Why the Energy Charter Treaty could become the key to the success of the Trans-Afghan energy corridor

Why the Energy Charter Treaty could become the key to the success of the Trans-Afghan energy corridor

By Danila Bochkarev

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.

Power outage in India (c) IEEE

India and Pakistan combined make up close to one-fifth of the world's population, much of it without stable access to primary energy and power supplies. A timely response to this challenge is crucial considering last summer's energy shortages in India, which affected more than half-a-billion people. The shortage of energy supplies, especially electricity, already slows down considerably these countries' economic growth. The overall annual growth rate in Pakistan is 3 to 4 percent and in India 7 to 8 percent. Without energy shortages, the growth rates of Pakistan and India would be 3 to 4 percent higher.

In India and especially in Pakistan, natural gas is rapidly gaining importance as a key source in the power generation mix. Gas-fired turbines are highly efficient and relatively cheap to build. Gas-based power stations are also flexible and can quickly respond to peak demand, which is particularly relevant for the electricity sectors of these two countries.

Geography vs. politics

Both countries can meet their demand for natural gas partly by developing their indigenous (especially unconventional) resources, but they will still need to import considerable amounts  from their energy-rich neighbours - Iran, Qatar and Turkmenistan. According to Business Monitor International, Pakistan will need gas imports of 13 bcm (billion cubic metres) by 2021. (In 2011 Pakistan produced and consumed about 39 bcm, according to the BP Statistical Review of Energy.) India will need to import some 91 bcm, up from about 15 bcm in 2011. (India produced 46 bcm and consumed 61 bcm. Note that the biggest consumer in the EU, the UK, used some 80 bcm, according to the BP Review.)

In the case of Pakistan, gas-based electricity can be complemented by the import of cheap seasonal surplus of hydropower from Central Asia, in particular from Kyrgyzstan and Tajikistan. (It is expected that Tajikistan's hydroelectricity production will reach 26.4 billion KWh in 2015. This level of production will allow Dushanbe to export up to 5 billion KWh/year by 2015. Kyrgyzstan has the 3rd largest hydropower potential (142 billion KWh) in the former Soviet Union. Export of electricity is expected to rise from 1.47 billion KWh in 2010 to 6.9 billion KWh in 2020.)

But there are significant obstacles that need to be overcome before this kind of international gas and electricity trade can be realised. In terms of resources and geographical location, Iran is well positioned to meet Pakistan and India's energy needs, but current international sanctions have removed Tehran from the regional energy landscape. Qatar, being the owner of the world's third largest reserves of natural gas, could be a major supplier as well, but for the moment it can offer only limited volumes of LNG which would not cover incremental demand. Furthermore, the price Qatar demands for its LNG is often higher than existing and future arrangements for the supply of pipeline gas. There is also a lack of re-gasification facilities in Pakistan. This leaves Turkmenistan as a possible attractive source of energy. Islamabad and to a lesser extent New Delhi, have therefore little choice but to consider using the trans-Afghan energy corridor to access Turkmenistan gas and Central Asian electricity.

The Trans-Afghan transit corridor consists of two elements: the planned Trans-Afghanistan Pipeline (TAPI) and the Central Asia-South Asia electricity interconnection (CASA-1000).

TAPI is a $7.6 billion Asian Development Bank project which is supposed to bring up to 33 bcm/year of

So far, none of the numerous regional multilateral institutions has been able to successfully tackle important political and economic challenges

natural gas from Turkmenistan to Afghanistan, India and Pakistan via Afghanistan's territory. On 23 May 2012, Afghanistan, India, Pakistan and Turkmenistan signed the TAPI gas supplies purchase agreement (GSPA), agreeing that the pipeline, with a transmission capacity of 33 bcm of gas per year, has to be built by 2018.  TAPI would cover up to 25 percent of Pakistan's energy shortfall and will help to alleviate the growing energy deficit, particularly in northern India.

The CASA 1000 project foresees a $1 billion electricity grid, designed to bring the summer surplus of cheap hydroelectricity from Kyrgyzstan and Tajikistan to Afghanistan and Pakistan via northern Afghanistan. The grid has up to 1300 MW of transmission capacity and would offer Afghanistan the possibility of taking up to 300 MW of electricity supplies or simply transiting all Central Asia's electricity exports to Pakistan. As of now, the project still does not have a clear construction schedule.

