Russia is in the throes of a debate on whether, or not, to join the Energy Charter Treaty — with a strong resistance being led by Gazprom which has branded it as totally unacceptable.
The debate has occupied the State Duma’s committee for energy, transport and communications which held parliamentary hearings recently when a phalanx of opposition from the Duma, government agencies and some companies (primarily Gazprom) resolutely objecting the ECT’s ratification, clashed with its proponents culminating with a view that there is still much talking to be done before Russia finds itself in a position to make a decision — one way or the other.
That the general feeling is positive is seen from a clear understanding that the ‘force of arguments’ is preferable to ‘force arguments’.

The participants chose a longer, but more reliable, path of expanding the number of supporters of the ECT’s ratification by convincing those who have doubts and trying to persuade opponents by the power of argument.
The hearings have also shown that even though the Russian government formally stands for the ECT’s ratification, it does not have a uniform position on the issue.
The deputy head of the State Duma’s energy committee, Yuri Lipatov, said that “the cabinet actually does not know the document.” In his opinion, even ministries standing for the ECT’s ratification — the Foreign Ministry, the Ministry of Energy and the Ministry of Economic Development — “lack a clear understanding of the document.”
Whether this is good or bad, it is an objective fact. As Russian cabinets have been changing constantly, the ECT’s ratification, like any issue of a long-term nature, has been pushed into the background.

Since the ECT was signed in 1994, new people have appeared among decision makers. The state of the Russian economy and the situation in the energy market in the country, and in the world, have also changed radically.
As a result, there has emerged a new environment, in which those newcomers weigh pros and cons of the ECT’s ratification afresh.
Under those conditions, with the hearings showing a lack of consensus, the only acceptable position was voiced by Russia’s deputy foreign minister, Ivan Ivanov: the ECT should be ratified, but not today.

Gazprom has been the main opponent of the ECT’s ratification. Its objections can be reduced to three arguments:
• The ECT’s ratification will increase the transit of gas across Russia to Europe in competition with Russian gas;
• It cannot improve the investment climate and will not attract more foreign investment in the Russian gas industry;
• It will ruin the system of long-term contracts in the gas market.

According to Gazprom’s estimates, total losses would be between $9bn and $10bn a year.
“Last year proceeds from gas exports to Europe amounted to $11bn,” said Yuri Komarov, a member of Gazprom’s board. “This year they will be around $13bn. We are convinced that we can increase revenues to $15bn-$17bn by 2005.”
“We have estimated that (as a result of the ECT’s ratification) we will lose at least one third of our market and will, at best, get $6bn-$7bn. We will continue to supply as much gas but we will get substantially less income.”
I don’t think we should regard Gazprom’s figures as gospel — even though the monopoly promised to present detailed substantiation for its estimates.
If we get three times less for the same amount of gas, this means that by 2005 gas prices in Western Europe will be down to a third of their current level.

In that case crude and petroleum products prices should also go down — a year to a year and a half before that happens to gas prices — by far more than three times, because gas prices depend on price movements of crude oil and other resources (petroleum, coal) competing with gas.
I have not seen a single forecast for either the world or for the European energy market’s development that would predict a plummeting of oil, petroleum products and coal prices by that margin.
For oil, that would mean a drop from the current level of $25 a barrel for Brent oil to less than $8 a barrel in two to three years, if gas proceeds are to go down by Gazprom’s forecast amount by 2005.
Even if we take the highest oil quotes over the past year ($37 a barrel for Brent), for Gazprom’s forecast to be true, oil prices would have to plummet to below $12 a barrel, which is at odds with the logic of all the forecasts I know.

If Gazprom’s estimate is based on the assumption that one third of the market will be lost due to Russia’s alleged obligation to let Turkmen and Kazakh gas into our gas transport networks, it is based on a wrong interpretation of relevant provisions of the ECT.
If we can really lose around $10bn a year, why should other opponents of the ECT’s ratification, while also proceeding from Gazprom’s estimates, cite different figures?
Valery Yazev, a member of the State Duma, mentioned between $4.5bn and $5bn in annual losses for Gazprom.
Mr Nigmatullin of the Ministry of Nuclear Energy: “$4.5bn in losses for gas and half a billion dollars for the nuclear energy sector.”
The differences are so marked that they should be checked as well as their logic substantiated.

