Multilateral, Regional and Bilateral Energy Trade Governance

38

Multilateral, Regional and Bilateral Energy Trade Governance

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance Rafael Leal-Arcas,* Costantino Grasso** and Juan Alemany Ríos*** The current international energy trade governance system is fragmented and multi-layered. Streamlining it for greater legal cohesiveness and international political and economic cooperation would promote global energy security. The current article explores three levels of energy trade governance: multilateral, regional and bilateral. Most energy-rich countries are part of the multilateral trading system, which is institutionalized by the World Trade Organization (WTO). The article analyses the multilateral energy trade governance system by focusing on the WTO and energy transportation issues. Regionally, the article focuses on five major regional agreements and their energy-related aspects and examines the various causes that explain the proliferation of regional trade agreements, their compatibility with WTO law, and then provides several examples of regional energy trade governance throughout the world. When it comes to bilateral energy trade governance, this article only addresses the European Union’s (EU) bilateral energy trade relations. The article explores ways in which gaps could be filled and overlaps eliminated whilst remaining true to the high-level normative framework, concentrating on those measures that would enhance EU energy security.

I. Introduction The current international energy trade governance system is fragmented and multi-layered. Streamlining it for greater legal cohesiveness and international political and economic cooperation would promote global energy security.1 The current article explores three levels of energy trade governance: multilateral, regional and bilateral. Most energy-rich countries are part of the multilateral trading system, which is institutionalized by the World Trade Organization (WTO). Regionally, for the sake of brevity, we will focus on five major regional agreements and their energy-related aspects. When it comes to bilateral energy trade governance, and again for the sake of brevi-

ty, this article will only address the European Union’s (EU) bilateral energy trade relations. After this introduction, in Section II, we will analyse the multilateral energy trade governance system by focusing on the WTO and energy transportation issues. Further, we shall compare and assess the role of major organizations such as the WTO and the International Renewable Energy Agency (IRENA) towards the promotion of regulatory convergence in order to lower technical barriers to trade in energyrelated goods and services and the promotion of renewables. Section III examines the various causes that explain the proliferation of regional trade agreements, their compatibility with WTO law, and then provides

*

**

Reader in European and International Economic Law, Queen Mary University of London (Centre for Commercial Law Studies), United Kingdom. Ph.D. (European University Institute, Florence); JSM (Stanford Law School); LL.M. (Columbia Law School); M.Phil. (London School of Economics and Political Science); BA, LL.B. (Granada University). Member of the Madrid Bar. Author of the books INTERNATIONAL ENERGY GOVERNANCE: SELECTED LEGAL ISSUES (Edward Elgar Publishing, 2014); CLIMATE CHANGE AND INTERNATIONAL TRADE (Edward Elgar Publishing, 2013); INTERNATIONAL TRADE AND INVESTMENT LAW: MULTILATERAL, REGIONAL AND BILATERAL GOVERNANCE (Edward Elgar Publishing, 2010) and THEORY AND PRACTICE OF EC EXTERNAL TRADE LAW AND POLICY (Cameron May, 2008). Contact: [email protected].

Research Associate, Queen Mary University of London (Centre for Commercial Law Studies). Ph.D. (University of Naples); LL.M. (Queen Mary University of London); International Research Fellow (Depaul University, Chicago). Qualified to practise as a solicitor in England and Wales, and as a lawyer in Italy. Email: [email protected].

*** Research Associate, Queen Mary University of London (Centre for Commercial Law Studies). LL.M. (in European Law) (Queen Mary University of London); LL.B. (Université Catholique de Louvain). Contact: [email protected]. 1

For an analysis of the broader notion of international energy governance, see Leal-Arcas, R. et al., International Energy Governance: Selected Legal Issues, Edward Elgar, 2014.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

several examples of regional energy trade governance throughout the world. In Section IV, we will endeavour to explore ways in which gaps could be filled and overlaps eliminated whilst remaining true to the high-level normative framework, concentrating on those measures that would enhance EU energy security. This section will suggest methods of operation for the pertinent institutions and processes in the energy trade system to demonstrate the benefit of lowering technical barriers to trade in energy-related goods and services, including in relation to technological goods and services that could encourage the proliferation of renewables. In addition, we shall endeavour to analyse the EU´s bilateral trade agreements with its major energy partners as well as other significant energy-rich countries; and evaluate the relevance of a forthcoming major preferential trade agreement (PTA), i.e., the Transatlantic Trade and Investment Partnership (TTIP), and its consequences for the promotion of sustainable development and EU interests. Section V concludes the article.

II. Multilateral Energy Trade Governance 1. The World Trade Organization and energy trade This section illustrates the role of the WTO2—the multilateral trade organization with the highest

2

The WTO, the multilateral organization with the highest profile in international trade, was created to satisfy the need for a better institutional and dispute resolution mechanism within the General Agreement on Tariffs and Trade (GATT) system. The original proposal for a new "Multilateral Trade Organization" was included in the Draft Final Act of the Uruguay Round and transformed the GATT into the new international organization, which came into being on 1 January 1995, with a change in name to World Trade Organization. See Mitsuo Matsushita, Thomas J. Schoenbaum and Petros C. Mavroidis, The World Trade Organization: law, practice, and policy, 2nd ed. (Oxford University Press 2006) 6-7. Hereinafter Matsushita, The World Trade Organization.

3

At the moment, 160 Member States participate in the WTO. Yemen is the latest country to have joined, on 26 June 2014. See WTO, accessed 08 September 2014.

4

See Rafael Leal-Arcas and Andrew Filis, ‘The fragmented governance of the global energy economy: a legal-institutional analysis’ (2013) Journal of World Energy Law and Business, 20; see also Leal-Arcas, R. and Abu Gosh, E. “Energy Trade as a Special Sector in the WTO: Unique Features, Unprecedented Challenges and Unresolved Issues,” Indian Journal of International Economic Law, Vol. 6, pp. 1-53, 2014.

5

The GATS, adopted during the Uruguay Round, is the first multilateral agreement covering trade in services sectors. Its main aim is to reduce barriers to trade in services, which have a traditional-

39

membership in existence.3 The WTO, governing trade relations among its members, serves an important function in the field of multilateral energy trade.4 Over the last few years, both a general call for new WTO negotiations addressing the energy sector (mainly seeking to treat petroleum and gas in the same way as other traded goods), and a growing demand to subject energy services to freer trade under the General Agreement on Trade in Services (GATS)5 have taken place. A driving factor behind these demands is that oil prices have been inflated since 2006, hurting many economies and giving rise to a storm of protest, especially in the most industrialized countries,6 thus leading to urgent demands for new international policies on energy security.7 In particular, for the second time in history,8 from 2006 to 2008 oil prices almost tripled, soaring to a peak of almost $135 a barrel (see Figure 1 in Annex).  One of the main problems related to the applicability of WTO rules to the energy sector has arisen from the initial absence of any significant specific discussion of energy issues in the early rounds of the General Agreement on Tariffs and Trade (GATT)9 due to the non-participation of many of the most important energy exporters such as Indonesia, Nigeria, Kuwait, Venezuela, Qatar, the United Arab Emirates and, most notably, Saudi Arabia.10 Moreover, due to its strategic importance in the world economy, petroleum has not been traditionally treated within the WTO rules, but in an essentially political context.11

ly regulatory nature, by introducing general obligations and specific commitments. See Matsushita, The World Trade Organization, 604-606. 6

For instance, fishermen in France blockaded ports and poured oil on the roads, British lorry drivers paraded coffins through London as a symbol of the feared imminent demise of the haulage industry, and in the United States politicians harangued oil producers and called for tax cuts. See The Economist, “Energy - Double, double, oil and trouble,” 29 May 2008, accessed 22 September 2014.

7

For instance, during the June 2006 G8 Summit, the then EU Trade Commissioner Peter Mandelson called for a new round of WTO negotiations specifically focused on the energy sector. For a historical perspective see Susan L. Sakmar, ‘Bringing Energy Trade into the WTO: The Historical Context, Current Status, and Potential Implications for the Middle East Region’ (2008) Indiana International & Comparative Law Review, 89. Hereinafter Sakmar, ‘Bringing Energy Trade into the WTO.’

8

In the early 1970s, a fourfold rise in the price of oil almost brought the world to a standstill, creating a dangerous wage-price spiral. The 1970s showed how demand and supply, inelastic in the short run, eventually give rise to conservation and new production. See The Economist, “The Oil Price - Recoil,” 29 May 2008, accessed 22 September 2014.

9

The GATT originally represented a multilateral treaty containing general principles of trade developed in the context of the Inter-

40

Multilateral, Regional and Bilateral Energy Trade Governance

However, notwithstanding the fact that energy issues were not specifically addressed during the ITO and GATT negotiations, natural resources matters in general were brought up, discussed and agreed upon.12 A report drafted by the United Nations Conference on Trade and Development (UNCTAD) in 2000 on Trade Agreements, Petroleum and Energy Policies acknowledged that "tariffs in the energy sector typically reflect more the dictates of energy policy – securing adequate supply – than a trade policy in the classic sense,"13 and it concluded that the Uruguay Round had hardly any impact on Most-Favoured-Nation (MFN) tariffs for crude oil and a limited impact on petroleum products.14 Due to the very broad scope of the WTO rules, it appears that they are applicable to most energy-related commercial activities.15 Therefore, the relevant issue here is to determine how precisely they operate in relation to every specific activity. Energy trade has a distinctly hybrid nature. On the one hand, the industry does not traditionally distinguish between goods and services in relation to energy and, on the other, the energy sector includes aspects of both trade in goods and in services.16 Due to its hybrid nature, it is possible to conclude that, in the WTO context, energy trade can be covered by both GATT and GATS rules. Because the GATT and the GATS were not negotiated simultaneously and negotiators did not pay particular attention to the issue of overlap between the two legal instruments, several issues have arisen concerning their relationship.17 Notwithstanding that, WTO jurisprudence, analysing the possibility

national Trade Organization (ITO) and post-war international trading system negotiations. The GATT was conceived during a Geneva meeting in 1947 and, although the ITO project was abandoned due to the U.S. withdrawal, the GATT was successfully adopted. The GATT subsequently evolved into an international organization and the Interim Commission for the ITO became its Secretariat. The GATT can be defined as a code of general rules regulating the conduct of the participating governments primarily imposing restraints on the introduction of tariffs on international trade. See Matsushita, The World Trade Organization, 1-3. 10 See Sakmar, ‘Bringing Energy Trade into the WTO,’ 96. 11 Ibid 96. 12 Furthermore, during the ITO negotiations era, in parallel to the creation of the GATT, the Havana Charter addressed issues relevant to natural resources in several provisions. See Rafael LealArcas and Ehab S. Abu Gosh, ‘Energy Trade as a Special Sector in the WTO: Unique Features, Unprecedented Challenges and Unresolved Issues’ (2014) Indian Journal of International Economic Law, 33. Hereinafter Leal-Arcas, ‘Energy Trade as a Special Sector in the WTO.’

RELP

1|2015

of conflict in the application of the GATT and the GATS, has stated that a single commercial activity and even a single measure can be covered by the rules of both agreements. The following statement issued by the WTO Appellate Body in Canada – Certain Measures Relating to Periodicals appears highly illustrative of such an approach: "The entry into force of the GATS […] does not diminish the scope of application of the GATT 1994 […] The ordinary meaning of the texts of GATT 1994 and GATS as well as Article II:2 of the WTO Agreement, taken together, indicates that obligations under GATT 1994 and GATS can co-exist and that one does not override the other."18 Moreover, the same WTO Appellate Body had the opportunity to clarify in European Communities — Regime for the Importation, Sale, and Distribution of Bananas that: "The second issue is whether the GATS and the GATT 1994 are mutually exclusive agreements […] Given the respective scope of application of the two agreements, they may or may not overlap, depending on the nature of the measures at issue. Certain measures could be found to fall exclusively within the scope of the GATT 1994, when they affect trade in goods as goods. Certain measures could be found to fall exclusively within the scope of the GATS, when they affect the supply of services as services. There is a third category of measures that could be found to fall within the scope of both the GATT 1994 and the GATS."19

13 See U.N. Conference on Trade & Development, Trade Agreements, Petroleum and Energy Policies (2000), available at accessed 12 September 2014, 26. 14 Ibid 27. 15 Services in the energy sector, which are supplied in the exercise of governmental authority and are neither provided on a commercial basis nor are in competition with other providers, are excluded from the application of WTO rules. See Matsushita, The World Trade Organization, 607. 16 See Gabrielle Marceau, "The WTO in the Emerging Energy Governance Debate" in Joost Pauwelyn (ed.), Global Challenges at the Intersection of Trade, Energy and the Environment (Centre for Trade and Economic Integration 2010) 25. Hereinafter Marceau, "The WTO in the Emerging Energy Governance Debate." 17 See Matsushita, The World Trade Organization, 609. 18 See Canada — Certain Measures Concerning Periodicals (AB-1997-2), 30 June 1997, WT/DS31/AB/R19, 97-2653, 19. 19 See European Communities — Regime for the Importation, Sale, and Distribution of Bananas (AB-1997-3), 09 September 1997, WT/DS27/AB/R, 97-3593, 94, para 221.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

More recently, a similar issue arose from the case China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products. In that case, China assumed that because films for theatrical release cannot be regarded as goods, its measures pertaining to film releases did not violate GATT rules because they did not regulate the importation of goods but rather the content of films and the services associated with the importation of such contents20 The United States contested such a perspective arguing that: "The vast majority of goods are commercially exploited through a series of associated services and that China’s argument would transform virtually all goods into services."21 On that occasion, the WTO's Appellate Body clarified that sometimes the distinction between "content" and "goods" cannot be clearly drawn because the "intangible content" of a product can be embodied in its "physical carrier." Therefore, the Appellate Body rejected China’s arguments considering them "premised on an artificial dichotomy between film as a mere content (which China contends is not a good) and the physical carrier on which content may be embedded (which China views as a good)."22 Given the above, a specific role that the WTO plays in the energy trade field is to determine which aspects of trade in energy are covered by the rules of the GATT and which are covered by the rules of the GATS. As regards GATT rules, since they impose disciplines on all trade in goods, they are clearly applicable to all fossil fuel energy sources (e.g. petroleum, coal, natural gas), which cumulatively represent more than 80 per cent of global primary energy sources (see Figure 2 in Annex). Indeed, these prod-

20 See China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products (AB-2009-3), 21 December 2009, WT/DS363/AB/R, 09-6642, 75, para 169. 21 Ibid 78, para 173. 22 Ibid 87, para 195. 23 See Encyclopedia.com, "Electricity" Entry - The Columbia Encyclopedia 6th ed. (2014) accessed 19 September 2014. 24 See John H. Jackson, World Trade and the Law of GATT (BobbsMerrill Co. 1969) 119-126. Hereinafter Jackson, World Trade and the Law of GATT. 25 For instance, according to Sanders, "within the GATT community, at least in the post-1973 world, energy goods have been treated de facto as beyond the reach of normal GATT rules. In practice this has often meant treating such goods as falling within the GATT exceptions (such as those relating to conservation or national security) or concluding special trade arrangements to cover trade in energy." See J. Owen Saunders, ‘Energy, Natural Resources and

41

ucts, having a physical nature that makes it possible to store them in containers, have been traditionally subject to commercial transactions. On the contrary, the nature of electricity raises a more complex definitional challenge. In fact, electricity, which is the flow of electric charge that constitutes an electric current moving inside a wire,23 has a unique physical consistency that makes it intangible and very difficult to store. This distinctive characteristic has led to a certain degree of inconsistency in relation to the application of the GATT rules. For instance, historically, the GATT's negotiators considered electricity a service rather than a good.24 Moreover, in the period following the oil crisis of 1973, energy was de facto treated as falling outside the scope of GATT rules,25 whereas, since the end of the crisis, energy products are once more being treated as other common trade goods.26 This issue has sparked an intense debate among academics. While some scholars support the idea that the GATT rules are applicable to every type of energy product,27 others argue that, although it can be assumed that under the GATT energy is generally considered a good, hydroelectric power has to be deemed a service.28 Furthermore, for some academics GATT rules do not apply to electricity due to its intangible nature.29 Nevertheless, as has been argued by some scholars,30 on several occasions domestic and other legal systems have commonly considered electricity a good. For example, in the landmark decision Costa v. Enel, the European Court of Justice confirmed implicitly that electricity is a good.31 Moreover, Article 2 of the Council Directive of 25 July 1985 on the approx-

the Canada-United States Free Trade Agreement’ (1990) 8/1 Journal of Energy and Natural Resources, 7.Hereinafter Saunders, ‘Energy and the Canada-United States Free Trade Agreement.’ 26 See Martha M. Roggenkamp, ‘Transit of Networkbound Energy: A New Phenomenon? Transit Examined from the Barcelona Transit Convention to the Energy Charter Treaty’ (1995) 19/2 World Competition, 126. Hereinafter Roggenkamp, ‘Transit of Networkbound Energy.’ 27 See Lothar Ehring, "Energy Transit" in Yulia Selivanova (ed.), Regulation of Energy in International Trade Law (Wolters Kluwer 2011) 58.Hereinafter Ehring, "Energy Transit." 28 See Saunders, ‘Energy and the Canada-United States Free Trade Agreement.’ 29 See André Plourde, 'Canada’s International Obligations in Energy and the Free–Trade Agreement with the United States' (1990) 24/5 Journal of World Trade, 35–37. 30 See, for instance, Ehring, "Energy Transit," 58. 31 Case 6/64, Costa v. Enel, [1964] ECR 585.

42

Multilateral, Regional and Bilateral Energy Trade Governance

imation of the laws, regulations and administrative provisions of EU Member States concerning liability for defective products expressly provides that "For the purpose of this Directive, ‘product’ means all movables even if incorporated into another movable or into an immovable. ‘Product’ includes electricity."32 Arguably, contrary to other areas of law where, for the interests at stake, the strictest standards of due process should impose a stringent interpretation of the relevant legal provisions that comply with the so called literal rule, under civil and commercial law, this necessity does not arise. So, when ambiguities arise in construing the GATT rules, they could be resolved by drawing an analogy with the rules applied in similar cases. As a result, there should be no legal impediment to the application of the GATT rules to every kind of energy product. Therefore, there are several fundamental GATT rules that are potentially applicable to trade in fossil fuels. For instance, the MFN principle provided by GATT Article I,33 the National Treatment requirement set out by GATT Article III,34 and the rule governing the use of quotas, which is laid down in GATT Article XI.35 Concerning services,36 the rules set out by the GATS, due to the broad scope of their definitions, are

32 See Council Directive 85/374/EEC (OJ L 210, 7.8.1985, p. 29). 33 The MFN principle, whose origins may be traced back to medieval times, represents one of the oldest and most important legal obligations in the field of international trade law. Providing that a country must treat other countries at least as well as it treats the "most favoured" country, it works as a general non-discrimination requirement that prohibits discriminating among trading partners. Article I of the GATT sets out a broad definition of the principle that can potentially cover every government measure. See Simon Lester and others, World Trade Law: Text, Materials and Commentary (Hart Publishing Limited 2012) 309-311. Hereinafter Lester, World Trade Law. 34 The National Treatment requirement is another core element of the GATT. It also represents a general non-discrimination requirement but, contrary to the MFN principle, it prohibits discriminating against foreign products (for instance by means of an imposition of internal measures). See ibid 265-267. 35 Article XI of the GATT, which is entitled "General Elimination of Quantitative Restrictions", represents the primary provision regulating the use of quotas. It prohibits quantitative restrictions applied at the border. See ibid 244-245. 36 Services represent at the present time more than 70 per cent of global Gross Domestic Product (GDP). See World Bank, accessed 11 September 2014.

RELP

1|2015

applicable to all measures that affect services related to trade in energy.37 Contrary to GATT rules, which are applicable to all products, the GATS provisions are not applicable to all services. In fact, although GATS rules have been developed adopting a comprehensive approach, which makes them applicable in principle to any service in any sector, there are two exceptions to their applicability. Firstly, the GATS does not apply to services supplied in the exercise of governmental authority in accordance with GATS Article I:3(b).38 Secondly, the Agreement shall not apply to measures affecting traffic rights and related services, as provided by para. 2 of the Annex on Air Transport Services.39 Even if it seems that GATS rules reflect those for goods in several aspects, their application differs considerably due to the specific nature of trade in services.40 For instance, GATS Article II requires the MFN treatment to be respected by all trading partners.41 Although this rule resembles the one provided by GATT Article I, it does not oblige any participant to accept foreign services and service suppliers into its market, but rather enforces granting access to all WTO Members if such an access is granted to a single WTO Member.42 Moreover, Article I:3 expressly excludes services supplied in the exercise of govern-

petition with one or more service suppliers. Thus, in order to exclude a service from the application of GATS rules, all these conditions have to be cumulatively met. In particular, the term "governmental authority" appears to impose a certain degree of governmental connection (e.g. services that are supplied by entities which are vested with governmental powers). At the same time, services have to be supplied on a non-commercial basis–i.e., without the expectation or necessity of making profit–and in a non-competitive way–i.e., without creating rivalry in the market. See Rüdiger Wolfrum, Peter-Tobias Stoll and Clemens Feinäugle (eds.), WTO - Trade in Services (Martinus Nijhoff Publishers, 2008) 60-69. Hereinafter Wolfrum, WTO Trade in Services. 39 See ibid 44. 40 As opposed to goods, services do not have a physical nature that makes them easy to identify and classify. Various definitions and classifications of services have been conceived. In the GATS context the main one is represented by the UN Central Product Classification (CPC), which is quite exhaustive. Moreover, distinguishing between services and goods might be difficult on some occasions. For instance, some items have both a goods and a services component. See Lester, World Trade Law, 635-636.

37 See Marceau, "The WTO in the Emerging Energy Governance Debate," 28.

41 GATS Article II provides that: "With respect to any measure covered by this Agreement, each Member shall accord immediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than that it accords to like services and service suppliers of any other country."

