No. 2, 2009

Oil of Russia magazine talks to Vladimir Rakhmanin, Deputy Secretary General of the Energy Charter

The Energy Charter has the potential to lay firm foundations for an international partnership in the energy sphere. At present, 51 nations are signatories to the Energy Charter Treaty; of these, Australia, Belarus, Norway, Iceland, and Russia have signed but not yet ratified the document. LUKOIL takes an active part in the Energy Charter's work, as do other leading Russian companies.

Q: Mr. Rakhmanin, what in your view is the practical significance of the Energy Charter Treaty today?

A: First of all, its main value lies in its being today's sole multilateral international treaty for regulating matters of energy cooperation. Regulation is done in all areas: investment, transit, energy efficiency, and so on.

Second, the treaty's unifying character is important. The document takes into consideration the opinion of each member of the energy chain: producing nations, consumer nations, and transit nations. The Energy Charter process brings together all of the main players in the energy sector onto one field.

Third, the treaty applies to territories that are not covered by any other document. All of Europe is party in the Energy Charter, as are all the nations of the former Soviet Union, and the nations of Asia, the Middle East, and the Americas.

Perhaps, the treaty is not the perfect document for everyone, and not everyone is 100 percent satisfied with it. It is therefore the result of conscious compromises by more than 50 nations. From the time it was drafted, however, the world has been changing rapidly, as have the conditions under which energy cooperation developed. In recent times, Russia's leadership has also been quick to point this out.

The Energy Charter's documents are built upon the understanding that we need general rules of energy cooperation. The situation is changing, but an understanding of the importance of multilateral cooperation remains. Under the new circumstances, combined efforts are needed. The Energy Charter Treaty contains instruments for adapting to the new realities. The member nations must decide how to manage this.

Q: At the end of last year, the annual Energy Charter conference took place in Athens. In your view, what were the most important results of that conference?

A: First of all, Egypt and the Palestinian National Authority expressed a desire to join in the Energy Charter process as observers. Their application was supported by the conference participants, and was an important step. Second, all of the conference delegates confirmed their interest in continuing multilateral consultations on the Treaty's Transit Protocol, in order to arrive at practical accords. Negotiations on that point have dragged out far too long. Third, the 2008 report from the Industry Advisory Panel, which includes energy company representatives, was reviewed. Among the main documents discussed within the panel over the last year were, in particular, the reasons for the current price drop for energy resources, the lack of investment, and the barriers to investment in the energy sector. Considering the importance of direct collaboration with representatives of the private sector, the conference participants decided to extend immediately the Industry Advisory Panel's mandate for another four years (previously, the extension period was limited to one year). Fourth, a report from the chairman of the Ad Hoc Working Group on Strategy was heard, in which the political aspects of energy cooperation, along with new challenges in this area and our possible joint responses to them, were discussed. The group will continue its work in 2009 as well. Particularly active within the group is the Russian delegation, which would like to bring the Charter's process closer to present day reality and redirect it toward the future.

Q: Nevertheless, Russia has still not ratified the Treaty, just as Norway hasn't. It turns out that two major energy resource exporters did not join this document. Can we really say then that producers and consumers are taking an equal part in the Energy Charter?

A: The Russian Federation has declared its temporary adherence to the ECT, which allows it to take an active, full, and equal part in the Charter's work. At the same time, certain restrictions are imposed: Russia observes the ECT fully, except in those cases where its provisions contradict the RF constitution and domestic legislation.

Russia enjoys great authority within the Energy Charter, and its words carry a good deal of weight. Our country is one of the founders of the process, has always been up-to-date in all details, and has regularly influenced the Charter's work. This is why the other participants in the Charter process take any proposals or constructive criticism from Russia very seriously indeed.

Q: You've mentioned the Industry Advisory Panel. Do Russian commercial companies take part in the Energy Charter's work?

A: Yes, there are Russian companies on the panel, Gazprom and LUKOIL in particular. The aim of this structure is to involve representatives of the energy sector from each member country in the process. It drafts recommendations on issues concerning energy investment, transborder flows of energy resources, energy efficiency, and so on. Its Chairman is Mr. Howard Chase, Director of Government Affairs at BP Europe.

Q: What does the Energy Charter Treaty do for business and for Russian business in particular?

A: Companies get the atmosphere of trust in which they can and should operate, especially under the conditions of today's financial difficulties. This is especially important for investment. We are talking here about investments both in energy production and in energy-intensive industrial plants.

