THE ENERGY CHARTER PROCESS: ITS LONG-TERM HISTORIC ROLE AND COMPETITIVE NICHE WITHIN THE GLOBAL ENERGY ENVIRONMENT Dr. Andrei Konoplyanik Deputy Secretary General The Energy Charter Secretariat CEPMLP, University of Dundee - 4 May 2005
TABLE OF CONTENTS 1. Development of energy markets and mechanisms of investor’s protection & stimulation 2. General characteristics of the Energy Charter Process 3. Business role of the Energy Charter process 4. Energy Charter competitive niche among other international organisations 5. Energy Charter emerging geography and expansion policy 6. Conclusions: Energy Charter process then and now www.encharter.org
1. Development of energy markets and mechanisms of investor’s protection & stimulation
DEVELOPMENT OF ENERGY MARKETS Energy Markets Local Internationalisation Regional Globalisation World markets of certain energy resources World energy market Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 1 www.encharter.org
“EVOLUTION CURVE” OF GAS MARKETS DEVELOPMENT AND CURRENT POSITION OF DIFFERENT COUNTRIES AT THAT CURVE MONOPOLY COMPETITION Scale of market INITIAL GROWTH INTENSIVE GROWTH MATURE MARKET development Japan (LNG) USA (12:1) UK Korea, Continental Europe (10:1) Taiwan (LNG) China, Thailand, India etc. (LNG) Russia (2:1) Middle & Far East, Latin Gas price America, Africa, rest of CIS t 1 3 Time 2 Long-term contracts Short-term contracts + Spot deals + Pricing mechanism development stages: Futures trading 1 - cost + + - escalation formulas (based on alternative fuels prices) 2 - based on futures prices 3 Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 2 www.encharter.org
DEVELOPMENT OF ENERGY MARKETS AND MECHANISMS FOR INVESTORS PROTECTION / STIMULATION Energy Markets Mechanisms for investors protection / stimulation Local Stability zones in PSA, unstable environment Concessions, FEZ Domestic + legislation Increasing of general Tax Code, Internationalisation level of investment investment and subsoil legislation + attractiveness Regional Bilateral International BITs, DTTs legal mechanisms + End of 2003: Globalisation Multilateral 2265 BITs 2316 DTTs World markets TRIPs of certain WTO/ Trade TRIMs energy GATT GATS + resources Investments ECT ECT + Transit World energy market + Energy + Dispute settlement Efficiency Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 3 www.encharter.org
2. General characteristics of the Energy Charter Process
ENERGY CHARTER HISTORY Lubbers’ initiative on common broader European June 25, 1990 energy space presented to the European Council December 17, 1991 European Energy Charter signed Energy Charter Treaty (ECT) and Protocol on December 17, 1994 Energy Efficiency and Related Environmental Aspects (PEEREA) signed ECT enters into force and became an integral part 16 April, 1998 of international law • ECT signed by 51 states + European Communities = 52 ECT signatories • ECT ratified by 46 states + EC (excl. 5 countries: As of today Russia, Belarus, Iceland, Australia, Norway ) • Russia and Belarus : provisional application of ECT Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 4 www.encharter.org
ENERGY CHARTER AND RELATED DOCUMENTS Political Declaration EUROPEAN ENERGY CHARTER Legally Binding Instruments ENERGY CHARTER TREATY TRADE AMMENDMENT INVESTMENT SUPPLEMENTARY TREATY Energy Efficiency Protocol Energy Transit Protocol Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 5 www.encharter.org
THE ENERGY CHARTER TREATY – A BALANCE OF INTERESTS BETWEEN PRODUCERS AND CONSUMERS OF ENERGY ECT Article 2 “This Treaty establishes a legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits” www.encharter.org Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 6
MAIN CONTENT OF SELECTED INTERNATIONAL INVESTMENT-RELATED AGREEMENTS Organisation Legal Scope Investment Trade Transit Energy Dispute Status Efficiency Settlement ECT LB Energy Yes Yes Yes Yes Yes WTO LB General (Yes) Yes Yes Yes/No* No Services NAFTA LB General Yes Yes Yes No No MERCOSUR LB General Yes Yes Yes No No OECD LB General Yes No No No No APEC General Yes Yes Non- No No No LB Source: J.Karl, Senior Expert, DEI, Energy Charter Secretariat * - application of GATT Art.V to grid-bound transportation systems is under debate Plus specialised energy-related organisations: OPEC, IEA, IEF, UN ECE Plus specialised “regional” organisations: BSEC, BASREC, … Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 7 www.encharter.org
