A new era of energy cooperation in the ECO region

During the closing years of the 20th century and beginning of 21st century it was the Caspian Sea's vast energy wealth potential that offered the energy thirsty industrialized world a vital new source of petroleum which they needed for their economic growth. In 1992 three Caspian Sea littoral states namely the Republic of Azerbaijan, the Republic of Kazakhstan and Turkmenistan joined the Economic Cooperation Organization (ECO) which was established as a regional non-political for economic cooperation by Iran, Turkey and Pakistan in early 1980’s. As result today four of ECO member states are littoral states of the Caspian Sea. ECO-Caspian Sea petroleum resources Petroleum resources of the region have also magnified the post-Soviet competition for influence among Turkey, Russia, and major Asian petroleum importers in Transcaucasia and Central Asia, such as China, India, and Pakistan... The U.S. government has failed to recognize what is at stake in the struggle for petroleum and influence in the ECO-Caspian Sea region. Thus by imposing all kinds of sanctions on one of the important littoral states of the ECO-Caspian Sea and the Persian Gulf contributing to the rise of a potentially dangerous security environment not only in the region, but beyond the region. ECO Energy Charter The former ECO Secretary General M. Yahya Maroofi met Iran's Minister of Petroleum, Rostam Qassemi, on 30 May 2012 in preparation for the 3rd ECO Energy /Petroleum Ministerial Meeting, which was scheduled to take place during 25-27 June 2012 in Tehran but was later postponed to 6 March 2013. Shana News Agency reported that the outcome of this meeting was the emergence of an innovative concept for the creation of what was termed an "ECO Energy Charter". The idea was subsequently discussed at the ECO 22nd Regional Planning Council and the Institute of International Energy Studies (IIES), which is affiliated to Islamic Republic of Iran's Ministry of Petroleum, offered to study and submit the outcome to ECO decision making meetings. What is the Energy Charter Treaty (ECT)? There appears to be general confusion – since the meaning has literally become 'lost in translation' - as to what exactly the “ECO energy charter” proposal actually is and in particular how it relates to the existing framework of the Energy Charter Treaty (ECT) based in Europe. In simple terms the Energy Charter Treaty is a framework for investment in energy resources, and its principal purpose is to enable investment by the advanced nations, particularly in Europe, in securing energy supplies. The focus – which reflects the energy security concerns of the sponsoring nations is therefore principally on the extractive industries and the production of non-renewable oil and natural gas in particular. The Energy Charter Treaty – the political declaration that forms the foundation of the Energy Charter Process and exists since 1991 – was signed by 58 countries. Seven of ECT member countries, including the U.S. and Canada, did not sign the legally binding Energy Charter Treaty, which was adopted three years later, in 1994, and entered into force in 1998. Five other ECT member states including Norway, Australia and Russia signed the treaty, but have not yet ratified it. According to the newly appointed Energy Charter Treaty (ECT) Secretary-General Rusnák, who speaks seven languages and started his job on the 1st of January 2012, the Energy Charter Treaty (ECT) is in a difficult, if not crucial phase of its development (1). Iran and Pakistan, the two founder member of ECO Energy Accord Just prior to the Economic Cooperation Organization (ECO) 3rd Energy/Petroleum Ministerial Meeting on March 6, 2013, Supreme Leader Ayatollah Seyed Ali Khamenei in a meeting with visiting Pakistani President Asif Ali Zardari on 27 February 2013 in Tehran pointed to the two ECO founder members’ brotherly bonds and said, "We seriously believe that the two countries' economic, political, social and security ties should be reinvigorated." The Leader also pointed to the Iran–Pakistan (IP) gas pipeline which is due to take Iran's rich gas reserves to Pakistan as a crucially important instance of Tehran-Islamabad cooperation, and called for ignoring the opposition shown by certain actors to the development of Iran-Pakistan relations. The Supreme Leader reminded Pakistan's urgent need to stable and secure energy resources, similar to every other country and added, "The Islamic Republic of Iran is the only country in the region which enjoys secure energy resources and we are ready to supply Pakistan's need in this ground." President Zardari who headed a high-ranking delegation to Iran arrived in Tehran on 27 February to discuss bilateral ties and regional developments with senior Iranian officials. Iran-Pakistan Joint Contracting Company The Iranian oil minister agreed with his Pakistani counterpart to set up a joint contracting company between the two countries in a bid to complete the construction of the IP gas pipeline by December 2014. The IP gas pipeline stretches from Iran-Pakistan border to Navabshah region in Pakistan and it covers 781 km of the total 1,881 km of the pipeline. Demand for natural gas in Pakistan has outstripped supply in recent years, putting existing reserves under immense pressure. The 2700-kilometer long pipeline was to supply gas for Pakistan and India which are suffering from a lack of energy resources, but India has evaded talks. In 2011, Iran and Pakistan declared they would finalize the agreement bilaterally if India continued to be absent in the meeting. International energy expert are of the opinion that