Energy Charter Treaty and India

Energy Charter Treaty and India


Mary Sabina Peters

India's economy is largely energy-driven and energy-dependent. India imports almost 70-80 percent of its crude oil needs and produces barely half the gas it consumes and is negotiating gas pipelines from Iran, Turkmenistan, and Bangladesh to meet the growing energy requirements of its booming economy. India is aiming at creating a level playing field for potential investors and gas producers, consumers, and transit countries across south Asia so that the various gas pipeline projects become a reality. For the $4 billion Iran-Pakistan-India gas pipeline to become a reality, 18 agreements would need to be signed between the three countries. However, an available alternative is the Energy Charter Treaty (ECT). The ECT obviates the need for separate inter-governmental, bilateral and multilateral agreements, which are inescapable in the IP gas pipeline project. The ECT is a legally binding multilateral agreement, and the only one dealing specifically with inter-governmental co-operation in the energy sector. Although the focus is mainly on gas pipelines, its charter also covers grid power. India, yet not a signatory, is considering signing the ECT. The treaty will equip India to cooperate with other countries to fulfil its demands for fuel and energy technology.

The most important area from India’s viewpoint is the issue of transit, as the pipeline from Iran would have to cross Pakistan. The ECT has already dealt with situations similar as the break-up of the Soviet Union that had led to some countries (e.g., Ukraine and Belarus) becoming transit countries for the gas pipelines from Russia to Western Europe. It was then felt that the WTO agreements would not be sufficient to minimize the transit risk through these countries and hence a multilateral treaty, such as the Energy Charter Treaty, would be required.

The ECT’s transit provisions require that the members facilitate energy transit without distinction as to the origin, destination or ownership of energy, or discrimination as to pricing, and without imposing any unreasonable delays, restrictions or charges. A contracting party shall not interfere with the transit of energy in the event of a dispute and shall have to abide by the dispute resolution procedures of the ECT. The ECT recognizes that it is very important that there are no disadvantages to the transit country. All costs and risks have to be addressed and covered, which must also have some incentives in the form of fees and taxes to allow for transit facilities. In view of the importance of transit, it is also proposed to establish a detailed transit protocol. One of the purposes is to make transparent the criteria for setting cost-based transit tariffs and to promote the effective settlement of transit disputes.

Two interdependent model agreements are available under the ECT: the intergovernmental model, for state-to-state agreements, and a host governmental model for an agreement between an individual state and the project investor(s). It is these models, with some modifications as may be agreed between the parties, that can largely replace the multiplicity of agreements mentioned earlier.

An important feature of the ECT is that with a country quitting the treaty, the transit and trade provisions will continue to apply for one year thereafter, the investment provisions for a period of twenty years. The aim is to protect foreign investors from political risks. However, expropriation or nationalization is permitted if it is for a public purpose and the investor is adequately compensated at a fair market value.

The process for accession to the treaty requires a country to first join as an observer by signing the Energy Charter Political Declaration. It should then prepare three reports: first on harmonization of laws and regulations with the treaty provisions, second on investment climate and exception to national treatment and third on energy efficiency. On acceptance of these reports, the country is invited to sign the treaty, becoming a full member.

Apart from the Iran-Pakistan-India pipeline, other cross-border pipelines from Turkmenistan, Bangladesh and Myanmar are being considered. Turkmenistan is a member of the ECT and Iran an observer. There is every reason for India to also become an observer, which will allow it to participate in policy discussions of the Energy Charter Conference, the governing and decision-making body of the treaty. This would also encourage Pakistan and other countries in the region to follow the suit.

The author is a faculty at Xavier School of Sustainability in Xavier University Bhubaneswar, Odisha, India.