Russia is in the throes of a debate on
whether, or not, to join the Energy Charter Treaty — with a
strong resistance being led by Gazprom which has branded it as
The debate has occupied the State
Duma’s committee for energy, transport and communications
which held parliamentary hearings recently when a phalanx of
opposition from the Duma, government agencies and some
companies (primarily Gazprom) resolutely objecting the ECT’s
ratification, clashed with its proponents culminating with a
view that there is still much talking to be done before Russia
finds itself in a position to make a decision — one way or the
That the general feeling is positive is seen from a
clear understanding that the ‘force of arguments’ is
preferable to ‘force arguments’.
The participants chose a longer, but more
reliable, path of expanding the number of supporters of the
ECT’s ratification by convincing those who have doubts and
trying to persuade opponents by the power of argument.
hearings have also shown that even though the Russian
government formally stands for the ECT’s ratification, it does
not have a uniform position on the issue.
The deputy head
of the State Duma’s energy committee, Yuri Lipatov, said that
“the cabinet actually does not know the document.” In his
opinion, even ministries standing for the ECT’s ratification —
the Foreign Ministry, the Ministry of Energy and the Ministry
of Economic Development — “lack a clear understanding of the
Whether this is good or bad, it is an objective
fact. As Russian cabinets have been changing constantly, the
ECT’s ratification, like any issue of a long-term nature, has
been pushed into the background.
Since the ECT was signed in 1994, new people
have appeared among decision makers. The state of the Russian
economy and the situation in the energy market in the country,
and in the world, have also changed radically.
As a result,
there has emerged a new environment, in which those newcomers
weigh pros and cons of the ECT’s ratification afresh.
those conditions, with the hearings showing a lack of
consensus, the only acceptable position was voiced by Russia’s
deputy foreign minister, Ivan Ivanov: the ECT should be
ratified, but not today.
Gazprom has been the main opponent of the
ECT’s ratification. Its objections can be reduced to three
• The ECT’s ratification will increase the
transit of gas across Russia to Europe in competition with
• It cannot improve the investment climate and
will not attract more foreign investment in the Russian gas
• It will ruin the system of long-term contracts
in the gas market.
According to Gazprom’s estimates, total
losses would be between $9bn and $10bn a year.
proceeds from gas exports to Europe amounted to $11bn,” said
Yuri Komarov, a member of Gazprom’s board. “This year they
will be around $13bn. We are convinced that we can increase
revenues to $15bn-$17bn by 2005.”
“We have estimated that
(as a result of the ECT’s ratification) we will lose at least
one third of our market and will, at best, get $6bn-$7bn. We
will continue to supply as much gas but we will get
substantially less income.”
I don’t think we should regard
Gazprom’s figures as gospel — even though the monopoly
promised to present detailed substantiation for its
If we get three times less for the same amount
of gas, this means that by 2005 gas prices in Western Europe
will be down to a third of their current level.
In that case crude and petroleum products
prices should also go down — a year to a year and a half
before that happens to gas prices — by far more than three
times, because gas prices depend on price movements of crude
oil and other resources (petroleum, coal) competing with
I have not seen a single forecast for either the world
or for the European energy market’s development that would
predict a plummeting of oil, petroleum products and coal
prices by that margin.
For oil, that would mean a drop from
the current level of $25 a barrel for Brent oil to less than
$8 a barrel in two to three years, if gas proceeds are to go
down by Gazprom’s forecast amount by 2005.
Even if we take
the highest oil quotes over the past year ($37 a barrel for
Brent), for Gazprom’s forecast to be true, oil prices would
have to plummet to below $12 a barrel, which is at odds with
the logic of all the forecasts I know.
If Gazprom’s estimate is based on the
assumption that one third of the market will be lost due to
Russia’s alleged obligation to let Turkmen and Kazakh gas into
our gas transport networks, it is based on a wrong
interpretation of relevant provisions of the ECT.
If we can
really lose around $10bn a year, why should other opponents of
the ECT’s ratification, while also proceeding from Gazprom’s
estimates, cite different figures?
Valery Yazev, a member
of the State Duma, mentioned between $4.5bn and $5bn in annual
losses for Gazprom.
Mr Nigmatullin of the Ministry of
Nuclear Energy: “$4.5bn in losses for gas and half a billion
dollars for the nuclear energy sector.”
The differences are
so marked that they should be checked as well as their logic
Mr Komarov: “Europe has already ruined the
energy market and has caused energy prices to plummet. They
now need cheap gas to produce cheap energy. Under the Treaty,
Russia would undertake to transit other nations’ gas at
Gazprom’s key objection is its
conviction that the ECT’s ratification would open the road to
rivals’ inexpensive gas (for example that from Turkmenistan
and Kazakhstan and, following that logic, from Iran and other
Middle Eastern nations) via Russia’s existing pipeline
capacities, at inexpensive Russian domestic tariffs, to the
Western European market.
