Emerging Threats to Energy Security and Stability NATO Advanced Research Workshop January 23 to January 25, 2004 - St. George’s House, Windsor Castle, UK “Responding to Emerging Threats to Energy Security and Stability” (Luncheon Speech, January 24th) Dr.A.Konoplianik Deputy Secretary General The Energy Charter Secretariat
ENERGY SECURITY ENERGY SECURITY = sustainable, reliable, environmental-friendly supplies at reasonable cost (including cost of externalities). ENERGY SECURITY has many dimensions, but several are very important: 1. Security of supply vis à vis particular type of energy (e.g. oil, gas); 2. Security of supply in the short run (diversification, system “hardening”, stocks, management, etc.) of the existing energy system; 3. Security of supply in the long run (“running out” of oil – its new alternatives, global warming, shifts in primary energy by type –and for new types… a whole new world) of the developing new energy system. The greatest risks are in the third area (long-run), since the instruments deployed in the first two are not sufficient to resolve insecurity of the third type… ENERGY SECURITY INSTRUMENTS evolve over time – alongside with energy markets development! As energy interdependence (globalization) grows, international law becomes a more effective instrument (relatively cheap per unit of supplies/final consumption) for providing energy security. Figure 1 www.encharter.org
PARTICULAR MECHANISMS OF DIMINISHING VOLUME AND PRICE RISKS UNDER DIFFERENT ENERGY SECURITY INSTRUMENTS Mechanisms Concession system Strategic reserves + stocks International law of diminishing: - volume risk Traditional & modernized Producer states production & export Diversified energy concessions, PSAs, risk-service quotas + strategic reserves + stocks in supply infrastructure contracts (direct control of both producer and consumer states (idle (multiple supplies supplies via LTC for duration of producing capacities, float tanker storage concept) + consumers agreement between host-country vs. SPR, government & company owned with switching & foreign company) commercial stocks) + LTCs (competitive supplies) - price risk Stable & low posted prices + Spot + forward pricing = unstable prices; Exchange pricing = transfer pricing + cost-plus increased price volatility to be futures + options = (isolated projects) compensated by producers export quotas unstable prices; increased (major exporters = swing producers) + price volatility to be consumers stocks regulation policy + compensated by hedging escalation formulas (derivatives) Basis for Physical energy (oil, gas) Physical energy (oil, gas) Paper energy (oil, gas pricing (traded contract) item) Driving force Monopoly (individual consumer Monopoly (cartel of producer states/state Competition of market states/cartel of private companies) development companies) ЭНИПиПФ ЭНИПиПФ Figure 2 www.enippf.ru www.encharter.org
Stocks go down …. Security is not necessarily impacted, if markets work Figure 3 www.encharter.org
ENERGY CHARTER AND RELATED DOCUMENTS Political Declaration EUROPEAN ENERGY CHARTER Legally Binding Instruments ENERGY CHARTER TREATY TRADE AMMENDMENT INVESTMENT SUPPLEMENTARY TREATY l o c o l t o o c r o P t o y r c P n e t i i c s n i f a f E r T y g y r g e r n e n E E Figure 4 www.encharter.org
DEVELOPMENT OF ENERGY MARKETS AND MECHANISMS FOR INVESTOR PROTECTION / STIMULATION Energy Markets Mechanisms for investors protection / stimulation Local Stability zones in PSA, unstable environment Concessions, FEZ Domestic + legislation Increasing of general Internationalisation Tax Code, level of investment investment and subsoil legislation attractiveness + Regional Bilateral International BITs, DTTs legal mechanisms + Globalisation Multilateral World markets TRIPs of certain WTO/ Trade energy TRIMs GATT resources + GATS Investments ECT ECT + World energy market Transit + Energy + Dispute settlement Efficiency Figure 5 www.encharter.org
ENERGY CHARTER TREATY: GEOGRAPHY ■ Energy Charter Treaty Signatory States (1994) ■ Observer States that have signed the European Energy Charter (1991) ■ Other Observer States ECT current expansion move 1. From trans-Atlantic political declaration to broader Eurasian single energy market 2.ECT expansion is an objective and logical process based on economic and financial reasons Figure 6 www.encharter.org
VARIUOS FACETS OF ENERGY SECURITY � Energy security = diversified energy mix, many suppliers, many routes and shippers, many destinations, etc. � Energy security means investing, at both consumer and producer end, and within the whole energy chain � Energy security means risk minimization as a constant process (addressing changing risks composition), and minimizing political risks helps energy investment most strongly � Manageable risks mean greater competitiveness, less cost, more diversified investment with higher ROR � In terms of cost-benefits ratio, international law instruments are among the most efficient � The Energy Charter Treaty is the only multilateral international law instrument specific to the energy sector with its specific risks Figure 7 www.encharter.org
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