Iran-Pakistan agreement is a first step to new era of ECO regional energy accord. ECO energy resources The ECO region comprises an area of around 8 million square kilometers endowed with rich energy resources and a diverse population of more than 400 million sharing cultural heritage, common economic interests and common geographical borders and hinterland, such as watersheds. In order to access the massive investment necessary in energy resources, many ECO member states are members of the above Energy Charter Treaty (ECT) which provides a legally binding set of rules for international energy investment. But as the region develops economically and competes in the global economy it is increasingly using the region's energy resources domestically which results in a reduction in energy export potential. One of the key economic questions to solve is how to optimize the use of finite carbon fuel resources and to manage the transition to a sustainable ECO economy in the long term. There are several policy issues addressed by the proposed ECO Energy Accord and this article will address the most important. Energy Security The basic principle is simple: energy producers require security of demand, while energy consumers require security of supply. During the recent Euro- Med E&P: Oil & Gas Exploration & Production Summit (24-26 September 2012, Larnaca, Cyprus) Dr. Saleh S. Jallad, chairman & publisher of Middle East Economic Survey (MEES), had much to say in relation to energy security. In his view the energy security rationale for consuming countries is: - Energy security = stable supply = economic growth Whereas for energy producing countries the rationale is: - Energy security = stable demand = economic development Finally for countries through which energy flows, the requirement for stability may be expressed as - Energy security = stable input, output, transmission = economic & human development. In Dr. Jallad's view the global challenges currently are: • Volatile prices of hydrocarbon sources • Uneconomic alternatives below certain levels of oil prices, yet rapid technical progress are being achieved. • Geographic imbalance of energy sources & users • The increasingly important role of transit countries (land & sea) • Demand growth in developing nations as incomes increase • Vast capital investments at all stages of the energy supply chain • Critical environmental issues • National, regional and international political instability • The Palestine question and its dangerous implications • Civil, regional and limited cross-border wars, terrorism, piracy • Globalization of losses and privatization of profits There is an increasingly prevalent view among nations that the financial meltdown has led to a severe loss of confidence in the basic economic and political institutions of advanced countries and the need for new and complementary solutions. Energy investment Observers generally agree that the ECT has yet to create the firm legal bonds necessary to provide a safe investment environment for energy resources development and transit guarantees. Amongst the ECO countries, the Republic of Azerbaijan, Kazakhstan, Turkmenistan, Kyrgyzstan, Uzbekistan, Tajikistan and Turkey are members of ECT. Pakistan and Afghanistan are in the process of becoming member of ECT and Iran enjoys the observer status. Dr. Iranmanesh is the president of the Institute of International Energy Studies (IIES) in Tehran which was nominated by Minister Qasemi to cooperate with ECO Secretariat on the new regional energy/petroleum cooperation initiative which was named the ECO Energy Charter. Iranmanesh, who is a noted expert on systems architecture and engineering, told ECO Chronicle: “Holistic system thinking is necessary in ECO energy policy. The energy market is evolving rapidly; new economies are emerging; but energy prices are unpredictable and unstable, with fluctuations which make investment decisions particularly difficult for emerging market participants. Investments in the energy industry are mostly agreed on a bilateral and therefore fragmented and short-sighted basis rather than within a regional framework. ECO energy co-operation is essential for the necessary 21st century networked energy systems.” Dr. Ali Khanbutayev, the ECO Secretariat's Director for Energy, Minerals and Environment, during a brief talk with ECO Chronicle said: “This is a new idea that may pave the way for ECO cooperation with Energy Charter Treaty and therefore ECO Secretariat may become observer to the ECT.” Director Khanbutayev, who played a major role in preparation and adoption of the 2nd ECO Energy/Petroleum Cooperation Action Plan (2011-2015), is further of the view that: “the ECO member states should also pursue the implementation of the Action Plan in parallel to studying this new idea”. While appreciating Iran’s readiness to host the 3rd ECO Energy/Petroleum Ministerial Meeting during 2012-2013, he expressed hope that "this new idea will be supported by the ministers and the ECO Energy Charter may become a reality that will serve the region’s economic growth." Energy economics The originator of the thinking which underpins what became known as the ECO Energy Charter is the leading global energy strategist and market expert, Chris Cook, who first introduced the concepts in his presentation on 'Transition through Gas' in November 2011 at the 15th IIES conference. Mr. Cook says: “I advocate the strategic energy policy first adopted by Denmark after the 1973 oil shock when they saw their oil fueled energy costs increase tenfold almost overnight. The Danes approach this question 'at the other end of the telescope'. They commence with