It seems to me that companies benefit from this directly. Representatives of business circles tell us this themselves. It is from them we hear that trust, confidence in investments, and in stability of consumption and deliveries are prerequisites for doing business in the energy sector. You really can't rely on luck in such a costly sector, and you need some generally accepted rules of the game.

Q: What effect is the financial crisis having on the Energy Charter's work? A lot of countries have stated a desire to protect their own economies, and a number of protectionist measures have been taken. It would seem that under such conditions, international cooperation in all areas is now in doubt. Will the rules of the Charter be observed even under unfavorable conditions?

A: Each country is sovereign and has the right to make decisions that are favorable to it alone. The Treaty is the fruit of the collective reason and the collective will of all members, and emphasizes that sovereignty with regard to energy issues. It recommends open market mechanisms as the most effective for all links of the energy chain, but recognizes that we live in the real world and does not dictate one model or another. At the same time, it offers a negotiating platform that allows the development of partnership even under unfavorable conditions, through dialogue and confidence building. It therefore seems to me that the rapidly developing Charter process grows increasingly important during the crisis.

Q: At the beginning of 2009, the memorable Gas Dispute between Russia and Ukraine took place. What effect can the Charter have on such a situation?

A: The Treaty prescribes procedures for settling disputes between nations. In particular, it is valid with regard to investment and transit conflicts, but not in cases of disagreement over deliveries, which are often of a commercial nature.

While recognizing the commercial nature of the dispute, the Charter's Secretary General Andre Mernier noted in his special address of December 23 that the reliability principle of transit is one of the ECT's central elements. He also pointed out the importance of creating a transparent system of allocating gas flows and the possibility of involving an independent world intermediary.

Of course, the January crisis was a major trial for the Energy Charter Treaty. Unfortunately, the Charter's mechanism was of no help in resolving the rapidly developing crisis. It turned out to be oriented toward solving problems in the middle and long terms. At the same time, I regret to say that the ECT member states have not used, for one reason or another, the intermediary mechanism specified in Article VII of the Treaty. Eventually, the conflict was resolved on a bilateral basis. Now all of us have to analyze the lessons of the crisis to ensure, on the one hand, that such a thing doesn't happen again, and to preserve the multilateral negotiation approach to settling energy problems, on the other.

Q: Don't you think we're seeing a shift in emphasis toward security of transit? So far as supplies are concerned, neither Russia, nor the Middle Eastern countries, nor Norway have raised any issues. Complicated situations arise either in connection with the threat of Somalian pirates or because of rocky relations with transit nations.

A: To be sure, this topic is on everyone's lips. And the energy community of all nations is working on it. We shouldn't forget, however, that the concept of energy security isn't limited just to transit. Right now, it's also associated with the fluctuating prices for energy resources. Last summer, oil prices stood at $150 per barrel. They fell to $40 per barrel in autumn, and this was scary. At this price, it's very difficult to count on long-term investments. Each company does its best to economize under conditions of financial difficulty. But if capital investment isn't made now, problems will arise in a few more years.

I think we have to create an atmosphere of trust and adhere to certain rules and guarantees in order to accelerate the investment process. Of course, they won't be terribly strict from the legal point of view, but they will nevertheless give us a field for cooperation where we speak the same language, where there is transparency and the possibility of acting in accordance with our long-term future.

Q: What do you expect from the Energy Charter in the future?

A: The Energy Charter Conference that will be held at the end of 2009 will be very important for the Charter. It will be a jubilee event, the Charter's 20th anniversary. We are reviewing the Energy Charter's process - which, in accordance with the ECT, is done no less than once every five years. This means that all this year we will be discussing within the working groups and at the conference itself what direction the Charter's work should be taking, how best to adapt the Charter process to contemporary conditions, and how to make the Charter's work more manageable and effective.

Q: You mentioned that Russia's LUKOIL is also taking part in the Energy Charter process. You've been working in Brussels for six months now, and can probably judge how much the Belgians are aware of its operations.

A: The Russian company LUKOIL really has become well-known among the Belgian population. I am proud to see our Russian gasoline filling stations on all of the country's lively highways. But LUKOIL is also famous now for the work its representatives are doing in leading Belgian and European cities. It's very important that a Russian company has the opportunity to bring its point of view to its European partners directly and objectively, since dialogue is the only way to build a long-lived, mutually beneficial structure for cooperation. This is why I believe that the LUKOIL management's initiative to open an office in Brussels is a very important step, and an excellent example for other Russian energy companies to follow.