38 The exception includes all services which are supplied in governmental authority and neither on a commercial basis nor in com-

42 See Marceau, "The WTO in the Emerging Energy Governance Debate," 29.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

mental authority from the application of GATS rules.43 At this point, it is worth briefly illustrating some specific aspects related to the applicability of the above-mentioned rules to the energy trade sector. In particular, concerning the MFN principle, it has been argued that it could be basically seen as a self-enforcing rule. This is mainly because terms of electricity contracts are easily knowable and the prices of crude oil and gas are quoted on the international market.44 As regards the National Treatment rule, various implications for trade in energy can be examined. Generally speaking, uneven national treatment that could be considered relevant in relation to this rule would essentially relate to governmental forms of support for the domestic energy industry.45 Moreover, more indirect advantages can be granted to national producers in the energy sector. They can take the form, for example, of research and development grants or the introduction of weaker liability rules for the environmental consequences of the energy business.46 However, it is important to point out that the issue of national discrimination might not arise in countries with a high rate of energy production, which are less likely to import energy products. Concerning more specifically the other WTO rules connected to the removal of tariffs to trade, there has traditionally been little complaint for exporting

43 Although the same Article also provides that "'a service supplied in the exercise of governmental authority' means any service which is supplied neither on a commercial basis, nor in competition with one or more service suppliers," and the WTO website gives the example of education or health services provided at non-market conditions, the full scope of this provision appears obscure. See Matsushita, The World Trade Organization, 638. 44 The concession of special terms to partners in energy trade is obviously always potentially grantable, for instance, in the form of deferred conditions of payment or the use of machines and equipment directly imported from the favoured country. See Francis N. Botchway, ‘International Trade Regime and Energy Trade’ (2001) Syracuse Journal of International Law and Commerce, 8. 45 For instance, a county might introduce tariffs on imported energy without imposing any similar tax on the domestic energy industry. See ibid 9. 46 Ibid 9. 47 Ibid 10. 48 Ibid 10. 49 Although crude oil and petroleum products have been traditionally transported by sea tankers, liquefied natural gas (LNG) only recently has been transported by ships. It is stored in doublehulled ships specifically designed to handle its low temperature (-150 degrees Celsius). These carriers, which are up to 1,000 feet long and require a minimum water depth of 40 feet when fully loaded, are insulated to limit the amount of LNG that evaporates. By the end of 1979, the world fleet comprised 52 LNG carriers. As of December 2013, the amount of LNG ships operating world-

43

countries if, due to the considerable inelasticity of energy demand, governments usually impose tariffs on it to generate revenue.47 In relation to technical barriers to trade, it has been argued that they are rarely grounded on discriminatory or trade-restrictive motivations.48

2. Energy transportation issues A thorny question concerning the applicability of WTO rules to energy trade relates to energy transportation. Unlike common goods, fossil fuel energy sources can be transported not only by using ordinary means of transport (e.g. ships, lorries, and trains)49 but also by using pipelines. At the same time, electricity, which cannot be extracted from nature but needs to be manufactured, can be transmitted from the production site to the end consumer only via an extensive network of aerial and/or underground power lines.50 Networks (e.g. pipelines, cables, and power lines), in contrast to ordinary means of transport that require drivers, are the result of more recent technical developments51 and can be operated without direct human intervention.52 Moreover, whilst for the vast majority of manufactured goods, capacity-related issues can be addressed without particular difficulties, the volumes of energy to

wide has increased to 387. See Lloyd's Register, Growth of the LNG Carrier Fleet 1980 – 2014 accessed 20 October 2014. 50 The construction of these kinds of physical interconnections for electricity transport across different countries is very expensive and takes several years. In Europe, the creation of a so called "European Super Grid" has been planned. However, although under the EU Electricity Liberalization Directive, the project aiming at establishing a single European electricity market has been moving in a positive direction, there is still a long way to go. The main issues appear to be related to the connection and integration of national electricity markets, the physical interconnections between EU Member States, and the promotion and facilitation of cross-border market-balancing. See Renewable Energy World Com, Moving Towards the European Super Grid, (2014), available at accessed 19 September 2014. 51 For instance, in the 19th century, pipelines were originally made of wood in the United States and of glass in Europe, but only when, in the early 1900s, the ability to weld steel pipelines was developed, did the transportation of gas over long distances become possible. Likewise, only the technique of converting high voltages to lower voltages made long-distance electricity supply feasible. See Donald N. Zillmanet al., "Energy Networks and the Law: Innovative Solutions in Changing Markets" in Martha M. Roggenkamp et al. (eds.), Energy Networks and the Law (Oxford University Press, 2012) 9. 52 Ibid 1.

44

Multilateral, Regional and Bilateral Energy Trade Governance

be conveyed have to be planned on a long-term basis and they can be extremely difficult to store.53 In addition, requiring fixed installations and the permanent occupation of land, transporting energy might be subject to various domestic laws aiming to prevent or limit the construction of such infrastructures.54 Finally, another substantial difference lies in the fact that, in case of changes in market conditions, vehicles can move to the location where the demand of a certain type of good has risen, whereas networks, being fixed infrastructures, cannot.55 The first attempt to multilaterally regulate energy transit occurred with the Convention Relative to the Transmission in Transit of Electric Power, whose Article 2 expressly provides that: "Electric Power shall be considered as transmitted in transit across the territory of a Contracting State when it crosses the said territory by means of conductors erected for this purpose alone without being wholly or in part produced, utilized or transformed within such territory."56 As has been argued by some commentators, the Convention offers only a limited definition of transit. Indeed, under this provision, electricity cannot be considered in transit where it is necessary to transform it on the territory of a transit State.57 The above-mentioned distinctive features of energy transportation are relevant to the applicability of both the GATT and GATS rules. As regards the GATT, a key issue relates to the scope of application of the GATT transit obligation on goods.58 Cross-border trade in energy can be significantly affected by the physical transit of energy products through the territory of different countries. Moreover, protracted energy transit disputes—such as those that took place between Russia and Ukraine in 200659 and 200960—are a clear demonstration of the importance that transit issues have in relation to energy trade.61 The main GATT rule related to transit of goods is set out by Article V, which is titled "Freedom of Transit" and provides that: "Goods (including baggage), and also vessels and other means of transport, shall be deemed to be in transit across the territory of a contracting party when the passage across such territory, with or without trans-shipment, warehousing, breaking bulk, or change in the mode of transport, is only a portion of a complete journey beginning and terminating beyond the frontier of the contracting

RELP

1|2015

party across whose territory the traffic passes […] There shall be freedom of transit through the territory of each contracting party, via the routes most convenient for international transit, for traffic in transit to or from the territory of other contracting parties […] All charges and regulations imposed by contracting parties on traffic in transit to or from the territories of other contracting parties shall be reasonable, having regard to the conditions of the traffic." As has been argued by some commentators, this Article is consistent with the provisions of the Barcelona Transit Convention of 1921, which established some basic principles related to the transit of goods via navigable waterways and railways.62 As a result, under such a rule, if WTO Members require that traffic in transit through their territory be subject to customs checks, they may unnecessarily delay or restrict this traffic.63 Fundamentally, there are two kinds of charges which may be imposed: those for transporta-

53 See Ehring, "Energy Transit," 50. 54 See Martha M. Roggenkamp, ‘Implications of GATT and EEC on Networkbound Energy Trade in Europe’ (1994) 12 Journal of Energy & Natural Resources Law, 59. Hereinafter Roggenkamp, ‘Implications of GATT and EEC on Networkbound Energy Trade.’ 55 Ibid 51. 56 The Convention, which was signed in Geneva on 9 December 1923, aimed to facilitate the transmission in transit of electric power. Only a limited number of nations have ratified the Convention (18 countries, including the British Empire, Spain, France, and Italy). See ‘Convention Relative to the Transmission in Transit of Electric Power, and Protocol of Signature’ (1928) 22/2 The American Journal of International Law, 85. 57 See for instance Roggenkamp, ‘Transit of Networkbound Energy,’ 124. 58 See Marceau, "The WTO in the Emerging Energy Governance Debate," 34. 59 In January 2006, Russia cut off supplies to Ukraine for failing to accept a sharp rise in prices. Energy firms in several countries which import Russian gas via Ukraine reported a sharp drop in the supplies they were receiving despite Russia’s promises that they would not be affected by its action. See The Economist, “Russia turns off the gas taps,” 2 January 2006, accessed 22 September 2014. 60 The crisis of 2009 began as an ordinary gas dispute between Russia and Ukraine, but it grew into the biggest energy emergency the European Union had seen in years. The disagreement was related to the fact that for years Ukraine had been paying below market prices for gas (about $179.50 for 1,000 cubic metres, instead of market prices that were more than twice as high). In truth, both crises (2006 and 2009) were not purely commercial disputes, having also a political nature. See The Economist, “Russia, Ukraine and gas - Pipe down,” 8 January 2009, accessed 22 September 2014. 61 See Ehring, "Energy Transit," 49. 62 See Roggenkamp, ‘Transit of Networkbound Energy,’ 125-126. 63 See Ehring, "Energy Transit," 55.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

tion and those commensurate with administrative expenses or with the cost of services rendered.64 Therefore, GATT Article V, fostering the liberalization of trade and the removal of trade barriers, requires not hindering or imposing unreasonable charges on goods in transit. The most crucial issues concerning the application of GATT Article V have recently arisen in relation to some natural resource-exporting countries. For instance, Russia and other WTO Members have argued that this rule is not applicable to energy networks because, as opposed to ordinary vehicles, they lack locomotion. On the other hand, other WTO Members have highlighted the speciousness of such a perspective, arguing that train tracks are also stationary but, nevertheless, are widely considered an integral part of train transportation. The question is particularly relevant considering the European Union's current dependence on Russian gas that is conveyed by means of pipeline routes that encircle the European Union from the north and the south (see Figure 3 in Annex). The definition of "traffic in transit," provided in GATT Article V.1, expressly covers both the goods and the ordinary means of transport utilized to trans-

64 See Roggenkamp, ‘Implications of GATT and EEC on Networkbound Energy Trade,’ 68. 65 Ibid 57. 66 Hoekman, B. and Mavroidis, P. The Political Economy of the World Trading System, p. 47 (Oxford University Press 2011). 67 Jackson, J., Davey, W. and Sykes, O. Legal problems of international economic relations: cases, materials and text on the national and international regulation of transnational economic relations, p. 217-221 (West Group 5th ed. 2008). 68 Ibid., p. 215. 69 World Trade Organization, “Understanding the WTO: Who we are” accessed 21 October 2014. 70 UNCTAD, “Trade Agreements, Petroleum and Energy Policies”, UNCTAD/ITCD/TSB/9, at 14 (2000). 71 Cottier, T., et al. “Energy in WTO law and policy” in Cottier, T. and Delimatsis, P. (eds.) The Prospects of International Trade Regulation: From Fragmentation to Coherence, p. 211 (Cambridge University Press 2011). 72 Russia, Saudi Arabia and Oman are WTO members, whilst Algeria, Libya, Iran and Iraq are currently observers. 73 BP Statistical Review of World Energy, 2013 (at p. 40), available at http://www.bp.com/content/dam/bp/pdf/statistical-review/statistical_review_of_world_energy_2013.pdf. 74 See generally Leal-Arcas, R. Climate Change and International Trade (Edward Elgar Publishing 2013); Cottier, T. et al. International Trade Regulation and the Mitigation of Climate Change: World Trade Forum (Cambridge University Press 2009). 75 Marhold, A. “The World Trade Organization and Energy: Fuel for Debate” ESIL Insights, Vol. 2, Issue 8, 2013.

45

port them. Notwithstanding the fact that the notion of "traffic in transit" does not include networks because of their fixed nature, it does include the goods that are transported via such networks because such goods physically cross WTO Members’ territory.65

3. Promotion of regulatory convergence In order to promote regulatory convergence to lower technical barriers to trade in energy-related goods and services and to foster the use of renewables multilaterally, this section will analyse the WTO and IRENA. a. The World Trade Organization In the wake of World War II, 23 countries negotiated a multilateral agreement for tariff reductions.66 These negotiations culminated in the establishment of the GATT in 1947. The GATT was set up to boost worldwide economic growth as well as to liberalize global trade.67 In order to do so, it disallowed its members from placing tariffs, quotas, internal taxes, regulations or any other measure likely to curb or hinder international trade.68 The WTO was established in 1994 by the Marrakesh Agreement and came into existence in 1995. The WTO currently has 160 members, enjoys an international organization and treaty structure, and includes almost 30 legal agreements and supplementary decisions (all of which are binding to its members as a single package, except the plurilateral agreements).69 Energy resources have always represented a vigorous geopolitical and strategic tool in global governance.70 Yet, liberalizing global trade in energy was not contemplated as a political priority when the GATT was first negotiated in the 1940s.71 This approach has been reconsidered over the past few years due to a number of circumstances such as the accession of many energy-rich countries to the WTO,72 increasing energy needs73 and the growing attention given to trade in energy under multilateral trade regulation (taking into account the intertwined relationships of energy, environment and trade)74 among others. Consequentially, the role of the WTO in the regulation of global trade in energy goods and services has progressively come into question.75 To this end, 14 WTO members (Australia, Canada, China, Chinese Taipei, Costa Rica, the EU, Hong Kong, Japan,

46

Multilateral, Regional and Bilateral Energy Trade Governance

RELP

1|2015

New Zealand, Norway, Singapore, Korea, Switzerland and the US) commenced negotiations on a plurilateral Environmental Goods Agreement (EGA). This agreement aims to encourage green growth and sustainable development by liberalizing trade in environmental goods,76 such as the promotion of renewable and clean energy technology.77 The EGA will apply the most-favoured nation (MFN) principle78 once a critical mass of WTO members follows suit. Therefore, all WTO members (including those that refrained from participating in the negotiations and from engaging in the obligations) will eventually benefit from the reduced tariff rates.79 It is expected that this critical mass will be attained once the members participating in the EGA negotiations account for 90% of global trade in environmental goods. This should occur sooner than later, given that the WTO members presently involved in the negotiations already account for 86% of this particular sector of trade.80 With regard to these plurilateral negotiations, WTO Director-General Roberto Azevêdo stated: “Those involved made it clear that these negotiations on environmental goods are open to all WTO members and that all members would benefit from the tariff reductions that arise from any agreement. Above and beyond the economic benefits that enhanced trade in environmental goods will deliver, we remain conscious of the positive role that trade can

play in environmental protection. The topic of environmental protection is of utmost importance in the WTO and the liberalization of environmental goods is also a significant element of negotiations under the Doha Development Agenda.”81 The term “green goods” is understood as encompassing “products, services and technologies that contribute to green growth, environmental protection, climate action and sustainable development”82 by pushing for the generation of renewable energy, the promotion of energy efficiency or the management of waste, among others.83 These 14 WTO members will liberalize trade for green goods by building on the Asia-Pacific Economic Cooperation’s (APEC) 84 list of environmental goods.85 The first stage of the negotiations will seek to remove tariffs, customs or any other such measures with similar effects on a wide range of green goods, whilst the second stage could tackle the legal and regulatory hurdles (also known as non-tariff barriers) that could hinder trade in environmental goods and services.86 Although the manner in which these participating WTO members will build upon the APEC list appears nebulous, in April 2014 there were some clearer indications on the type of goods that could potentially be included on such a list.87 The US Trade Representative issued a list of goods deemed suitable for inclusion in the EGA, which included ethylene, wood pellets, palm oil and, most notably, LNG.88

76 “Joint statement regarding the launch of the Environmental Goods Agreement negotiations,” available at http://eeas.europa.eu/delegations/wto/documents/press_corner/final_joint_statement_green_goods_8_july_2014.pdf.

83 Ibid.

77 On the link between renewables and the trading system, see LealArcas, R. and Filis, A. “Legal Aspects of the Promotion of Renewable Energy within the EU and in Relation to the EU’s Obligations in the WTO,” Renewable Energy Law and Policy Review, Vol. 5(1), pp. 3-25, 2014; Leal-Arcas, R. and Filis, A. “Certain legal aspects of the multilateral trade system and the promotion of renewable energy,” Queen Mary School of Law Legal Studies Research Paper No. 166/2014, pp. 1-37. 78 Article I of the GATT. 79 Carreno, I. et al., Trade Perspectives, Fratinivergano, Issue No. 14, 11 July 2014, p. 1, available at http://www.fratinivergano.eu/Trade%20perspectives%202014/14.07.11%20TP%20Issue%2014.pdf. 80 Ibid. 81 World Trade Organization, “Azevêdo welcomes launch of plurilateral environmental goods negotiations” accessed 1 October 2014. 82 European Commission, “The “Green Goods Initiative”: Liberalising trade in environmental goods and services” accessed 1 October 2014.

84 “Asia-Pacific Economic Cooperation, or APEC, is the premier forum for facilitating economic growth, cooperation, trade and investment in the Asia-Pacific region. APEC is an intergovernmental grouping that operates on the basis of non-binding commitments, open dialogue and equal respect for the views of all participants. Unlike the WTO or other multilateral trade bodies, APEC has no treaty obligations required of its participants. Decisions made within APEC are reached by consensus and commitments are undertaken on a voluntary basis.” See Asia-Pacific Economic Cooperation, “What is Asia-Pacific Economic Cooperation?” accessed 1 October 2014. 85 “Joint statement regarding the launch of the Environmental Goods Agreement negotiations,” available at http://eeas.europa.eu/delegations/wto/documents/press_corner/final_joint_statement_green_goods_8_july_2014.pdf. 86 World Trade Organization, “Azevêdo welcomes launch of plurilateral environmental goods negotiations” accessed 1 October 2014. 87 Carreno, I. et al., Trade Perspectives, Fratinivergano, Issue No. 14, 11 July 2014, p. 1, available at http://www.fratinivergano.eu/Trade%20perspectives%202014/14.07.11%20TP%20Issue%2014.pdf. 88 Ibid.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

This is significant. Although (at the time of writing) none of these enterprises has yet reached a successful outcome, were the US to finally develop into a major LNG exporter, and the EGA negotiations result in the removal of quantitative restrictions on trade of LNG, the two combined would be major advancements towards achieving EU energy security. Such a development would be perfectly in line with actual EU energy policies, which pursue simultaneously effective energy security and sustainable development. By ensuring a steady supply of LNG from the US, unburdened by tariffs or other quantitative restrictions which would raise the price of energy imports, the EU would have a clear and reliable alternative to Russian gas. As such, the “EGA provides a landmark opportunity to meet environmental objectives by liberalizing trade and agreeing on a set of global standards for environmental products.”89 Even if the US does not ultimately lift its current crude oil export restrictions, should the EGA negotiations reach a favourable conclusion, the EU would benefit from that alone. In spite of its precarious situation from an energy security point of view, the EU

89 Ibid. 90 European Commission, “The ‘Green Goods Initiative’: Liberalising trade in environmental goods and services” 3 July 2014, available at accessed 1 October 2014. 91 Ibid. 92 Ibid. 93 European Parliament, “Fact Sheets on the European Union: Renewable Energy” accessed 4 September 2014. 94 European Commission, “The ‘Green Goods Initiative’: Liberalising trade in environmental goods and services” accessed 1 October 2014. 95 Ibid. 96 IRENA, “Introduction to the International Renewable Energy Agency,” available at http://www.irena.org/DocumentDownloads/Publications/IRENA_Brochure2013.pdf. 97 Ibid. 98 Ibid. 99 International Renewable Energy Agency, “IRENA membership” accessed 3 October 2014. 100 These figures are calculated based on data as they appear in International Energy Agency, 2014 Key World Energy Statistics, OECD/IEA, 2014 (at p. 6). During 2012, the global primary energy supply was 13,371 million tons of oil equivalent (Mtoe). During 1973, it stood at 6,106 Mtoe. 101 Leal Arcas, R. “Trade proposals for climate action” Queen Mary University of London School of Law Legal Studies Research Paper No. 173/2014, p. 11, 2014.

