Energy Charter Treaty and Pakistan


Dr. Mehmood Ul Hassan Khan

Energy Charter Treaty (ECT) being a sovereign regulator of international energy system granted an observer status to Pakistan in 2005. Since then lots of sincere and serious efforts have been initiated from both sides to achieve the end goal i.e. full membership. Unfortunately, government of Pakistan has not yet been rectified it because of so many self-assumed imperfections. Pakistan has not been receiving any substantial inflows of foreign direct investments because of status-quo with the ECT’s rectification/accession.

ECT & International Energy System

International energy system is a complex and complicated phenomena wherein many institutions are parallel and overlapped in their missions, operationalization and channelization. All the energy international institutions and regulators are failed to respond the current international energy challenges which are not confined to energy security, access to energy, and the negative environmental and climatic externalities created by the extraction, production, transport and consumption of energy.
The existing international energy institutions have a partial scope, limited membership and/or weak authority. Their weakness stems from the hybrid nature of international energy governance, where multilateral institutions co-exist and compete with strong bilateral and bloc relations. But ECT provides a solid legal framework to minimize the chances of any ambiguity or conflict between two parties/countries. It has diversified but integrated expertise to address the complex nature of international energy governance i.e. resource development, infrastructure and technology; costs, finance, business models and markets; institutions; and the ecological and climate dimensions.

ECT: A Complete Package of Convergences

As compare to other international energy institutions and organizations, the ECT covers all main energy resources oil, natural gas, nuclear energy, coal and renewables. Moreover, it also regulates end products by referring to electricity production. On the contrary, the OPEC is concerned with oil. The main regulations of the IEA concern oil stocks. IRENA works on renewables while the IAEA addresses nuclear energy, and so on. The ECT is the best choice for the development of energy resources, energy investments, diversification of energy mix, removal of energy conflicts and the last but not the least, energy projects for Pakistan. So, Pakistan must immediately rectify it and enjoy the unlimited dividends afterwards.

ECT & Operationalization

The ECT also refers to the modernization, renewal and rationalisation of the energy infrastructures of signatory countries, for maximising the efficiency of production, conversion, transport, distribution and use of energy. It guarantees clean and low-emission technologies and energy efficiency. Pakistan has not been achieved the level of international energy efficiency. Moreover, it is still an energy deficit country which badly needs to rectify the ECT for brightening of scope and utility of regional as well as international energy cooperation in the near future.

ECT: A Binding Legal and Investment Regulations

In terms of the costs, finance, business models and markets dimension, the ECT is instrumental to reiterating the economic preoccupations of the European Energy Charter and the Energy Charter Treaty. It introduces binding regulation on investment, trade and transit related issues, including a dispute settlement mechanism. On this basis, the new International Energy Charter commits its signatories to avoid imposing discriminatory rules on the ownership of resources, operation of companies and taxation. Such restrictions prevail for example in the pipeline based gas exports.

ECT & Regional Energy Cooperation

It calls to facilitate the operation of market forces and promote competition and to remove barriers to trade in energy products, equipment and services, as well as investments, in line with WTO provisions and nuclear non-proliferation regimes. It recognizes the role of ‘commercially sound’ conditions for transit; and stresses the development of cross-border oil and gas networks and power grids to practically facilitate energy trade.

Turkmenistan, Afghanistan, Pakistan and India (TAPI) and Iran-Pakistan Gas Pipelines would be benefited from the experience of ECT. Keeping in view, rapidly changing socio-economic restrictions at international economic system in terms of rigid economic nationalism, and geo-political compulsions in shape of expected socio-economic sanctions on Iran, it is advised to government of Pakistan to rectify ECT as soon as possible to secure its vested interest in the days to come.

ECT’s Institutional Dimension

In terms of the institutional dimension, the main thrust of the ECT is to provide a non-binding political framework for the new relationships that have recently formed among producer, consumer and transit states. It mentions upfront developing countries and emerging economies, and the need for a structured dialogue with non-signatories of the European Energy Charter.

ECT & Climate Change

The ECT protects climate change. It specifically addresses energy efficiency and environmental protection, encouraging the clean and efficient use of fossil fuel resources and use of renewable energy sources and clean technologies equally. It strives to reduce gas flaring, encouraging sharing of best practices on clean energy, investment and low emission technologies. According to many regional and international reports, Pakistan is among the worst hit country from climate change which has negative impact on its society and economy as well. It is suggested that Pakistan must try to lessen high ratios of carbon footnotes by applying the experience and expertise of the ECT and rectify it.