the outcome of the energy system – Heat, Power and Transport – and then work back to identify the optimal mechanisms giving rise to the least possible consumption of carbon fuels. In other words, the Danes mandate least energy cost solutions, as distinct from the least $ cost, least € cost, or least £ cost solutions which typically offer short term financial benefits at the expense of medium and long term problems”. Mr. Cook therefore proposed firstly that a new, but complementary ECO framework agreement should be promulgated, discussed, and implemented, and secondly that energy investment could be financed and funded within that framework through the use of complementary energy market instruments. These are based on techniques which pre-date the modern banking system, but are increasingly once again in use, and use the dollar as a pricing reference. An ECO Energy & Power Accord: Mr. Cook is disappointed at the semantic confusion which has obscured a crucially important neutral policy initiative based upon energy co-operation. “Had I been asked for my view, I would have suggested that the proposed initiative, which could lead to a transition through gas to a low carbon economy, might better be described as an “ECO Energy & Power Accord”. This is because in my opinion, ECO members' national interests are best served by optimizing heat and power production while minimizing wasteful and profligate use of non-renewable oil and gas resources.” At the recent 22nd RPC meeting, while oil and gas energy policy makers were distracted by semantics, Mr. Cook's view received support from power generation policy makers, and it was agreed that a report should be prepared for consideration by the ECO energy ministers when they next convene. It is envisaged that the initiative will be carried out by the neutral ECO Secretariat who would bring to bear whatever consultancy and professional resources are necessary to pursue this important task. This initiative will constitute a separately resourced addition to the existing ECO Energy Action Plan for the period 2011 to 2015 which may include the following: So what then does the proposal look like? ECO Energy & Power Accord The accord consists of two protocols or agreements for promulgation, discussion, agreement by decision makers and implementation. • ECO Energy Principles – an outline statement of the proposed principles and values which will underpin ECO energy strategy and policy; • ECO Energy Doctrine – outline statement of proposed ECO strategic energy policies. The proposed ECO energy principles are as follows: Accessibility – open access to energy consistent with geographic and resource constraints and open access to energy investment in order to address energy imbalances. Equity – fair sharing of risk and reward between ECO members in energy interaction and projects in accordance with cultural and religious values Neutrality: recognition of the sovereignty of ECO members within a neutral framework for ECO energy collaboration and solidarity. Resilience - the enduring power and capacity of ECO members for transformation, renewal and recovery through the flux of energy interaction and projects Security: security of demand for ECO energy producers and security of supply for ECO energy consumers. Stability: minimizing energy price volatility to enable sustainable investment in energy production and energy efficiency. Sustainability- meets ECO member needs now without compromising future requirements. Transparency: open access between members to energy data and knowledge. Looking forward: Foreseeing Four Seas Energy Co-operation Based upon 30 years experience of regional and international energy policy and the geophysical realities which underpin them, I foresee a Four Seas Energy Accord, linking the resources of the Caspian Sea, Persian Gulf, Black Sea and Mediterranean Sea. I have long believed that the starting point – the source, if you will – of such a 21st century energy initiative will be the energy resources of the Caspian Sea and the littoral nations generally, and the creation of a Caspian gas market hub, benchmark and market instrument in particular. Moreover, I believe that Azerbaijan – as the gateway to the Caspian from the West – will be crucial to leading a new era of energy co-operation, and it is a source of pleasure to me that the new ECO Secretary General, His Excellency Dr. Shamil Aleskerov, is so well versed in the energy field generally and energy diplomacy specifically. Indeed, this was essentially the subject of the 2006 Baku Initiative aimed at the progressive convergence of energy market integration of the Black Sea and Caspian Sea region with the EU. Such a process implied progressively converging energy policies on issues of trade, transit and environmental rules as well as standards. I believe that there is now an opportunity to transcend existing groupings based upon conventional economic competition and a dysfunctional financial paradigm – the G-7, G-8, G-20 and so on - to new groupings based purely upon energy co-operation: an E-3 or E-10. ***** Mahmood Khaghani, now retired, had more than 33 years of service in senior international positions in Iran's petroleum industry. He held the position of the director for energy, minerals and environment at the secretariat of the Economic Cooperation Organization (ECO) during 1996-2000. He cooperates with ECO Chronicle as honourly advisor and member of editorial board. E-mail: ecochronicle@ecosecretariat.org & mkh50mkh@yahoo.com Reference: 1-Interview with Urban Rusnák, Secretary-General of the Energy Charter, By Karel Beckman, 7 June 2012, European Energy Review (By Mahmood Khaghani)