47

enjoys technologically world-class companies which provide advanced environmental goods and services.90 Moreover, there has been unprecedented employment growth in the European green sector.91 This was so even during the recession years between 2007 and 2011, as employment rose by 20% in that particular sector within that period.92 The EU is a world leader in environmental goods, both in exports and imports.93 Even though environmental goods currently amount to a negligible share of the EU’s total trade, the sector is very dynamic.94 EU exports from the 54 products currently included in the APEC list amounted to €71 billion, whilst imports amounted to €31 billion.95 These figures are set to increase, provided that these 14 WTO members manage to bring the EGA to fruition. b. The International Renewable Energy Agency IRENA is an intergovernmental organization which purports to support countries in their transition to a sustainable energy future.96 The organization serves as the main platform for international cooperation as well as being a centre of policy, technology, resource and financial knowledge on renewable energy.97 IRENA’s main goal is to foster the widespread adoption and sustainable use of renewable energy (such as bioenergy, geothermal, hydropower, ocean, solar or wind energy) in the quest towards sustainable development, energy access, energy security and low-carbon economic growth and prosperity.98 Currently, IRENA has 135 members and more than 30 states have started the formal process of accession.99 The main global energy challenge for IRENA is to promote the global use of renewable energy. According to the latest available data issued by the IEA, fossil fuels accounted for 81.7% of the world’s total energy mix, whilst renewable energy sources accounted for a meagre 13.5% of the global energy mix in 2012.100 Along with climate change mitigation, promoting sustainable development is a vital global energy challenge. In that sense, “the only way forward is to increase access to energy for all - but energy that is clean, efficient, and renewable. Continuing in the current vein is not an option.”101 The future of renewable energy will largely depend on a wide variety of factors, including elevated prices of fossil fuels, price reduction of many renewable technologies, and the enhancement of these technolo-

48

Multilateral, Regional and Bilateral Energy Trade Governance

gies in order to make them more efficient.102 IRENA is carving out a role for itself as the major advocate of this longed-for transition towards a cleaner energy mix. It is doing so, inter alia, by facilitating a wealth of information, which enables investors to determine where different types of renewable energy projects are most feasible103 as well as by drafting initiatives and contributing financially to these projects.104 In spite of the large consensus on the need to urgently tackle climate change by shifting from highly polluting fossil fuels to renewable energy, the heavy economic strain of such a conversion prevents global leaders from taking decisive steps in that direction. The need to make renewable energy economically profitable has been recognized by IRENA DirectorGeneral Adnan Amin: “The way we are positioning the whole renewable energy case is not only about climate change. That’s not going to sell renewable energy. What’s going to sell renewable energy is if there’s a business case for it. If there is a case for investment, if investors are going to make money on renewables, if countries are going to benefit economically and if it’s going to generate employment.”105 Thus, regrettably enough, it would appear that the recognition of climate change as the greatest environmental threat to humankind is not a sufficient incentive on its own to spur renewable energy usage worldwide. Moving forward, the promotion of renewables will therefore have to be reconciled with economic objectives. In June 2014, IRENA developed a global renewable energy roadmap which pursues the ambitious objective of doubling the share of renewables in the global energy mix by 2030.106 Even though the roadmap concedes that only a few countries have explicit policies to promote renewables in the manufacturing sector, the overall tone of the document remains optimistic as it suggests that existing and future renewable energy expansion projects will increase the share of renewables by 21% by 2030.107 Moreover, linking economic as well as social benefits with the promotion of renewables, IRENA estimated that, in 2013, up to 6.5 million jobs stemmed from the renewable energy sector with a promising trend expected for the following years and with solar and wind energy leading the way as the most dynamic renewable energy technologies.108 The main employers were China, Brazil, the US, India, Germany, Spain and Bangladesh.109 The focus of IRENA’s current projects is mainly on developing countries, especially emerging mar-

RELP

1|2015

kets in Asia and Africa, as these appear to be the most fertile environments to promote the use of renewables.110 This is because these countries are at a relatively early stage in terms of infrastructure and, in some cases, have an urgent need to tackle pollution.111 Thus, rapidly developing countries, such as Nigeria, are confronted with the dilemma of adopting a myopic mindset by further investing in fossil fuels, with the detrimental consequences this entails for the environment, versus taking effective steps towards the transition to a more sustainable energy mix. In early 2014, IRENA and the Abu Dhabi Fund for Development announced that they would provide USD 41 million to finance renewable energy projects scattered all over the world.112 This funding will sponsor undertakings in Ecuador, the Maldives, Mali, Mauritania, Samoa and Sierra Leone.113 The financed enterprises are expected to bring energy access to more than 300,000 people as well as numerous businesses by providing 35 megawatts of energy capacity.114 In addition, committed to sustainable energy

102 Fitch, A. “IRENA: Making A Business Case for Renewable Energy” The Wall Street Journal, (2 April 2014) accessed 3 October 2014. 103 Ibid. 104 Shahan, Z. “IRENA & ADFD Announce $41 Million For 6 Renewable Energy Projects In Developing Countries” Clean Technica, (19 January 2014) accessed 6 October 2014. 105 See the views of Adnan Amin in Fitch, A. “IRENA: Making A Business Case for Renewable Energy” The Wall Street Journal, (2 April 2014) accessed 3 October 2014. 106 IRENA, “Renewable Energy in Manufacturing: A technology roadmap for Remap 2030,” p. 3, 2014, available at http://irena.org/remap/REmap%202030%20Renewable-Energy-in-Manufacturing.pdf. 107 Ibid. 108 IRENA, “Renewable Energy and Jobs: Annual Review 2014,” p. 2, available at http://www.irena.org/publications/rejobs-annual-review-2014.pdf. 109 Ibid. 110 Fitch, A. “IRENA: Making A Business Case for Renewable Energy” The Wall Street Journal, (2 April 2014) accessed 3 October 2014. 111 Ibid. 112 Shahan, Z. “IRENA & ADFD Announce $41 Million For 6 Renewable Energy Projects In Developing Countries” Clean Technica, (19 January 2014) accessed 6 October 2014. 113 Ibid. 114 Ibid.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

worldwide, and working closely with IRENA, the United Arab Emirates offered USD 350 million in concessional loans to finance renewable energy projects in developing countries.115 Over the past few years, subsidies directed at promoting renewable energy have notably increased.116 According to the IEA, increasing renewable subsidies to USD 250 billion117 could result in a range of positive outcomes; for instance, wind energy could become competitive by 2020 in the EU and by 2030 in China,118 and up to 3.4 gigatons of energy-related CO2 could be contained.119 Arguably, any measure which promotes renewables would be beneficial for EU energy security. It is encouraging to observe that the EU captures 60% of the global market share in wind energy.120 If the EU manages to keep investing in renewables to maintain its privileged position in this particular energy sector, this could empower it to invest in technologies such as up-to-date energy grids and enable the export of cutting-edge technologies by means of trade and bilateral cooperation agreements.121 In other words, the global increase in renewable energy in the total world energy mix is to be welcomed as this is a very dynamic and promising sector in which the EU already enjoys an advantaged position. Were the global markets for renewable energy to experience such a surge, and the EU to effectively ac-

115 Ibid. 116 See for instance Leal-Arcas, R. and Filis, A. “Certain Legal Aspects of the Multilateral Trade System and the Promotion of Renewable Energy” Queen Mary University of London School of Law Legal Studies Research Paper No. 166/2014, p. 9, 2014. 117 International Energy Agency, World Energy Outlook 2011 Factsheet (at. p. 6), available at http://www.worldenergyoutlook.org/media/weowebsite/factsheets/factsheets.pdf. 118 Ibid. 119 Ibid. 120 European Commission, “Communication from the Commission to the European Council and the European Parliament: An energy policy for Europe,” SEC (2007) 12, COM(2007) 1 final, p. 4, available at http://ec.europa.eu/energy/energy_policy/doc/01_energy_policy_for_europe_en.pdf. 121 Leal-Arcas, R. and Schmitz, J. “Unconventional Energy Sources and EU Energy Security: A Legal, Economic and Political Analysis” Oil, Gas & Energy Law Journal, Vol. 12, pp. 1-37, pp. 3-4, 2014. 122 More concretely, the EU’s commitment to increase the share of renewables in the EU’s final energy consumption to 27% by 2030. See Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, “A policy framework for climate and energy in the period from 2020 to 2030,” COM (2014) 15 final, p. 5. For an analysis, see Buchan, D. and

49

complish its ambitious goals in this field,122 it is safe to say that the EU’s influence in the international energy arena would grow. As mentioned earlier, the EU enjoys technologically world-class companies that could greatly benefit from exporting vanguard renewable technologies, which are increasingly in vogue in countries that are major greenhouse gas emitters such as China.123

III. Regional Energy Trade Governance 1. The proliferation of regional trade agreements This section illustrates the role that regional trade agreements (RTAs) play in the energy sector. Although RTAs have historically been concluded for various reasons (e.g. the European Union (EU) was conceived in order to bring peace among its members through deeper integration and trade liberalization), countries typically enter into them for economic interests and advantages.124 RTAs currently represent a major, and perhaps irreversible, characteristic of the multilateral trading system.125 Since the mid-1990s, there has been a virtual explosion in the number of economic integration agreements (EIAs)126 concluded. According to

Keay, M. “The EU’s new energy and climate goals for 2030: under-ambitious and over-bearing?” The Oxford Institute for Energy Studies, 2014, available at http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/01/The-EUs-new-energyand-climate-goals-for-2030.pdf. 123 Worldwatch Report 182, Renewable Energy and Energy Efficiency in China: Current Status and Prospects for 2020, Wold Watch Institute, 2010 (at. p.5), available at http://www.worldwatch.org/system/files/182%20China%20Energy.pdf. 124 See Thomas Cottier and Marina Foltea, "Constitutional Functions of the WTO and Regional Trade Agreements," in Lorand Bartels and Federico Ortino (eds.), Regional Trade Agreements and the WTO Legal System (Oxford University Press 2006) 44. Hereinafter Cottier, "Constitutional Functions of the WTO and Regional Trade Agreements." 125 See Jo-Ann Crawford and Roberto V. Fiorentino, ‘The Changing Landscape of Regional Trade Agreements’ (2005) World Trade Organization 1 available online at accessed 06 October 2014. Hereinafter Crawford, ‘Regional Trade Agreements.’ 126 Economic integration agreement (EIA) is a general term referring to treaties established between countries in order to reduce policy controlled barriers to the flow of goods, services, capital, labor, and so on. See Scott L. Baier and others, ‘Do Economic Integration Agreements Actually Work? Issues in Understanding the Causes and Consequences of the Growth of Regionalism’ (2008) The World Economy 461. Hereinafter Baier, ‘Do Economic Integration Agreements Actually Work?’

50

Multilateral, Regional and Bilateral Energy Trade Governance

RELP

1|2015

the World Trade Organization web site, as of 15 June 2014, some 585 notifications of RTAs (counting goods, services and accessions separately) – 379 of which are in force – had been received (see Figure 4 in Annex).127 Such a large number of EIAs has resulted in an extraordinarily complex structure of relationships within the international community. Estevadeordal has vividly depicted this situation using the so called "spaghetti bowl," in which each line represents an EIA between countries (see Figure 5 in Annex). The reasons behind the proliferation of RTAs from the 1990s to the present day are numerous.128 The success of RTAs originally derives from a combination of geopolitical developments, most of which date back to the late 1980s and early 1990s. These include: the difficulties encountered in the Uruguay Round, which incentivized various countries to pursue preferential deals as an alternative in case of failure of multilateral trade negotiations; the ongoing enlargement of the European RTA network, which expanded to include new acceding countries from Central and Eastern Europe, the Balkans and the Mediterranean; the influence exercised by United States in its strong preference towards preferential agreements; the "additive regionalism" policy adopted by countries such as Chile, Mexico and Singapore, aiming to establish preferential relations with all their major trading partners; the fragmentation of the former Soviet Union and the dismantlement of the Council for Mutual Economic Assistance (COMECON).129 Another significant factor that has to be taken into account is that, over the past 50 years, the number

of countries participating in the WTO has grown to 160 members as of 2014, with more to come in the future. This large number of parties might potentially hinder the multilateral negotiations to liberalize multilateral trade. In the face of such an impasse, governments have considered the creation of freetrade blocs as a possible alternative to improve economic welfare and firms' profits.130 The difficulties with multilateralism can be seen in the recent collapse of the deal conceived during Bali’s 2013 WTO Ministerial Conference in the context of the Doha Round131 due to the withdrawal of India at the end of July 2014, just before ratification. The WTO is increasingly regarded as a divided forum which is often in gridlock (whereas much trade liberalization has been recently achieved through regional trade bodies and free-trade areas).132 It is not surprising then that countries are showing a clear preference for RTAs.133 Few RTAs include specific provisions regulating the energy sector. Among them are the North American Free Trade Agreement (NAFTA), the European Union, the Association of Southeast Asian Nations (ASEAN), the forum for Asia-Pacific Economic Cooperation (APEC), the Mercado Común del Sur or Southern Common Market (MERCOSUR), the Energy Charter Treaty (ECT), and the Free Trade Area of the Americas (FTAA).134 An analysis of the most relevant ones is provided in this section. Regulating energy trade at the transnational level has traditionally faced serious difficulties,135 stemming from the asymmetric distribution of reserves, production, and consumption of natural resources among countries and the fact that numerous nations

127 See WTO, accessed 06 October 2014.

134 See Roberto Rios Herrain and Pietro Poretti, "Energy Trade and Investment under the North American Free Trade Agreement" in Yulia Selivanova (ed.), Regulation of Energy in International Trade Law (Wolters Kluwer 2011) 338. Hereinafter Rios Herrain, "Energy Trade and Investment under the North American Free Trade Agreement."

128 For an analysis, see Leal-Arcas, R. “Proliferation of Regional Trade Agreements: Complementing or Supplanting Multilateralism?” Chicago Journal of International Law, Vol. 11, No. 2, pp. 597-629, 2011. 129 See Crawford, ‘Regional Trade Agreements,’ 7. 130 See Baier, ‘Do Economic Integration Agreements Actually Work?’ 465. 131 The Doha Round is the latest round of trade negotiations among the WTO membership. Its works, which aim to further bring down trade barriers in about 20 areas of commerce, has been protracted since 2001. See WTO, accessed 06 October 2014. 132 See The Economist, World Trade – Bailing out from Bali, 9 August 2014, accessed 6 October 2014. 133 See Crawford, ‘Regional Trade Agreements,’ 1.

135 See generally Leal-Arcas, R. and Filis, A. “The Fragmented Governance of the Global Energy Economy: A Legal-Institutional Analysis,” Journal of World Energy Law and Business, Vol. 6, Issue 4, pp. 1-58, 2013; Leal-Arcas, R. and Abu Gosh, E. “The Conservation of Exhaustible Natural Resources in the GATT and WTO: Implications for the Conservation of Oil Resources,” The Journal of World Investment and Trade Vol. 14, No. 3, pp. 480-531, 2013; Leal-Arcas, R. and Filis, A. “Conceptualizing EU Energy Security through an EU Constitutional Law Perspective,” Fordham International Law Journal, Vol. 36, No. 5, pp. 1225-1301, 2013; Leal-Arcas, R. and Abu Gosh, E. “Energy Trade as a Special Sector in the WTO: Unique Features, Unprecedented Challenges and Unresolved Issues,” Indian Journal of International Economic Law, Vol. 6, pp. 1-53, 2014.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

strategically prioritize fossil fuel energy because those resources are limited.

2. The compatibility between WTO and regional trade agreements In order to analyse the compatibility between the WTO rules and RTAs, it is necessary to point out that all trade agreements, whether bilateral, regional or multilateral, are international treaties in nature. With all international agreements having the same value under international law,136 the WTO rules do not have per se any legal supremacy over EIAs.137 As a consequence, the validity and existence of EIAs are not compromised by possible inconsistencies with the WTO agreements. The WTO rules on both goods and services allow for regional preferences. As a result, it is commonly accepted that RTAs can lead to some discriminatory restrictions on trade, so long as they are inherent and necessary to the formation of the RTA.138 This is consistent with the main objective of the WTO rules, which consists of providing a set of regulations under which countries can negotiate more liberal trade policies.139 In fact, such rules welcome RTAs as a means of contributing to the expansion of world trade. The words of GATT Article XXIV:4 appear highly emblematic of such an open approach:

136 In international law, it is not possible to establish any hierarchy between treaties. This is due to the absence of constitutional structures defining the relationship between different sources of law. As a result, all treaties are basically of a similar standing (except for the Charter of the United Nations, whose Article 103 provides a supremacy clause). See Cottier, "Constitutional Functions of the WTO and Regional Trade Agreements," 51. 137 See Wolfrum, WTO - Trade in Services, 128. 138 See Marceau, "The WTO in the Emerging Energy Governance Debate," 30. 139 See Kyle Bagwell and Robert W. Staiger, ‘Multilateral Tariff Cooperation during the Formation of Free Trade Areas’ (1997) 38/2 International Economic Review, 291. Hereinafter Bagwell, ‘Multilateral Tariff Cooperation.’ 140 As it has been affirmed by the WTO Appellate Body, "paragraph 4 contains purposive, and not operative, language. It does not set forth a separate obligation itself but, rather, sets forth the overriding and pervasive purpose for Article XXIV which is manifested in operative language in the specific obligations that are found elsewhere in Article XXIV." See Turkey – Restrictions on Imports of Textile and Clothing Products (AB-1999-5), 22 October 1999, WT/DS34/AB/R, 99-4546, 15, para 57. Hereinafter Turkey – Textile. 141 For a definition of a customs union, see GATT Article XXIV:8.a. A customs union, such as the one implemented within the Euro-

51

"The contracting parties recognize the desirability of increasing the freedom of trade by the development, through voluntary agreements, of closer integration between parties to such agreements. […] The purpose […] should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories."140 As regards trade in goods, GATT Article XXIV provides the legal framework for the observance of the Agreement at a regional level, as well as the rules concerning the admissibility of custom unions (CUs),141 free trade areas (FTAs)142 and interim agreements.143 Whilst the provisions regarding CUs were already present in the original version of the GATT, the rules related to FTAs were introduced in 1948 during the Havana Charter upon a proposal by Lebanon and Syria.144 At the same time, the GATT does not cover more complex forms of integration agreements, such as common markets and economic unions, which were difficult to foresee when it was drafted in the 1940s.145 Specifically, Article XXIV:4-8 sets out the formal and substantive requirements under which WTO Members have the conditional right to enter into CUs, FTAs and interim agreements. For instance, paragraph 5(a), which sets out the condition that CUs must meet in order to be compatible with GATT rules, requires that the regulations of commerce imposed

pean Union (EU), establishes a free trade regime between member countries and a common external tariff imposed by those countries on all imports. See Bagwell, ‘Multilateral Tariff Cooperation,’ 291. 142 For a definition of a free trade area, see GATT Article XXIV:8.b. A free trade agreement, such as the North American Free Trade Agreement (NAFTA), is characterised by the fact that trade is free within the bloc, but the member countries independently select import tariffs on goods from non-member countries. See Bagwell, ‘Multilateral Tariff Cooperation,’ 291. 143 Interim agreements, such as the one that provided for the accession of Portugal and Spain to the European Communities in 1985, are treaties that have not been implemented yet as full regional agreements, but are planned to become so after a certain implementation period is passed. See Lorand Bartels, ‘"Interim agreements" under Article XXIV GATT’ (2009) 8/2 World Trade Review, 339. Hereinafter Bartels, ‘Interim agreements.’ 144 In particular, the Lebanese and Syrian representatives submitted an amendment to exempt from MFN rules regional groups that eliminated restrictions on mutual trade without establishing a common customs system. See Kerry Chase, “Multilateralism compromised: the mysterious origins of GATT Article XXIV” World Trade Review, Vol. 5, No. 1, p. 14, 2006. 145 See Rüdiger Wolfrum, Peter-Tobias Stoll and Holger P. Hestermeyer (eds.), WTO - Trade in Goods (Martinus Nijhoff Publishers, 2010) 624. Hereinafter Wolfrum, WTO - Trade in Goods.

52

Multilateral, Regional and Bilateral Energy Trade Governance

by a CU "shall not on the whole be higher or more restrictive than" the rules applicable in the constituent territories prior to the formation of the union.146 Similarly, paragraph 5(b) provides that FTAs may not impose rules that are higher or more restrictive than the regulations existing in the same constituent territories prior to the formation of the FTA. Finally, paragraph 5(c) establishes that interim agreements shall include a plan and schedule for the formation of the corresponding CU or FTA within a reasonable length of time.147 As regards trade in services, GATS Article V, which is titled "Economic Integration," sets out a number of substantial requirements for the conclusion of EIAs in trade in services. Unlike GATT Article XXIV, this provision does not distinguish between customs unions and free trade areas, but utilizes the general notion of an "agreement liberalizing trade in services." GATS Article V provides some mandatory requirements that any other regional agreement has to comply with in order to be consistent with the WTO rules. In particular, it requires EIAs to have a "substantial sectoral coverage." Such a requirement appears to be a response to the need to avoid excessive proliferation of sector-specific agreements that can hinder the goals of multilateral trade.148 Moreover, GATS Article V requires that EIAs provide for "the absence or elimination of substantially all discrimination." This means that EIAs must bring about level playing fields between domestic and foreign services on the markets of the parties to the agreement in relation to the sectors covered.149

146 The WTO Appellate Body has established that the compatibility between a specific customs union and Article XXIV has to be assessed through an "economic" test. See Turkey – Textile, 15, para 55. 147 According to Paragraph 3 of the Understanding on the Interpretation of Article XXIV of the General Agreement on Tariffs and Trade 1994, the "reasonable length of time" referred to in paragraph 5(c) of GATT Article XXIV should exceed 10 years only in exceptional cases. Practice indicates that it is relatively common for the implementation period to stretch to 12 years, and in some cases further. See Bartels, ‘Interim agreements,’ 346. 148 This requirement has to be met both under a quantitative and qualitative approach. See Wolfrum, WTO - Trade in Services, 132. 149 Ibid 135. 150 See Rios Herrain, "Energy Trade and Investment under the North American Free Trade Agreement," 335. 151 The consensus on the agreement was reached on 12 August 1992. President Carlos Salinas of Mexico executed the Agreement in Mexico on 17 December 1992. The Agreement was then ratified by the Canadian Senate on 23 June 1993, and eventually the U.S. House of Representatives and Senate approved the pact in mid-November 1993. See Michael E. Arruda, ‘Effect of the

RELP

1|2015

3. NAFTA and energy trade The way in which the NAFTA deals with the energy sector is distinctive among EIAs. In fact, as opposed to other regional agreements, NAFTA includes several provisions specifically related to energy trade.150 The NAFTA came into effect on 1 January 1994 among three contracting parties: Canada, Mexico and United States.151 NAFTA represents a trading bloc that now links 450 million people, producing $17 trillion worth of goods and services.152 Contrary to the Treaty of Rome establishing the European Economic Community, NAFTA does not establish a customs union, but only a free trade zone that is based on a series of rules and principles (i.e., most favoured nation treatment, national treatment, and transparency of government regulations and practices).153 The main purposes of the pact are to dismantle trade barriers by eliminating tariffs on goods produced within the borders of the free trade zone, to foster fair competition, and to increase investment opportunities.154 NAFTA embraces not only trade in goods but also in services, as well as other substantive issues related to investments, labour, and the environment. It also provides a dispute resolution system155 and a comprehensive intellectual property regime.156 After two decades of implementation, it is evident that NAFTA represents a successful agreement. The overall merchandise trade among the United States, Canada, and Mexico reached $944.6 billion in 2010, an increase of 218% since 1993157 (see Figure 6 in Annex

North American Free Trade Agreement on Trade Between the United States and Mexico in the Energy and Petrochemical Industries’ (1994) 1/2 Tulsa Journal of Comparative & International Law,192. Hereinafter Arruda, ‘Effect of the North American Free Trade Agreement.’ 152 See Office of the United States Trade Representative, North American Free Trade Agreement (NAFTA) accessed 07 October 2014. 153 See Joseph J. Norton and Thomas L. Bloodworth (eds), NAFTA and Beyond (Martinus Nijhoff Publishers 1995) 5. Hereinafter Norton, NAFTA and Beyond. 154 See NAFTA, 32 I.L.M. 289 (1993), Article 102. 155 For a comparison between the dispute settlement systems of NAFTA and the WTO, see Leal-Arcas, R. “Choice of Jurisdiction in International Trade Disputes: Going Regional or Global?” Minnesota Journal of International Law, Vol. 16.1, Winter 2007, pp. 1-59. 156 See NAFTA, 32 I.L.M. 289 (1993), Articles 1701-1721. 157 See International Trade Administration – Export.gov, The North American Free Trade Agreement (NAFTA), accessed 10 October 2014.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

53

for a surface transportation trade figure between the United States and its NAFTA partners). When the three nations of the North American continent decided to enter into this free trade agreement, a significant part of the negotiations concerned the energy sector. This happened mainly because, over the course of the 1990s, the United States represented one of the world's leading consumers of energy,158 while Mexico was deemed to have one of the largest oil reserves in the world (see Figure 7 in Annex).159 Currently, the situation has changed considerably, with Mexican crude oil reserves having drastically diminished to some 10,000 million barrels.160 As a result, Chapter Six of NAFTA, titled "Energy and Basic Petrochemicals," is entirely dedicated to energy and energy products. The Chapter establishes three central principles in relation to energy trade: 1) full respect for members’ domestic constitutions; 2) the necessity to strengthen the important role that trade in energy and basic petrochemical goods plays in the free trade area; and 3) the commitment to pursue a sustained and gradual liberalization of trade in the energy sector.161 Notwithstanding the overall success of the agreement, two decades after its establishment, energy is still a sector that has not been developed to its full potential. There are two reasons for this. Firstly, the fact that NAFTA does not deal comprehensively with the issue of infrastructure, leaving key issues uncov-

ered (e.g. transit fees and third party access to infrastructures).162 Secondly, as will be examined further, the Mexican energy sector has remained for a long time largely closed to foreign participation.163 In fact, the wording of NAFTA’s Energy Chapter betrays the considerable concern that the contracting parties felt when they regulated market access to these extremely relevant commodities.164 From the outset, the protection of Mexican petroleum resources represented a thorny issue during the NAFTA negotiations. Historically, the importance of petroleum to the Mexican people has extended far beyond its relevance as a natural resource and, whilst originally oil was seen as "a badge of foreign domination and interference,"165 it later became a national "symbol of pride, self-respect, and independence."166 In fact, since President Lazaro Cardenas of Mexico made the decision to expropriate the assets of the foreign oil corporations operating in Mexico,167 Mexican politicians have traditionally been reluctant to allow any sort of foreign interference or control in the energy sector.168 Although during the 1990s the administration of President Salinas pursued a path to innovate the economy aimed at eventually transforming Mexico into an industrialized country, the Cardenas approach was maintained over the course of the NAFTA negotiations.169 As a result, Mexico defended the inviolability of its constitutional monopoly170 over hydrocarbon re-

158 In 1990 the United States consumed approximately 17 million barrels of oil a day, but produced only 9.68 million barrels. See Ernest E. Smith and David P. Cluchey, ‘GATT, NAFTA and the Trade in Energy: A US Perspective’ (1994) 12/1 Journal of Energy and Natural Resources Law, 27. Hereinafter Smith, ‘GATT, NAFTA and the Trade in Energy.’