Obviously, the precarious security situation in Afghanistan is a major challenge to these options and prevents the energy projects from going forward. Moreover, neither India nor Pakistan can rely with confidence on the key exporter (Turkmenistan) as a guarantor for transit of its gas via Afghanistan. Turkmenistan's export policy provides a good example of a (typical) unilateral stance on energy policy. Though Turkmenistan supports the Trans-Afghan gas pipeline, Ashgabat is not really concerned by issues linked with the transit via Afghanistan. The country has a policy of selling its gas on the border and leaves it to the customer to arrange for transit and delivery to the final destination. In other words, Turkmenistan will do little if anything to ensure safe transit through Afghanistan.

Institutional insufficiency

Politics in the region is generally shaped by mistrust and - despite a number of regional multilateral institutions and agreements - by lack of genuine multilateral cooperation, with negative effects on energy relations. Put differently, the region is generally characterized by institutional insufficiency. Political, economic and energy cooperation may be occasionally developed at a bilateral level, but not multilaterally.

To make multilateral energy trade possible, what is needed is a set of functional frameworks with binding rules. The construction of TAPI and CASA 1000 and the subsequent transit of gas and electricity via Afghanistan will require a multitude of important regulatory and investment decisions. This can only be realized via a multilateral regional framework.

So far, none of the numerous regional multilateral institutions has been able to successfully tackle important political and economic challenges. Although all regional organizations recognize the importance of the energy dimension, not one has effectively addressed energy cooperation.

For example, the South Asia Association for Regional Cooperation (SAARC) did generate some relevant energy policy and infrastructure plans such as the proposal for an Energy Ring in South Asia, yet no visible progress on these initiatives was achieved. This organization still largely fails to sufficiently address the complicated and diverse energy landscape in the region. Moreover, China is not a member of the SAARC and only possesses observer status. The region's largest existing and potential natural gas and electricity suppliers (Iran, Kyrgyzstan, Tajikistan and Turkmenistan) are also present only as observers.

The Economic Cooperation Organization (ECO), an international framework aimed at the promotion of regional cooperation in Central and West Asia with the Secretariat based in Tehran, also suffers from institutional insufficiency. Although it has a relevant geographic scope, it has not been able to play a substantial role in the region. Given the fact that its seat is in Tehran, this is unlikely to change in the near future.

The Central Asia regional Economic Cooperation Program (CAREC) also has a geographically relevant membership and scope of action. CAREC addresses important regional energy issues such as efficient use of energy resources, energy-water linkage, regulations and contractual arrangements, and has a relevant set of supporters both among governments and international organizations. However, it does not directly deal with energy governance or energy cooperation issues. For example, its functional pillar on "regulations and Contractual Arrangements" does not fully cover Central Asia-South Asia energy infrastructure connections.

The Regional Economic Cooperation Conference on Afghanistan (RECCA) on the other hand has been able to gain some relevance. RECCA is an international forum focused on the promotion of stabilization of Afghanistan and South and Central Asian

The ECT, with its vast membership and relevant institutional mechanisms, could become the most appropriate and efficient institutional energy cooperation framework in the region

regional economic integration. For example, the RECCA I Kabul Declaration signed on 5 December 2005 stated that "Afghanistan will consider joining the Energy Charter Organization". Afghanistan is now completing the process of joining the Energy Charter. The most recent RECCA conference (RECCA V) was held in Dushanbe on 26-27 March 2012. RECCA V participants reaffirmed their commitment to regional development through building infrastructure, including TAPI and CASA-1000. Nevertheless, despite its apparent relevance, RECCA is still a discussion platform rather than a formal regional organization capable of dealing with energy-related issues on a regular day-to-day basis. 

Competing interests, institutional weakness, lack of firm functional bodies focused on the practical issues of energy governance (transit, investment promotion/protection, framework supply contracts, arbitration, etc.) and irrelevant membership structure make the above-mentioned institutions not likely to be able to provide efficient support for the regional multilateral energy framework that is needed.

The creation of a new regional energy framework or the empowerment of existing regional institutions could be possible remedies. But both would require regional consensus on key functional principles as well as a lengthy process of multilateral negotiations. This would probably take too long, given the existing level of regional multilateral economic cooperation and the diverging interests of key players. The use of existing energy frameworks, already present in the region could be a better solution.

The Energy Charter Treaty (ECT)

The Energy Charter Treaty (ECT) is probably the best candidate for this role. The ECT was established after the end of the Cold War, when there were new opportunities to overcome old divides between West and East. The prospects for mutually beneficial cooperation were especially promising in the energy sector. There was a realization in Europe at the time that this could bring fast and tangible dividends for all parties concerned. It was clear that there was a growing interdependence between energy exporters and energy importers, which led to the need of a new multilateral framework, providing a set of universally accepted and legally binding rules of the game. These considerations led to the launch in 1991 of the Energy Charter process after the signing of the Energy Charter political declaration in The Hague on 17 December 1991.