ECT & Global Energy Governance

International Energy Charter represents the best international energy governance. It has revolutionized the international energy system in terms of attracting some new signatories. It cares about interest of energy producers, transit states and above all energy consumers, just as some other institutions, like the International Energy Forum, have sought to do.

ECT: An International Multilateral Legal Framework

The ECT is also an international multilateral legal framework. It was established during the early 1990s in order to promote long term, inter-state cooperation in the field of energy. More than 50 countries mostly from the European Union (EU) and the former-Soviet Union, as well as Japan and Australia are members of this legally binding international management/agreement. Member states of the Treaty apply its rules on investment, trade, transit, energy efficiency and other dimensions of energy cooperation. ‘Common rules, for global energy’ is the motto of the ECT constituency. Treaty members abide by its provisions on investment protection and dispute resolution mechanisms, whilst membership also helps countries to attract foreign investment into the domestic energy sector.

Pakistan’s Observer Status

Pakistan has still an observer status which marginalizes its full effective participation, utility and productivity. Being an observer country it only privileges its access to the flow of strategic information within the framework of the Energy Charter Conference the ‘trade and investment club’ of countries created under the Treaty. It is high time for Pakistan to finalise its accession to the Treaty to cash in on the full spectrum of benefits accorded to members only, including the application of the ECT’s robust legal framework which is widely deemed to be conducive for the attraction of FDI into the energy sector, particularly from the EU countries but also the likes of Japan.

ECT’s Pursuance

The Energy Charter Treaty has unanimously invited the Pakistan to become the full member of the Energy Charter, opening the way for Pakistan to accede to the 1994 Energy Charter Treaty. Demand for energy is growing rapidly in Pakistan and across South Asia. This will require new investments in energy production and infrastructure, and attention to the environmental impact of energy use. The Energy Charter can help Pakistan to meet these challenges.

ECT & Energy Market Restructuring

The ECT envisages energy market restructuring and provides legal safeguards to investment, transit and trade of energy sources including oil, gas, coal, uranium, electricity and renewable energy. It covers land transportation, distribution, storage and supply of energy materials and products by way of transmission and distribution grids and pipelines or dedicated rail lines. It also covers promotion, protection and treatment of investments in case of wars, armed conflicts, state of national emergencies, civil disturbances and similar other events to improve security of energy supplies to nations on a sustainable basis. So, accession to the ECT is the best option for Pakistan.

ECT: Best Option for Pakistan

Volatility of prices at international energy markets, uncertainties in regional and international energy security mechanism, and constant looming of energy circulars debts, energy deficits, limited energy mix, energy development, storage, diversification, it strongly suggested that government of Pakistan may consider to join Energy Charter Treaty(ECT) an international structure of energy in order to mitigate these losses and moreover, lessen spillover repercussions of imminent socio-economic sanctions scenarios to Iran.

ECT Integrated Efforts towards Pakistan

The ECT has been assisting many emerging economies and developing countries to rectify its treaty for the befitting propositions of the both. In this regard, it has been in close liaison with Pakistani government officials and decision makers providing the required information on accession procedures through various meetings, interactive seminars and workshops with the concerned stakeholders in the country.

A Degree of Skepticism & ISDS

But now it seems that there is a degree of skepticism about ECT membership exists in some quarters of government especially in the area of ISDS (Investor State Dispute Settlement) clauses which is the part and parcel of the ECT. It provides a legal cover to foreign investments may be in shape of Bilateral Investment Treaties (BITs) or other inter-state agreements. Pakistan is signatory to some of the oldest BITs in the world and has a mixed record with ISDS, losing some cases of international arbitration to foreign investors whilst winning others. It seems that Pakistan’s government and its main stakeholders are not comfortable have BIT fatigue, one of the biggest hurdles in rectifying the ECT right now.

Misconceptions

There are many misconceptions about Pakistan’s future obligations under ECT not confined to providing national treatment to foreign investors and protecting their investments. They are of the opinions that by rectifying the ECT may override existing regulatory mechanism and legislative arrangements and moreover, precisely Pakistan’s right to interrupt energy transit through country will be reduced. In addition to this, there is a concern that accession to the ECT will confer protection upon companies incorporated on the territory of an ECT member country although such companies may be owned and supervised by non-ECT nationals.