164 See Norton, NAFTA and Beyond, 78.

159 See Richard D. English, ‘Energy in the NAFTA: Free Trade Confronts Mexico's Constitution’ (1993) 1/1 Tulsa Journal of Comparative & International Law, 1. Hereinafter English, ‘Energy in the NAFTA.’ 160 According to the Organization of the Petroleum Exporting Countries (OPEC), as of 2013, the proven crude oil reserves of Mexico have decreased to 10,070 million barrels, whereas the United States’ reserves have risen to 33,000 million barrels and the Canadian ones seem stable at 4,893 million barrels. See Organization of the Petroleum Exporting Countries (OPEC), World crude oil reserves, accessed 08 October 2014. 161 See NAFTA, 32 I.L.M. 289 (1993), Article 601. 162 The lack of infrastructure necessary for successfully engaging in energy trade appears to severely hamper a full integration of the NAFTA energy market. The situation is aggravated by the fact that NAFTA’s legal framework does not address the issue. See Rios Herrain, "Energy Trade and Investment under the North American Free Trade Agreement," 368. 163 Ibid 336.

165 See English, ‘Energy in the NAFTA,’ 3. 166 Ibid 3. 167 After the expropriation, Mexican authorities established a national state-owned oil company, Petróleos Mexicanos (PEMEX), and forbade foreign participation in their oil industry in the years afterwards. This policy generated a major conflict with foreign multinational corporations such as Royal Dutch/Shell, Standard Oil of New Jersey, Sinclair, Cities Service, and Gulf Oil. See Marcelo Bucheli, ‘Economic Nationalism, Political Constituencies, and Multinational Corporations: The Impact of the Mexican Oil Nationalization in Colombia’ (2006) University of Illinois Working Papers, available at accessed 07 October 2014. 168 See Norton, NAFTA and Beyond, 78. 169 See J Owen Saunders, ‘GATT, NAFTA and North American Energy Trade: A Canadian Perspective’ (1994) 12/1 Journal of Energy and Natural Resources Law, 4. Hereinafter Saunders, ‘GATT, NAFTA and North American Energy Trade.’ 170 Article 27 of the Mexican Constitution provides, inter alia, that "In the Nation is vested the direct ownership of all natural resources […]; solid mineral fuels; petroleum and all solid, liquid, and gaseous hydrocarbons […]." See Organization of American States, The Constitution of the United Mexican States, accessed 07 October 2014.

54

Multilateral, Regional and Bilateral Energy Trade Governance

sources. This outcome was achieved by means of NAFTA Annex 602.3, whose Article 1, entitled "Reservations," expressly provides, among other things, that: "The Mexican State reserves to itself the following strategic activities […] exploration and exploitation of crude oil and natural gas; refining or processing of crude oil and natural gas; and production of artificial gas, basic petrochemicals and their feedstocks and pipelines […]." Therefore, since NAFTA preserves Mexico’s monopoly on its oil and gas resources and perpetuates the prohibition of foreign ownership of oil and natural gas reserves, it appears to be very limited in its application to the exploration and production sector. Accordingly, in relation to Mexico, NAFTA is intended to have the most significant impact on the petroleum service sector and the petrochemical industry.171 Despite its restrictive approach, NAFTA allows energy producers to carry out direct negotiations with consumers of natural gas, without having to go through the Mexican state-owned oil company as an intermediary. Concerning the petrochemical sector, NAFTA provides that 50 per cent more basic petrochemicals in Mexico are available to investors from the United States and Canada.172 Moreover, Mexico committed to not impose export taxes on energy products on the other contracting parties that it does not impose domestically.173 This experience is illustrative of the inherent difficulties of establishing trade agreements in the energy sector among countries because of the asymmetric distribution of fossil fuel energy reserves. However, this situation is eventually likely to change. In De-

171 See Arruda, ‘Effect of the North American Free Trade Agreement,’ 203. 172 See NAFTA, 32 I.L.M. 289 (1993), Annex III: Activities Reserved to the State, Activities Reserved to the Mexican State. 173 See NAFTA Article 604. 174 In order to adopt such a revolutionary reform, the Mexican government has agreed to implement several legal instruments (e.g. creating four oil and gas exploration and production contract models that include production-sharing, profit-sharing, and licences; keeping PEMEX as a state-owned company, but allowing it to compete fairly with other firms for bids on new projects; establishing the Mexican Petroleum Fund to manage contract payments and oil revenues). See US Energy Information Administration, International Energy Outlook 2014, 16, accessed 10 October 2014. 175 Ibid 9.

RELP

1|2015

cember 2013, Mexico’s government approved constitutional amendments to revise the 1938 nationalization of the energy sector, effectively terminating almost a century of state monopoly.174 The decision was driven by the fact that Mexico’s oil production has dropped to its lowest level since 1995 and that the state-owned company Petróleos Mexicanos (PEMEX) does not possess either the resources or the technology to exploit the ample oil reserves still present in the country. As a result, there are reasonable prospects for a significant improvement in oil production in Mexico in a not-too-distant future.175 Another implication of this constitutional change is that it will allow foreign investment in Mexico’s oil industry. As regards Canada and the United States, they basically readopted the same provisions as those set forth in the Canada-United States Free Trade Agreement (CUSFTA).176 In fact, NAFTA Annex 608.2 expressly provides that "Canada and the United States shall act in accordance with the terms of Annexes 902.5 and 905.2 of the Canada United States Free Trade Agreement, which are hereby incorporated into and made a part of this Agreement for such purpose." These provisions include mutual assurances of energy supply that exceed GATT standards.177 In fact, whilst there are some relevant differences between NAFTA and the CUSFTA, the former is commonly considered an extension of the CUSFTA to Mexico.178 The NAFTA and the CUSFTA differ in three fundamental traits: firstly, as previously discussed, the inclusion of Mexico raised specific issues related to that country; secondly, NAFTA provided an opportunity to deal with several issues that had arisen between Canada and the United States since the implementation of the CUSFTA; thirdly, the experience

176 The Canada-United States Free Trade Agreement (CUSFTA), which is for the large part still in force and effect, was established in 1988 and was inspired by the concurrent wishes of Canada to secure and increase access to existing U.S. consumer markets, whose accessibility was endangered by the protectionist measures adopted by the U.S. government in the early 1980s, and those of the United States to restrict what it considered unfair Canadian trade policies. Most CUSFTA rules resemble GATT principles and, thus, seek only to assure that the rules of the GATT are tailored to the needs of the two North American countries' trade relationship. See Gerald K. McKim, ‘United States-Canadian Free Trade: Economic Repercussions of the CFTA and NAFTA on the United States, Canada and the Great Lakes Region’ (1994) 25 University of Toledo Law Review, 486. The text of the agreement is available at , accessed 24 October 2014. 177 See Norton, NAFTA and Beyond, 78. 178 Saunders, ‘GATT, NAFTA and North American Energy Trade,’ 10.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

gained with the GATT and the CUSFTA allowed for regulating areas that were not previously subject to any international regulation.179

4. European Union energy policy Due to the complexity of the EU’s legal framework related to the energy sector, a comprehensive analysis of the legal instruments developed at the European level to regulate energy production and trade is beyond the scope of the present article. This section will offer a brief outline of EU energy policy, highlighting its primary objectives and the most recent developments. Energy has always been a strategic issue for European countries. From a historical perspective, there are two main reasons behind the progressive deterioration in Europe’s ability to meet its primary energy needs: the exponential growth of oil consumption180 and a secular decline in Europe’s ability to mine coal at competitive prices.181 Currently, the European Union produces less than 50% of the energy that it consumes (see Figure 8 in Annex for an illustration of the different sources of European primary energy production).182 In 2012, the production of primary energy in the European Union totalled 794.3 million tons of oil equivalent (toe),183 whereas gross inland consumption of energy reached 1,683 million tons of oil equivalent (toe).184 As a result, the European energy dependency rate reached 53.4%.185

179 Ibid 10. 180 The combination of Western Europe’s growing demand for petroleum and a structural deficiency in European crude oil production due to the absence of adequate deposits has been at the root of its energy problems since the middle of the 20th century. See James Frederic Dewhurst et al., Europe’s Needs and Resources – Trends and Prospects in Eighteen Countries (Macmillan & Co. Ltd., 1962) 562. Hereinafter Dewhurst, Europe’s Needs and Resources. 181 Coal production dominated the energy supply in Western Europe during the first half of the 20th century. This happened until coal production costs rose to an unsustainable level. Ibid, 571-577. 182 See Patricia Park, International Law for Energy and the Environment (CRC Press 2013) 157. Hereinafter Park, International Law for Energy. 183 See European Commission - Eurostat, Energy production and imports, accessed 12 October 2014. 184 See European Commission - Eurostat, Consumption of energy, accessed 12 October 2014.

55

The excessive dependence on energy supply from foreign countries and the current worsening of the relationship between the European Union and Russia are making the issue of energy security a major priority for Europe. As a matter of fact, Russia provides one-third of the gas that other European countries rely on to heat their homes, generate electricity, and feed industry (see Figure 9 in Annex for an illustration of the main sources of natural gas imports in the European Union).186 Such a situation has sparked off an intense debate over the issue of EU energy security. As has been argued, in order to reduce its energy supply vulnerability, the EU should take several steps: – it should reduce its reliance on imported energy by taking energy-saving measures (i.e., energy efficiency) and developing the production of renewable energy within its borders;187 – it needs to diversify its sources of imported gas (e.g. more could come from Norway and, in the near future, from North Africa and the US); and – it should develop an integrated, flexible and liberalized European energy market in order to allow energy to be traded and transported across the continent at a reasonable price.188 It is therefore not surprising that from the outset, the European Union has developed a very complex and multi-layered legal framework in relation to the energy sector. In fact, since the end of World War II, the great need for energy supply has strengthened a European coordinated action in the energy sector.189

185 For a detailed analysis of EU energy consumption, see Rafael Leal-Arcas and Andrew Filis, ‘Conceptualizing EU Energy Security Through an EU Constitutional Law Perspective’ (2013) 36 Fordham International Law Journal 1224. Hereinafter Leal-Arcas, ‘Conceptualizing EU Energy Security.’ 186 See The Economist, Energy in Europe - The gasman cutteth, 20 September 2014, accessed 12 October 2014. 187 See for instance Leal-Arcas, R. and Filis, A. “Legal Aspects of the Promotion of Renewable Energy within the EU and in Relation to the EU’s Obligations in the WTO,” Renewable Energy Law and Policy Review, 1/2014, pp. 3-25. 188 See The Economist, Charlemagne - Adrift over energy, 22 March 2014, accessed 12 October 2014. 189 See Bram Delvaux and Alice Guimaraes-Purokoski, "Vertical Divisions of Competences between the European Community and its Member States in the Energy Field – Some Remarks on the Evolution of Community Energy Law and Policy" in Bram Delvaux, Michael Hunt, and Kim Talus (eds.), EU Energy Law and Policy Issues (Euroconfidentiel 2008) 17. Hereinafter Delvaux, "Evolution of Community Energy Law and Policy."

56

Multilateral, Regional and Bilateral Energy Trade Governance

Such a need has led European countries to strongly prefer a multilateral approach to a national one. As a result, in the 1950s, the six European Economic Community founding states190 decided to bring under common control the production of two strategic materials: steel and coal.191 Therefore, the European Coal and Steel Community (ECSC) was established under the Treaty of Paris.192 Four major institutions were created to control the Community: A Council of Ministers, representing Member States; a High Authority, having executive powers, subsequently called Commission; an Assembly, to be composed either of delegates appointed by national parliaments or elected by direct universal suffrage; and a Court of Justice, which later became common to the three European Communities of the time (namely the ECSC, EURATOM and the European Economic Community).193 On 25 March 1957, the Treaty of Paris was followed by the Treaty of Rome, which established the European Economic Community (EEC) and the Treaty Establishing the European Atomic Energy Community (EURATOM).194 As confirmed by the European Court of Justice (ECJ) in Gerlach & Co. BV, notwithstanding the adoption of the EEC Treaty, the ECSC Treaty remained in force in relation to the common

190 Belgium, France, West Germany, Italy, Luxemburg, and the Netherlands. 191 The European Coal and Steel Community (ECSC) can be considered the first step towards the creation of a united Europe. It followed the Schuman Declaration of 9 May 1950, which had two main aims: to terminate the Franco-German rivalry and to make the first move towards a Europe built through a de facto solidarity. As argued by Robert Schuman, the organization was conceived in order to create a free market in coal and steel products, allowing a fall in prices and, as a consequence, improved standards of living. See Doreen Collins, The European Communities – The Social Policy of the First Phase – Volume 1, The European Coal and Steel Community 1951-1970) (Martin Robertson & Co. Ltd. 1975) 4. Hereinafter Collins, The European Communities – Volume 1. 192 The ECSC was only one of a number of major developments occurring in this historical period (e.g. the establishment of the Organization for European Economic Cooperation (OEEC), the North Atlantic Treaty Organization (NATO), and the Council of Europe). See David Weigall and Peter Stirk, The Origins and Development of the European Community (Leicester University Press 1992) 57. 193 Ibid 4-9. 194 The treaties for both communities came into force on 1 January 1958. 195 In the judgment of the case, which concerned the importation into the Netherlands of four consignments of galvanized steel sheet originating in the German Democratic Republic, the Court stated that "[…] The rules of the ECSC Treaty and all the provisions adopted to implement that Treaty remain in force as regards

RELP

1|2015

market in coal and steel.195 Due to its specific nature, the ECSC Treaty granted more independent powers to the Commission and provided for a self-financing capacity obtained through levies imposed on coal and steel production.196 The ECSC Treaty expired in 2002 and it was not renewed.197 The necessity of developing a post-World War II European energy policy also led to the establishment of EURATOM in 1957. When the EURATOM Treaty was negotiated, the idea of obtaining energy self-sufficiency through a substantial increase of European nuclear energy production seemed worthwhile.198 In fact, great expectations for the development of nuclear power arose throughout Europe in the mid-1950s.199 As a result, EURATOM was conceived to create a common market for nuclear ores and fuels in Europe and foster the peaceful use of nuclear energy.200 Its functions are, among others, developing research and ensuring the broadest dissemination of knowledge and techniques related to nuclear power, establishing and enforcing uniform safety norms for the protection of the population at large and the labour force, as well as providing for a regular and equitable supply of ores and fissionable materials for all users within its territorial limits.201 In order to achieve these objectives, EURATOM has

the functioning of the common market in coal and steel, despite the adoption of the EEC Treaty." See Gerlach & Co. BV, Internationale Expeditie, Case C-239/84 (1986) E.C.R., 3517, para 9. 196 See Park, International Law for Energy, 158. 197 As a consequence, the ECSC assets were transferred into special research funds, and the European coal and steel policy was integrated into mainstream EU industrial policy. During the 50 years of its existence, the ECSC operated not only as a regulator but also as a stimulator of innovation, providing large funds for projects aimed at research and development in coal and steel production. Notwithstanding these efforts, several industrial zones in Europe are still in decline. As a matter of fact, the expiration of the ECSC Treaty in 2002 did not imply that the problems in the European coal and steel sector were solved. See Nico Groenendijk and Gert-Jan Hospers, ‘A Requiem for the European Coal and Steel Community (1952-2002)’ (2002) 150/5 De Economist 601. 198 See Park, International Law for Energy, 159. 199 For instance, the United Kingdom began a large-scale nuclear power program and the OEEC Energy Advisory Commission estimated a sharp rise in nuclear energy production. However, this initial enthusiasm for a rapid expansion of nuclear capacity was soon moderated. See Dewhurst, Europe’s Needs and Resources, 594. 200 EURATOM Treaty Article 1 expressly provides that the Treaty aims to create the "conditions necessary for the speedy establishment and growth of nuclear industries." 201 See Hugo J. Hahn, ‘EURATOM: The Conception of an International Personality’ (1958) 71/6 Harvard Law Review 1005.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

been provided with exclusive jurisdiction over nuclear supply in both internal and external European relations.202 Contrary to the EURATOM Treaty, the Treaty of Rome, which was designed to create an internal market establishing the EEC, did not include any specific provision on energy policy. However, such a lacuna did not prevent the European Community from enacting various measures – mainly Directives203 – in the energy field.204 Notwithstanding that, for several years no effective or comprehensive energy policy was developed at the European level,205 partly because the regulation of the energy sector in Europe has traditionally fallen within the competence and jurisdiction of individual EU Member States.206 The situation eventually evolved when the Treaty on European Union (TEU)207 inserted specific provisions in the EC Treaty in the areas of transport, telecommunications and energy infrastructure,208 and specifically when an explicit provision concerning energy was finally enshrined in Article 194 of the Treaty on the Functioning of the European Union (TFEU).209 This provision sets out four main objectives for EU energy policy, in the spirit of solidarity between EU Member States:

202 As provided by Articles 52-76 and Article 86 of the EURATOM Treaty, all special fissile materials automatically become the property of EURATOM. See also Park, International Law for Energy, 160. 203 As a matter of fact, the European Community adopted several Directives with particular relevance to the energy sector, such as the Environmental Impact Assessment (EIA) Directive (85/337/EEC), the Directive on the assessment of the effects of certain plans and programmes on the environment (2001/42/EC), the Directive on Integrated Pollution Prevention and Control (2008/1/EC), the Directive on the conservation of natural habitats and of wild fauna and flora (92/43/EEC), and the Directive on the promotion of the use of energy from renewable sources (2009/28/EC). For a detailed analysis of these and other Directives relevant in the energy sector see Park, International Law for Energy, 166-184. 204 The European Community had adopted several measures within the sphere of energy on the basis of a range of EC Treaty provisions such as Articles 93, 95, 100, 156, 175 and 308. See Henrik Bjørnebye, Investing in EU Energy Security: Exploring the Regulatory Approach to Tomorrow's Electricity Production (Kluwer Law International 2010) 131. 205 See Delvaux, "Evolution of Community Energy Law and Policy," 18-21. 206 See Pekka Voutilainen, ‘Developing Energy Policy for Europe: A Finnish Perspective on Energy Cooperation in the European Union’ (2008) 29 Energy Law Journal 122. Hereinafter Voutilainen, ‘Developing Energy Policy for Europe.’ 207 The Treaty on European Union was signed in Maastricht on 7 February 1992. According to the Treaty, the contracting Parties established among them a Union based on three pillars: the first pillar consisted of the three Community treaties (i.e., ECSC,

57

– ensuring the functioning of the energy market; – ensuring security of energy supply in the Union; – promoting energy efficiency and energy saving and the development of new and renewable forms of energy; and – promoting the interconnection of energy networks. As a result, in recent years the role of the European Union in establishing an energy policy has significantly increased, despite the fact that the concrete implementation of European legal acts remains for the most part in the domestic competence of individual EU Member States.210 Currently, EU energy policy is essentially a bundle of policies that target or engage various aspects of energy, both internal and external.211 Overall, EU energy policy has been consistently geared towards achieving the following objectives: making energy in the European Union affordable and competitively priced, environmentally sustainable, and secure for everybody.212 Such objectives have been pursued through the development of an Internal Energy Market,213 whose aim is to include all EU Member States in European gas and electricity networks as of 2015.214

EURATOM, and EEC); the second pillar was built upon a common foreign and security policy; the third pillar consisted of a combination of home affairs and judicial cooperation. See Dieter Kugelmann, ‘The Maastricht Treaty and the Design of a European Federal State’ (1994) 8 Temple International and Comparative Law Journal 339. 208 See Article 154 to 156 of the EC Treaty (ex Article 129b). 209 This was the main innovation introduced by the Lisbon Treaty in relation to the energy sector. Notably, under Article 194, EU energy policy is unequivocally linked to the EU’s environmental objectives. See Leal-Arcas, ‘Conceptualizing EU Energy Security,’ 1250. 210 See Voutilainen, ‘Developing Energy Policy for Europe, 123’. 211 See Leal-Arcas, ‘Conceptualizing EU Energy Security,’ 1257. 212 See European Commission, ‘Communication from the Commission - Progress towards completing the Internal Energy Market COM(2014) 634 Final, issued on 13 October 2014’ p. 2, available at accessed 16 October 2014. 213 To fulfil this objective, the European Commission adopted on 19 September 2007 the third package of legislative proposals for electricity and gas markets (consisting of two Directives and three Regulations), which includes unbundling rules aimed at separating energy production and supply interests from the network in order to eliminate any conflict of interests between these activities, the establishment of a national regulatory authority (NRA) for each EU Member State, and the Agency for the Cooperation of Energy Regulators, which provides a forum for NRAs to work together. Ibid 8. 214 Ibid 2.

