Energy charter treaty is an instrument for the promotion of cooperation in the energy sector and provides the legal basis for an open and non-discriminatory energy market

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International Journal of Management (IJM) 
Volume 8, Issue 4, July–August 2017, pp.109–117, Article ID: IJM_08_04_014 
Available online at 
Journal Impact Factor (2016): 8.1920 (Calculated by GISI) www.jifactor.com 
ISSN Print: 0976-6502 and ISSN Online: 0976-6510 
© IAEME Publication 
ENERGY CHARTER TREATY IS AN 
INSTRUMENT FOR THE PROMOTION OF 
COOPERATION IN THE ENERGY SECTOR AND 
PROVIDES THE LEGAL BASIS FOR AN OPEN 
AND NON-DISCRIMINATORY ENERGY 
MARKET 
Shivanku Bhatt 
Legal Consultant at Uttarakhand Electricity Regulatory Commission, India 
ABSTRACT 
“Mixed agreements create no great difficulties as long as their implementation 
runs smoothly.” The ECT is a living proof of this fact. As it has been shown, certain 
problems of compliance of the ECT within the EC area have already aroused. 
Furthermore, the ECT case show how the recurrent problems regarding mix 
agreements and Laws can lead to problems of competence, and subsequently to highly 
problematic issues like the substantive fragmentation of International Law. 
Key words: Retention, Work-life balance, Commitment, Motivation, Talent 
management. 
Cite this Article: Shivanku Bhatt, Energy Charter Treaty is an Instrument for the 
Promotion of Cooperation in the Energy Sector and Provides the Legal Basis for an 
Open and Non-Discriminatory Energy Market. International Journal of Management, 
8 (4), 2017, pp. 109–117. 
1. INTRODUCTION 
1.1. Overview of the Energy Charter Treaty 
With the growing population over the years the need for energy has taken a tremendous 
transition. Countries have realized that the fundamental principle for the development of 
infrastructure, better transportation facilities and protecting the territory of a state, one need to 
have surplus energy. From the very basic household work to making a nuclear bomb the 
requirement of energy is inevitable. 
The topic of the study does not only help one to understand the demand for the energy and 
the tussle among the countries for the same but also gives a multidimensional approach to the 
Shivanku Bhatt 
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subject. The swell in the international market for energy demand has made the world to study 
the very intricacies of its generation, demand-supply and the agreements involved in it. 
The importance of energy to the development of a nation‘s economy can hardly be over-
flogged. The need to meet the international demand for energy is even more pressing; the 
incentive to use unorthodox .methods of negotiation and control becoming attractive and 
therefore every country is trying to build up its energy competency. The presence of 
.hydrocarbons and other sources of energy bring with it, political and economic relevance The 
interplay of states in the international .energy market can result in friction, the only remedy 
being the introduction of internationally accepted standards. While international law is 
considered to be the most favoured solution in most circumstances, it is not without saying 
that like every other law, it is moulded and fashioned around the economics and politics of the 
world to which it applies. 
Energy Charter Treaty is one platform where the international agenda for the growth and 
demand of energy is bolstered. The motive of ECT is to "set up a legal framework for key 
dimensions of international energy relations – security of investment and security of supply 
and demand –" still catered "for the demands of the changing international energy 
market."[1] The Energy Charter Treaty therefore plays an important role as part of an 
international effort to build a legal foundation for energy security, based on the principles of 
open, competitive markets and sustainable development. The topic will make the researcher 
understand the whole legal concept of the flow of energy from one country to another. To 
understand the purpose of the study a thorough reading of various research papers were done, 
reports of the WTO were read and many articles of the various publications of international 
journals were referred. 
During the study of the reports and articles it was found that although the Energy Charter 
Treaty has been very helpful for providing a legal backbone to the world energy market but 
there is a need to make policies which deal with the specific issues pertaining to the 
developed , developing and underdeveloped countries. The policies should be flexible in a 
way that they cater the need of all the players in the world energy market. The study purports 
to identify the lacuna in the legal framework of the International Energy Policies and address 
the methods to heal the same. 
