Winter 2014

Afghanistan joins the Energy Charter Treaty

On 20 June 2013, Afghanistan became the fifty-fourth member of the Energy Charter Treaty (the “ECT“). The ECT provides members with legally binding rules regulating energy trade, investor protection and dispute settlement mechanisms. Established after the end of the Cold War to develop mutually beneficial cooperation in the energy sector among the states of Europe and Asia, this multilateral framework is particularly efficient in a context of interdependence between energy exporters and energy importers.

The rules on energy trade, which are based on World Trade Organization (“WTO“) rules and cover the entire energy chain, provide greater security for energy transfer. Specifically, pursuant to the principle of freedom of energy transit, member countries must not interrupt or reduce energy flows in case of transit disputes.

The ECT aims at creating stability for international energy investments. It grants specific protections to foreign investors against political risks such as discrimination, expropriation, nationalisation, breach of individual investment contracts, damages due to war, national emergency or civil disturbance, and unjustified restrictions on the transfer of funds.

While the ECT encourages the amicable settlement of disputes, it also offers efficient mechanisms to resolve State-to-State or investor-State disputes if negotiations fail.

Afghanistan’s accession to the ECT

Afghanistan lies at a critical junction point between Central Asian States, which have important energy reserves, and South Asian States, which are energy deficient. In India and Pakistan, which account for one-fifth of the world’s population, it is estimated that energy shortages depress economic growth by 3 to 4% annually. With rapidly increasing populations in these countries, stable access to energy and power supplies is crucial to economic and social stability.

This demand could be met with foreign sources of supply. Turkmenistan, for example, has the second largest gas reserves in the world and the region holds considerable oil reserves and hydroelectric power. While the transportation of energy from Central Asia to South Asia via Afghanistan is expected to be cheap, the unstable security situation in Afghanistan and the lack of multilateral cooperation or an institutional framework in the region have formed obstacles to the development of energy transfers through Afghanistan.

Graham Coop, formerly General Counsel to the Energy Charter Secretariat and now a partner at Volterra Fietta, believes that Afghanistan’s accession to the ECT will help to overcome these challenges. The treaty will provide greater security for energy transfers through Afghanistan. This is essential in light of the withdrawal of NATO forces from the region in 2014 and the fear of a resurgence of Taliban forces. “Whilst Afghanistan’s accession may not stop the Taliban in practical terms,” Graham explains, “it at least demonstrates that the government takes security of energy transit seriously.” The multilateral institutional framework and the investor protection provisions also constitute attractive features of the ECT since most major energy projects require significant investment over the long term.

The ECT’s likely benefit for two ongoing projects

Two projects will benefit in particular from Afghanistan’s accession to the ECT. These projects plan to harness the reserves from Central Asia for the benefit of South Asia by building a “New Silk Road” which would transform Afghanistan into a platform to transport energy.
The first project is the Trans-Afghanistan Pipeline, also known as the Turkmenistan-Afghanistan-Pakistan-India Pipeline (“TAPI“). This is a US$ 7.6 billion project backed by the Asian Development Bank to transfer Caspian Sea natural gas from Turkmenistan via Afghanistan to India and Pakistan, with a small share being reserved for use in Afghanistan. Gas-based power is becoming a key source of energy in India and Pakistan as it is cheaper than electricity produced by oil. With most of the gas to be distributed equally between Pakistan and India, and a small share to be consumed in Afghanistan, the 1,700-km pipeline could cover up to 25% of Pakistan’s energy shortfall, address summer energy shortages in India, and supply the energy needed in Afghanistan as the country continues to rebuild itself.
The four States involved signed the TAPI gas sale and purchase agreement in 2012 and have recently agreed to set up an autonomous company for the execution of the TAPI pipeline. While the gas supplies purchase agreement provides that the pipeline has to be built by 2018, no other specific deadline has been set, and neither project funding sources nor future transit tariffs have yet been identified.

The second major project, the Central Asia-South Asia electricity interconnection (“CASA-1000“), is a $1 billion electricity grid project to export the summer surplus of hydroelectricity from Kyrgyzstan and Tajikistan to Pakistan via northern Afghanistan, with a portion being reserved for use in Afghanistan. A surplus of hydropower in Kyrgyzstan and Tajikistan is currently being wasted during the summer months while significant demand for electricity exists in South Asia. The project would involve building a high voltage direct current power line with 1300 megawatts of transmission capacity. Afghanistan would be permitted to take up to 300 megawatts from this power line, or simply transit all electricity to Pakistan.

CASA-1000 will require private sector and government participation as well as inter-regional cooperation. Kyrgyzstan, Tajikistan, Afghanistan and Pakistan have created the Inter-Governmental Council to foster cooperation on the project. However, there is currently no clear construction schedule in place.  Graham Coop, who in his capacity as General Counsel to the Energy Charter Secretariat participated in the Task Force on Regional Energy Cooperation in Central and South Asia, points out that, if the challenges are enormous, so are the potential rewards, in both economic and political terms: “By sponsoring a forum to discuss these projects, we encouraged politicians and experts who had not spoken for ten years to engage and share ideas with one another. The economic stakes are huge, but the potential political upside is even greater.”

Comments

The five Central Asian states, all of which are major producers either of hydrocarbons (Kazakhstan, Turkmenistan and Uzbekistan) or hydroelectric power (Kyrgyzstan and Tajikistan) are already members of the ECT. Afghanistan’s accession should facilitate both the TAPI and CASA-1000 projects and will likely strengthen inter-regional economic cooperation between Central Asia and South Asia. Afghanistan’s accession – the first accession to the ECT for many years – may also encourage Pakistan and India, who are not yet member States of the ECT, to join. As Graham Coop explains, “Afghanistan’s accession to the ECT is good news for Afghanistan, but it is also good news for the Energy Charter”. In any case, accession to an institutional and legal framework providing a structure for energy trade will undoubtedly contribute to the development of Afghanistan as an energy hub and to its broader economic development.