The ensuing treaty (the ECT) as well as the Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects were signed in December 1994 and entered into force in April 1998. Note that whereas the 1991 Energy Charter is a political declaration, the ECT is a legally-binding multilateral document, providing necessary guidance for multilateral energy cooperation.
All states who have signed or acceded to the Treaty are observers to or full members of the Conference.

To date, the Treaty has been signed or acceded to by fifty-one states, the European Union and Euratom. Potential gas and electricity suppliers such as Turkmenistan, Tajikistan and Kyrgyzstan and other Central Asian states are already full members of the ECT. Afghanistan, China, Iran, Pakistan and the US are observers. There is quite a strong likelihood that Afghanistan and Pakistan might become full members of the Energy Charter Conference in the near future. If Islamabad and Kabul join, India most likely will follow and become at least observer to the Conference.

Thus, if this process can be made to continue, TAPI and CASA 1000 projects could become subject to a homogeneous legal and regulatory framework that would facilitate uninterrupted energy supplies. The success of the Energy Charter Process in this part of the word depends however on the prospects of full Energy Charter Conference membership of the key regional actors - Afghanistan, India and Pakistan.

Afghanistan, which is already actively participating in the ECT work, signed the Energy Charter on 4th August 2006. On 17th November 2012, the Charter was approved by the Wolesi Jirga (Afghanistan's Parliament) plenary session. The document is expected to be signed by the President and is expected enter into force before March 2013.

Pakistan, which became the observer to the Energy Charter Conference in December 2005, has also shown enthusiasm about the application of the Energy Charter Treaty legal mechanisms to the trans-Afghan energy corridor. Islamabad has the ambition to become a major hub for regional energy trade, and accession to the Energy Charter Treaty "will facilitate this ambition. This energy corridor will further help Pakistan to become a bridge of economic progress between the wider East and West," said Pakistan's President Pervez Musharraf during his meeting with the then-Secretary General of the ECT André Mernier on 12 September 2006. 

Gas pipeline in Turkmenistan (c) Energy Tribune

Pakistan's enthusiasm was shared by its large neighbor India. Speaking in April 2005, India's petroleum secretary S.C. Tripathi said: "We are thinking of becoming an observer in the Energy Charter Treaty to begin with. The treaty will obviate the need for separate inter- governmental, bilateral and multilateral agreements, which are inescapable in the proposed pipeline projects like Iran-Pakistan-India, Turkmenistan-Afghanistan-Pakistan-India and Myanmar-Bangladesh-India".

This initial "high-level" enthusiasm, however, was short-lived. Pakistan still has not ratified the ECT and India is not yet even an observer to the Energy Charter Conference. The hesitations of New Delhi and Islamabad are partly explained by the lack of progress on TAPI and CASA-1000.  The signature of the TAPI gas supplies purchase agreement and (expected) full ratification of the ECT by Afghanistan this winter will certainly reanimate the interest of India and Pakistan in the ECT. By 2014 Islamabad and New Delhi are expected to become respectively full member and observer to the Energy Charter Conference.

The ECT could in this way become an umbrella providing for regional rules of the game. 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. such as:

• Investment facilitation/ investment protection and the extension of national treatment, or most-favored nation treatment,  to foreign investors.
• 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.
• 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.

We have to note that ECT dispute resolution mechanisms are often criticized for inefficiency despite quite a long list of "success stories" - over thirty cases have been brought by investors to international arbitration using the ECT legal mechanisms. However, larger disputes, such as Sakhalin-II PSA (2005-2006) and Kashagan PSA (2007-2008), were resolved without usage of the ECT. The ECT also failed to resolve the Russia-Ukraine gas crisis in January 2009, which was settled directly by the prime ministers of the two countries - Vladimir Putin and Yulia Timoshenko. However, these disputes occurred in the context of already strong (and functioning) bilateral ties between two countries (e.g. in the case of Russia and Ukraine) or intensive working contacts of PSA operators (ENI, Shell) with the host governments (Kazakhstan, Russia). The actors involved in these disputes had several communication/cooperation channels, allowing them to solve their disputes out of court. This is not the case in Southwest Asia which has a relatively poor bilateral/multilateral cooperation record between governments and private companies. 

For these reasons, the ECT, with its vast membership and relevant institutional mechanisms, could become 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. Though it was created especially for Europe and the Former Soviet Union, the ECT's provisions could become even more relevant in Southwest Asia. Southwest Asia, despite existing regional frameworks, does not have a large choice of multilateral and universally accepted cooperative tools. 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.

 

Danila Bochkarev is Senior Fellow at the EastWest Institute in Brussels.