2. BACKGROUND & EVOLUTION 
THE Energy Charter Treaty (ECT) was established as an extension of the European Energy 
Charter of (1991). The EEC was a political initiative creating a non binding agreement 
between the Eastern and Western European States to foster and encourage East-West co-
operation in the energy sector.[2] As with the end of the cold war the nations started to realize 
the importance and need of the energy, an unprecedented opportunity arose for Eastern 
European States to develop energy co-operation with the western states. The idea of the 
charter sprouted when it was observed that the eastern European states possessed energy 
resource that western European states needed, and the western European states could provide 
access to much needed capital for energy and infrastructure development in Eastern 
Europe[3]. The thought of the interdependence was ignited but the major concern then was 
that the member countries realize the importance that the cooperation in this field is much 
needed. The most fundamental question was, whether the nations will compromise its right on 
its resources. The sovereign authority of any nation over its resources and even a minor doubt 
would create a threat and would lead to a suspicion was the major challenge. 
Energy Charter Treaty is an Instrument for the Promotion of Cooperation in the Energy Sector and 
Provides the Legal Basis for an Open and Non-Discriminatory Energy Market 
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The Energy Charter process started with the European Energy Charter initiated by the 
Dutch Presidency of the European Community in 1990. In December 1991, the European 
Charter Declaration was adopted with the aim of bringing about a new East-West economic 
relationship. Three years later, the Declaration evolved into a binding Treaty. After ten years 
ECT continues to be the first and only multilateral agreement on the promotion and protection 
of energy investment. 
The ECT represents the first international regime in energy trade and transit, issues that 
are not addressed by the World Trade Organizations agreements[4]. In order to improve and 
clarify related transit provisions, the ECT contracting parties began to develop a Transit 
Protocol as a supplement to the Treaty. Although the Transit Protocol was never completed, 
with negotiations having stalled since 2009, there is a common understanding that a specific 
agreement on energy transit would be more effective than a general WTO-based framework. 
The ECT‘s multilateral investment protection represents a positive move toward the 
unification of energy investment protection governance. The scope of the investment 
provisions covers fair and equitable treatment, ‗constant protection and security‘ for investors 
as well as an obligation to respect any contractual arrangement. 
Not only does ECT gushes out the investment clause and trade related provisions but also 
gives a platform to the contracting parties to settle their dispute arising in this arena. 
Arbitration is one of the key attractions of the treaty and has a flexible dimension of its own. 
The treaty holds that a member country does not necessarily need to have a separate clause or 
a separate agreement for Arbitration. A mere membership of the ECT gives the parties an 
option to go for an Arbitration settlement. 
In spite of its goal to forge a global energy governance framework, the geographical scope 
of the ECT remains rather limited. Several energy export-oriented states have rejected the 
Treaty, including Organization for Petroleum Exporting Countries members, Norway and 
Australia. Moreover, the United States, which is one of the biggest energy importers in the 
world, has distanced itself from the process since the beginning of the Treaty negotiations. 
Washington‘s scepticism towards multilateralism is not unique in this case. Other countries, 
such as China, carefully considered the Treaty‘s implementation before acceding to it. 
3. ENERGY CHARTER TREATY- TRADE & TRANSIT 
Energy and hydrocarbons in particular .is transported over increasingly large distances from 
producers to consumers. The demand supply chain has to be maintained through a defined, 
uninterrupted channel. The treaty tries to ensure that the free flow of the energy is maintained 
throughout the globe. Trade and transit although are two different terms but to understand the 
working of each one has to read them both together. Where Article 5 of the ECT seeks to 
address trade related investment measures that create discrimination and favor, generally 
towards the host state, Article 7 addresses matters relating to "Transit". Article 7(3), in turn, 
deals with a non-discrimination obligation of Contracting Parties towards treatment of Energy 
Materials and Products, which are ―in Transit". 
