FAQ

The Energy Charter is based on the recognition that all countries stand to benefit from a balanced framework for cooperation in the energy sector. Countries with natural resources get a means to attract investment, to protect their interests downstream, and to ensure reliable transportation for their energy exports to consumers.

Energy-importing countries get protection for their outward energy investments, and mechanisms to promote security of supply. All countries benefit from measures to encourage the efficiency of energy production and use and to minimise their environmental impacts.

The Energy Charter has two distinctive features. Firstly, the Treaty is the only body of international rules that is tailored to the specific needs of the energy sector. Secondly, the Energy Charter covers a broad and diverse range of countries across Eurasia, including energy producers, consumers and transit countries.

The Charter dates back to a political initiative launched in Europe in the early 1990s, at a time when the end of the Cold War offered an unprecedented opportunity to overcome the previous economic divisions on the European continent. A political declaration on international energy cooperation, the European Energy Charter was adopted in 1991, and was followed by the legally binding Energy Charter Treaty, which was signed in 1994 and which entered into force in 1998.

Fifty-one European and Asian countries have signed or acceded to the Energy Charter Treaty. All EU states are individual signatories,
but the Treaty has also been signed collectively by the European Community and Euratom so the total number of parties to the Treaty
is fifty-three.

Of these fifty-three, all have ratified the Treaty except for five. These countries are Australia, Belarus, Iceland, Norway, and the Russian Federation. Belarus and the Russian Federation have accepted provisional application of the Treaty, which meant that – pending ratification – they agreed to apply the Treaty to the extent that it was consistent with their own constitutions, laws and regulations. On 20 August 2009 the Russian Federation has officially informed the Depository that it did not intend to become a Contracting Party to the Energy Charter Treaty. In accordance with ECT Article 45(3(a)), such notification resulted in Russia's termination of its provisional application of the Treaty upon expiration of 60 calendar days from the date on which the notification was received by the Depository. Therefore, the last day of Russia's provisional application of the Energy Charter Treaty was 18 October 2009. Belarus still applies the Treaty provisionally.

With its current membership, the Energy Charter has a natural focus on the evolving Eurasian energy market, including the Mediterranean region, the Middle East and North Africa. Although the Treaty was conceived as a European initiative with a focus on ‘East-West’ cooperation, the scope of the Energy Charter is now considerably broader. Pakistan, China, Korea, Iran and Association of South-East Asian Nations have all have all taken on observer status in recent years; the role of the Energy Charter in Asia is becoming increasingly important. (See 'Members and Observers' page for more information).

The Treaty’s common ‘rules of the game’ for the energy sector are designed to encourage investment and trade, to ensure reliable transit, and to promote efficient energy use.

A huge volume of investment is required, all along the supply chain, in order to meet growing demand for energy. The Energy Charter is based on the idea that international flows of investments, capital and technologies for the energy sector are mutually beneficial, and a primary aim of the Treaty is to promote the necessary climate of predictability that can attract private sector involvement.

The Treaty does not create investment opportunities for companies by forcing open access to resources or defining a certain market structure for Energy Charter member countries. These are sovereign decisions for member governments.

However, once an energy investment is made, the Treaty is designed to provide a stable interface between the foreign investor and the host government. This stability is particularly important in the global energy sector, where projects are highly strategic and capital-intensive, and where risks have to be assessed over the long-term.

It is a major task to reduce these risks, as far as possible, by creating a stable and transparent investment climate. The Energy Charter Treaty assists by offering binding protection for foreign energy investors against key non-commercial risks, such as discriminatory treatment, direct or indirect expropriation, or breach of individual investment contracts.

A second priority for the Treaty is to promote reliable international transit flows. This is a particularly important issue for Eurasian energy security, since a high proportion of oil and gas in Eurasia is delivered through long-distance pipelines that cross multiple national borders and jurisdictions.

Under the Treaty, member countries are under an obligation to facilitate energy transit in line with the principle of freedom of transit and not to interrupt or reduce established energy transit flows.

Thirdly, the Treaty requires that all member states act to minimise the harmful environmental impact of energy-related activities. The Treaty does not have binding targets in this area, but member countries use the Energy Charter as a forum to exchange information on programmes and policies that have been successful in improving energy efficiency.