58

Multilateral, Regional and Bilateral Energy Trade Governance

5. The Energy Charter Treaty The Energy Charter Treaty (ECT) is a unique legal instrument pursuing the promotion of international cooperation in the energy sector.215 Having entered into force on 16 April 1998, it provides an important legal basis for the creation of an open international energy market.216 It dates back to a political initiative to overcome economic divisions in Europe at the end of the Cold War.217 The Energy Charter Treaty includes provisions on energy investments, trade and transit, as well as rules aiming to improve energy efficiency and reduce the energy cycle’s negative environmental impact. It also establishes dispute settlement procedures for investment-related disputes between an investor and a Contracting Party, and for state-to-state disputes concerning the application or interpretation of the Energy Charter Treaty between Contracting Parties.218 The ECT represents a political commitment to cooperation in the energy sector based on some key principles: the establishment of market conditions that will stimulate private investments; the respect for state sovereignty over natural resources; the application of the principle of non-discrimination among participants; and the recognition of the importance of environmental sustainability.219 The ECT also includes a set of legally binding rights and obligations of hard-law nature, a distinctive feature that makes it a unique multilateral (in the sense that there

215 On the link between the EU and the Energy Charter Treaty, see Leal-Arcas, R. and Filis, A. “The Energy Community and the Energy Charter Treaty: Special Legal Regimes, their Systemic Relationship to the EU, and their Dispute Settlement Arrangements,” Oil, Gas & Energy Law Journal, Vol. 12, Issue 2, pp. 1-42, 2014. 216 See Energy Charter Secretariat, ‘The Energy Charter Treaty and Related Documents’ 3, available at accessed 16 October 2014. Hereinafter Energy Charter Secretariat, ‘The Energy Charter Treaty and Related Documents.’ 217 The ECT originated in a proposal of the Dutch government to the Council of the European Communities in June 1991 to create—in addition to the European Coal and Steel Community and EURATOM—a European Energy Community. See Jan Kleinheisterkamp, ‘Investment Protection and EU Law: The Intra- and Extra-EU Dimension of the Energy Charter Treaty’ (2012) 15/1Journal of International Economic Law 86. 218 See Energy Charter Secretariat, ‘The Energy Charter Treaty and Related Documents,’ 14-16. 219 See Yulia Selivanova, "The Energy Charter and the International Energy Governance" in Yulia Selivanova (ed.), Regulation of Energy in International Trade Law (Wolters Kluwer 2011) 374. Hereinafter Selivanova, "The Energy Charter." For a comparison between the ECT, the Energy Community and the EU, see Leal-

RELP

1|2015

are several parties to the treaty) legal instrument in the international context, albeit for a specific region at present, namely the Eurasian region. Its importance is also enhanced by the fact that, being the only forum open to all countries in the energy security field, it has surpassed its original Eurasian regional limits, with the potential for expanding its geographical scope to acquire a truly global dimension.220 Since the late 2000s, the ECT has come under severe criticism that, firstly, it does not reflect anymore the contemporary realities of the energy world and, secondly, its provisions present potential ambiguities.221 The fiercest criticism came from then Russian President Dmitry Medvedev after the gas crisis of January 2009. However, although it is true that the ECT is the result of a more than 20-year-old multilateral compromise and reflects the realities of that time,222 many of its critiques might be unfair. The importance of the ECT in establishing a constructive dialogue between different groups of players in the energy sector cannot be underestimated.223

6. The Southern Common Market (MERCOSUR) In July 1990, the plan for creating a common market between Argentina and Brazil was announced.224 Subsequently, Paraguay and Uruguay, fearing exclusion from a common market between two of their

Arcas, R. and Filis, A. “The Energy Community and the Energy Charter Treaty: Special Legal Regimes, their Systemic Relationship to the EU, and their Dispute Settlement Arrangements,” Oil, Gas & Energy Law Journal, Vol. 12, Issue 2, pp. 1-42, 2014. 220 As of June 2013, the ECT has been signed and ratified by the European Community, the EURATOM and 47 other nations including Japan, Mongolia, and Afghanistan. Five countries, including Norway and the Russian Federation, have signed but not yet ratified the Treaty. See Energy Charter Secretariat, ‘Status of ratification of the Energy Charter Treaty’ available at accessed 16 October 2014. 221 See Selivanova, "The Energy Charter," 391-394. 222 See Andrey Konoplyanik, ‘A Common Russia–EU Energy Space: The New EU–Russia Partnership Agreement, Acquis Communautaire and the Energy Charter’ (2009) 27/2 Journal of Energy & Natural Resources 262. 223 See Selivanova, "The Energy Charter," 395-403. 224 Regional cooperation in South America can be traced back to the establishment of the Asociación Latinoamericana de Libre Comercio (ALALC) in 1960. For an analysis of the historical background related to the creation of MERCOSUR, see Leonor Machinandiarena de Devoto, Historia del MERCOSUR: desde su fundación hasta el año 2000, (Libros del CEIEG, 2006).

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

largest trading partners, asked to be included. As a consequence, the Treaty of Asunción was signed on 26 March 1991.225 Since the accession of Venezuela to MERCOSUR in 2006, five countries make up the common market, and Bolivia is currently following its accession procedure. Chile, Colombia, Peru, Ecuador, Guyana and Suriname have acquired the status of associated countries (see Figure 10 in Annex).226 The members of MERCOSUR committed themselves, since the end of the transition period on 31 December 1994, to build a common market on the basis of reciprocity and in accordance with the provisions of the 1991 Treaty of Asunción.227 According to Article 1 of this treaty, the main obligations imposed by the agreement are: the establishment of a free trade area through the elimination of customs duties and non-tariff restrictions on the flow of goods and services; the establishment of a common external tariff and the adoption of a common trade policy in regard to third States; the coordination of macro-economic and sectoral policies among Party States; and the commitment to harmonize Party State legislation in order to strengthen the integration process.

225 See Thomas Andrew O'Keefe, ‘An Analysis of the Mercosur Economic Integration Project from a Legal Perspective’ (1994) 28The International Lawyer, 439. 226 See MERCOSUR, accessed 16 October 2014. 227 See Paulo Borba Casella, ‘The Common Market of the South (MERCOSUR): Models and Qualitative Mutations for Consolidating an Integrated Economic Area’ (2013) 9/1 Annual Survey of International and Comparative Law 9. 228 MERCOSUR was originally conceived as a mere intergovernmental organization and, thus, has suffered from a deficit of independent, supranational institutions seen in other international economic organizations, such as the EU. In order to solve this structural issue, the Committee of Permanent Representatives (COREPER) was established in 2003 and the MERCOSUR Parliament (PARLASUR) was created in 2005. See Rafael A. PorrataDoria, ‘Mercosur at Twenty: From Adolescence to Adulthood?’ (2013) 27 Temple International and Comparative Law Journal 25-29. 229 A dispute resolution mechanism was eventually created by means of the Brasilia and Olivos Protocols, which established a Permanent Revision Tribunal; however, the functioning of such an organism appears to be doubtful. See ibid 1.

59

However, the development of MERCOSUR encountered from its very outset two major problems: the original absence of supranational institutions228 and the lack of an effective dispute resolution mechanism.229 Moreover, the global financial crisis of 2008, which has worsened the economic asymmetries among its members, has hampered the process of further regional integration.230 Regarding energy trade, the accession of Venezuela represents a crucial moment for MERCOSUR. Although an intense debate surrounded its accession, the fact that Venezuela’s accession allowed MERCOSUR Member States access to the largest oil and gas reserves in Latin America certainly played a decisive role.231 As of 2011, energy consumption in MERCOSUR was still highly dependent upon fossil fuels (see Figure 11 in Annex). This is a matter of concern for the countries in the region, especially because of the recent considerable increase in crude oil prices and the negative environmental impacts related to a massive use of fossil fuels.232 Although the Treaty of Asunción does not include any specific provision concerning the energy sector, the decision-making bodies of the organization have adopted secondary rules in relation to this sector that mainly establish memoranda of understanding. For instance, on 24 September 1993, MERCOSUR CMC Decision 57/93 was adopted, providing Guidelines on Energy policies. It sets basic criteria for coordination of national energy policies among MERCOSUR’s Member States and aims to achieve greater energy integration and a more efficient use of natural resources among MERCOSUR parties. It also fosters the use of renewable energy on an economically and environmentally sustainable basis. Similarly, on 24 July 1998, a Memorandum of Understanding on electric exchanges and electric integration was adopted (MERCOSUR CMC Decision 10/98) in order to optimize the supply of energy among MERCOSUR’s participants. Finally, MERCOSUR CMC Decision 10/99 was adopted on 7 December 1999 in relation to gas exchanges and gas integration in the region.

230 Ibid 3, 8. 231 There are other important reasons that led to the participation of Venezuela in MERCOSUR, such as the fact that it would have given Brazil access to a large new market and that admitting Venezuela to MERCOSUR would have helped to attenuate Venezuela's social radicalism and anti-neoliberal economic policies. See ibid 34. 232 See CEFIR, Integración Regional, Atlas de Energías Renovables del Mercosur accessed 16 October 2014.

7. The Association of Southeast Asian Nations (ASEAN) The Association of Southeast Asian Nations (ASEAN) was founded in 1967 with the Bangkok Declaration, after the 1963-1966 'confrontation' between Malaysia

60

Multilateral, Regional and Bilateral Energy Trade Governance

RELP

1|2015

and Indonesia.233 However, the formal agreement recognizing the existence of this association and its guiding principles was signed only 10 years later with the Treaty of Amity and Cooperation in Southeast Asia (TAC).234 Currently, 10 countries participate in ASEAN. Its founding members are Indonesia, Malaysia, the Philippines, Singapore and Thailand. Brunei joined the association in 1994, Vietnam in 1995, Laos and Burma (Myanmar) in 1997, and Cambodia in 1999. Due to the fact that, since its foundation, conflicts among its members have been relatively minimal, ASEAN has been hailed as one of the most successful regional organizations. However, its political stability has been achieved through the violent repression of opposition forces within the societies of ASEAN’s Members States and the perpetuation of a capitalist social order, which conferred disproportionate costs and benefits.235 ASEAN's goals were initially modest, including merely the moderation of inter-State relations in order to ensure regional peace and stability. To achieve this objective, ASEAN was grounded on two key principles: the commitment to sovereignty and non-interference. These principles have justified a marked reluctance to impose rules and standards for domestic, political, social and economic governance.236 In particular, the non-interference clause, which provides parties with significant autonomy to decide to what extent they might implement regional cooper-

ation, has traditionally been construed very broadly, allowing the various governments to exclude any politically sensitive issue from the discussion at the regional level.237 In addition, ASEAN was also governed by a set of procedural norms that emerged through interaction practices. They are known as the "ASEAN Way" of cooperation.238 Although both sovereignty and non-interference guaranteed a certain amount of success to ASEAN, preventing open conflicts between its members, they have proven to be a major obstacle to effective cooperation. This happened after the Cold War, when Western powers asked ASEAN members to democratize their political systems and respect human rights.239 As a result, ASEAN faced severe criticism in the 1990s, when it did not find an effective solution at the regional level to some key issues such as the 1997-1998 Asian financial crisis, the gross violations of human rights in Myanmar, and the massive pollution caused by forest fires in Indonesia. All this led in the late 1990s to a debate about the possible institutional amendment of ASEAN through the inclusion of new principles such as "constructive intervention"240 and "flexible engagement,"241 but eventually they were not implemented.242 The situation changed after the end of the Cold War, when ASEAN embraced several new areas of cooperation such as regional trade liberalization, environmental protection,243 fighting transnational crime, and a number

233 The term "confrontation," also known as "konfrontasi" by its Indonesian/Malay name, refers to a war launched by Indonesia and led by its president Sukarno, who was supported by the Indonesian Communist Party (PKI), in order to thwart the plan for the creation of the Malaysian Federation, which was seen as an attempt by the UK to maintain colonial rule in South-East Asia. The war ended in a violent evisceration of the Indonesian left, actuated after by General Suartho, who seized power in a military coup d'état during which almost a million people were killed and 750,000 people were imprisoned. See Lee Jones, ASEAN, Sovereignty and Intervention in Southeast Asia (Palgrave MacMillan 2012) 40-44. Hereinafter Jones, ASEAN.

237 See Helen E. S. Nesadurai, ‘The Association of Southeast Asian Nations (ASEAN)’ (2008) 13/2 New Political Economy 226-227. Hereinafter Nesadurai, ‘ASEAN.’

234 See Treaty of Amity and Cooperation in Southeast Asia, as amended by the first protocol amending the Treaty of Amity and Cooperation in Southeast Asia of 1987, the second protocol of 1998, and the third protocol of 2010, available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/228909/8472.pdf.

239 See Nesadurai, ‘ASEAN ’228.

235 See Jones, ASEAN 39-40. 236 It is not surprising that, in almost half a century of history, only few ASEAN hard-law agreements were developed and that disputes between Member States have traditionally been settled by conciliation and consultation, not by means of judicial types of resolution. See Koh Kheng-Lian and Nicholas A. Robinson, ‘Strengthening Sustainable Development in Regional Inter-Governmental Governance: Lessons from the "ASEAN way"’ (2002) 6 Singapore Journal of International & Comparative Law 643. Hereinafter Kheng-Lian, ‘Strengthening Sustainable Development.'

238 Under such informal rules, the decision-making approach follows what is called in Malay "Musyawarah" and "Mufakat." The former represents a process of discussion and consultation; the latter, the necessity of consensus. Such an approach requires intense informal and discrete discussions behind the scenes and relies mainly on personal interaction, as opposed to the Western structurally oriented way. See Paul J. Davidson, ‘ASEAN: the legal framework for its trade relations’ (1994) 49 International Journal 595-596.

240 In July 1997, the Malaysian Deputy Prime Minister Anwar Ibrahim suggested that ASEAN adopt a policy of "constructive intervention" in order to foster a more compassionate side of ASEAN. See Jurgen Haacke, ASEAN's Diplomatic and Security Culture: Origins, Development and Prospects (Routledge 2013) 167. 241 In July 1998, the Thai Foreign Minister Surin Pitsuwan proposed that ASEAN adopt a policy of flexible engagement, which involved discussion of fellow members' domestic policies. See Brendan Howe and Boris Kondoch, The Legality and Legitimacy of the Use of Force in Northeast Asia (BRILL 2013) 59. 242 See Nesadurai, ‘ASEAN ’229. 243 For a detailed analysis of ASEAN’s environmental policies, see Kheng-Lian, ‘Strengthening Sustainable Development.’

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

of other social development issues such as rural development and higher living standards.244 Moreover, the ASEAN Free Trade Area (AFTA)245 was established in Singapore on 28 January 1992 by means of the Agreement on the Common Effective Preferential Tariff Scheme for the ASEAN Free Trade Area (AFTA-CEPT Agreement).246 Its purpose is the implementation of the Common Effective Preferential Tariff (CEPT) commitments in the lowering of intra-regional tariffs. Regarding the energy sector, the Organization of Petroleum Exporting Countries’ (OPEC) oil embargo of 1973 led to the creation of an ASEAN Council on Petroleum (ASCOPE) on 15 October 1975,247 which entails four offices that manage almost 20 programs specifically dedicated to the promotion of energy research and the solution of energy issues. ASEAN’s energy policy aims to establish a regionally harmonized framework of energy supply in order to promote industrialization and economic growth.248 In 1990, a project for the creation of a TransASEAN Gas Pipeline (TAGP) was announced. It aims to connect the gas reserves in the Gulf of Thailand, Myanmar and Indonesia to the rest of the region. As of 2014, 11 bilateral connections have already been established with a total of 3,020 kilometers of pipeline connections (see Figure 12 in Annex).249

244 See Nesadurai, ‘ASEAN’ 226. 245 In 1992, ASEAN Heads of State and Government decided to establish the ASEAN Free Trade Area (AFTA), which has the objective of increasing the ASEAN region’s competitive advantage as a production base geared at the world market. This aim is pursued through liberalization of trade and elimination of tariffs and non-tariff barriers among the ASEAN members. See ASEAN, ASEAN FREE TRADE AREA (AFTA): AN UPDATE accessed 24 October 2014. 246 In 1992, ASEAN Members entered into this agreement convinced that preferential trading arrangements among ASEAN Member States will act as a key economic stimulus. See ASEAN, Agreement on the Common Effective Preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area (AFTA) accessed 24 October 2014. 247 The purpose of this Council is to establish cooperation among the parties to deal with the emergencies related to the supply of petroleum. See Shankar K. Karki, Michael D. Mann and Hossein Salehfar ‘Energy and environment in the ASEAN: challenges and opportunities’ (2005) 33 Energy Policy 499. Hereinafter Karki, ‘Energy and environment in the ASEAN.’ 248 See Benjamin K. Sovacool, ‘Energy policy and cooperation in Southeast Asia: The history, challenges, and implications of the trans-ASEAN gas pipeline (TAGP) network’ (2009) 37 Energy

61

On 4 January 1999, the ASEAN Centre for Energy (ACE) was established in Kuningan, Jakarta, Indonesia.250 Moreover, as of 1999, three plans of actions for energy cooperation (APAEC) have been adopted in the ASEAN context. The most recent one is represented by the ASEAN Plan of Action for Energy Cooperation 2010–2015.251 It contains 26 strategies and 91 actions divided into seven strategic areas.252 The APAEC 2010-2015 states: "[it] contains strategic programs with some quantitative, aspirational goals or targets that are expected to move the region towards enhancing greater energy security and strengthening international cooperation, including financial institutions and dialogue partners, to tap their resources and expertise."253 The central issue that ASEAN countries are currently dealing with in relation to the energy sector is their dependence on foreign crude oil.254 In fact, whilst most of ASEAN’s commercial energy requirement presently is satisfied by oil, about 60 per cent of ASEAN’s oil needs is imported from non-ASEAN countries, in particular from the Middle East. Such a lack of self-sufficiency is currently posing the most serious risk for ASEAN countries in terms of energy security.255

Policy 2357. Hereinafter Sovacool, ‘Energy policy and cooperation in Southeast Asia.' 249 TAGP is a massive project, involving 10 countries and aimed at connecting almost one billion people, and eventually connecting this network with China, India and Japan. See Sovacool, ‘Energy policy and cooperation in Southeast Asia' 2357. 250 The ASEAN Centre for Energy (ACE) represents an intergovernmental organization guided by a Governing Council composed of the senior officials on energy of the ASEAN countries and a representative from the ASEAN Secretariat. Its mission is to accelerate the integration of energy strategies within ASEAN by providing relevant information, state-of-the-art technology, and expertise. See ASEAN Centre for Energy, accessed 17 October 2014. 251 See ASEAN Centre for Energy, ASEAN Plan of Action for Energy Cooperation 2010–2015 accessed 17 October 2014. 252 ASEAN Power Grid, Trans-ASEAN Gas Pipeline, Coal and Clean Coal Technology, Energy Efficiency and Conservation, Renewable Energy, Regional Energy Policy and Planning, and Civilian Nuclear Energy. 253 Ibid, para 7. 254 This notwithstanding the fact that renewable energy sources appear to be abundantly available in most of the member countries of ASEAN. See N.W.A. Lidula et al., ‘ASEAN towards clean and sustainable energy: Potentials, utilization and barriers’ (2007) 32 Energy Policy 1441. 255 See Karki, ‘Energy and environment in the ASEAN,’ 503.

62

Multilateral, Regional and Bilateral Energy Trade Governance

IV. Bilateral Energy Trade Governance: The Case of the European Union In terms of energy security, the EU is in a deeply vulnerable position. Despite being considered a leader in the field of renewables and energy-efficient products,256 the EU is 54% energy dependent on the outside world.257 Its primary energy mix originates from four providers: Russia, Norway, Algeria and Libya.258 The current regulatory framework on global energy governance is largely multi-layered and eminently fragmented, to the extent that it fails to ensure not only EU energy security but also global energy security.259 If the EU is to break free from its energy dependence, it needs to address the flaws of the current energy governance system by seeking cooperation and partnerships through both bottom-up260 and topdown approaches.261 This would involve tackling the current weaknesses of the international trade in energy system through bilateral, regional and multilateral agreements. These flaws include, inter alia, the absence of a single international organization focused on global energy governance as well as the lack of a single agreement governing energy in a comprehensive manner. Instead, there is a patchwork of instances of inter-State cooperation that deal with the global energy economy.262 Given the high degree of politicization, the fragmentation of its governance system and the profusion of relevant international institutions, addressing the pitfalls of the global energy economy is a challenging enterprise. However, given the EU’s weight and influence as a global actor, one can be optimistic about its ability to strategically promote the integration of energy markets and regulatory convergence with third countries, by means of rational markets, in order to ensure its own energy security. Below is an analysis of the EU’s bilateral trade agreements with energy-rich countries.

