without imposing delays, restrictions or unreasonable taxation.

A 2000 Transit Protocol was signed that provides fro clear and transparent rules for energy transit flows. Included are:

  • The sanctity of transit
  • Transparent and non-discriminatory access to transit infrastructure
  • Prompt and effective dispute settlement

Russia has been a challenge, in that it is the major exporter of natural gas to Europe, and it asserts that its own Internal Energy Market rules prevail over the ECT transit provisions. This has delayed the effective implementation of the transit protocol.

Dispute Settlement

The ECT provides for state v state and state v investor arbitration.  There are additional special provisions based on the WTO model for trade issues. the ECT offers a conciliation procedure for transit disputes. The ECT allows for international arbitration before exhausting local remedies (Calvo Doctrine). If the dispute is between two countries, an ad hoc tribunal may be set up. These settlements are binding. In transit disputes, the conciliator must establish tariffs for transit to ensure non-disruption of transit during the dispute.

Trade in Energy Products

The ECT trade regime is broken into two parts – one which is based on the 1947 GATT rules and one based on the 1998 WTO rules. Trade in energy products is then governed by the GATT/WTO framework.

The WTO/GATT rules apply to the ECT. This means that all countries must be treated the same as the favorite trading partner (MFN), and requires that imported products not be treated less favorably than like domestic products. GATT allows nations to use environmental rationale to impose national measures or restrictions on trade – but these cannot be arbitrary or unjustifiable. It needs to be the least trade restrictive measure reasonably available to achieve the environmental objective.

The ECT follows the WTO principles in transparency and non-discrimination. The rules are fully compatible with the international trading system, and some countries have used the ECT as a stepping stone to WTO membership. The ECT goes beyond the WTO in providing additional protections on investments and energy in transit. Additionally it includes a mechanism for energy in transit disputes.

Case Law

Petrobart v. Kyrgyz Republic (2005) – State gas company (KGM) failed to pay Petrobart for gas under a 1 years treaty. Found that the state gas company was an arm of the state and held the state owed Petrobart under the treaty. Petrobart awarded compensatory damages but not lost profits.