ECT: THE FIRST MULTILATERAL INVESTMENT AGREEMENT • Binding guarantee of non-discriminatory treatment for post-establishment phase • Protection against key political/regulatory risks: - expropriation and nationalisation, - breach of individual investment contracts, - unjustified restrictions on the transfer of funds • Reinforced by access to binding international arbitration in case of dispute Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 8 www.encharter.org
3. Business role of the Energy Charter process
GLOBAL ENERGY TRENDS Increase in World Energy Production and Consumption 2001-2030: (Source: IEA WEIO 2003) • Increase in energy 2001-2030 1971-2000 7,000 7,000 production: 6,000 6,000 95% outside of OECD • Increase in energy 5,000 5,000 consumption: 4,000 4,000 Mtoe Mtoe 70% outside of OECD 3,000 3,000 • Cumulative energy 2,000 2,000 investment: 1,000 1,000 - 50% from non-OECD to non-OECD markets, and 0 0 Production Production Consum Consum ption ption Production Production Consum Consum ption ption - 10% from non-OECD to OECD markets OECD OECD Transition econom Transition econom ies ies Developing countries Developing countries www.encharter.org Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 9
ENERGY CHARTER WORLD AND MAJOR ENERGY FLOWS IN THE EASTERN HEMISPHERE Major energy flows: existing future Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 10 www.encharter.org
FINANCING ENERGY PROJECTS: FROM EQUITY TO DEBT FINANCING Equity/debt financing ratio: Pre-1970’s = ~ 100 / ~ 0 Nowadays = ~ 20-40 / ~ 60-80, f.i. most recent: BTC pipeline = 30 / 70 Sakhalin-2 (PSA) = 20 / 80 (2 fields+pipeline+LNG plant) � Increased role of financial costs (cost of financing) of the energy projects � Availability and cost of raising capital = one of major factors of competitiveness with growing importance in time Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 11 www.encharter.org
“NATURAL” VS. FINAL COMPETITIVE ADVANTAGES OF ENERGY PROJECTS $/boe $/boe Country A Country B I Total costs A Total costs B Financing costs B Financing costs A II Technical costs B Technical costs A t t I “Natural advantage” of country A over country B II Final competitive dis advantage of country A over country B Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 12 www.encharter.org
ECT IS BUSINESS-ORIENTED TREATY (how it works) ECT/Legislation → ↓ risks → ↓ financial costs (cost of capital) = → 1 ↑ inflow of investments (i.e. ↑ FDI, ↓ capital flight) → ↑ CAPEX → ↓ technical costs = → 2 + = → ↑ pre-tax profit → ↑ IRR (if adequate tax system) → ↑ competitiveness → 1 2 3 ↑ market share → ↑ sales volumes → ↑ revenue volumes ECT provides multiplier legal effect in diminishing risks with consequential economic results in cost reduction and increase of revenues and profits $/boe $/boe Total costs 1 3 Financial costs 2 Technical costs ∆ t t t Before ECT After ECT ∆ Financial costs Cumulative ∆ costs ∆ Technical costs 1 2 3 Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 13 www.encharter.org
NON-RATIFICATION OF ECT BY RUSSIA = ITS COMPETITIVE DISADVANTAGE Russia’s objective competitive disadvantages: longest distances to markets + falling production at major fields + more complex geology (from Senoman gas of W.Siberia to Valanzhin, Achimov, offshore and Yamal gas) + harsh natural conditions of producing areas Russia: Highest stimuli to diminish technical and financial costs of production and transportation: (a) technical costs � investments � legal environment in host and transit countries (b) financial costs � cost of capital � credit ratings (sovereign, corporate, project) � legal environment in host and transit countries ECT and related documents (when ratified) = common legal environment minimizing risks and technical & financial costs Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 14 www.encharter.org
4. Energy Charter competitive niche among other international organisations
ENERGY CHARTER PROCESS IN A GLOBAL FRAMEWORK • General vs. specific risks, • Global vs. regional scope Dr. A.Konoplianik, CEPMLP, University of Dundee - 4.05.2005 - Figure 15 www.encharter.org
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