1. Russia There is a Partnership and Cooperation Agreement (PCA) between the European Communities and their Member States, on the one hand, and Russia, on the other.263 The agreement was signed in 1994 and entered into force on 1 December 1997. The PCA regulates the political, economic and cultural ties be-

RELP

1|2015

tween the EU and Russia and constitutes the legal basis for the EU´s bilateral trade relations with Russia. A new PCA is being negotiated since 2008. It will concentrate on improving the regulatory environment by building on the WTO rules and bolstering bilateral trade relations. The negotiations were interrupted in 2010 because no progress could be made on trade and investment.264 Currently, given the deepening of the Eurasian Economic Union (a customs union between Russia, Kazakhstan and Belarus) and the difficulties for Russia in fulfilling its WTO commitments, it is not clear how further progresses can be achieved on trade and investment and in general with the new PCA.265 The EU and Russia face bilateral tension, in which a crucial issue is energy security. An example of this lies in the gas disputes between Russia and neighbouring countries such as Ukraine through which supplies to all 28 member states must be brought.266 On 22 March 2013, in Moscow, the coordinators of

256 “Fact Sheets on the European Union: Renewable Energy” (European Parliament) accessed 4 September 2014. 257 Rostowska, M. “Energising TTIP: A Step towards Better EU Energy Security” PISM Bulletin, No. 57 (652), p. 1, 2014. 258 Leal-Arcas, R. and Filis, A. “Conceptualizing EU Energy Security Through an EU Constitutional Law Perspective,” Fordham International Law Journal, Vol. 36, p. 1272, 2013. 259 For an analysis of the challenges posed by the specific case of EU energy security, see Leal-Arcas, R. et al. “The European Union and its energy security challenges,” Queen Mary School of Law Legal Studies Research Paper No. 187/2014, pp. 1-22. 260 A bottom-up approach to a problem is one that begins with details and works up to the highest conceptual level. An example of such an approach would be where action starts at the national level based on each country´s circumstances through a patchwork of national policies and measures (which are not necessarily binding) until they develop into unified policies at the international plane. 261 A top-down approach to a problem is a situation that begins at the highest conceptual level and works down to the details. An example of such an approach would be where targets are set out at the international level and must be attained through national policies and measures. 262 See Leal-Arcas, R. and Filis, A. “The fragmented governance of the global energy economy: a legal institutional analysis” The Journal of World Energy Law & Business, Vol. 6, Issue 4, pp. 1-58, 2013. 263 Council and Commission Decision 97/800/EC, ECSC, Euratom, 1997 O.J. (L327) 1. 264 European Commission, “Russia” accessed 27 August 2014. 265 Ibid. 266 Leal-Arcas, R. “How Will the EU Approach the BRIC Countries? Future Trade Challenges” Vienna Journal on International Constitutional Law, Vol. 2, No. 4, p. 263, 2008.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

63

the EU-Russia Energy Dialogue, EU energy commissioner G.H. Oettinger and A.V. Novak, minister of energy of the Russian Federation, signed the "Roadmap EU-Russia Energy Cooperation until 2050,"267 which states: “Over the past half century, Russia has been a vital supplier of energy to the EU. But if Russia is important to the EU, the EU as a neighbour with half a billion energy consumers in a unified internal market is just as important to Russia.”268 Despite this situation of mutual dependence between the EU and Russia, the energy supply deal, concluded in May 2014, between Russia and China marks a geopolitical shift to the East, which will further weaken the already shaky position of the Union in terms of energy security.269 It has been suggested that this colossal deal was triggered by the turbulent political backdrop arising from the 2014 Ukraine crisis which further soured the already tense relations between the EU and Russia.270 Even though this energy agreement will only have material implications from 2018 onwards, Russia assuredly gains the upper hand in pipeline politics over Europe by engaging with an alternative gas partner.271 This turn of events poses a serious dilemma for the EU, as there is no single alternative that could entirely replace Russian energy exports (which, in 2012, represented 33.7% and 32% of the EU´s oil and gas imports, respectively).272 Hence, the EU will have to undertake multiple courses of action to tackle the issue. First, the EU should actively seek to diversify its sources of energy supply by trading with alternative

markets such as Azerbaijan, Kazakhstan, Turkmenistan, Saudi Arabia, Qatar, Iran, Iraq or Nigeria, for instance. It would be in the EU´s interest to foster energy market liberalization for the rest of the world, aiming for more energy commodities to reach the market, along with other consumers, to meet needs not met by preferential deals.273 At the same time, the EU could invest in renewables which, despite being an expensive and inefficient option in the short-run, promote sustainable development and represent a more attractive solution from an energy security point of view.274 Further, this alternative would contribute to the EU´s commitment to increase the share of renewables in the EU´s final energy consumption to 27% by 2030.275 Another option would be to follow the steps of the US and invest in shale gas exploration, although there is much uncertainty surrounding this unconventional source of energy and disparate positions between EU member states on the matter (e.g., France and Bulgaria have banned fracking, in other EU member states (Belgium and Latvia) it is allowed;276 and in others, it is allowed with issued permits (UK, Spain and Portugal), whilst Poland is very keen on shale gas exploration).277 Having said this, shale gas development will only go ahead if it proves to be both economically and environmentally viable.278 Article 65 of the PCA between the European Communities and their Member States, on the one hand, and the Russian Federation, on the other, specifical-

267 European Commission, “EU-Russia Energy Relations” accessed 28 August 2014.

274 Genus, A. “The governance of technological transitions: The case of renewable energy in G. Marletto (ed.), Creating a sustainable economy: An institutional and evolutionary approach to environmental policy (Routledge 2012).

268 Common Understanding on the Preparation of the Roadmap of the EU-Russia Energy Cooperation until 2050, Brussels, 24 February 2011, p. 3. 269 Piet, R. “Russia-China energy deal: Geopolitical tectonic shift” Aljazeera, (17 June 2014) accessed 27 August 2014. 270 Lain, S. “Russia's gas deal with China underlines the risks to Europe's energy security” The Guardian, (26 May 2014) accessed 27 August 2014. 271 Ibid. 272 European Commission, Key Figures, Market Observatory for Energy, Directorate-General for Energy, (June 2013) (Hereinafter Key figures). 273 Luciani, G. Security of Oil Supplies: Issues & Remedies (Claeys and Casteels Publishing 2013).

275 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, “A policy framework for climate and energy in the period from 2020 to 2030,” COM (2014) 15 final, p. 5. For an analysis, see Buchan, D. and Keay, M. “The EU’s new energy and climate goals for 2030: underambitious and over-bearing?” The Oxford Institute for Energy Studies, 2014, available at http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/01/The-EUs-new-energyand-climate-goals-for-2030.pdf. 276 See for instance Leal-Arcas, R. and Schmitz, J. “Unconventional Energy Sources and EU Energy Security: A Legal, Economic and Political Analysis” Oil, Gas & Energy Law Journal, Vol. 12, Issue 4, pp. 1-37, 2014. 277 The Economist, “Conscious uncoupling,” 5 April 2014, p. 30. 278 Kronenberg, J. “Shale Gas Extraction in Poland in the Context of Sustainable Development” PROBLEMY EKOROZWOJU – PROBLEMS OF SUSTAINABLE DEVELOPMENT 2014, vol. 9, no. 2, 2014.

64

Multilateral, Regional and Bilateral Energy Trade Governance

ly addresses the issue of energy. The article calls for, inter alia, the modernization of energy infrastructure, the improvement of energy technology, the promotion of energy saving and energy efficiency, the increase of energy trade and investment and, more notably, the improvement of the quality and security of energy supply.279 In spite of these commendable resolutions towards the enhancement of EURussia energy relations, it would appear that the current energy alliance between the two sides is far from idyllic. Given the aforementioned situation of interdependence between the two parties and the fact that any other alternative will hardly be able to replace Russian energy imports in the short-run, the EU should strive to maintain, inasmuch as possible, amiable relations with Russia.

2. Norway Norway has become one of the world´s largest producers of oil and gas through the exploitation of huge reserves located in the North and Norwegian Seas. Additionally, it has immensely expanded its production in renewable energy by relying on hydroelectric power and investing in other forms of alternative energy. As such, Norway is a model for the energy policies of other states and a leader in the global energy economy.280 Norway´s economic and trade relations with the EU are primarily governed by the Agreement on the European Economic Area (EEA).281 Norway´s trade with the EU shows a surplus. The trade flows of this country have traditionally been dominated by trade with the EU and this trend is increasing after the latest EU enlargements (with Bulgaria and Romania joining in 2007, and Croatia in 2013). Further, the EU remains Norway’s major import and export partner, capturing 74.3% of Norway´s trade.282 In 2012, Norwegian gas exports accounted for 31.3% of EU gas imports, with almost all Norwegian exports going to the EU.283 Norway is the world’s third largest exporter of oil and gas after Saudi Arabia and Russia.284 As a member of the EEA, it applies most of the EU acquis communautaire, including legislation on the internal energy market (IEM) and related flanking policies (competition, environment, consumer protection, research and development programs, among others). Bilaterally, the EU-Norway Energy Dialogue principally aims at the coordination of

RELP

1|2015

energy policies in a wider sense, including research and technological development in the energy sector and relations with other energy producing countries.285 On 6 July 2005, the European commissioner for energy and Norwegian minister of petroleum and energy met in Oslo and confirmed their interest to cooperate on energy issues, specifically in the areas of energy efficiency, renewable energy, and security of energy supply, including exploration and production activities in the Arctic area.286 Commissioner Andris Piebalgs underlined the importance of Norway as a major supplier to the European Union. "Norway is not only an important energy supplier to the EU, it is a partner in developing an energy policy for Europe to meet the new challenges facing us. In particular, we have a common view on the need not only to develop new sources of oil and gas supplies, particularly in the Arctic region, but also to actively and positively address climate change in a way that provides concrete benefits for our citizens. This can be done notably through better technology such as carbon capture and storage and through energy efficiency, as well as by promoting renewable energy. An effective collaboration between the EU and Norway on these and other energy issues can make a real contribution."287 On 22 June 2012, EU energy commissioner Günther Oettinger and Norwegian minister for petrole-

279 Agreement on partnership and cooperation establishing a partnership between the European Communities and their member states, of one part, and the Russian Federation, of the other part, available at http://trade.ec.europa.eu/doclib/docs/2003/november/tradoc_114138.pdf. 280 Kamprath, R. “Norway: A Template for World Energy Policy”, available at SSRN at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1577928, p. 1, 2009. 281 European Commission, “Norway,” accessed 28 August 2014. 282 Ibid. 283 European Commission, Key Figures, Market Observatory for Energy, Directorate-General for Energy, (June 2013) (Hereinafter Key figures). 284 European Commission, “Energy from abroad” accessed 28 August 2014. 285 Ibid. 286 Ibid. 287 Joint statement on the meeting between Andris Piebalgs, commissioner responsible for energy, and Thorhild Widvey, Norwegian minister of petroleum and energy, Oslo, 6 July 2005. accessed 28 August 2014.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

um and energy Ola Borten Moe agreed to further develop energy cooperation between Norway and the European Union.288 In particular, the two sides agreed on the importance of reinforcing energy infrastructure to achieve security of supply, the inclusion of renewables in the market, sustainability and competitiveness.289 Article 24 of the Agreement on the EEA refers to Annex IV, which contains specific provisions on energy-related matters. As a member of the EEA, Norway has implemented all the most significant EU energy legislation related to the internal market.290 In a similar vein, Annex IV contains a whole set of regulations, decisions and directives on energy emanating from the EU institutions which, unless otherwise indicated, also apply to Iceland, Liechtenstein and Norway.291 Therefore, the Agreement on the EEA constitutes an optimal framework for the EU to shape and promote its interests as well as to secure energy supply with a reliable partner which is a net exporter of energy par excellence.

65

The EU-Algeria Association Agreement was signed in April 2002 and entered into force in September 2005.292 This agreement lays out the framework for the EU-Algeria relationship in all areas including trade.293 The EU is “Algeria´s largest trading partner and absorbs half of Algerian international trade (54.1%)”.294 The trade between these two sides has

been increasing steadily by an average of 5% per year between 2008 and 2012, driven mainly by rising oil exports to the EU.295 Algeria ranked as the EU´s third largest energy provider in 2013, after Russia and Norway, supplying around 15% of the EU´s gas imports that year, with 98.2% of EU imports from Algeria in 2013 comprising fuel and mining products.296 A Memorandum of Understanding on strategic energy partnership was signed between the two sides in July 2013.297 The Memorandum covers a broad section of cooperation in the conventional and renewable energy sectors, as well as the transfer of technology, and is expected to help boost investment in Algeria.298 Despite the fact that the In Amenas hostage crisis299 will probably reduce Western interest for investment in Algeria in the immediate future, the European continent will eventually be so dependent on the country that the EU will have no choice but to further invest in the Algerian energy sector.300 Article 61 of the EU-Algeria Association Agreement expressly deals with energy and mining. According to this provision, both parties will endeavor, among other things, to bolster their relations in areas such as oil and gas exploration, production and processing; the production of equipment and services used in the production of energy products; the setting-up of databases on the mining and energy sectors; the development of gas, oil and electricity distribution; and the promotion of the modernization and development of energy networks and their link-

288 European Commission, “Energy from abroad” accessed 28 August 2014.

296 Ibid. See also European Commission, Key Figures, Market Observatory for Energy, Directorate-General for Energy, (June 2013) (Hereinafter Key figures).

289 European Commission-Norway Energy Dialogue, Brussels 22 June 2012.

297 http://ec.europa.eu/commission_2010-2014/president/news/archives/2013/07/20130707_1_en.htm.

290 Norwegian Ministry of Foreign Affairs, Meld. St. 5 (2012-2013) Report to the Storting (White Paper), “The EEA Agreement and Norway´s other agreements with the EU”, available at http://www.eu-norway.org/Global/SiteFolders/webeu/MeldSt5_UD_ENG.PDF.

298 “Algeria, EU sign 'strategic' energy deal,” Fox News, 7 July 2013 accessed 29 August 2014.

3. Algeria

291 EEA Agreement, Annex IV: Energy, available at http://www.efta.int/media/documents/legal-texts/eea/the-eea-agreement/Annexes%20to%20the%20Agreement/annex4.pdf. 292 L 265, 10/10/2005, p. 2. 293 European Commission, “Algeria” accessed 29 August 2014. 294 Ibid. 295 Ibid.

299 The In Amenas hostage crisis began on 16 January 2013, when alQaeda-linked terrorists took 800 people hostage at the Tigantourine gas facility near the Algerian town of In Amenas. In an effort to free the hostages, Algerian special forces raided the site. At least 39 foreign hostages were killed along with an Algerian security guard, as were 29 militants. A total of 685 Algerian workers and around 100 foreigners were freed. Three militants were captured. For more information see “Q&A: Hostage crisis in Algeria” BBC, (21 January 2013) accessed 6 September 2014. 300 Lanthemann, M. “In Europe, the Strategic Importance of Algerian Natural Gas” Natural Gas Europe, (23 January 2013) accessed 29 August 2014.

66

Multilateral, Regional and Bilateral Energy Trade Governance

ing to EU networks.301 As such, the Article reflects the vital role played by the energy and mining industry in bilateral trade relations between the EU and Algeria. Moreover, the Article further stresses the importance of fostering investment in these sectors as a means to open up trade markets. This Association Agreement, along with the 2013 Memorandum of Understanding on strategic energy partnership,302 provides a solid framework for the EU to pursue and cultivate its energy relations with Algeria.

4. Libya Relations between the EU and Libya have so far taken place outside a bilateral legal framework. It is worth noting that Libya is the only Mediterranean country (along with Syria) that is yet to conclude a free trade agreement (FTA) with the EU.303 Negotiations for a framework agreement between the EU and Libya started in November 2008, the ultimate goal being to complete an FTA covering trade in goods, services and investment. This would bring about new export opportunities and a higher degree of legal certainty for EU exporters, mainly in areas such as services and establishment, public procurement and gas and oil markets.304 However, the Libyan civil war in early 2011 interrupted negotiations in February of the same year. EU imports from Libya are dominated by energy, in particular petroleum and petroleum products. Prior to the Arab Spring and the uprising in Libya, the EU was an important trading partner for Libya, accounting for 70% of the country´s total trade.305 The EU was Libya´s major source of imports and its largest market for exports in 2010.306 The Libyan civil war of 2011 resulted in a decline in trade the following year.307 However, in both 2012 and 2013 trade flows rose,308 confirming that Libya remains a fundamental energy partner of the EU. Indeed, Libyan energy exports represented 8.2 % of the EU´s oil imports in 2012.309 Having said this, the situation of the country three years after the revolution remains quite somber with a deteriorating security situation, power voids, targeted political assassinations, kidnappings, and a deep-rooted economic crisis due to the blockades of oil fields by armed groups, which has resulted in a notable fall in oil revenues. Reinforcing the non-oil sector would be crucial to solve the blockades and

RELP

1|2015

mass unemployment.310 The EU could contribute to that aim in a variety of ways: e.g., by helping develop the infrastructure for tourism, helping to preserve Libyan heritage, and supporting education and the development of new business and political leadership.311 Should the political backdrop in Libya improve and allow for more stable trade relations, the EU would greatly benefit from concluding an FTA with Libya.312 Such advancement would increase the coherence of the EU´s trade policy in the region by closing a gap in the establishment of the EuroMediterranean Partnership (Euromed) free trade zone.313

5. Caspian alternatives a. Azerbaijan EU-Azerbaijan bilateral trade relations are regulated by a PCA, concluded in 1999. The agreement provides a legal framework for the political, economic and cultural relations between both sides.314 With the inclu-

301 Euro-Mediterranean Agreement establishing an Association between the European Community and its Member States, of the one part, and the People's Democratic Republic of Algeria, of the other part, available at http://www.bilaterals.org/IMG/pdf/EUDZ_FTA.pdf. 302 See press statement at http://europa.eu/rapid/press-release_MEMO-13-665_en.htm. 303 European Commission, “Libya” accessed 29 August 2014. 304 Ibid. 305 Ibid. 306 Ibid. 307 Ibid. 308 Ibid. 309 European Commission, Key Figures, Market Observatory for Energy, Directorate-General for Energy, (June 2013) (Hereinafter Key figures). 310 Toaldo, M. “Why Europe should step up its efforts in Libya” European Council on Foreign Relations, (17 February 2014) accessed 29 August 2014. 311 Ibid. 312 European Commission, “Libya” accessed 29 August 2014. 313 The Euro-Mediterranean Partnership (Euromed) deals with economic integration and democratic reform across 16 EU neighbors to the south in North Africa and the Middle East. Ibid. 314 European Commission, “Azerbaijan” accessed 30 August 2014.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

67

sion of the countries of the South Caucasus into the European Neighbourhood Policy in 2004, the EU decided to extend its cooperation with Azerbaijan beyond the 1999 PCA.315 In 2006, the EU and Azerbaijan signed a Memorandum of Understanding in the field of energy.316 This was a crucial step in strengthening the EU’s energy relations with Azerbaijan, while also helping the country to reform and modernize its domestic energy sector.317 In 2010, the EU and Azerbaijan began negotiations on an Association Agreement.318 In order to satisfy the increasing energy demands and diversify its energy sources of supply, the EU has initiated the Southern Gas Corridor so as to achieve the flow of natural gas to markets from the Caspian region.319 There are, however, some hurdles: the land-locked nature of the Caspian region increases its dependence on transit countries such as Georgia or Turkey. Further, as Baku has direct access to the sea, it requires transit pipelines for its energy exports to reach European energy markets.320 Moreover, Azerbaijan and Russia concluded in 2010 an energy supply deal which is likely to rekindle serious questions about the fate of the EU´s Nabucco gas pipeline project.321 Having said this, the EU is also a trade partner of crucial importance for Azerbaijan, as it accounted for 50% of the country´s exports in 2012.322 With its westward energy policy and undiversified economy, Azerbaijan depends on the European energy market for its oil and gas exports.323 Article 55 of the PCA between the European Communities and their Member States, of the one part,

and the Republic of Azerbaijan, of the other, tackles energy. This provision has, word for word, the same content as the already discussed Article on energy in the EU-Russia PCA, except for the inclusion of a profoundly telling third paragraph, which reads as follows: “The parties shall exchange relevant information relating to investment projects in the energy sector, in particular concerning the construction and refurbishing of oil and gas pipelines or others means of transporting energy products.”324 Yet again, this reinforces the perception that building energy relations with Azerbaijan might be very profitable not only to have a trustworthy energy supply partner (taking into account the vast wealth of resources that the country enjoys), but also to reduce heavy reliance on Russian energy imports, given the geographic situation of Azerbaijan, through the creation of alternative energy routes and pipelines.

315 Ibid.

321 Azerbaijan, Turkmenistan and Kazakhstan: the three promising hydrocarbon states of the Caspian region accessed 30 August 2014.

316 “President Barroso and the President of Azerbaijan sign a Memorandum of Understanding on energy partnership” Europa.eu Press Releases Database, (7 November 2006) accessed 6 September 2014. 317 European Commission, “Azerbaijan” accessed 30 August 2014. 318 Ibid. 319 For an analysis of several ways to enhance EU energy security through energy transit, see Leal-Arcas, R. and Peykova, M. ‘Energy Transit Activities: Collection of Intergovernmental Agreements on Oil and Gas Transit Pipelines and Commentary,’ Queen Mary School of Law Legal Studies Research Paper No. 177/2014, pp. 1-54. 320 Mammadova, S. “Natural Gas Supply to Europe: Azerbaijan´s Energy Policy” Caucasus International, Vol. 2, No. 1, pp. 160-161, 2013.

b. Kazakhstan Trade relations between the EU and Kazakhstan are governed by a PCA signed in 1995,325 which entered into force in 1999.326 In November 2011, the EU and Kazakhstan opened negotiations for a new, enhanced PCA replacing the 1999 PCA, with the aim of further strengthening their bilateral relations. The enhanced agreement, once concluded, will bring about better conditions for trade and investment relations between the two parties.327 However, despite considerable progress at the beginning of the negotiations, Kazakhstan´s interest in the agreement seems to be dwindling, as differences arise on two key issues:

322 Hale, J. “EU relations with Azerbaijan: More for Less?” Discussion paper Open Society Institute-Brussels, p. 6, 2012. 323 Ibid. 324 Partnership and Cooperation Agreement between the European Communities and their member states, of the one part, and the Republic of Azerbaijan, of the other part, available at http://eeas.europa.eu/delegations/azerbaijan/documents/eu_azerbaijan/eu-az_pca_full_text.pdf. 325 http://trade.ec.europa.eu/doclib/docs/2004/april/tradoc_116738.pdf. 326 European Commission, “Kazakhstan” accessed 30 August 2014. 327 Ibid.

