Yangfan WU, Faculty of Law, The Chinese University of Hong Kong, Hong Kong

One major challenge that states face in ensuring external energy security is the discrimination or protectionism of local industries from host countries. This challenge could happen in energy investment, energy trade, or energy transit, and there are a lot of relevant regulations regarding both substantive protection and procedural remedies in international energy law to tackle this problem.

A host state can discriminate against foreign companies and protect the local enterprises by taking measures like expropriation, prior access to the electricity network, adapting the fiscal regime, amending relevant regulations, etc. To attract as many foreign investments as possible, the government always provides some inducing conditions to foreign investors before investing. However, once they decide to invest, the government then changes the relevant rules and regulations for the interest of state-owned companies under the banner of the state. So there is always a high risk of failing to return costs for the foreign companies in energy investment. As a result, the investment amount will be reduced while the growing energy demand can not be satisfied. International law provides both substantive protection and procedural remedies in encouraging foreign investments.

Both Bilateral investment treaties and multilateral treaties help protect foreign investments against discrimination. For instance, the principle of national treatment and non-discriminatory is stipulated in BITs between China and Uzbekistan: “one contracting party should “associated investments treatment no less favorable than that accorded to its local investors in like circumstances.” It is also reflected in ETC – “stats shall not be impaired by unreasonable or discriminatory measures their (investments) management, maintenance, use, enjoyment or disposal.”[1] The standard of equitable treatment in both the Article 10 of ECT and in BITs between China and Uzbekistan is stipulated to create “stable, equitable, favorable and transparent conditions” for investors.[2] [3]

In Article 26 of ECT, there is an “unconditional consent for the dispute to be submitted to international arbitration or conciliation,”[4] which means investors can seek legal remedies by arbitration or conciliation instead of going to the international court.

Nowadays, energy is the cornerstone of economic development, and it is of high geopolitical importance to every state. States tend to impose restrictions on foreign investments and protect the local investors in the energy trade. The international energy trade law has the idea of cooperation and moves the obstacle to international energy trade and facilitates the flow of energy products and equipment. This idea is reflected in WTO Agreement and other international energy law instruments such as the International Energy Charter— “energy trade can strengthen international cooperation in energy security and the sustainable use of energy” and “ensure freedom of movement of energy to achieve stable and transparent trade.”[5] All these instruments provide a strong backup for the achievement of energy security.

Similar regulations in GATT have also been applied in several cases. In the China-Raw Materials case, the Chinese government required foreign investors to build the factories in China and support national demand to provide the materials at a low price, thus boosting domestic industries’ development.[6] However, according to Art. XI, export restrictions were illegal and did not constitute the possible exception in Art. XX. Even though it was relevant to the “conservation of exhaustible natural resources,” there are no similar domestic measures. Therefore, the act constituted “unjustifiable discrimination.”[7]

Russia claimed that the third country certification was “an additional condition imposed on all third-country pipeline transport service suppliers” in the EU Energy Package case. At the same time, there was no need for the European countries which constituted discrimination in the energy trade.[8] Although the EU argued that this access procedure was designed to “maintain public order and ensure the energy security of EU” and Russia’s investment was intended for geopolitical rather than commercial use, the tribunal broadened the scope of the non-discrimination principle and decided that the third country certification of EU constituted the less favorable treatment which was not compatible with GATT.[9] From this case, we could see the effectiveness of the non-discrimination principle under international energy law in ensuring the liberalisation of energy trade and guaranteeing energy security. However, it seems like a rigid interpretation of the non-discrimination principle. The tribunal constrains the rights of the state to regulate the energy sector and manage its energy security, regardless of the commercial freedom and the possibility of constituting the exception of essential security interests. States usually have large discretion in deciding if there is an essential security interest.[10]

Transportation is an essential step in the whole process of energy trade and is vital to improving energy efficiency and guaranteeing the secure and stable supply and demand of energy. Hence, it is necessary to regulate the process of energy transit and avoid discrimination in international energy law. “The freedom of energy transit” is protected under GATT (Article V:2), ETC (Art. 7, para. 1). Similar to the idea of energy trade, the third countries with the role of transit shall provide the most convenient route for the transportation of energy goods, which helps promote energy efficiency. There should not be any arbitrary or unreasonable restrictions on energy transportation. According to Art. 7 of ECT, states also should cooperate in transporting energy to modernize, develop, and interconnect the facilities necessary for transit. The principle of the most favored nation is emphasized as well: “treat energy materials and products in transit in no less favorable a manner than its provisions treat such materials and products originating in or destined for its own Area.”[11] The non-discrimination principle in the context of energy transit means that a state is required to provide “non-discriminatory treatment in access to and use of pipeline networks” while considering the actual conditions of the state like the “technical capacities of networks” in the meanwhile.[12]

The resolution of disputes relating to energy transit of ETC is that after “the exhaustion of all relevant contractual or other dispute resolution remedies previously agreed between the Contracting Parties party,” they could refer to the Secretary General of ECS for conciliation and then a “12-months observation” would be enforced on a certain state.[13] While this is an additional remedy for states, it is indeed time-consuming to “exhaust all relevant contractual or other dispute resolution remedies.”[14]

Therefore, we can see that the challenge of discrimination that states face in ensuring external energy security is to some extent addressed by the international energy law. But there are still some shortages that remain in the regulatory regime in tackling this challenge.

[1] The International Energy Charter Consolidated Energy Charter Treaty with Related Documents, https://www.energychartertreaty.org/treaty/energy-charter-treaty/ pp. 10-21.

[2] Note 1 above.

[3] Note 1 above.

[4] Note 1 above

[5] Note 1 above.

[6] China — Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds431_e.htm.

[7] The General Agreement on Tariffs and Trade (GATT 1947) https://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm#art11_1.

[8] European Union and its Member States — Certain Measures Relating to the Energy Sector <https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds476_e.htm&gt;.

[9] Ibid.

[10] PAO Rosneft Oil Company, anciennement NK Rosneft OAO and Others v Council of the European Union <https://eur-lex.europa.eu/legal-content/SV/ALL/?uri=CELEX:62018CJ0732&gt;.

[11] Note 1 above.

[12] Schedule of commitments in WTO accession https://www.wto.org/english/tratop_e/serv_e/serv_commitments_e.htm.

[13] Energy Charter Secretariat, Reports of the Secretary-General https://www.un.org/securitycouncil/content/reports-secretary-general.

[14] Ibid.