This conviction requires the
elucidation of several issues.
In their addresses, Mr
Komarov, and especially Mr Yazev (“Europe now wants to get
access to Russia’s unique system of gas supplies for free”),
focused on transit using the nation’s existing transport
But this is not the only scenario stipulated by
the ECT. A working group is looking at seven transit
scenarios (see Transit scenarios).
|A. Transit by
||A1. Capacities are fully
loaded by a transit nation’s products and other
|A2. There are backup
|B1. The shipper has the
right of transit across the transit territory and itself
finances the creation of capacities, i.e. is an
investor. Possible options:|
• new capacities become
the investor’s property;
• new capacities are handed
over to the transit nation (company) on agreed terms
(buyout, indefinite tenancy)
|B2. A transit nation
(company) itself creates new capacities and owns them.
• a transit nation (company) itself
finances the creation of
•• at its own
risk of pay-back;
•• on use
and pay terms with back to back guarantees;
transit nation (company) creates capacities using funds
provided by the
A contracting party has no commitment to
third countries which are not ECT signatories, as stipulated
in documents linked with the ECT — Paragraph IV.1(b)(i) of
Section IV of the Final Act of the Conference on the European
Energy Charter says that the provisions of the Treaty do not
obligate any contracting party to provide open access to third
If another contracting party is involved, the
provisions of the ECT’s Article 7, Transit, shall be
The article does not obligate any transit nation
which is a contracting party to the ECT (for example, Russia)
to give another contracting party’s shipper (for example,
Turkmenistan) access to its available energy transport
This is what Gazprom seems to fear.
7(1) of the ECT also states that each contracting party “shall
take measures to facilitate the freedom of transit of Energy
Materials and Products consistent with the principle of
freedom of transit and without distinction as to the origin,
destination or ownership of such Energy Materials or Products
or discrimination as to pricing on the basis of such
This means that a transit nation is not
obligated to provide its capacities for transit — but if it
decides to provide access to them, this should be done on
The ECT demands that the transit
regime should not be less favourable than that granted to
goods originating in the transit nation or intended for
Therefore, the feasibility of transit scenarios A1 and
A2 (see the table), for example, for Turkmen and Kazakh
gas, becomes a key issue in this respect. This is the first
level of protection of Russia’s and Gazprom’s
Obviously, the arguments (reliable information
on the availability or absence of capacities) are in Gazprom’s
If the situation falls under one of those
scenarios (i.e. if a transit nation can and is willing to let
shippers use its transit capacities), the provisions of
Article 7(4) of the ECT shall be applied. It reads that if
transit of Energy Materials and Products cannot take place on
commercial terms using energy transport capacities,
contracting parties “shall not place obstacles in the way of
new capacity being established.”
This gives Russia and
Gazprom another level of protection — the possibility of
ensuring commercial terms for transit on a non-discriminatory
base, provided that there are capacities and the will to
realise scenarios A1 and A2.
The third level of protection
is stipulated by Article 7(5). A contracting party which could
act as a transit nation for Energy Materials and Products is
not obligated to allow the construction or modification of its
energy transport capacities or allow new or extra transit via
its existing facilities if it can demonstrate to other
interested contracting parties that this would “endanger the
security or efficiency of its energy systems, including the
security of supply.”
in favour of the Treaty’s
Gazprom is known to be selling its gas
in Western Europe mostly on delivered-at-frontier terms
at prices ranging from $100 to $120 per 1,000 cubic
metres. The price paid by end consumers is 2.3 to 2.5
Gazprom is looking to get access to
Western European gas distribution networks and to be
paid for its gas what Western European consumers pay,
but it has so far failed to do this.
ratification would let Gazprom demand access to
distribution networks similar to that which Ruhrgas, Gaz
de France and other Western European companies
What economic benefits this can give to the
company, and Russia in general, what extra costs Gazprom
will sustain requires additional estimates. But this
argument has not been considered so
There is no doubt that Gazprom, having
relevant information, can prove a threat to “security or
efficiency of its energy systems” if required. True, to be
able to convince other contracting parties that there is such
a threat, it will have to provide relevant data to those
parties, which may be at odds with its reluctance to disclose
any information, especially to its rivals.
If, for some
reason, Gazprom is unable, or reluctant, to prove that there
is a danger, it would have to allow transit by new — not
existing — capacities under the ECT.