Mr Komarov: “Europe has already ruined the energy market and has caused energy prices to plummet. They now need cheap gas to produce cheap energy. Under the Treaty, Russia would undertake to transit other nations’ gas at domestic tariffs.”
Gazprom’s key objection is its conviction that the ECT’s ratification would open the road to rivals’ inexpensive gas (for example that from Turkmenistan and Kazakhstan and, following that logic, from Iran and other Middle Eastern nations) via Russia’s existing pipeline capacities, at inexpensive Russian domestic tariffs, to the Western European market.
This conviction requires the elucidation of several issues.
In their addresses, Mr Komarov, and especially Mr Yazev (“Europe now wants to get access to Russia’s unique system of gas supplies for free”), focused on transit using the nation’s existing transport capacities.
But this is not the only scenario stipulated by the ECT. A working group is looking at seven transit scenarios (see Transit scenarios).

A contracting party has no commitment to third countries which are not ECT signatories, as stipulated in documents linked with the ECT — Paragraph IV.1(b)(i) of Section IV of the Final Act of the Conference on the European Energy Charter says that the provisions of the Treaty do not obligate any contracting party to provide open access to third parties.
If another contracting party is involved, the provisions of the ECT’s Article 7, Transit, shall be applied.
The article does not obligate any transit nation which is a contracting party to the ECT (for example, Russia) to give another contracting party’s shipper (for example, Turkmenistan) access to its available energy transport capacities.
This is what Gazprom seems to fear.
Article 7(1) of the ECT also states that each contracting party “shall take measures to facilitate the freedom of transit of Energy Materials and Products consistent with the principle of freedom of transit and without distinction as to the origin, destination or ownership of such Energy Materials or Products or discrimination as to pricing on the basis of such distinctions.”

This means that a transit nation is not obligated to provide its capacities for transit — but if it decides to provide access to them, this should be done on non-discriminatory terms.
The ECT demands that the transit regime should not be less favourable than that granted to goods originating in the transit nation or intended for it.
Therefore, the feasibility of transit scenarios A1 and A2 (see the table), for example, for Turkmen and Kazakh gas, becomes a key issue in this respect. This is the first level of protection of Russia’s and Gazprom’s interests.
Obviously, the arguments (reliable information on the availability or absence of capacities) are in Gazprom’s hands.

If the situation falls under one of those scenarios (i.e. if a transit nation can and is willing to let shippers use its transit capacities), the provisions of Article 7(4) of the ECT shall be applied. It reads that if transit of Energy Materials and Products cannot take place on commercial terms using energy transport capacities, contracting parties “shall not place obstacles in the way of new capacity being established.”
This gives Russia and Gazprom another level of protection — the possibility of ensuring commercial terms for transit on a non-discriminatory base, provided that there are capacities and the will to realise scenarios A1 and A2.
The third level of protection is stipulated by Article 7(5). A contracting party which could act as a transit nation for Energy Materials and Products is not obligated to allow the construction or modification of its energy transport capacities or allow new or extra transit via its existing facilities if it can demonstrate to other interested contracting parties that this would “endanger the security or efficiency of its energy systems, including the security of supply.”

There is no doubt that Gazprom, having relevant information, can prove a threat to “security or efficiency of its energy systems” if required. True, to be able to convince other contracting parties that there is such a threat, it will have to provide relevant data to those parties, which may be at odds with its reluctance to disclose any information, especially to its rivals.
If, for some reason, Gazprom is unable, or reluctant, to prove that there is a danger, it would have to allow transit by new — not existing — capacities under the ECT.
But the fourth protection level then takes effect, related to the choice of a scenario from group B (see the table) for capital- and time-consuming procedures of organising, preparing, financing and building new pipelines.
In that case Russia, as a transit nation and the owner of unified trunk pipeline networks, would have enough effective levers to protect its interests during negotiations on relevant projects.