Investor State Dispute Settlement

Our international financial, monetary, trade, economic as well as international legal systems are so complicated and overlapped that provide both benefits as well as obligations upon signatory governments. Investor State Dispute Settlement under the ECT umbrella does not necessarily force the signatory countries to use international arbitration as a mechanism to defend their rights in case of foreign investments/investors in the country. One must recognize the fact that both parties i.e. foreign investors as well as the State has equal right to defend its rights within the given legal framework which will in turn reduce the lengthy legal battle and resolve the conflict in shorter times. One more thing, the ECT is not a middle agent to conflicting parties. It does not force parties to a dispute to restore to international arbitration, rather offering them this option in the event that they so prefer. Furthermore, the ECT values holistic approach which is based on a core value that disputes must be settled amicably.
The main purpose of the ECT is investment protection and promotion for any investment of an investor of another contracting party associated with an economic activity in the energy sector. The ECT sets out certain absolute legal requirements that are found in most bilateral investment protection agreements.

ECT’s Legal Treatment

The ECT provides that investments of investors from contracting parties must be treated no less favourably than investments of domestic investors or investors of any third country. The principle of equal treatment is subject to standard exceptions (for example, on grounds of national security). The only specific exception to this principle relates to direct taxes, as fairness requires that taxation in the parent country be taken into account.

ECT & FDIs

The ECT plays a significant role in the development of foreign energy investments. It is considered to be the most significant instrument for the promotion of cooperation in the energy sector. The ECT entered into force on 16 April 1998 and has so far provided an unprecedented legal basis for the creation of an open international energy market. Although the ECT was originally intended to facilitate integration of the energy markets of Europe and the Soviet Union, it is open for accession to all countries committed to observe its principles.

Role of Country’s Risks & ISDS

To attract more and more inflows of foreign direct investments, country risks (social, political, economic, and legal) play very important role. Denial to state’s guarantee supplemented by any international institution/regulatory body or organization gets diminish chances of FDIs in the country. Moreover, due to height of political uncertainty and economic meltdown in the country the ratios of FDIs have dried up. Offering potential energy investors to invest in Pakistan, the option of defending their investments through ISDS would reduce trust deficits and enhance confidence. So accession to the ECT is must for Islamabad to follow and implement international standards in the recognition of investors rights.

Pakistan’s Strategic Alliances & ECT

Pakistan has many strategic alliances with so many regional as well as international players including Turkey and the Central Asia Republics (CARs) are pioneer of the ECT. All these countries fully endorse investor protection under the ECT. Unfortunately, Pakistan is badly lagging in terms of its soft image projection and investment heavens. So, accession to the ECT will definitely enhance its soft image among the members states and inflows of FDIs will also be increased.

ECT: Widening Prospects of Diversified Loaning

It will also further widen its prospects of FDIs from different diversified destinations other than the GCC and China. Although, China, Pakistan Economic Corridor (CPEC) is a game and fate changer but it is always wise economically and politically to have “Plan B”. Pakistan’s accession to the ECT would be its plan B which will also enhance investors confidence by projecting to view that the country is business/investor friendly within the international energy sector. Moreover, rectifying the ECT will also help Pakistan to achieve self-reliance and alternativeness seeking international loans from political motivated organizations.

ECT & Befitting Proposition

Accession to the ECT provide a befitting proposition to Pakistan in terms of energy security, energy investment, energy development, diversification of energy resources, energy efficiency and the last but not the least, environment protection. ECT provides an effective legal framework to both the parties without any comparative advantage or points of weakness. So, accession to the ECT is the gate-way to attracting more and more inflows of FDIs in the country.

ECT’s Attribution to Macro-Economy of Pakistan

The ECT envisages energy market restructuring and provides legal safeguards to investment, transit and trade of energy sources including oil, gas, coal, uranium, electricity and renewable energy. It covers land transportation, distribution, storage and supply of energy materials and products by way of transmission and distribution grids and pipelines or dedicated rail lines. It also covers promotion, protection and treatment of investments in case of wars, armed conflicts, state of national emergencies, civil disturbances and similar other events to improve security of energy supplies to nations on a sustainable basis. So, accession to the ECT is the best option for Pakistan. It is hoped that after Pakistan’s accession to the ECT it would assist Pakistan in its ambition to promote economic development by expanding regional energy investment and trade. The Treaty’s provisions on energy trade and the groundbreaking provisions on energy investments have no equivalent in any other multilateral instrument of this importance.

ECT’s Strategic Significance

The energy deficits and power shortages in Southwest Asia force key regional players to look for new sources of supply at home and abroad. Turkmenistan’s gas and Central Asia’s hydroelectricity could become indispensable sources of energy for the regional states, in particular for Pakistan. Afghanistan could become a key gas and electricity transit corridor. But this can only happen if a regional multilateral framework is created in which energy investments are secure. Probably the best way to achieve this is by further extending the Energy Charter Treaty (ECT), which already has a considerable presence in Central Asia, to encompass all the major players in Southwest Asia. The ECT might even become for Southwest Asia what the European Coal and Steel Community was for Europe. According to Business Monitor International, Pakistan will need gas imports of 13 bcm (billion cubic metres) by 2021, so accession to the ECT is the best available policy option for Pakistan which must be followed.