But the fourth
protection level then takes effect, related to the choice of a
scenario from group B (see the table) for capital- and
time-consuming procedures of organising, preparing, financing
and building new pipelines.
In that case Russia, as a
transit nation and the owner of unified trunk pipeline
networks, would have enough effective levers to protect its
interests during negotiations on relevant projects.
Gazprom’s statements about “inexpensive
domestic” tariffs which would have to be applied if Turkmen or
Kazakh gas is let into Russian pipelines, are also
The deputy chairman of Russia’s Federal Energy
Commission, Mr Yankov, said at the hearings, when countering
Gazprom’s arguments, that “the tariff we will apply for their
gas when we let it into our pipe will be different from that
now applied for Gazprom’s Transgaz transport
“So far, Gazprom has used its own transfer
tariffs for settlements between its subsidiaries, which have
little in common with actual costs and have no relation to the
investment component required for the Transgaz system’s
In Mr Yankov’s opinion, any losses can be
computed if one proceeds from those transfer tariffs.
the way, the transit of ‘foreign’ oil across Russia is now
more substantial than amount of foreign gas expected by
Gazprom in the event of the ECT’s ratification.
Last year, transit supplies of oil amounted
to 14.1m tonnes, which was 11 per cent of Russian exports
proper. But oilmen have not raised the issue of tariffs or
access to capacities. They can hardly be unaware of the
Is this accidental? I think not.
problem can also be looked at from the point of view of
“reciprocity,” which is one of the key provisions of the
contract law and an efficient means of resolving problems
Gazprom has been facing when exporting.
cent of Russian gas is supplied to consumers by going across
third countries. To export natural gas to its final markets,
Russian gas pipelines cross the borders of 14 nations.
other main world exporters, transit issues and, therefore,
relevant provisions of the ECT are substantially less
important than for Russia.
The share of transit traffic in gas trade is
24 per cent for the Netherlands, 32 per cent for Norway, and
55 per cent for Algeria. Virtually all Dutch and Norwegian and
44 per cent of Algerian gas is transited across the territory
of one or two countries.
The share of Russian gas crossing
the borders of three or more nations is more than 90 per cent
of supplies. Therefore, the availability of effective legal
instruments for transit regulation is vitally important for
Russia from the point of view of increasing economic
efficiency and providing legal protection for Russian energy
Russia’s main problems are known to be related to
its main transit country — Ukraine.
At the start of last
January, Ukraine’s then deputy prime minister in charge of the
fuel and energy sector, Ms Yulia Timoshenko, admitted that
“Ukraine’s debt to Gazprom is $2,223m and the Ukrainian side
daily steals Russian gas worth $10m.” This is about $4bn a
Therefore, the ECT’s ratification and
application could minimise, or totally stop, violations of the
transit regime — related to non-payment, disputes over transit
tariff rates and unsanctioned withdrawal of energy
Russia cannot use this mechanism as it has not
ratified the ECT.
But that does not exhaust the list of
Mr Komarov said during the hearings
that, after the ECT’s ratification, European nations will
allow Russian gas passage at their domestic tariffs.
not need this. We have already been granted transit terms in
Europe that are far better than those we can get due to the
I cannot agree with Mr Komarov.
For transit supplies across third nations who
are members of the GATT/WTO, Russia would benefit from the
fact that the ECT mechanism offers Russia, which is not a
GATT/WTO member yet, a transit regime more favourable than the
GATT/WTO stipulates for member nations.
One should realise
that each ECT signatory is protected against arbitrary
increases in Russian transit supplies just as Russia is
protected against uncontrolled increases in transit supplies
of Turkmen or Kazakh gas.
But current transit (that is,
virtually all current exports of Russian gas) falls under
scenario A1 (see the table) and, therefore, after the
ECT’s ratification, those most favourable transit terms that
Gazprom enjoys in some European nations should also apply to
all European supplies from the company.
European Union member nations now have a
uniform regime and regulations for mutual supplies. Having
ratified the ECT, while not being an EU member, Russia will be
able to insist on being granted a domestic regime (for trade
or transit) which EU members have established among themselves
or an even more favourable regime, if it is applied in its
relationships with an EU nation (they are all ECT signatories)
and any ECT member nation.
Therefore, for Russia the ECT is
a more favourable (at least for transit) international legal
treaty than the GATT/WTO or the Russian-EU partnership and
Are there grounds to say then that
we do not need this kind of transit treatment?
raise objections to other arguments voiced by the ECT’s
opponents. They certainly should not be regarded as an
intention to put an end to discussions. My intention is in
elucidating the real state of affairs. This requires a
dialogue...and this article is an invitation to join