68

Multilateral, Regional and Bilateral Energy Trade Governance

technical and regulatory aspects related to trade and investment as well as a more resolute pledge from Astana towards democratic reform.328 Trade between the two sides has been increasing since 2002. The EU is Kazakhstan’s largest trading partner, accounting for almost 40% of its external trade.329 The country´s exports to the EU are mainly oil and gas, which represent 80% of Kazakhstan’s total exports.330 Moreover, the importance of Kazakhstan as an oil and gas supplier to the EU is growing. The country has greatly benefited from very strong foreign direct investment (FDI) flows over the last few years, mainly in its prosperous oil and gas sector.331 Almost half of this FDI originates from the EU.332 As a normative actor, the EU is determined to promote good governance and the rule of law among its trading partners. However, it tends to shy away from its normative agenda when dealing with energy-rich countries, given its situation of energy dependence. This should not be the case with Kazakhstan, for which the EU is also of vital importance in terms of trade and technology transfer. Therefore, the EU´s firm stand on Kazakhstan’s human rights and democratic commitments could be mutually beneficial: the political stability which would ensue from Kazakhstan’s move towards greater democracy would reinforce its profile in the international arena, whilst the EU would gain a more reliable energy partner.333 Article 53 of the PCA concluded between the EU and the Republic of Kazakhstan addresses the issue of energy. This provision has the standard content of the articles on energy analysed earlier within the framework of a PCA.334 The only seemingly striking

328 Tsertsvadze, T. and Axyonova, V. “Trading values with Kazakhstan” EUCAM working paper n. 32, p. 1, 2013. 329 European Comission, “Kazkahstan” accessed 30 August 2014. 330 Ibid. 331 Ibid. 332 Ibid. 333 Tsertsvadze, T. and Axyonova, V. “Trading values with Kazakhstan” EUCAM Working Paper n. 32, p. 1, 2013. 334 Partnership and Cooperation Agreement between the European Communities and their member states, of the one part, and the Republic of Kazakhstan, of the other part, available at http://eeas.europa.eu/delegations/kazakhstan/documents/eu_kazakhstan/pca_kazakhstan_en.pdf. 335 European Commission, “Turkmenistan” accessed 31 August 2014.

RELP

1|2015

feature, to the extent that it was included in the EUAzerbaijan PCA, is the absence of any reference to the construction of alternative pipelines and energy routes. c. Turkmenistan Bilateral trade relations between the EU and Turkmenistan are governed by an Interim Trade Agreement of 1998, pending ratification of a PCA by the EU member states and the European Parliament.335 Additionally, both parties also signed a Memorandum of Understanding in the field of energy in 2008.336 The EU-Turkmenistan relations also take place within the framework laid out by the EU-Central Asia Strategy,337 through which the EU aims to enhance relations with the region as a whole and each of its particular countries (including Azerbaijan and Kazakhstan).338 In the area of trade and investment, the Strategy focuses inter alia on the accession of the entire Central Asian region to the WTO.339 Turkmenistan´s role has become increasingly critical in the EU´s energy plans as the prospect of the Nabucco pipeline becomes stronger, given the urgency to diversify energy routes in order to increase EU energy security.340 Turkmenistan ranks fourth in the world, behind Russia, Iran and Qatar, in terms of natural gas reserves341 and thirteenth in terms of natural gas production.342 In spite of its wealth in terms of energy reserves, Turkmenistan´s ability is constrained, given that it is surrounded by energy-rich Central Asian and Caspian countries with more favourable investment climates, greater market ac-

336 Ibid. 337 Ibid. 338 European Commission, “Central Asia” accessed 31 August 2014. 339 European Commission, “Turkmenistan” accessed 31 August 2014. 340 Boonstra, J. “The EU-Turkmenistan energy relationship: difficulty or opportunity?” Policy brief EDC 2020, p. 2, 2010. 341 Central Intelligence Agency, “The World Factbook: Natural Gas Proved Reserves” accessed 19 October 2014. 342 Central Intelligence Agency, “The World Factbook: Natural Gas Production” accessed 19 October 2014.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

cess, and given the country´s current dearth in terms of a plurality of major export pipelines routes.343 The EU should endeavour to facilitate dialogue and cooperation between Azerbaijan, Kazakhstan and Turkmenistan within the framework of its Central Asia Strategy. Indeed, such an advancement would contribute to the unlocking of substantial energy reserves.344 Regarding good governance and rule of law concerns surrounding these three countries, if the EU is hesitant to do business with Central Asian producers over their poor human rights record, Russia and China will have no difficulties to do so instead, not fettered by any concerns over democracy.345

6. Persian Gulf alternatives The EU has been trying to conclude an FTA with the Gulf Cooperation Council (GCC), whose members are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, but to no avail, as the GCC interrupted negotiations in 2008.346 The 1988 Cooperation Agreement lays out the economic and political ties between the two sides.347 The Agreement calls for the development of closer cooperation on issues such as transport, research, the economy, and energy.348 In addition, the EU and the GCC are pursuing the establishment of a long-term strategic energy relationship through the EU-GCC Clean Energy Network,349 which aims at the promotion of sustainable, clean and renewable energy.350

343 Azerbaijan, Turkmenistan and Kazakhstan: the three promising hydrocarbon states of the Caspian region accessed 30 August 2014. 344 European Commission, “Central Asia”, accessed 30 August 2014. 345 De Jong, S. and Wouters, J. “Central Asia and the EU´s Drive Towards Energy Diversification” Leuven Centre for Global Governance Studies Working Paper No. 64, p. 38, 2011. 346 European Commission, “Gulf region” accessed 11 September 2014. 347 EU-GCC Cooperation Agreement, available at http://trade.ec.europa.eu/doclib/docs/2008/september/tradoc_140300.pdf. 348 European Commission, “EU relations with the Gulf Cooperation Council (GCC)” accessed 11 September 2014. 349 http://www.eugcc-cleanergy.net/Home.aspx. 350 European Commission, “EU-GCC Clean Energy Network” accessed 11 September 2014. 351 European Commission, “Gulf region” accessed 11 September 2014. 352 Ibid. 353 Ibid. 354 Ibid. 355 U.S. Energy Information Administration, “Country Analysis Brief: Saudi Arabia” accessed 12 September 2014. 356 Oil & Gas Journal, “Worldwide look at reserves and production” accessed 19 October 2014. 357 This figure is calculated based on data as they appear in OPEC Annual Statistical Bulletin, Organization of the Petroleum Exporting Countries, 2014 (at. p. 8) accessed 20 October 2014.

70

Multilateral, Regional and Bilateral Energy Trade Governance

oil.358 The issue is so acute that Saudi Arabia’s capacity to export oil may wane or even disappear altogether.359 In order to tackle this matter, the country is actively seeking to improve energy efficiency as well as to promote renewable energy production.360 Therefore, remarkably and paradoxically enough, the world’s largest oil producer pledges to initiate a transition towards clean energy, with the ultimate goal of being entirely powered by renewable energy.361 Taking into account the fact that Saudi’s energy consumption is currently derived almost exclusively from fossil fuels, it seems illusory to expect this laudable resolution to materialize anytime soon. However, the country has already set out ambitious plans in this direction. Firstly, it intends to take advantage of its abundant sunlight to produce solar energy.362 More concretely, the Kingdom plans to install 24 gigawatts of renewable power capacity by 2020 and 54 gigawatts by 2032.363 In addition, Saudi Arabia plans to bolster its relationship with other countries from the Gulf, such as Kuwait and Qatar, to share energy in situations of emergency through the Northern Gulf grid.364 Although it might prima facie appear that enhancing energy relations with Saudi Arabia is not a very enticing alternative for the EU (given that the Kingdom is itself confronting significant energy challenges), Saudi Arabia’s transition towards renewable energy for its own sake could, indirectly, provide some relief for the EU. Indeed, a further project of

358 Woert, E. “Trouble in oil paradise: domestic challenges in Saudi Arabia and their global implications” Energy Post, (25 April 2014) accessed 12 September 2014. 359 Ibid. 360 Ibid. 361 Harvey, F. “Saudi Arabia reveals plans to be powered entirely by renewable energy” The Guardian, (19 October 2012) accessed 12 September 2014. 362 “Summer demands taxes Saudi power sector, but kingdom is working on solutions”, International Energy Institute accessed 12 September 2014. 363 De Clercq, G. “Saudi Arabia hopes to export solar electricity to Europe” Reuters, (11 April 2013) accessed 12 September 2014. 364 International Energy Agency, “Summer demands taxes Saudi power sector, but kingdom is working on solutions”, 6 August 2014 accessed 12 September 2014. 365 Ibid. 366 Ibid. 367 U.S. Energy Information Administration, “Qatar” accessed 12 September 2014. 368 Ibid. 369 Ibid. 370 Gaub, F. “Gas crisis in Europe and the alternative Qatari role” Aljazeera, (18 May 2014) accessed 12 September 2014. 371 Szalai, P. “Gas in Central Europe: From Russia to Qatar And Back” V4 Revue, (20 August 2012) accessed 13 September 2014. 372 “LNG is a gas which has been cooled to -161 degrees centigrade where it condenses into a liquid phase. Compared to its gaseous form, LNG´s energy density is 600 times greater, which enables marine transportation. One LNG tanker can transport a volume equivalent to the annual consumption of an average French city. And it can change destination fairly rapidly based on the demand.” Ibid.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

EU’s gradual diversification of natural gas sources, Russia would lose weight vis-à-vis the EU at the negotiation table.373 It is expected that by 2020, LNG will meet 14% of the EU’s gas needs.374 For Qatar, the EU represents a very alluring energy client with an enormous potential for growth.375 In 2011, Qatar’s share accounted for almost 10% of the European gas market.376 Prospects for increasing this share are high, even more so after the Ukrainian crisis of 2014: it is expected that Qatari deliveries to the EU will rise by 22% in 2014.377 In total, European countries will receive 71.5 million tons of LNG in 2014.378 While the US is gearing up to become a major LNG exporter to the EU in the next few years, importing LNG from Qatar is an appealing alternative for the EU in its quest for energy security.

7. Other Middle East alternatives a. Iran Negotiations for a Trade and Cooperation Agreement (TCA) between the EU and Iran have been interrupted since 2005 due to concerns arising from the Iranian nuclear program.379 The EU used to be Iran’s biggest trading partner; however, due to the interna-

373 Wagner, D., Cafiero, G. and Bin Uzayr, S. “As the European Union Reconsiders Russian Natural Gas, Qatar Waits in the Wings” Inter Press Service, (25 April 2014) accessed 13 September 2014. 374 Gaub, F. “Gas crisis in Europe and the alternative Qatari role” Aljazeera, (18 May 2014) accessed 12 September 2014. 375 Ibid. 376 Hulbert, M. “The Vital Relationship: Why Russia needs Qatar (and Qatar could use Russia)” European Energy Review, accessed 13 September 2014. 377 Ibid. 378 Tuttle, R. and Shiryaevskaya, A. “Qatar to Boost Europe LNG Sales as Gas Trades at 7-Year High” Bloomberg, (23 December 2013) accessed 13 September 2014. 379 European Commission, “Iran” accessed 19 September 2014. 380 “Deep and increasing concerns about unresolved issues and Iran’s continued refusal to comply with its international obligations and co-operate fully with the International Atomic International Agency (IAEA) led to resolutions by the United Nations Security Council (UNSC) in 2006, 2007, 2008 and 2010, impos-

71

tional sanctions regime,380 it is currently only the Republic’s fourth trading partner after China, the United Arab Emirates and Turkey.381 Most Iranian exports to the EU are energy-related.382 Due to the sanctions, EU oil imports from Iran were completely suspended.383 Between 2012 and 2013, total EU imports dropped by 83%, whilst total EU exports decreased by 26%.384 On November 2013, a provisional agreement was reached between the EU, the five permanent members of the United Nations Security Council (UNSC) (the US, the UK, France, Russia and China) and Germany (P5+1).385 Under this interim settlement, Iran agreed to freeze some of its nuclear activities in exchange for sanctions relief.386 The agreement was extended in 2014.387 Notwithstanding the unease surrounding the country’s nuclear program and its poor human rights record, there is a great potential for enhanced relations between the EU and Iran.388 As of January 2014, Iran had an estimated 157 billion barrels of proved crude oil reserves, which constitutes 10% of the world’s crude oil reserves and 13% of reserves of the Organization of the Petroleum and Exporting Countries (OPEC).389 Although Iran has already been subject to four rounds of UNSC sanctions, much more severe measures were inflicted by the US and the EU, which markedly hindered Iran’s ability

ing sanctions against Iran, which are binding on all UN member states. The EU fully implements these United Nations sanctions and has also adopted a number of complementary measures.” Fact Sheet, “The European Union and Iran” accessed 19 September 2014. 381 European Commission, “Iran” accessed 19 September 2014. 382 Ibid. 383 Ibid. 384 Ibid. 385 “Q&A: Iran sanctions” BBC, (20 January 2014) accessed 19 September 2014. 386 Ibid. 387 Council of the European Union, “EU extends sanction relief for Iran” accessed 19 September 2014. 388 European Commission, “Iran” accessed 19 September 2014. 389 U.S. Energy Information Administration, “Country Analysis Brief: Iran” accessed 19 September 2014.

72

Multilateral, Regional and Bilateral Energy Trade Governance

to export oil, thereby affecting Iran’s oil production.390 In terms of gas, Iran holds the second-largest proved natural gas reserves in the world, behind Russia.391 Iran holds 17% of the world’s proved natural gas reserves and more than one-third of OPEC’s reserves.392 Regardless of the restrictions placed on Iranian energy supplies over the last few years, US investment393 in the country might prompt the re-emergence of Tehran as a major global energy supplier.394 Indeed, given its impressive wealth in terms of natural gas reserves, Iran could easily export gas to Europe through pipelines and also in the form of LNG. This means that Iran may help towards the EU’s diversification of gas supply sources.395 Once again, as was the case with the Caspian alternatives, it appears that the EU faces the dilemma of enhancing its energy security while trying to promote the rule of law and good governance in a conflict-ridden or war-torn country. Even though the current political backdrop, with the sanction regime, is far from ideal, deepening energy relations with Iran seems an attractive course of action to the extent that it is one of the few relatively nearby energy-rich countries which could export energy supplies to the EU, bypassing Russia. b. Iraq Bilateral relations between the EU and Iraq are governed by a PCA, signed in May 2012.396 Its trade provisions conditionally entered into force on August 2012 until ratification procedures for the whole agree-

390 Ibid. 391 Ibid. 392 Ibid. 393 “US company signs $1.175bn Iran energy deal: Report” The Times of India, (5 July 2014) accessed 19 September 2014. 394 Critchlow, A. “Iran offers Europe gas amid Russian energy embargo fears” Telegraph, (4 May 2014) accessed 19 September 2014. 395 Pashang, M. “Ukraine’s Crisis and Role of Iran in Europe’s Energy Security” Iran Review, (23 March 2014) accessed 19 September 2014. 396 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:204:0020:0130:EN:PDF.

RELP

1|2015

ment are completed.397 The EU is a major trading partner for Iraq, ahead of the US, India and China.398 Oil imports account for 99.6% of the EU’s total imports from Iraq and show a significant surplus in favour of the Republic.399 There is considerable potential for bilateral trade between Iraq and the EU, as well as for Iraq to develop into a strategic energy partner.400 In 2012, Iraq held the fifth largest proven petroleum reserves after Saudi Arabia, Venezuela, Canada and Iran, and was the eighth largest producer of petroleum liquids in the world.401 Merely a fraction of the Republic´s known fields are in development; in that sense, Iraq is one of the very few places left where hydrocarbon resources are yet to be fully exploited.402 After several years of being lashed by sanctions and wars, Iraq has begun to develop its oil and gas reserves.403 This said, the Republic will need to overcome infrastructure constraints and political disputes in order to reach its full production potential.404 Iraq has already been given the opportunity to enhance its energy production by having access to European infrastructures and pipelines.405 Indeed, by participating in the Southern Gas Corridor through the Trans-Anatolian pipeline, Iraq could also add its own natural gas supplies to the energy flows from the Caspian region to the EU.406 This would further diversify the energy supplies of the EU and boost the ongoing projects of alternative pipelines and energy routes. The issue of energy is specifically addressed by Article 91 of the PCA between the EU and its Member

397 http://ec.europa.eu/trade/policy/countries-and-regions/countries/iraq/. 398 Ibid. 399 Ibid. 400 European Commission, “EU-Iraq relations” accessed 20 September 2014. 401 U.S. Energy Information Administration, “Iraq”, p. 1 accessed 20 September 2014. 402 Ibid. 403 Ibid. 404 Ibid. 405 “Azerbaijan offers Iraq access to Europe gas pipelines” Daily News, (10 February 2014) accessed 20 September 2014. 406 Ibid.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

States, of the one part, and the Republic of Iraq, of the other part.407 This provision includes the standard content of other provisions on energy analysed earlier within the framework of a PCA. Given Iraq’s scarcity of proper energy infrastructure, the most relevant parts of the provision are the ones that touch upon cooperation between the two parties to promote energy investments in Iraq and the construction of alternative energy routes. Indeed, should the EU invest in Iraq to exploit its considerable energy wealth, the increase in Iraq’s energy production could be notable.

8. Sub-Saharan Africa alternative: The Nigeria case The Cotonou Agreement408 provides a legal framework for political, trade and development cooperation between the EU and Nigeria.409 In 2009, the two parties decided to bolster their relations by signing the Nigeria-EU Joint Way Forward,410 which lays out

407 Partnership and Cooperation Agreement between the European Union and its member states, of the one part, and the Republic of Iraq, of the other part, available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/261650/EU.7.2013.PCA.Iraq.pdf. 408 Partnership Agreement between the African, Caribbean and Pacific Group of States of the one part, and the European Community and its Member States, of the other part, signed in Cotonou on 23 June 2000, OJ L 317/3. The Agreement was amended in 2005. See OJ L209/27. 409 European External Action Service, “Nigeria” accessed 21 September 2014. 410 http://eeas.europa.eu/delegations/nigeria/documents/eu_nigeria/the_nigeria-eu_joint_way_forward_en.pdf. 411 Central Intelligence Agency, “The World Factbook: GDP (Official Exchange Rate)” accessed 20 October 2014. 412 Delegation of the European Union to Nigeria, “Trade” accessed 21 September 2014. 413 Ibid. 414 U.S. Energy Information Administration, “Nigeria,” p. 1 accessed 21 September 2014. 415 Ibid. 416 Ibid. 417 Ibid. 418 European Commission, “New EU support for renewable energy policy in Nigeria,” Press release, 4 July 2013, available at http://europa.eu/rapid/press-release_IP-13-649_en.htm. 419 “Nigeria promises to meet EU's long term gas supply needs” Platts, (25 June 2014) accessed 21 September 2014. 420 Ibid.

73

plans for enhanced dialogue and cooperation. Nigeria’s economic growth over the last few years has been remarkable, to the extent that it has become the largest economy in the African continent.411 The EU mainly imports oil products from Nigeria.412 In addition, the EU captures more than 50% of non-oil exports and is a key partner, by promoting the industrialization of Nigeria through trade and investment.413 Nigeria is, by far, the largest oil producer in Africa, holds the largest natural gas reserves on the continent and is a global leading exporter of LNG.414 In spite of the country’s energy prosperity, most of the oil and natural gas industries are located in the conflicted Niger Delta region, which curbs Nigeria’s oil production because of instability and supply disruptions.415 Local groups seek a share in oil revenues by launching offensives against oil infrastructure, thereby forcing companies to declare force majeure on oil shipments.416 These disruptions and the lack of proper infrastructure, both in the oil and natural gas sectors, constitute a crucial issue for Nigeria as up to 96% of its total export revenue derives from these sectors.417 Taking into account Nigeria’s need to attract investment to develop its infrastructure for producing oil and gas to its full potential and the EU’s resolution to diversify its energy supply, the two parties could withdraw substantial benefits by strengthening their ties. Since the Joint Way Forward agreement in 2009, the two sides have strived to deepen their relations, especially on the energy front. For instance, the European Commission announced in 2013 the investment of €27 million to support renewable energy policy in Nigeria.418 For its part, Nigeria claims that it could provide an alternative to Russian gas in the long term for the EU.419 According to Nigerian energy minister, Mrs. Alison-Madueke, the country endeavours to undertake significant investments to increase its export capacity, its natural gas production and, especially, complete LNG exports projects.420 The prospect of dealing with a rapidly developing country, with as remarkable potential for improvement as Nigeria, is an enticing option for the EU as a means of diversifying its sources of energy supply and dealing with an alternative energy partner. Moreover, Nigeria is already a leading LNG exporter as is Qatar, for instance. This, and the prospective emergence of the US as a major LNG exporter in the coming years, further reinforces the perception that we

74

Multilateral, Regional and Bilateral Energy Trade Governance

are, as the International Energy Agency (IEA) puts it, in the “golden age of gas”.421 Even though increasing its LNG imports may not provide an instant panacea for the EU’s energy dependence, this, along with the other courses of actions suggested above, would surely help the EU diversify its sources of energy supply and may provide the first steps towards effective energy security.