ECT & Regional Energy Cooperation

The ECT would be an umbrella to regional energy cooperation. The Energy Charter Treaty already has specific legally binding rules regulating transit and trade in energy, energy-related environmental issues and dispute settlement/investor protection mechanisms. Unlike the existing cooperation frameworks, the ECT covers specific issues related to CASA-1000 and TAPI.

I. Investment facilitation/ investment protection and the extension of national treatment, or most-favored nation treatment, to foreign investors.
II. Non-discriminatory trade in energy and energy-related equipment based on WTO rules and provisions for reliable energy transit. A distinctive feature of the Energy Charter is that it provides a set of rules that covers the entire energy chain production, generation, transit and trading. ECT legal provisions compel member states to respect the principle of freedom of free, secure and un-interruptible transit. Treaty provisions also promote creation of the new transit capacity. Transit issues are addressed by the ECT Trade and Transit Group.
III. Dispute resolution mechanisms between member states or between member states and investors (based on the WTO model plus specific ECT conciliation procedure for transit disputes). There were over thirty cases that have been brought by investors to international arbitration under ECT dispute resolution mechanisms.

Benefits of ECT Vast Membership

The ECT, with its vast membership and relevant institutional mechanisms would be the most appropriate and efficient institutional energy cooperation framework in the region. It has all the necessary legal instruments and institutions to promote regional energy cooperation and facilitate implementation of transit infrastructure projects. The Energy Charter Treaty could therefore become a relevant “umbrella” energy governance framework for the regional energy equation.

Certainly a stable uninterrupted flow of natural gas and electricity through Afghanistan is unachievable without a legally binding, energy-transit regime, which the ECT can provide. The ECT, if widely adopted, would also more generally help to re-establish international investors’ confidence in the region’s economic and regulatory policies and support economic growth and social development in Southwest Asia.

Energy Charter Treaty (ECT)

The Energy Charter Treaty is an inter-governmental organization. It is the governing and decision-making body for the Energy Charter process. It was established by the 1994 Energy Charter Treaty. The Energy Charter Treaty (ECT) is an international agreement which establishes a multilateral framework for cross-border cooperation in the energy industry. The treaty covers all aspects of commercial energy activities including trade, transit, investments and energy efficiency.

All states or Regional Economic International Organisations which have signed or acceded to the Treaty are members of the Conference. The member countries meet on a regular basis to discuss issues affecting energy cooperation among the Treaty’s signatories, to review the implementation of the provisions of the Energy Charter Treaty and the Protocol on Energy Efficiency and Related Environmental Aspects, and to consider possible new instruments and joint activities within the Energy Charter framework.

Importance of Energy Charter Treaty

The Energy Charter Treaty is a unique legally binding instrument regulating the issues of energy transit, as reflected in the report of the UN Secretary-General “On Reliable and Stable Energy Transit and Its Role in Ensuring Sustainable Development and International Cooperation”, published in 2014. Signing the International Energy Charter that currently unites over 80 countries worldwide is the first step towards acceding to the Treaty, which aims to strengthen legal norms in the energy sector by applying uniform rules binding for all participants and minimizing the risks associated with investment and energy trade.

Energy Charter Process

The Energy Charter process has developed two main multilateral political agreements the European Energy Charter (1991) and the International Energy Charter (2015), and planed the binding legal framework of the Energy Charter Treaty. It was signed in December 1994 and entered into force in December 1998.

Remarkable Legal and Financial Implications

The Energy Charter Treaty (ECT) has remarkable legal and financial repercussions for commercial energy relations between member countries, above all concerning investments, trade and transit. It covers all forms of energy and all stages of production and consumption. It extends to issues of competition, environment and energy efficiency, but has less binding force in these areas. The ECT stands for formal mechanisms for dispute resolution. It is based on international arbitration, which have been widely used in disputes between states and private investors, but rarely used in inter-state disputes. The ECT also set up bodies to manage the Energy Charter process, in particular a multinational Secretariat and an intergovernmental decision-making body (the Energy Charter Conference).

