The Role of the Energy Charter Treaty in Developing Liquefied Natural Gas Trade in Russia

ABSTRACT: Massive new developments in Liquefied Natural Gas (LNG) trade have been taking place globally with an increase in Atlantic LNG trade. The Energy Charter Treaty (ECT) of 1994 provides energy exporting and importing countries with a unique framework for cooperation and securing cross-border energy flows. Along with other energy materials and products, the ECT is designed to cover LNG and its provisions apply to the LNG trade and investments in LNG projects. In view of the above, this research paper attempts to examine the role of the ECT in developing LNG trade in Russia. This is in the view of the fact that Russia is the largest producer of natural gas which makes it a leading actor in the pipeline gas market within the European region. Additionally, Russia views the treaty as having a bias where it favors consumers at an expense of producers.

1.0 Introduction

Energy is one of the most vital factors that determine the economic development of a country. However, different countries are endowed with varying reserves of natural energy a fact that makes some countries prominent producers of natural energies such as gas as a form of hydrocarbon energy. The exploration, discovery, production, storage and transportation of natural gas energy require a lot of capital investment. This means that such countries must commit a lot of their capital in these projects in order exploit these resources at an economic level. This necessitates for joint ventures where other investors commit their capital to set up extraction facilities. Any individual country or foreign firm would be hesitant to involve its capital where there is no security of investment. On the other hand, there are possibilities of disputes arising between such investors and their host countries in terms of repayment of their investment capital. The Energy sector including the Liquefied Natural Gas (LNG) is governed by the Energy Charter Treaty signed in 1994 by developing a common ground where the concerns of energy exporting and importing countries can be addressed . This treaty sets forth guidelines and acts as an arbitrator in case of disputes relating to energy sector among its members.

Russia presents a good case for analysis in its position as a major supplier of LNG to the European Union. For instance, according to the Energy Charter Secretariat (2008), in 2003, Russian government undertook a strategic energy policy aimed at achieving a balance in both domestic and export policies by the year 2020. This is a part of the government's goal of maximizing the potential of its energy sector, hence achieve increased economic growth and eventually improve the quality of life of its population . This is in line with the country's foreign energy policy which aims at strengthening Russian position on the global energy market through the maximization of efficiency of LNG exports and improvement of the competitiveness of its energy products in the world market.

2.0 Evolution Liquefied Natural Gas

Liquefied Natural Gas is a natural gas in form of hydrocarbon which is super-cooled to low temperatures. The cooling to minus 260 degrees Celsius allows the natural gas to turn in to liquid through a process called liquefaction process. In this liquid state, the gas can easily be transported for long distances using specialized vessels. John (2009) asserts that unlike un-liquefied gas that requires fixed networks in form of pipeline for transport from their source to consumption points under special agreements, LNG is more flexible as it can be transported to different consumption points in liquid and compressed state . However, LNG requires the installation of liquefaction facilities in the shipping points, gasification equipments and storage facilities at the offloading points.

LNG provides an alternative form of natural energy with lower emissions compared to other fossil fuels like coal and oil. It's non-toxic, odorless and colorless characteristics makes it the cleanest fossil fuel in the world hence gaining a lot of preference as the preferred fuel inn regard to environmental concerns. Kupchinsky (2007) reports that, according to current market trends, LNG will account for a third of total gas energy by 2011 with a rise to 60 percent expected by 2020 . The continued tightening of the world oil market allows LNG to play a greater role now and in the future. Additionally, there has been a steady rise in demand for natural gas largely due to environmental concerns. The rise in demand has necessitated for purchasing of long-term contractual agreements between the importing and exporting countries.

3.0 Liquefied Natural Gas in Russia

Natural gas is a finite resource and Russia though at a better position in endowment of this resource considers that this is a resource that will