9. United States The Transatlantic Trade and Investment Partnership (TTIP) is a proposed FTA between the US, on the one hand, and the EU and its member states, on the other. The idea of such an agreement has been discussed for decades.422 The benefits of this FTA for the EU and the US in terms of trade liberalization, investment and regulatory convergence are potentially substantial. It is estimated that the economic profits would amount to a $ 125 billion annual GDP boost for each party.423 The TTIP aims to enhance economic growth, investment and trade between the US and the EU. It will tackle this objective through two main routes: 1) the reduction or removal of tariffs and 2) the elimination of the so-called “behind the border” technical barriers to export. A further goal of the TTIP is to open markets for services, investment and public procurement.424 More importantly for our purposes, the TTIP has considerable potential to promote sustainable development, energy efficiency and energy security through the agreement’s terms and the prospected increase in trade.425

421 For more information see IEA, “Are we entering a golden age of gas?” World Energy Outlook 2011 Special Report, available at http://www.worldenergyoutlook.org/media/weowebsite/2011/WEO2011_GoldenAgeofGasReport.pdf. 422 Barker, T. and Workman, G. “The Transatlantic Trade and Investment Partnership: Ambitious but Achievable” (2013) 1, (Atlantic Council and Bertelsmann Foundation) accessed 1 September 2014. 423 Ikenson, D. “The Transatlantic Trade and Investment Partnership: A Roadmap for Success” (14 October 2013) accessed 1 September 2014. 424 European Commission, “About TTIP” accessed 1 September 2014. 425 Leal-Arcas, R. and Wilmarth, C. “Strengthening Sustainable Development through Preferential Trade Agreements” in Wouters,

RELP

1|2015

Having said this, the degree to which the TTIP will succeed in this enterprise will largely depend on the quality of its environmental provisions, transparency, enforcement, and monitoring mechanisms.426 To encourage the creation of an economically sustainable business climate between the EU and the US, it would be judicious to facilitate trade in sustainable and green goods, technologies, information and services. Sustainability assurance schemes are an ancillary tool mentioned by the EU in its initial policy papers that would support economic sustainability.427 Sustainable development is one of the goals of the Lisbon Treaty,428 which means that the EU will strive for policies that ensure that objective in the ongoing TTIP negotiations. The EU already has its own Sustainable Development Strategy, aiming to identify and develop actions that will enable it to reach its sustainable development goals through efficient resource use, realizing ecological and social innovation potential, environmental protection and, ultimately, achieving prosperity.429 a. Raw materials and natural resources In its initial position paper, the EU aired concerns about WTO rules not fully reflecting issues related to international production and trade in raw materials and energy.430 More concretely, the EU contends that the WTO has firm rules addressing import barriers, but the rules dealing with export barriers are weaker. Moreover, the General Agreement on Trade in Services (GATS) does not include a definition of the term “energy services” or adequate rules for gov-

J. and Marx, A. (eds.) Ensuring Good Global Governance through Trade (Edward Elgar, forthcoming in 2015). 426 Ibid. 427 “Final Report: High Level Working Group on Jobs and Growth” 1, (United States-European Union High Level Working Group on Jobs and Growth, 11 February 2013) accessed 3 September 2014. 428 Articles 3 and 21 of the Treaty on European Union, as amended by the Treaty of Lisbon. 429 Council of the European Union, “Renewed Sustainable Development Strategy” accessed 3 September 2014. 430 European Commission, “EU-US Transatlantic Trade and Investment Partnership: Raw Materials and Energy: Initial EU Position Paper” accessed 3 September 2014.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

erning international trade in energy goods. In addition, trade and distribution monopolies, local content requirements and the absence of transparency in licenses for exploitation or trade in energy products are also gaps and issues affecting the current framework of international trade in energy.431 Therefore, the TTIP could contribute to the development of the multilateral trade system by implementing a stronger set of rules for the application of market principles in the area of energy and raw materials.432 Given the importance of the agreement, an energy chapter in this FTA would likely constitute a blueprint for future agreements.433 Were the TTIP to successfully liberalize trade in energy and raw materials, one of the anticipated advantages would be the increased US exports of LNG to the EU.434 Importing energy from the US would be beneficial for the EU, given the current situation on the international energy plane. This is so because it would, inter alia, mitigate the EU’s dependence on Russian gas.435 b. US shale gas revolution The US shale gas revolution has caused energy prices to fall in the US. EU gas prices are now around three times higher than those of the US.436 Currently, US natural gas imports are bounded by the 1938 Natural Gas Act, according to which exporters must apply for licenses, which have a cumbersome and tedious approval process. Nonetheless, this process is smoother for export to territories with which the US has an FTA.437 Consequently, becoming preferential partners would help the EU and no adjustments

431 Ibid., p. 1. For further analysis on legal issues arising from international trade in energy, see Leal-Arcas, R. and Abu Gosh, E. “Energy Trade as a Special Sector in the WTO: Unique Features, Unprecedented Challenges and Unresolved Issues,” Indian Journal of International Economic Law, Vol. 6, pp. 1-53, 2014. 432 European Commission, “EU-US Transatlantic Trade and Investment Partnership: Raw Materials and Energy: Initial EU Position Paper” p. 1 . 433 “Energy Trade in the Trans-Atlantic Trade and Investment Partnership: Endangering Action on Climate Change” Sierra Club accessed 3 September 2014. 434 Leal-Arcas, R. and Wilmarth, C. “Strengthening Sustainable Development through Preferential Trade Agreements” in Wouters, J. and Marx, A. (eds.) Ensuring Good Global Governance through Trade (Edward Elgar 2015).

75

would be needed in the US’s regulatory scheme to open trade. Moreover, negotiations may spur the US to reduce or even eliminate this permit scheme as well as other existing tariffs or licensing programs so that energy products and raw materials can cross borders more freely.438 In spite of the TTIP’s enormous potential to open trade in energy and raw materials, especially in the field of LNG,439 the resulting economic benefits are more nebulous. Indeed, even if the US were to lift its restrictions, it remains to be seen whether the EU would truly benefit from liberalized gas exports. This is so because gas prices are much higher in East Asian spot markets in comparison with gas prices on the European continent. Therefore, US gas exporters might first target Asian markets.440 All in all, US shale gas exports to Europe could provide a solution for diversifying energy sources and breaking the Russian stronghold on energy supplies. However, this solution faces technical and legislative barriers to trade in energy between the EU and the US. First, the EU needs considerable investments in building the necessary infrastructure for transporting gas from the US (e.g., liquefied gas terminals). Second, changes are required in US legislation to allow exports of energy resources (e.g., elimination of various forms of export quantitative restrictions, such as bans and discretionary licensing procedures). Regarding the first hurdle, of investment in liquefied gas terminals, the EU has already initiated a number of projects. In 2013, the European Commission approved an investment of €223.7 million in the construction of the Świnoujście LNG terminal in

435 See generally Leal-Arcas, R. and Schmitz, J. “Unconventional Energy Sources and EU Energy Security: A Legal, Economic and Political Analysis” Oil, Gas & Energy Law Journal, Vol. 12, pp. 1-37, 2014. 436 International Energy Agency, World Energy Outlook 2013, 2013 (at p. 12), available at http://www.iea.org/newsroomandevents/speeches/131112_weo2013_presentation.pdf. 437 Rostowska, M. “Energising TTIP: A Step towards Better EU Energy Security” PISM Bulletin, No. 57 (652), p. 2, 2014. 438 Leal-Arcas R. and Wilmarth, C. “Strengthening Sustainable Development through Preferential Trade Agreements” in Wouters, J. and Marx, A. (eds.) Ensuring Good Global Governance through Trade (Edward Elgar 2015). 439 LNG can be sold without a permit only to the few countries with which the US has FTAs. 440 Dreyer, I. “Energising TTIP: Diversification through trade?,” European Union Institute for Security Studies, p. 3, 2014, available at http://www.iss.europa.eu/uploads/media/Brief_18_TTIP.pdf.

76

Multilateral, Regional and Bilateral Energy Trade Governance

RELP

1|2015

Poland.441 This investment will increase security of energy supply as well as help diversify energy sources.442 The terminal is expected to begin importing Qatari gas in 2015.443 An additional example of the EU’s commitment of investing in the necessary infrastructure for increased LNG imports is a financial contribution of €107 million approved by the European Commission in 2014 to upgrade the Greek liquefied gas terminal of Revithoussa.444 Furthermore, the European Investment Bank (EIB) has been providing more than €2 billion for energy infrastructure in the Netherlands over the last five years, thereby endorsing large-scale investment in electricity transmission and in the Maasvlakte LNG terminal, located in Rotterdam harbor.445 Such investments in adequate infrastructure for LNG imports from the US will place a severe economic strain on the EU. Nonetheless, taking into account that ambitious enterprises have already been undertaken, whilst others are on their way, one may argue that it is a price that the EU will be happy to pay in the long-run in order to overturn Russia’s pipeline-based natural gas market dominance in the European continent. As far as the US legislative snag is concerned, the issue is, at the time of writing, being discussed in the US Congress. Many authoritative voices and pundits

advocate lifting the various forms of export quantitative restrictions, such as bans and discretionary licensing procedures.446 There are indeed, many reasons for such a move. The shale gas revolution in the US has profoundly transformed global energy production, consumption and trade: the US is currently experiencing a transition period in which it could, after decades of being a major energy importer, evolve into a major energy exporter due to the unprecedented surge of US domestic energy production.447 Although the environmental consequences of fracking are still being debated, the production of natural gas is certainly booming,448 to the extent that some have dubbed this period as the “dawn of a US oil and gas renaissance.”449 There are many reasons for lifting the current US restrictions on crude oil export as well as natural gas. Firstly, the US has a long-standing tradition of deference towards free trade.450 Secondly, contrary action by the US would infringe WTO rules (i.e., GATT Article XI)451 and might spur other countries to follow suit.452 Thirdly, removing the current quantitative restrictions would be in line with the Obama administration’s stated aim of expanding US exports.453 Moreover, many specialists argue that allowing the

441 European Commission, “A boost for clean and secure energy in Poland: European Commission approves more than € 200 million EU regional funds for liquefied natural gas terminal” press release (16 July 2013) accessed 15 September 2014.

http://www.americansecurityproject.org/ASP%20Reports/Ref%200116%20-%20The%20Geopolitical%20Implications%20of%20U.S.%20Natural%20Gas%20Exports.pdf, p. 1, 2013.

442 Ibid. 443 Wagner, D., Cafiero, G. and Bin Uzayr, S. “As the European Union Reconsiders Russian Natural Gas, Qatar Waits in the Wings” Inter Press Service, (25 April 2014) accessed 13 September 2014. 444 “EUR 107 million of EU regional funds to optimize natural gas supply in Greece” (12 August 2014) accessed 15 September 2014. 445 Counter Balance, “Myths and Facts: The Netherlands as a Gas Roundabout and EIB Investments in Excess Capacity,” http://www.counter-balance.org/wp-content/uploads/2014/06/Gas-Roundabout-finalweb.pdf. 446 See for instance Lawrence Summers’s speech at the Brookings Institute on 9 September 2014, available at http://larrysummers.com/wp-content/uploads/2014/09/140910_Brookings_Energy_Transcript_jd.pdf. 447 Cimino, C. and Hufbauer, G. “US Policies toward Liquefied Natural Gas and Oil Exports: An Update” Peterson Institute for International Economics Policy Brief Number 14-19, p. 1, 2014. 448 Cunningham, N. “The Geopolitical Implications of U.S. Natural Gas Exports” American Security Project available at

449 Houser, T. and Shashank, M. Fueling up: The Economic Implications of America’s Oil and Gas Boom (Peterson Institute for International Economics 2014) p. 15. 450 See Lawrence Summers’s speech at the Brookings Institute on 9 September 2014, available at http://larrysummers.com/wp-content/uploads/2014/09/140910_Brookings_Energy_Transcript_jd.pdf. 451 Incidentally, US energy export restrictions are in manifest violation of GATT Article XI, and yet have never been challenged at the WTO. Since WTO law is about economic interests, and WTO Members may obtain cheap coal from other countries, this may explain why no WTO Member has ever challenged this GATT Article XI violation by the US. Bringing a complaint before the WTO is costly and countries can certainly find cheap coal elsewhere. That said, the US has long argued that its energy export restrictions are excused by GATT Article XXI(b)(iii), which states that “Nothing in this Agreement shall be construed…to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests… taken in time of…emergency in international relations.” The legal basis of the US export restrictions is the 1975 Energy Policy and Conservation Act, which was a response to the 1973 oil crisis, and which expressly mentions that its measures are intended to prepare for energy emergencies. 452 Hufbauer, G., Bagnall, A. and Muir, J. “Liquefied Natural Gas Exports: An Opportunity for America” Peterson Institute for International Economics Policy Brief Number 13-6, p. 18, 2013. 453 Ibid.

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

lift of natural gas bans would benefit the environment, as increased natural gas exports would reduce the use of coal, which releases greater amounts of CO2 when burned and is, hence, more harmful to the environment.454 In addition, lifting the current export ban could also improve the geopolitical situation of the US in the global energy economy.455 By becoming a major energy exporter and a very alluring alternative to Russia for the EU, the US would strengthen its power and influence on the international energy trade market. In a similar vein, as noted by Cimino and Hufbauer, “free exports of LNG, crude oil, and other energy products are an essential complement of US international economic policy, which has long advocated free trade in raw materials, unconstrained by export barriers or restrictions. Free exports to Europe are a geopolitical necessity in the wake of Russia’s annexation of Crimea and its continued adventurism in East Ukraine.”456 Finally, “if freeing crude exports makes America richer, its allies stronger, its foes weaker and the world safer, what stands in the way?”457 Hence, one may argue that, should the EU and the US manage to overcome these technical and legislative barriers, the prospective benefits in terms of energy (let alone in the other areas addressed by the TTIP) could be remarkable for the two parties: the US would become a major energy exporter, which would provide it with a much needed investment stimulus458 whilst fostering the consumption of more environmentally friendly energy sources than coal—something already happening even without the TTIP; for its part, the EU would greatly benefit from such a turn of events. In spite of the fact that US LNG cannot in itself solve the current deadlock, it would, nonetheless, stimulate the diversification of energy supplies and hopefully spur further steps towards the transition to next-generation energy technologies and renewable energy, which could ul-

454 See Lawrence Summers’s speech at the Brookings Institute on 9 September 2014, available at http://larrysummers.com/wp-content/uploads/2014/09/140910_Brookings_Energy_Transcript_jd.pdf. 455 Ibid. 456 Cimino, C. and Hufbauer, G. “US Policies toward Liquefied Natural Gas and Oil Exports: An Update” Peterson Institute for International Economics Policy Brief Number 14-19, p. 9, 2014. 457 See “American energy exports: Crudely put,” The Economist, 7 February 2015, p. 58. 458 Cimino, C. and Hufbauer, G. “US Policies toward Liquefied Natural Gas and Oil Exports: An Update” Peterson Institute for International Economics Policy Brief Number 14-19, p. 9, 2014.

77

timately lead to the demise of Russia’s over-dominance of energy supply within the European continent.

V. Conclusion This article has analysed the multi-layered energy trade governance system from the multilateral, regional and bilateral perspectives. We conclude that, despite the link between trade and energy, it is surprising that the trade regime has not dealt with energy issues more directly. At the international level, there is no truly universal framework exclusively governing global trade, let alone governing global trade in energy. In its absence, a multi-layered patchwork of regimes has emerged, the largest component of which is the WTO. We also conclude that, since energy transit relies on a variety of means, including vessels and other means of transportation, and conduits such as cross-border overland and underwater pipelines, for bringing energy goods to markets, there is a need to further invest in such infrastructure for greater facilitation of energy security. Regarding regulatory convergence with the aim of lowering technical barriers to trade in energy-related goods and services and fostering the use of renewables, we have dealt with the Environmental Goods Agreement, which is currently being negotiated in the framework of a plurilateral agreement within the auspices of the WTO. This development is to be welcomed as it illustrates the willingness of global actors to collaborate in order to achieve greater cohesiveness in global energy governance. The 14 WTO members currently involved in the negotiations aim to liberalize trade for green goods by removing tariffs, customs or any other such measures as well as regulatory barriers (non-tariff barriers) which are likely to curb or hinder trade. Were the EGA to come to fruition and the US to lift its energy export restrictions, this would further boost prospective American LNG exports to the EU, thereby increasing EU energy security. We have also assessed IRENA’s laudable efforts to foster the use of renewable energy through the planning and financing of numerous ambitious projects around the world. Taking into account the privileged position of the EU, and the certainty that the transition to next-generation energy technologies and renewable energy must occur sometime soon (that is,

78

Multilateral, Regional and Bilateral Energy Trade Governance

if the EU is serious about its environmental commitments), one may argue that the wake-up call of the 2014 Ukrainian crisis may be the perfect juncture for the EU to forge ahead in that direction. Regarding regional energy trade governance, the inclusion of strong energy chapters in regional trade agreements can only help enhance energy security. RTAs currently represent a major characteristic of the multilateral trading system. It has considered the compatibility between the legal framework of RTAs and that of the WTO and has analyzed the role that several legal instruments play in relation to energy trade, namely the NAFTA, the EU, the ECT, MERCOSUR, and ASEAN. The adoption of RTAs offers both pros and cons. Regarding the positive aspects of RTAs, they are usually considered an essential component of liberalizing trade, as they allow to tailor agreements to the specific trade and investment context of a particular group of countries or region of the world. Furthermore, they can create regional fora where it is easier to discuss innovative provisions aimed at liberalizing trade. In fact, states that participate in regional trade agreements are able to undertake deeper commitments than the ones typically assumed at the multilateral level. As a result, well-established regional trade agreements can actually promote the multilateral trading system, offering opportunities for more advanced measures of trade liberalization, particularly when global trade negotiations seem to reach an impasse. Finally, RTAs increase trust between contracting parties and reduce the likelihood of conflict between them, as shown in relation to ASEAN, which has minimized the political tensions among its contracting parties. Although several advantages derive from the establishment of RTAs, their proliferation could pose considerable risks. Regional integration might hinder multilateralism, creating trade diversion through the raising of barriers to trading partners outside the region. In such cases, RTAs might become a stumbling block to multilateralism, rather than a building block. Furthermore, RTAs might divide the world in rigid trading blocs in conflict with each other. This is especially true in cases where countries that share common political and economic interests tend to combine forces in order to compete with other groups at the global level. Such a risk is particularly serious where RTAs are not created to achieve market aims, but to pursue political objectives. In recent

RELP

1|2015

years, the political tensions that have mounted among different groups of countries have increased such a threat, which is more significant in relation to energy trade, due to the asymmetric distribution of reserves, production, and consumption of natural resources among countries and the strategic importance they assume. For instance, the fact that the Eurasian Customs Union is assuming a greater role as an EU’s antagonist in the confrontation for political and economic control over the Eurasian region and that Russia is retaliating against some former Soviet republics (e.g., Ukraine) by limiting energy supply and even taking military actions is emblematic of such a risk. As for the EU’s bilateral energy trade governance, after the events that unfolded in early 2014 in Ukraine, the EU is at the crossroads in terms of its energy security. Its shaky position on the global energy stage has become even weaker as, yet again (after the 2006 and the 2009 energy disruptions), the already tense relations with Russia have further soured in the wake of the 2014 Ukrainian crisis. This incident has rekindled, more than ever, debates on the question of EU energy security and calls for swift and decisive actions in order to adequately tackle the issue once and for all. Tackling the issue is challenging, given the largely multi-layered and eminently fragmented regulatory framework of global energy governance. Moreover, taking into account the magnitude of the EU’s dependence on Russian gas imports and Russia’s tendency to use its energy sources as a political weapon, we suggest the undertaking of multiple courses of action. First, we have analysed the EU’s bilateral relations with its traditional energy partners (Russia, Norway, Algeria and Libya) and suggested alternatives by evaluating other energy-rich countries with which energy relations could be further enhanced. The EU should actively pursue diversifying its supply of energy sources by dealing with alternative markets such as Azerbaijan, Kazakhstan, Turkmenistan, Saudi Arabia, Qatar, Iran, Iraq or Nigeria. Bolstering the EU’s ties with these alternative energy partners (by introducing or reinforcing specific energy chapters within the framework of their respective bilateral agreements) would be a means of diversifying EU energy supply. In addition to the latter group of countries, we contend that, within the framework of the TTIP, the US could become an unexpected and attractive energy

RELP

1|2015

Multilateral, Regional and Bilateral Energy Trade Governance

supplier through the prospected export of LNG. However, this option will only be feasible if both legislative and technical barriers are overcome: the US should lift its current ban on energy exports and the EU should boldly invest in its energy infrastructure to accommodate imports of LNG. The anticipated advantages that such a turn of events would entail for the US, combined with the ongoing EU projects to raise and develop liquefied natural gas terminals all over the European continent, are promising indica-

79

tions towards the effective materialization of this option. To a lesser extent, we alluded to the possibility for the EU to redouble the exploration of unconventional sources of energy, in particular shale gas. Some European countries, such as Poland or France, hold large reserves which could, eventually, contribute to the enhancement of EU energy security, should shale gas extraction prove to be viable, both economically and environmentally.

80

Annex

Source: US Energy Information Administration, accessed 22 September 2014.

Source: US Energy Information Administration, accessed 11 September 2014.

RELP

1|2015

RELP

1|2015

81

Source: The Economist, accessed 20 October 2014.

Source: The World Trade Organization, accessed 07 October 2014.

82

RELP

Source: Estevadeordal, A. “The Rise of Regionalism,” Third CEPII-IDB Conference "The New Regionalism: Progress, Setbacks and Challenges" (Washington, DC, February 2006) accessed 07 October 2014.

1|2015

RELP

1|2015

83

Source: United States Department of Transportation, Bureau of Transportation Statistics, accessed 10 October 2014.

Source: Organization of the Petroleum Exporting Countries (OPEC), World crude oil reserves, accessed 08 October 2014.

84

RELP

Source: European Commission - Eurostat, Energy production and imports accessed 12 October 2014.

Source: European Commission - Eurostat, Energy production and imports accessed 12 October 2014.

1|2015

RELP

1|2015

85

Source: MERCOSUR accessed 16 October 2014.

86

RELP

1|2015

Source: Latin American Energy Organization – Resources accessed 16 October 2014.

RELP

1|2015

87

Source: ASEAN Council on Petroleum (ASCOPE) accessed 17 October 2014.