Provision of ECT

The ECT stands for a multilateral legal framework for commercial energy relations between member countries. It is based on the rule of law and fair treatment of both investors and states. The ECT provides various mechanisms for binding dispute resolution. It was the first and only binding intergovernmental agreement applicable to all forms of energy i.e. fossil fuels, nuclear, renewables etc. and all stages of the supply chain i.e. extraction, production, transit and consumption. It has also delimitations. It is not applicable during the pre-investment phase of energy production, with negotiations on a supplementary treaty covering pre-investment in the 1990s proving too difficult for member countries to reach agreement.

Right of Member Countries

The ECT ensures the right of member countries to decide how they manage their natural resources, and does not mandate third-party access. It imposes no obligation on member countries to open up their energy sectors to foreign investment, and even allows the right to expropriation, provided this is done in a legal manner with due compensation at fair market value. Yet once a member country does allow foreign investment in its energy sector, then such investors have the right to fair treatment under the ECT framework, with the possibility to seek legal redress through international arbitration.

Resolution of Investment Disputes

The use of the ECT to resolve investment disputes highlights the value of its binding multilateral framework. Moreover, the fact that proceedings have ruled in favour of both states and investors implies it is broadly balanced. Nevertheless, the proliferation of cases in recent years, as well as their concentration in particular countries, could undermine political support for the ECT among some signatory states.

Concluding Remarks

The Energy Charter Treaty provides complete package of bilateral and trilateral energy investments to all the members states. It is an apex regulatory organization in the world energy governance. It stands for amicable solution to any conflict. Its vast membership is the gate-way to greater regional energy cooperation and socio-economic integration.

Pakistan still has an observer status which limits its prospects in the regional as well international energy arenas. Accession to the ECT would bring desired goals of energy development and diversification in the country via energy security, efficiency, climate change under umbrella of the ECT. It would also enhance its prospects of attracting more and more inflows of FDIs in the country in the field of energy and associated sectors in the days to come.

Energy fuels development. Energy is life which is in endangered due to many regional political maneuvering and international economic nationalism. Energy security is at stake and main stakeholders are in search of safe heaven to protect their vested interests. The ECT provides the appropriate platform for this. Pakistan must rectify it and mitigate the regional as well as global spillover repercussions.

International system of justice, conflict resolution and of course arbitration is very complex and complicated but ECT does not provide a comparative advantage to any particular country which shows its spirits of impartiality. It provides legal framework to every member state to protect its energy investments. Pakistan being a law binding country should recognize ISDS for availing maximum benefits of the ECT.

For the further development of the ECT being an expert, I would like to suggest some meaningful measures including formation of an “Energy Investment Bank”. There must be a Energy Investment Bank in the Energy Charter Treaty \where every member states has the equal right to submit its proposal for seeking essential finances for its energy projects. Mobilization and channelization of funds may be generated through energy bonds to be floated/offered in all the member countries.

There must be “Capacity Building Bank” comprising of energy professionals, technicians, researchers and experts to initiate energy projects in the member countries and also act as catalyst for the further strengthening of capacity buildings.

Formation of “Energy Court” in case of any disagreements between the two member states primarily first resolve at national level under the supervision of the ECT. In case of “international arbitration an amicable solution must be order of the day. It may also fasten inflows of energy investments among the member countries. Withdrawal of government support for the development of renewables is a serious concern especially cases brought before international tribunals must be rectified as soon as possible.

There must be a joint “Technology Bank” to introduce doable and innovative ideas and projects of energy mix to all the member countries best suiting to their environment and styles of governance.

Since Turkmenistan and Pakistan are cooperating in different mega trans-regional energy projects in shape of TAPI (Turkmenistan-Afghanistan-Pakistan and India Gas Pipeline) and CASA-1000 with other CIS, so, Pakistan must upgrade its ”Observer Country” status in Energy Charter treaty by acceding it as soon as possible. Genuine concerns of Pakistan must be resolved to encourage it to rectify the energy charter treaty to achieve the desired goals of greater energy cooperation and investments in the future.

Shale Gas and renewables have become reality in the energy sector around the globe which has elements of viability, reliability and sustainability too, which must also be further developed in the ECT Process/mechanism.

Geo-political and Geo-strategic considerations/compulsions of energy cooperation and transit should be thoroughly studied and resolved. There is an urgent need to have a holistic approach to resolve these issues unilaterally, bilateral, or tri-laterally.

Mechanism of “conflict resolution” needs to be further strengthened within the framework of Energy Charter Treaty. Standardized operationalization, channelization and implementations of climate change policies for all the member states to achieve ecological balancing under the umbrella of the ECT is the need of the hour. More focus ought to be paid on its strategic expansion for its international functionality and acceptability in the days to come. There must be “Energy Charter Treaty” desk in all the member states embassies for easy and smooth liaison.

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