The Energy Charter –Can It Make a Contribution in East Asia and Eurasia?

Eurasian Pipelines – Road to Peace, Development and Interdependencies

Harriman Institute, Columbia University 30 November – 1 December 2006

Tim GouldTim GouldSenior AdvisorSenior AdvisorEnergy Charter SecretariatEnergy Charter Secretariat

2

The Energy Charter Treaty

■ Signatories (51 Signatory Countries + EU: 47 ratifications), Pakistan invited to accede (November 2006)

■ Observers (19 Countries, 10 International Organisations)

3

Primary Energy Demand by Region

Source: IEA WEO 2006

Developing countries become the biggest energy consumers within

a decade

0

2 000

4 000

6 000

8 000

10 000

1980 1990 2000 2010 2020 2030

Mtoe

OECD Developing countries Transition economies

4

CO2 Emissions, 1971-2030

Source: adapted from IEA WEO 2006

0

4 000

8 000

12 000

16 000

20 000

1970 1980 1990 2000 2010 2020 2030

Mt o

f CO

2

OECD Transition economies Developing countries

5

World Fossil Fuel Supply

Source: IEA WEO 2006

Oil

Coal

Gas

11%

15%

48%

54%

11%

20%

trade as % of world demand

0 1 000 2 000 3 000 4 000 5 000 6 000

20302004

20302004

20302004

MtoeProduction consumed within each region Traded between regions

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Why is Energy Different?Availability of hydrocarbons is determined by geology and by the sovereign decisions of resource-owning countries interdependence of states and other actors along the entire energy chainEnergy projects tend to be highly strategic and capital-intensive, where risks need to be assessed and mitigated across a long time horizon particular risks linked to energy investmentFor natural gas and electricity – and partly also for oil –international trade is mainly linked to dedicated and fixed infrastructure need for disciplines regarding access, tariffs, non-interruptible supplyEnvironmental impact of energy use global challenges require global responses

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Contribution of the Energy Charter?Mechanism to mitigate non-commercial risks:

Affecting investment in the energy sector; the only multilateral investment protection TreatyAffecting cross-border energy flows through pipelines and networks, especially energy resources in transit

Accessible Forum for:Cooperation and knowledge-sharing on policies to improve investment climate and energy efficiencyDevelopment of (binding and non-binding) instruments to meet new energy challenges

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Europe and the ECTSecuring External Supply for the Internal Market

LocalProd.

LNG Imports

PipelineImports

Demand

in Bcm515

570- 610

2004 2010 20202004 2010 2020

40

100

~700

140

207185 307

325 295 230

Source: Total,EON - Ruhrgas

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The Energy Charter in Asia

■ Signatories: Russia, Kazakhstan, Uzbekistan, Turkmenistan, Kyrgyzstan, Tajikistan, Mongolia, Japan; Pakistan invited to accede (November 2006)

■ Observers: Afghanistan, Bahrain, China, Iran, Korea, Kuwait, Oman, Pakistan, Qatar, Saudi Arabia, United Arab Emirates, ASEAN

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Kazakhstan-China Oil PipelineOmsk

PS Atasu

Pavlodar

Atyrau

Samara

Aktau

Karachaganak

Tengiz

Caspian

Sea

Kashagan

ShymkentAlmaty

RUSSIA

CHINA

UZBEKISTAN

TURKMENISTAN KYRGYZSTAN

IRANChardzhou

Alashankou

Urumqi

Orsk 2. Kenkiyak-Kumkol (-Atasu)L = 752 kmFeasibility Study planned

Kenkiyak-AtyrauCommissioned in 2004L = 449 km, d = 610 mmCapacity up to 12 mtyReverse Pumping envisioned

1. Atasu-AlashankouL = 962 km, d = 813 mmInitial capacity 10 mty.To be raised to 20 mty

Oil Pipelines

Kazakhstan-China Pipeline Stages

Possible Oil Supplies from West Siberia

Resources for Atasu-Alashankou

Kumkol

Kenkiyak

1st stage:Construction of the Atasu-Alashankou Pipeline with 10 mtycapacity

2nd stage:- construction of the Kenkiyak-Kumkol section- modernization of the existing Kumkol-Karakoin-Atasu section- reverse of the Kenkiyak-Atyrau Pipeline- capacity expansion to 20 mty for Atasu-Alashankou section

PS 384 km

Atasu-Alashankou Pipeline:Addressing the Energy Charter Principles

Non-discrimination as to the origin, destination, and ownership of energy resourcesGuarantee of free access to the pipeline, acceptance and transportation of oil to China including transitIntentions to attract any resources, particularly, Russian oil supplies from West Siberia

Rules for pipeline accessAll potential shippers are guaranteed equal access to the pipeline when capacity is availableCNPC and KMG have priority rights of accessing the pipeline capacityPipeline capacity, first of all, will be used to fulfill the obligations under long-term oil transportation agreementsIf one of the parties does not use its pipeline capacity in full, the other party has the right to use such unused capacityIn case transportation volumes under contracts exceed the pipeline capacity, the rights for transportation will be executed according to the shares of KMG and CNPC in the Project Company

Tariffs for transit/transportationThe tariff should be competitive and non-discriminatory compared to other options for exporting oil from KazakhstanThe following principles are observed when calculating the tariff:

Compensation of economically sound costs (including cost of financing);Payment of taxes and other duties imposed in accordance with the Kazakhstan laws;Profit made should ensure effective operation of the company (being a natural monopoly);The transportation option should be competitive compared to other options;The existing pipeline capacity should be utilized to full extent

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Possible evolution of gas infrastructure in Northeast Asia - 2030

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Russia and the Energy CharterOne of the original signatories of the Treaty (1994) Applies the Treaty on a provisional basisEngaged in the Energy Charter’s workPosition has been that conclusion of the Energy Charter Protocol on Transit would open door to ratification… but other issues also on the tableGenuine interest in the substance of the Transit ProtocolEnergy Charter principles and related issues formpart of the EU-Russia negotiations on a new bilateral legal arrangement

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Recognising the Asian dimensionof the Charter

“Leaders thoroughly discussed questions related to energy security, reiterating their earlier calls for multilateral measures to promote stable, effective, and transparent global energy markets, and agreed to cooperate in relevant international fora with a view to meeting these challenges. In this context, they noted the importance of the Energy Charter Treaty.”

From the Chairman’s Statement on the meeting of Heads of State of the Europe-Asia Meeting (ASEM), which brings together the ten members of ASEAN, China, Japan, Korea, the Member States of the European Union and the European Commission, Helsinki, 10-11 September 2006