The first step for a country wishing to join the Energy Charter is to sign the 1991 political declaration (the ‘European Energy Charter'). On the basis of this commitment to the principles of the Energy Charter, the country then becomes an observer to the Energy Charter, with access to all meetings and documents.

The next stage, if a country wishes to take it, is accession to the Treaty itself. This is a more lengthy process, since a country must first assess the compatibility of its domestic legislation with the provisions of the Treaty. Once the relevant reports have been approved by the Energy Charter Conference - the Energy Charter's governing body in which all member countries are represented - the applicant country is invited to accede to the Treaty.

The Treaty is open for accession by any country that wishes to participate, that is ready to take on the obligations in the Treaty, and whose application is accepted by the Energy Charter Conference.

The Treaty contains a variety of mechanisms to settle disputes, each of these being designed to address a particular aspect of the Treaty.

If a member country feels that another state is not complying with its obligations under the Treaty - and if no resolution is possible through bilateral diplomatic channels - then the matter can be taken to binding international arbitration. This mechanism is applicable to almost all disputes arising under the Treaty, with the exception of the articles on competition and on the environment.

The Treaty also grants individual foreign investors the right to take Energy Charter member countries to international arbitration, in the event of an alleged breach of the Treaty's investment provisions (more information on these cases is available here).

The number of cases brought to arbitration is not a good measure of the Treaty's effectiveness. Taking a dispute to arbitration is normally a ‘last resort'; for an individual investor, this is not a way to resolve day-to-day issues that can arise between an investor and a host government. But the fact that cases do find their way to arbitration is nonetheless important: it demonstrates that non-compliance with the Treaty can have both financial and reputational costs, and it encourages all parties to observe their obligations in the first place.

The Treaty also includes a unique conciliation procedure to deal specifically with disputes over transit. This can be invoked by member states, and is faster and less formal than taking a case to arbitration. Under this procedure, an independent conciliator is appointed in order to assist the parties in reaching an agreement. If no agreement is reached quickly, then the conciliator ultimately has the power to fix interim transit tariffs for up to twelve months while negotiations between the parties continue. The aim of this procedure is to reduce the risk of interruptions to transit flows while an agreement is being found.

The Secretary General of the Energy Charter Secretariat has a role in appointing the conciliator in this case, but - apart from this specific instance - the Secretariat itself is not involved in the dispute settlement mechanisms. The Secretariat has no mandate to act as arbiter on disputes arising under the Treaty, nor can it recommend or take any sanctions against member countries.

The Treaty includes an obligation on member countries to facilitate energy transit across their territory, in line with the principle of freedom of transit, and an obligation to secure established transit flows. At the same time, an understanding included in the Treaty makes it clear that the Treaty provisions “do not oblige any Contracting Party to introduce mandatory third party access”.

Negotiations on an Energy Charter Transit Protocol aim to clarify the operational meaning of ‘freedom of transit’ for the energy sector, on the basis of the existing Treaty provisions. The overall aim is to provide clear and transparent rules for international energy transit flows, which can encourage the efficient development and use of energy transportation infrastructure and reduce the risk of interruptions to supply.

While the Energy Charter is based on the idea that international flows of investments and technologies in the energy sector are mutually beneficial, national sovereignty over energy resources is a core principle of the Treaty (ECT Article 18).

Each member country is free to decide whether and how its national energy resources are developed, and also the extent to which its energy sector is open to foreign investors.

The Energy Charter shares core principles with the World Trade Organisation, in particular the principles of transparency and non-discrimination. The rules of the Treaty are fully compatible with those of the international trading system, and in practice the Energy Charter Treaty has been a valuable stepping stone for some member states on their way towards accession to the WTO.

However, the Energy Charter goes further than the WTO framework in addressing specific challenges for the energy sector. There is no counterpart in the WTO system to the Energy Charter Treaty's provisions on the protection of investment. The Charter also covers in more detail the issue of energy transit, and includes a distinctive mechanism for the resolution of energy transit disputes. In relation to the energy sector, memberships in the WTO and in the Energy Charter are complementary; these organisations are not substitutes for one another.