4. TRADE 
One of the prime objectives of the ECT is to control and minimize political risks and also that 
the Contracting Party shall not apply any trade-related investment measure that is inconsistent 
with the provisions of article III or XI of the GATT[5]. This forms the backbone of the trade 
provisions of the ECT. It can also be deciphered from the treaty that an investor in the energy 
sector needs to be able to predict his ability to sell his product, therefore there is a need to 
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have a trade provision in treaty. The treaty also talks about the non-discriminatory provisions 
when it comes to trade. The Article 5 trade provisions are not a new set of trade provisions. 
Rather under Article 5 (1), the ECT trade provisions incorporate the TRIM provisions .of 
Articles III and .XI of the GATT. In case of natural gas, most of which is transported by 
pipeline, this often involves crossing different .national borders. Bilateral disputes over 
energy transit can quickly have multilateral implications for gas supply, underlining the 
importance of standards, accepted by countries on a multilateral basis, to promote reliability 
of cross-border energy flows. One of the key issues that boil down is that the treaty is silent 
on the disputes relating to the member and non-member countries. This turns as a major 
concern when one deals in the energy market and that the application of the norms of the 
treaty turns futile. 
The issue that comes on the surface while reading the trade provisions which propounds to 
ensure non-discriminatory approach towards the non-domestic investors. But there are certain 
exceptions which are given under Article 5 of the ECT which talks about the situations where 
a country gives certain preferences to its domestic investors. On the surface it appears to 
prevent national favour, and shows the contradiction which does not nurture the interest of the 
developing countries, rather make them more apprehensive. The thought that the treaty flows 
from the interest of the rich countries and that it is a tool of the wealthy nations, give a sense 
of suspicion to the countries which have been under the colonial rule. There are some 
arguments that the provisions of the treaty are neither comprehensive nor robust as they first 
appear. On one hand the treaty talks about the theory of national treatment and on the other it 
also gives a narrow escape to the member in some exceptional circumstances. 
5. TRANSIT 
Article 7(3) of the Energy Charter Treaty provides: 
―Each Contracting Party undertakes that its provisions relating to transport of Energy 
Materials and Products and the use of Energy Transport Facilities shall treat Energy 
Materials and Products in Transit in no less favourable a manner than its provisions treat such 
materials and products originating in or destined for its own Area, unless an existing 
international agreement provides otherwise.‖ 
The study seeks to interpret Article 7(3) of the ECT. The attempt is to answer the question 
whether, along with an obligation not to discriminate energy materials and product in transit 
as compared to exports and imports of energy materials and products, the non-discrimination 
requirement contained in Article 7(3) of the ECT also includes an obligation not to 
discriminate such materials and products as compared to energy materials and products in 
domestic traffic. The treaty does not provide a clear reading on the subject and thus leaves 
some amount of ambiguity in the provision. There is a divergence in the view of the legal 
literature as to the proper interpretation of the text of Article 7 (3) with regard to the .scope of 
non-discrimination obligation. On the one hand, some scholars, says that Article 7(3) both 
provides National Treatment and Most favored Nations Obligations, i.e. that the treatment of 
energy materials and products in transit shall be compared with the treatment of imports, of 
exports and of domestic traffic[6]. On the other hand, the Russian proposal on the new 
Understanding of Article 10 of the draft Transit Protocol[7] considers that no national 
treatment obligation exists in Article 7(3), or, put differently, that the treatment of energy 
materials and products in transit shall be compared with the treatment of imports and of 
exports, but not with the treatment of domestic traffic. The issue is particularly acute in 
countries that provide internal transport subsidies designed to keep costs for internal 
transportation of energy lower than the cost of transit of energy. This again has led to a 
Energy Charter Treaty is an Instrument for the Promotion of Cooperation in the Energy Sector and 
Provides the Legal Basis for an Open and Non-Discriminatory Energy Market 
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definite amount of discontentment of the member courtiers and those who completely rely on 
the principles of the ECT. 
It is observed that there is no explicit obligation which supplements that domestic traffic 
must be included into the comparable standard for the purpose of Article 7(3). 
One of the major concerns that the treaty does not address is of the transit through the 
countries which are not signatories of the treaty. This is one of the fundamental issue that the 
treaty fails to resolve. At this juncture where there is a dearth of conventional source of 
energy and the nation‘s rivalry, it is found that the treaty has not made an adequate effort to 
resolve the disputes. when the enemy country does not allow the use of its territory for the 
transit of the energy. 
