RESEARCH AND ANALYSIS

Trade in Energy: Challenges for International Trade Regulation

Yulia Selivanova, Energy Charter Secretariat

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Energy is different from any other commodities. Apart from the fact that energy is more than any other good vital for economic and social development of modern world, conventional energy resources such as hydrocarbons have been distributed very unevenly throughout the world. The above factors lead to the prominent energy leverage that has governed over the last decades both in international and domestic policy discussions. The above aspects also make negotiations of international binding rules covering energy very difficult. Despite clear interdependence, the interests of consuming and producing countries differ significantly and finding common ground is challenging, although increasingly important.

In addition to the unequal distribution, energy resources are finite. Countries that possess such resources are usually driven in their decisions in regard to development and exploration of energy fields by two considerations: (1) desire to maximize their resource rent; (2) use their natural endowment to promote domestic industrialization and social policy objectives. These two considerations have provoked controversies in the multilateral trade forum (for instance with respect to the energy dual pricing policies).(1)

Decisions on depletion policy, that is, on whether and how fast national resources are to be developed, are matters for resource-owning governments(2) . International regulation is not likely to succeed if it tries to infringe in a binding way on these national prerogatives(3). This was in fact the experience during the preceding rounds of trade negotiations. In the current WTO negotiations, a number of countries made it clear that the access to, and use of, natural resources as well as the right to regulate, should remain outside the scope of negotiations.

Although WTO Agreements do not contain rules that are specifically aimed at energy trade, it is without doubt that the general rules of the multilateral trading system cover trade in energy. Existing GATT/WTO agreements, however, tackle mainly market access and do not address to the substantial degree the issues that are commonly regarded as most crucial in oil and gas — such as investment protection.

Furthermore, issues related to restrictive practices of the energy exporting countries and energy enterprises that occupy monopoly position and often are granted exclusive rights and privileges are not addressed to a substantial degree by the existing multilateral trade rules(4).

Finally, the energy sector is highly capital-intensive — significant costs are needed to find, produce and transport energy. Trade in electricity and gas has mainly been regional due to particular transportation characteristics of these products. Transportation of natural gas, for instance, takes place mainly through pipelines, although the share of LNG trade has been increasing steadily. Power needs to be transported over grids which are costly to duplicate. Finally, both electricity and gas are difficult to store. These characteristics of hydrocarbons and electricity and the fact that a significant part of such trade takes place through fixed infrastructure lead to significant challenges in energy trade.

Energy trade by fixed infrastructure puts an additional emphasis on two issues: the framework for investment in highly capital-intensive infrastructure projects; and the conditions for access to these networks — that is access to capacity restricted transportation services(5).

Construction of transportation pipelines and transmission grids requires substantial investments. Such transportation facilities, involve significant economies of scale in the construction phase and once constructed, have limited capacity for transporting specific energy products. Thus capacity has to be decided on a long-time basis.

For most manufactured goods (transported in vessels, trucks or railway) capacity constraints can be solved by queuing without adverse implications for the transportation. Because grid bound energy is difficult to store, availability of capacity at the right time matters. It may physically be impossible to provide access to transportation due to lack of capacity as it is unusual to invest in pipeline projects with substantial spare capacity. Investment rules are therefore necessary to ensure that additional capacity can be constructed, should the existing one prove insufficient(6).

There are thus two major questions to consider in the context of energy trade discussions: to what extent the existing or new rules could tackle (1) the non-discriminatory use of existing energy infrastructure and (2) the conditions to create an additional transportation capacity if available capacity is not sufficient. For the latter an effective investment framework is needed. The WTO has already experience with negotiating specific rules for another network industry, the — telecommunications sector. Here too, international trade may involve transmission by wires, although — by way of contrast to electricity and gas infrastructure — the fixed grid is now contestable by wireless telecommunications. While some lessons from these negotiations could be learned, the energy sector has some differences, especially with respect to security of supply and environmental concerns, which should be addressed(7).

Some of the above issues are dealt with by the Energy Charter Treaty (ECT) — the only international treaty setting legal norms specific to energy trade and investment. Comprising 52 member states it includes in its membership countries across Eurasian continent from European Union to former Soviet Union republics to Japan. Non-derogation from the WTO rules is the cornerstone of the ECT. Moreover, the Treaty’s trade regime applies WTO rules by reference to trade between its members that have not yet acceded to WTO. The last element — presence of investment rules enforceable through a dispute settlement system — makes the Energy Charter the only international energy investment treaty. Finally, the ECT deals specifically with issues of transit of energy materials and products via fixed infrastructure.

While the WTO agreements do not provide for specific rules on trade in energy, there are some distinctive features of the energy sector, where more energy-specific rules may be needed. Problems related to the existence of quantitative restrictions, transportation and access to pipeline networks, public service obligations, environment and climate change all have implications for energy production and trade and deserve consideration.

Notes:
1.
See Julia Selivanova, “World Trade Organization Rules and Energy Pricing: Russia’s Case”, 38 Journal of World Trade 4 (2004); Julia Selivanova “Energy Dual Pricing in WTO Law. Analysis and Prospects in the Context of Russia’s Accession to the WTO.” Cameron May (2008). back to text
2. See UN Resolution No. 1803 of 18 December 1962 on permanent sovereignty over natural resources. back to text
3. André Mernier, “Setting the Rules of Energy Trade.” In Fundamentals of the Global Oil and Gas Industry. London: Petroleum Economist (2008). back to text
4. Yulia Selivanova, The WTO and Energy. WTO Rules and Agreements of Relevance to the Energy Sector, Trade and Sustainable Energy Series, ICTSD Program on Trade and Environment, International Centre for Trade and Sustainable Development (August 2007), at 45. back to text
5. See discussion in Yulia Selivanova, “Managing the patchwork: Challenges for multilateral agreements in trade and investment” in: Global Energy Governance: The New Rules of the Game, eds. Andreas Goldthau and Jan Martin Witte (Washington, DC: Brookings Institution Press, 2010). back to text
6. Statement of the Energy Charter Secretariat at the Council for Trade in Services, WTO, 11 February 2010. back to text
7. Id. back to text

 

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