Russia signed the Energy Charter Treaty in 1994 and has accepted provisional application of the Treaty pending ratification. This means that Russia has agreed to apply the provisions of the Energy Charter Treaty to the extent that they are consistent with Russia's constitution, laws and regulations.

The absence of ratification does not present an obstacle to the practical and technical work of the Energy Charter process, in which Russia is an active participant. It does, however, leave ambiguity about the extent of Russia's legal rights and obligations under the Treaty.

On 20 August 2009 the Russian Federation has officially informed the Depository that it did not intend to become a Contracting Party to the Energy Charter Treaty and the Protocol on Energy Efficiency and Related Environmental Aspects. In accordance with Article 45(3(a)) of the Energy Charter Treaty, such notification results in Russia's termination of its provisional application of the ECT and the PEEREA upon expiration of 60 calendar days from the date on which the notification is received by the Depository. Therefore, the last day of Russia's provisional application of the Energy Charter Treaty and the PEEREA was 18 October 2009.

  

An objective of the Treaty is to promote transparency and efficiency in the operation of energy markets, but it is for governments to define the structure of their national energy sector. There is no obligation to privatise state-owned energy companies, or to break up vertically integrated energy companies.

The idea of an Energy Charter to promote international energy cooperation was launched by the (then) European Community in June 1990. All the member states of the enlarged EU are among the fifty-one signatories of the Energy Charter Treaty, and the Treaty is part of the acquis communautaire - the body of Community law.

However, the Energy Charter is a separate international organisation, which aims to find balanced solutions to key energy challenges among a diverse range of member countries across Europe and Asia, including producers, consumers and transit states, participating in the Charter on an equal basis. And although the Charter process was originally conceived in Europe as a forum for East-West cooperation, the Asian dimension of the Charter process has become an increasingly important priority in recent years.

The disputes over energy supply and transit between Russia and Ukraine in January 2006, and between Belarus and Russia in December 2006-January 2007, generated a lot of international attention and comment. One aspect of this related to the role of the Energy Charter and how the Charter framework could reduce the risk of interruptions to energy supply.

Representatives of Russia, Ukraine and Belarus referred to Energy Charter provisions and principles as a basis for finding a solution. In the case of the dispute between Russia and Ukraine, the Secretary General wrote to both parties on 3 January 2006 recalling that the Treaty had mechanisms for dispute settlement, including a specific conciliation procedure for transit issues, and proposed that these be used in the event that no bilateral agreement was reached. The conclusion of an agreement on 4 January 2006 between Gazprom and Naftogaz meant that this proposal was overtaken by events.

During the Russia-Belarus negotiations, the Secretary General called on 30 December 2006 and on 8 January 2007 for a settlement of the outstanding transit issues between Russia and Belarus on the basis of the principles of the Energy Charter.

Under the Treaty, member countries are under an obligation to facilitate energy transit in line with the principle of freedom of transit and not to interrupt or reduce established energy transit flows. Beyond a stance in principle favouring ‘market-oriented price formation', the Energy Charter does not interfere in negotiations about pricing or other elements of energy supply arrangements that are negotiated between member countries or their commercial entities. In relation to transit tariffs, the basic principle established by the Energy Charter Treaty is that tariffs should be non-discriminatory, and also that no party shall impose unreasonable delays, restrictions or charges on energy products in transit.

Throughout 2006-2007, the Energy Charter has encouraged a dialogue between member states on risks that can have an impact on transit flows. In addition to its regular meetings for member countries, the Secretariat has organised a series of expert workshops on promoting reliable gas transit, which brought together representatives of member countries, gas companies and industry experts, including participants from Russia, Ukraine, and Belarus.

The Treaty covers all types of energy materials and products, inclusive of electricity and energy-related equipment, and the provisions on investment protection apply also to investments in hydropower, solar, wind energy, and all other renewable energy sources. For example, the first arbitration award made to an investor under the Energy Charter Treaty concerned the treatment of an investment - by a small company - in environmentally-friendly cogeneration of heat and power.

