Leaked report reveals ‘misfunctioning’ of Energy Charter Treaty amid EU reform calls

Russian Energy Minister, Alexander Nowak (L), shakes hand with Urban Rusnak (R), Secretary-General Energy Charter, at the discussion club 'Valdai' in Berlin, Germany, 13 April 2015. [EPA/BRITTA PEDERSEN]

A confidential internal report, obtained by EURACTIV, lists the multiple failings of the Energy Charter secretariat, at a time when the treaty is undergoing a major revision process and is being used by Russia’s Nord Stream 2 pipeline in a first-time legal proceeding against the EU.

Signed in 1991 after the collapse of the Soviet Union, the Energy Charter’s initial objective was to provide legal protection for Western companies investing in the former communist bloc.

The treaty focuses chiefly on oil and gas activities and covers all aspects of energy trade and transit, including a dispute settlement mechanism aimed at protecting investors from “political risks” such as expropriation, nationalisation, or damages due to war.

Today, the Energy Charter boasts 55 full members, including countries as varied as Switzerland, Japan, Central Asia’s three energy-rich states – Kazakhstan, Turkmenistan, and Uzbekistan – the European Union, and all its member states with the exception of Italy.

While most people have never heard about the Energy Charter, it is well-known to lawyers who recently initiated legal proceedings against the EU under the treaty on behalf of the Gazprom-owned Nord Stream 2 company, in what would constitute a first.

But calls for reform are now growing louder, with the European Commission recently describing the treaty as “outdated,” notably when it comes to investor protection clauses, climate change and the clean energy transition.

Damning internal report

And now, reform calls are also coming from the inside.

A confidential internal report, prepared by the Energy Charter’s assistant secretary general Masami Nakata, and obtained by EURACTIV, makes a detailed analysis of the “misfunctioning of the energy charter’s secretariat,” based in Brussels.

“This misfunctioning,” Nakata writes, “is principally attributable to a failed organisational restructuring” led by Urban Rusnák, a Slovak diplomat who was appointed secretary general  of the Energy Charter Treaty in 2012.

In the report’s firing line are the “management methods” of Rusnák, including the repeated “unprofessional and non-transparent selection of officials” and unlawful dismissal of senior staff members, which she says is “undermining the performance of the organisation as a whole”.

An attempt to restructure the organisation, conducted in 2016, is described in the report as “an abject failure” which resulted in the extensive use of low-grade staff, interns, and temporary contracts, leading to “serious concerns about both the quality and quantity of the secretariat’s output”.

“There are compelling reasons to believe that, as a consequence, the results of the organisation are insufficient and well below par,” Nakata writes, pointing to a “lack of concrete, tangible results and real progress” in the secretariat’s main areas of work.

The Japanese official even suggests that the financial and human resources made available by treaty signatories “are thus being wasted and possibly misused”.

Nakata’s position is now advertised as vacant on the Energy Charter website.

“Modernisation” process

The damning internal report comes at a crucial moment for the Energy Charter Treaty, which initiated a “modernisation” process last year, aimed at aligning the pact with other international accords, such as the Paris Agreement on climate change.

But that process isn’t going smoothly. Any changes to the treaty would require a unanimous decision by the Energy Charter Conference, which brings together the 55 signatories, Nakata writes in her report.

And “it is unlikely that Contracting Parties would reach an agreement to align the Treaty with the Paris Climate Agreement,” she adds, pointing out that member states are too far apart on clean energy development and have conflicting interests when it comes to fossil fuels.

While the EU, Japan and Switzerland have developed decarbonisation strategies, “other contracting parties are either fossil fuel exporting countries” or “transit countries for fossil fuels,” Nakata remarks.

Contacted by EURACTIV, Rusnák acknowledged the report’s existence but said its contents were “not balanced” and contained “unfounded allegations” on his management style.

Regarding the treaty’s modernisation process, he said: “I cannot comment on this because we are not there yet.” Treaty signatories still need to agree the substance of the modernisation process, he explained, saying reform mandates are still being discussed around the world, including the EU.

“All my work since day one was to modernise the Energy Charter Treaty, which deserves to be modernised,” Rusnák told EURACTIV.

However, a clear impression that transpires from the report is that Rusnák enjoys little trust from senior staffers at the Energy Charter Secretariat. One insider who spoke to EURACTIV on condition of anonymity, pointed to Rusnák’s close connections with Russia where he studied in his youth, graduating from the Moscow institute of oil and gas in 1990.

Although Russia pulled out of the treaty in 2012, Russian if frequently spoken at meetings, the source said, because most of the member countries are from the former soviet bloc. And because all meetings take place in English, Russian-language “interpreters” are present at all times to allow smoother exchanges between Central Asian representatives, the source said.

Treaty “outdated” EU says

The “modernisation” of the Energy Charter Treaty is scheduled to be officially started by the end of 2019, covering topics such as investment protection, pre-investment commitments, transit, the economic integration agreements clause and some provisions related to dispute resolution.

One of the key actors in the treaty’s modernisation process is the EU and its member states, which together contribute around 65% to the €4m annual budget of the Energy Charter Secretariat in Brussels.

In May this year, the European Commission proposed a draft mandate to negotiate the treaty’s revision on behalf of the 28 EU member states. The mandate is currently being discussed among the 28, with EU countries expected to reach a decision by the end of June.

And according to the EU executive, the need to revise the treaty has become urgent.

“Since its establishment in the 1990s, the ECT provisions have hardly been revised,” the Commission notes in its proposal. This is particularly visible in the area of investment protection, where the treaty’s rules “do not correspond to modern standards as reflected in the EU’s reformed approach on investment protection,” the Commission adds, saying “those outdated provisions are no longer sustainable or adequate for the current challenges.”

“Yet it is today the most litigated investment agreement in the world, with a total of at least 121 investment notified disputes,” it adds.

In fact, the number of disputes has soared since 2012, when Rusnák was appointed secretary general. From an average of 3 to 4 cases per year, the number of investment disputes rose sharply afterwards, reaching a peak of 29 new disputes in 2015.

Environmental campaigners have long denounced the treaty, saying it grants energy companies disproportionate powers to sue governments, for example over a decision to stop new oil or gas pipelines or to phase out coal.

The most famous example is when Russian oil company Yukos won a nearly 10-year-long case against Russia on the basis of the treaty, with a record-breaking $50 billion award. Russia has since pulled out of the treaty.

“The ECT is a powerful tool in the hands of big oil, gas, and coal companies to discourage governments from transitioning to clean energy,” argue the Corporate Europe Observatory (CEO) and the Transnational Institute (TNI), two research and campaign groups.

“They have used the ECT and other investment deals to challenge oil drilling bans, the rejection of pipelines, taxes on fossil fuels, and moratoria on and phase-outs of controversial types of energy. Corporations have also used the ECT to bully decision-makers into submission,” they write in a report called “One treaty to rule them all”.

Discussions have now started to expand the treaty to countries in Africa, the Middle East, Asia and Latin America. But activists fear this will lock developing countries into an unsustainable model of energy based on fossil fuels and extracting industries.

“If China signs up, developing countries are screwed,” said one source familiar with the  internal processes of the Energy Charter Secretariat.

According to critics, the treaty should now either be reformed or ditched. “The ECT is just one of thousands of international investment agreements in force today,” writes Sarah Keay-Bright, a former senior employee at the Energy Charter Secretariat in Brussels.

Many of those agreements now “need to be reformed, replaced or terminated,” she wrote earlier this year, saying any reform of the ECT “should end protection for fossil fuels” and promote clean energy instead.

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