ENERGY MAKING ITS WAY INTO EU TRADE POLICY

In its new trade policy strategy from early October, the EU has included securing energy supply and transit as an important objective. At a summit with India on 13 October, the two trading blocs agreed to work towards a "broad-based" bilateral trade and investment pact, with cooperation on energy and climate change being part of the package.

Meanwhile, at an EU-Russia summit in Finland on 20 October, Russian President Vladimir Putin resisted EU leaders' calls to ratify the international Energy Charter Treaty that would liberalise trade and investment in its oil and gas sector.

EU trade strategy to include energy

In its comprehensive trade strategy dated 4 October -- under which Brussels will pursue bilateral free trade agreements with major economies (see Bridges Weekly, 11 October 2006, http://www.ictsd.org/weekly/06-10-11/story4.htm) -- the EU has identified diversifying sources of energy supply and transit as an important objective. On this point, its strategy paper calls for efforts to improve "transparency, governance, and trade in the energy sector in third countries through non-discriminatory conditions of transit and third party access to export pipeline infrastructure". It also says that the links between trade policy and climate change need to be explored further.

Shortly following the release of its new trade policy, the EU and India at their 13 October summit agreed to step up efforts towards a bilateral trade and investment treaty, aiming to conclude a deal by 2009 (see Bridges Weekly, 18 October 2006, http://www.ictsd.org/weekly/06-10-18/story2.htm). In the joint statement released at the conclusion of the summit, the EU and India said they "attach high priority to energy security as a key to stable and sustainable development". They agreed to continue dialogue and cooperation in this area, including to "develop the necessary knowledge and expertise for the use of clean coal technology and sustainable clean energy resources".

Furthermore, the EU and India agreed to extend cooperation in the area of climate change, which they said requires urgent action. Here they would jointly facilitate "the development, transfer, deployment and dissemination of sustainable and efficient energy systems", and agreed to "exploit the synergies between the promotion of energy security, sustainable energy supply, innovation and reduction of greenhouse gas emissions in order to move to a low-carbon future".

EU, Russia energy cooperation

At a high-level summit with Russia on 18 October, the EU was less successful in forging mutual agreement on further energy cooperation. At the meeting, EU leaders including German Chancellor Angela Merkel called on Russia to ratify the Energy Charter Treaty. The agreement, which Russia has signed but not ratified, sets out binding protections for trade and investment in the energy sector, as well as rules for energy transit. Russian ratification would open the sector for investment by EU companies, and allow them to export oil and gas produced there through Russian pipelines. The treaty would also ensure that Russia did not discriminate against EU companies. Merkel urged Russia to provide the same legal contract security and market access that it enjoyed in the EU.

The EU currently relies on Russia for between a quarter and a third of its oil and natural gas imports, figures which are rising steadily. EU member states are concerned about Russia's reliability as an energy supplier, particularly after Moscow briefly cut off Ukraine's supply over a payment dispute earlier this year.

EU leaders expressed concern that the Russian government was taking firmer control of the sector, pointing to state-owned Gazprom's decision to develop the huge Shtokman gas field without foreign capital. They also drew attention to the Kremlin's recent threats to revoke Royal Dutch Shell's license to develop the Sakhalin gas field over alleged environmental breaches. Many Western governments believe the move was a politically motivated pretext to renegotiate the deal in favour of Russia.

Even before the summit, Russian officials had indicated that they were not prepared to let other companies use Gazprom's pipelines.

High energy prices have left Russian oil companies flush with money, as a result of which the country does not need foreign investment to develop the sector nearly as much as when the Charter was first negotiated between the EU and members of the former Soviet bloc in the early 1990s.

The Russian National Strategy Centre's Iosif Diskin said that Moscow's refusal to accede to the treaty was motivated by economic rather than geopolitical factors, since Russia stood to lose financially from ratification. He added that the Kremlin feared losing control over its natural resources.

Putin said that Russia is not against the principles included in the treaty, but "we believe that certain provisions of the charter should be defined better".

Although EU governments differed on how hard a line to take with Moscow, European Commission President Jose Manuel Barroso said that they agreed that Russia and the EU needed a partnership based on the principles of "transparency, the rule of law, reciprocity, non-discrimination, market opening and market access".

Energy has also featured in Russia's longstanding WTO membership negotiations (see Bridges Weekly, 25 October 2006, http://www.ictsd.org/weekly/06-10-25/story3.htm). In its earlier stages, countries pressured Russia to abandon its dual energy pricing policy of low domestic gas prices coupled with high export prices.

In order to join the WTO, applicants must clinch bilateral deals with Members that so request. The EU signed off on a bilateral WTO agreement with Russia in 2004, when Putin said he would speed up Russia's process to ratify the Kyoto Protocol (see Bridges Weekly, 2 June 2004, http://www.ictsd.org/weekly/04-06-02/story5.htm). In the final deal, Russia agreed to gradually increase gas prices -- without abolishing the dual energy pricing scheme -- and to open up its gas pipelines to private firms. The US has yet to finalise a bilateral agreement with Russia. While issues such as intellectual property have taken on higher priority in the bilateral negotiations, Members may still return to the energy issue.

ICTSD reporting; "Putin Firm on EU Energy Charter", BBC NEWS, 21 October 2006; "Putin Rejects EU Demands that Russia Ratify Energy Charter", INTERNATIONAL HERALD TRIBUNE, 20 October 2006; "Russia, EU Clash over Energy Charter", NOVYE IZVESTIA, 23 October 2006; "Russia Extends Shell Energy Probe," ASSOCIATED PRESS, 25 October 2006; Putin pressed to honour oil contracts," FINANCIAL TIMES, 21-22 October 2006; "The Really Cold War," NEW YORK TIMES, 25 October 2006.