The Energy Charter Treaty was signed in 1994 as a broad multilateral framework for Energy Cooperation, with a primary focus on the protection of investment in the energy and on ensuring reliable conditions for flows of energy, investment capital and technology across national borders. The Energy Charter has fifty-one member countries across Europe and Asia, and over twenty observer states.

The Energy Community Treaty is a specialised legal instrument that extends the detailed rules of the European internal energy market to non-EU members in Southeast Europe. Full information is available on the Energy Community web site.

The Secretariat has no formal role in relation to the settlement or administration of investment disputes under the Energy Charter Treaty, and parties to any dispute are not obliged to release information about the progress of individual cases. However, some information is in the public domain, and the Secretariat has compiled a list of cases containing - to the best of our knowledge - relevant public information about the investor-state disputes that have been formally initiated (more general information is also available on the page of this website on 'dispute settlement').

 

Initially, two countries applied the Energy Charter Treaty provisionally, namely the Russian Federation and Belarus.

The Energy Charter Treaty provides in Article 45(1) that "Each signatory agrees to apply this Treaty provisionally pending its entry into force … to the extent that such provisional application is not inconsistent with its constitution, laws or regulations" (emphasis added).

Provisional application of the Treaty was a possibility only for countries that signed the Treaty when it was initially open for signature (from 17 December 1994 until 16 June 1995). At the time of signing, each state had the option of filing a declaration to the effect that it was unable to accept provisional application of the Treaty, and a number of countries filed such declarations. The other signatories - among them the Russian Federation and Belarus - accepted provisional application.

Since end-June 1995, any new member wishing to be bound by the Treaty has to accede; this is a different procedure that does not entail signing of the Treaty itself, and so the question of provisional application does not arise in these cases.

As of 2007, five of the original signatory countries have not ratified the Treaty. Of these five, Norway, Iceland and Australia filed declarations at the time of signing to the effect that they were unable to accept provisional application. The Russian Federation and Belarus are the only two signatories which have not ratified the Treaty, and which have - by not filing declarations at the time of signature -accepted provisional application.

The status of Russia and Belarus in relation to the Energy Charter Treaty is open to a degree of interpretation, since the extent to which a state's acceptance of provisional application creates legal rights and obligations is - having regard in particular to the emphasised language above in Article 45(1) - not entirely clear under international law. Ultimately, this question can be settled authoritatively only in the context of relevant cases brought to international arbitration.

On 20 August 2009 the Russian Federation has officially informed the Depository that it did not intend to become a Contracting Party to the Energy Charter Treaty and the Protocol on Energy Efficiency and Related Environmental Aspects. In accordance with Article 45(3(a)) of the Energy Charter Treaty, such notification results in Russia's termination of its provisional application of the ECT and the PEEREA upon expiration of 60 calendar days from the date on which the notification is received by the Depository. Therefore, the last day of Russia's provisional application of the Energy Charter Treaty and the PEEREA was 18 October 2009.

Belarus continues to apply the ECT and the PEEREA provisionally.

  

As of early 2010, there are twenty four observers and ten international organisations with the status of observer to the Energy Charter (click here for a complete listing).

Observers have the right to attend all meetings of the Energy Charter Conference and of its subsidiary groups. They also have the right to receive all related documentation, reports and analysis, and to participate in the working debates taking place within the Energy Charter.

The intention is that observer status should provide the chance for a country to familiarise itself with the Charter and its functions, in order to facilitate its assessment of the benefits of accession to the Energy Charter Treaty. In cases where there is a strong interest in closer association with the Charter, energy experts from observer countries have also assisted in the work of the Secretariat as secondees or interns.

In 2004, the existing member countries made a detailed review of the functioning of the Charter process, and drew the following conclusions with regard to its expansion:

"The Energy Charter process has a natural focus on the evolving Eurasian energy market, including the Mediterranean, the Middle East and Asia. We welcome the interest shown in the Charter process by several non-member states, and acknowledge in particular the growing Asian dimension of the Charter process. Observer status at the Energy Charter Conference provides a mechanism for facilitating association and familiarity with the Charter process and we encourage the observer states to participate actively in the Charter's work and to consider the mutual benefits of full accession to the Energy Charter Treaty."