6. ENERGY CHARTER TREATY: INVESTMENT PROVISION 
The investment chapter is a cornerstone of the ECT. Its provisions aim to promote and protect 
foreign investment in member .countries. To this end, the Treaty grants a number of 
fundamental rights to foreign investors with regard to their .investment in the host country. 
Foreign investors are protected against the most important political risks, such as 
discrimination, expropriation and nationalisation, breach of individual investment contracts, 
damages due to. war and similar events, and unjustified restrictions on the transfer of funds. 
The dispute settlement provisions of the Treaty, covering both inter-state arbitration and 
investor-state dispute settlement, reinforce these investor rights. The perceived degree of 
political risks in the host country considerably affects the decision of foreign companies 
whether to make an investment in the first place or not, and what level of return it would 
require. The higher the perceived risk, the higher the return that the foreign investors demand. 
Vice versa, the lower the perceived risk, the more capital is likely to be invested and the more 
potential revenue the host country will gain. By reducing the political risks that foreign 
investors face in the host country, the ECT seeks to boost investor confidence and to 
contribute to an increase in international investment flows. 
7. DISPUTE SETTLEMENT UNDER THE ECT 
In the early 1990s ideas were discussed on how to develop the energy cooperation between 
Eastern and Western Europe. Russia and many of its neighbouring countries were rich in 
energy but in great need of investment to be able to reconstruct their economies at the same 
time as West European countries were trying to diversify their sources of energy supplies to 
decrease their potential dependence on other parts of the world. There was therefore a 
recognized need to set up a commonly accepted foundation for energy cooperation between 
the states of the Eurasian continent, out of which the Energy Charter Process was born.[8] 
Dispute settlement is regulated in Part V of the ECT (Articles 26–28). Article 26 of the 
ECT governs investment disputes between private investors and contracting states, and 
extends to investors a right to arbitration of such disputes. Article 27 regulates resolution of 
state-to-state disputes between contracting parties concerning the application or interpretation 
of the ECT (not limited to matters of investments). The ECT also contains special provisions 
for the resolution of trade disputes, a conciliation procedure for transit disputes and 
consultation procedures for competition and environmental disputes.[9] 
7.1. The Dispute Settlement Mechanism 
 State – State Dispute Settlement, Art. 27 ECT 
 Investor – State Dispute Settlement, Art. 26 ECT 
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 Transit Disputes, Article 7 (7) ECT 
 Trade Disputes, Art. 29 ECT + Annex D (where one party is not a WTO member) 
 Competition and Environmental Disputes 
 Competition: Article 6 (5), Art. 27 (1) ECT 
 Environment: Article 19 (2) ECT (consulation in the ECT Conference) 
The right to arbitration or other dispute resolution mechanism (see Section 3C below)—of 
investment disputes set out in Article 26 is only one of many dispute resolution mechanisms 
of the ECT, but arguably the most significant. Article 26(1) covers: ‗disputes between a 
Contracting Party and an Investor of another Contracting Party relating to an Investment of 
the latter in the Area of the former, which concern an alleged breach of an obligation of the 
former under Part III‘. The definitions of these terms and thus the scope of the investor's right 
to dispute resolution in accordance with Article 26 have been described in Section 2B above. 
It should be emphasised that the right to arbitration or other methods of dispute resolution, 
under Article 26 arises solely out of the ECT and is not subject to any requirement of 
exhaustion of local remedies, or any contractual dispute resolution mechanisms. 
7.2. Amicable Settlement 
In accordance with the first paragraph of Article 26, investment disputes (as defined above) 
must, if possible, be settled amicably. The investor may not submit a dispute for resolution in 
accordance with Article 26 until three months have elapsed from the date on which either 
party to the dispute requested amicable settlement. However, if a dispute cannot be settled 
amicably within three months, the dispute shall be resolved in a forum elected by the investor, 
as set forth in Article 26. 