Gazprom’s statements about “inexpensive domestic” tariffs which would have to be applied if Turkmen or Kazakh gas is let into Russian pipelines, are also dubious.
The deputy chairman of Russia’s Federal Energy Commission, Mr Yankov, said at the hearings, when countering Gazprom’s arguments, that “the tariff we will apply for their gas when we let it into our pipe will be different from that now applied for Gazprom’s Transgaz transport subsidiaries.
“So far, Gazprom has used its own transfer tariffs for settlements between its subsidiaries, which have little in common with actual costs and have no relation to the investment component required for the Transgaz system’s development.”
In Mr Yankov’s opinion, any losses can be computed if one proceeds from those transfer tariffs.
By the way, the transit of ‘foreign’ oil across Russia is now more substantial than amount of foreign gas expected by Gazprom in the event of the ECT’s ratification.

Last year, transit supplies of oil amounted to 14.1m tonnes, which was 11 per cent of Russian exports proper. But oilmen have not raised the issue of tariffs or access to capacities. They can hardly be unaware of the situation.
Is this accidental? I think not.
The transit problem can also be looked at from the point of view of “reciprocity,” which is one of the key provisions of the contract law and an efficient means of resolving problems Gazprom has been facing when exporting.
Ninety-five per cent of Russian gas is supplied to consumers by going across third countries. To export natural gas to its final markets, Russian gas pipelines cross the borders of 14 nations.
For other main world exporters, transit issues and, therefore, relevant provisions of the ECT are substantially less important than for Russia.

The share of transit traffic in gas trade is 24 per cent for the Netherlands, 32 per cent for Norway, and 55 per cent for Algeria. Virtually all Dutch and Norwegian and 44 per cent of Algerian gas is transited across the territory of one or two countries.
The share of Russian gas crossing the borders of three or more nations is more than 90 per cent of supplies. Therefore, the availability of effective legal instruments for transit regulation is vitally important for Russia from the point of view of increasing economic efficiency and providing legal protection for Russian energy exports.
Russia’s main problems are known to be related to its main transit country — Ukraine.
At the start of last January, Ukraine’s then deputy prime minister in charge of the fuel and energy sector, Ms Yulia Timoshenko, admitted that “Ukraine’s debt to Gazprom is $2,223m and the Ukrainian side daily steals Russian gas worth $10m.” This is about $4bn a year.

Therefore, the ECT’s ratification and application could minimise, or totally stop, violations of the transit regime — related to non-payment, disputes over transit tariff rates and unsanctioned withdrawal of energy resources.
Russia cannot use this mechanism as it has not ratified the ECT.
But that does not exhaust the list of potential benefits.
Mr Komarov said during the hearings that, after the ECT’s ratification, European nations will allow Russian gas passage at their domestic tariffs.
“We do not need this. We have already been granted transit terms in Europe that are far better than those we can get due to the ECT.”
I cannot agree with Mr Komarov.

For transit supplies across third nations who are members of the GATT/WTO, Russia would benefit from the fact that the ECT mechanism offers Russia, which is not a GATT/WTO member yet, a transit regime more favourable than the GATT/WTO stipulates for member nations.
One should realise that each ECT signatory is protected against arbitrary increases in Russian transit supplies just as Russia is protected against uncontrolled increases in transit supplies of Turkmen or Kazakh gas.
But current transit (that is, virtually all current exports of Russian gas) falls under scenario A1 (see the table) and, therefore, after the ECT’s ratification, those most favourable transit terms that Gazprom enjoys in some European nations should also apply to all European supplies from the company.

European Union member nations now have a uniform regime and regulations for mutual supplies. Having ratified the ECT, while not being an EU member, Russia will be able to insist on being granted a domestic regime (for trade or transit) which EU members have established among themselves or an even more favourable regime, if it is applied in its relationships with an EU nation (they are all ECT signatories) and any ECT member nation.
Therefore, for Russia the ECT is a more favourable (at least for transit) international legal treaty than the GATT/WTO or the Russian-EU partnership and co-operation agreement.
Are there grounds to say then that we do not need this kind of transit treatment?
I could raise objections to other arguments voiced by the ECT’s opponents. They certainly should not be regarded as an intention to put an end to discussions. My intention is in elucidating the real state of affairs. This requires a dialogue...and this article is an invitation to join it.