7.3. The Investor's Choice of Forum for Dispute Resolution 
The investor has the choice of submitting an unresolved dispute covered by Article 26 to one 
of the following fora under Article 26(2)(a)–(c): 
 the national court or administrative tribunals of the contracting party where the Investment 
was made, 
 in accordance with a previously agreed dispute settlement procedure, or 
 international arbitration. 
7.4. Applicable Law 
Article 26(6) provides that an arbitral tribunal established under para 26(4) shall decide the 
issues in dispute in accordance with the ECT and the rules and principles of international law. 
7.5. Local Companies Controlled by Foreign Investors 
As regards the nationality of an investor, Article 26(7) ECT states that a legal entity which has 
the nationality of the contracting party to the dispute, but before the dispute between it and the 
contracting party arose, the local party was controlled by investors of another contracting 
party, the local party shall be treated as a ‗national of another Contracting State‘ for the 
purpose of Article 25(2)(b) of the ICSID Convention, and a ‗national of another State‘ for the 
purpose of Article 1(6) of the Additional Facility Rules. Hence, if the majority of shares of an 
investor of the same nationality as the host state are controlled by investors of another 
contracting state, the investor is to be viewed as an investor of another contracting party for 
purposes of establishing ‗diversity‘ jurisdiction for an arbitral tribunal constituted under the 
ICSID Rules or the ICSID Additional Facility Rules. Accordingly, the ECT creates a 
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Provides the Legal Basis for an Open and Non-Discriminatory Energy Market 
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possibility for ‗local companies‘, which are owned or controlled by investors of another 
contracting party, to request international arbitration under the ECT against their ‗home 
states‘, and benefit from the investor protection of the ECT which may be more favourable 
than the protection available under national law. 
8. THE ENERGY CHARTER PROCESS: LOST? OR NEW 
MOMENTUM? 
Without doubt the Energy Charter Treaty is a ―child‖ of the 1990s, when the consumer 
countries had made significant inroads into producing countries, and the oil prices had been 
comparatively low due to a relaxed supply situation and new independent sup-pliers in the 
Former Soviet Union entering the scene. 
Since then, the market and producer-consumer relations have changed profoundly. Since 
the turn of the century, the OECD world has been losing relative consumer weight: Demand 
has been driven by China and India. It is also increasing in the Middle East and North Africa. 
Energy trade is related to enormous financial transfer but also to power shifts, and the strong 
demand between 2002 and 2008 had favoured producing countries in that respect. How-ever, 
the economic crisis and the gas glut (due to decreased demand, a shale gas revolution in the 
United States, and the freed liquid natural gas volumes available) have turned the gas markets 
around, especially in Europe. Climate change has become a pressing issue and the energy 
sector is at the heart of the problem. Energy savings, energy efficiency, and a rising share of 
renewable energy are more important than ever. 
The Energy Charter Conference adopted the Road Map for Modernisation of the Energy 
Charter Process on November 24, 2010, thereby acknowledging the new developments. This 
was the first visible out-put by the Strategy Group established at the previous conference in 
Rome, which had paved the way for the modernization of the Process with the Rome 
Declaration. The Road Map for the Modernisation of the Energy Charter Treaty, which makes 
reference to seven crucial areas (among them promotion of the Energy Charter and the Energy 
Charter Treaty; transit and cross border trade; investment promotion and protection; energy 
efficiency, etc.), reflects the new environment pretty well. 
Nonetheless, the Energy Charter Process is currently at a difficult stage. The Russian 
attitude toward the Treaty has contributed to that, but the EU has also favored its own 
instruments and mechanisms to deal with energy in the region, for example the Energy 
Community or the European Neighbourhood Policy, Partnership and Cooperation agreements, 
etc. Moreover, in a number of EU countries the ECT is seen as ―sacrosanct‖ and not subject to 
modernization, which is denounced as renegotiation with Russia position that could 
perpetuate the deadlock. Moreover, the gas glut and the North Stream pipeline diminish the 
pressure in respect to the transit issues at first glance. However, policymakers should not be 
led astray by these developments. 
9. CHALLENGES OF ECT 
A successful international organization or treaty is one, which is able to foster co-operation 
among states