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. Last Updated: 07/27/2016

Kemper Makes Case for Energy Charter

MTControl room staff at Gazprom?s headquarters. Miller met with Kemper on Tuesday.
The head of the Energy Charter Secretariat is to meet with State Duma lawmakers Friday for a roundtable that could prove to be a springboard toward long-awaited ratification by Russia of the global treaty.

The Energy Charter Treaty, first conceived in the early 1990s, sets the ground rules for transit, foreign and domestic investors and market liberalization. Russia and 50 other countries signed the document in 1994, but the agreement has not yet come to the Duma for ratification.

The treaty has many supporters -- among them the oil industry, the Economic Development and Trade Ministry and even President Vladimir Putin himself. It has in the past also had one major opponent: Gazprom. While former Gazprom CEO Rem Vyakhirev derided the treaty as "a scheme by Europe to get cheap gas," new CEO Alexei Miller has yet to publicly take a stance.

Miller met with Ria Kemper, secretary-general of the Brussels-based Energy Charter Secretariat, on Tuesday.

"It was a positive step that he agreed to see me," Kemper, a tall, energetic German, said in an interiew. "Last year, I requested a meeting with Vyakhirev and was greeted by Komarov."

Yury Komarov, then-head of exports to Europe, was an outspoken opponent of the treaty who argued it would cost Gazprom millions of dollars a year.

Miller was installed as Gazprom chief earlier this year, and his reign has been marked by more transparency and a reluctant understanding that the structure of natural gas markets is going to change whether Gazprom is ready or not.

Duma deputies say that parliament may go to vote on the charter by the end of this year. But first, the Duma's energy, transport and telecommunications committee must find common ground among its members. Kemper hopes to make some headway with the committee when she meets with its members Friday.

The ferocity of Gazprom's opposition became clear at Duma hearings earlier this year. The company claimed that it would be forced to open its pipelines to third parties and would have to unify tariffs for export and domestic shipments. Gazprom officials are worried that Turkmenistan's natural gas -- which is produced more cheaply than Russian gas -- would cut Gazprom's market share via Gazprom's own pipes.

Energy Charter officials say that this is a misinterpretation of the treaty and that Gazprom in no way would have to compromise its own leading position as a supplier to world markets.

While Russia has the largest natural gas reserves in the world, Turkmenistan is not far behind in fifth place. According to the U.S. Energy Department, Turkmenistan produced 1.7 trillion cubic meters last year. Turkmenistan was also the 12th country to ratify the charter.

To assuage Russian fears further, the Energy Charter signatories began debate on a Transit Protocol in December 1999. The document further clarifies the issue of energy transit between countries and focuses on problems that are specific to the former Soviet Union.

Russia, for example, would like to have the right of first refusal in the renewal of long-term gas contracts. This means that once a contract with an importer runs out, Gazprom -- not the buyer -- would decide whether it wants to renew the contract. "This would make it next to impossible for new producers, smaller producers, to enter the market," Kemper said. "It would really go against what the treaty is trying to achieve. But we are working on ways to compromise. Perhaps we can apply this rule only geographically or have it phased out over a number of years."

"That idea isn't very realistic," said Jonathan Stern, a gas expert at the London-based Royal Institute of International Affairs.

"No one would have a commercial arrangement like that," Stern said. "It's as if I sold you a car, and if you wanted to buy another one, then you could only buy it from me. It's kind of a crazy idea."

Forcing gas buyers to stick with Gazprom might sound crazy, but to Russia, it's a way to keep some of its best customers. Ever since the 1991 collapse of Comecon, a former economic union led by the Soviet Union, East European states have tried to distance themselves from Russia, even when it doesn't make commercial sense.

The latest example of anti-Russian policy occurred in Poland this month when the Polish government signed a 20-year deal worth $11 billion to import natural gas from Norway at prices higher than Gazprom's. However, the Polish parliament Wednesday refused to endorse the agreement.

The problems of third-party pipeline access and discriminatory buying practices of some European countries are intertwined, said Vitaly Peshkov, deputy head of the Duma committee. "What, are we going to open up our pipelines -- those that were built and paid for by us -- to Central Asia just so they can sell to those European countries who wouldn't buy from us even if we offered competitive prices?" Peshkov said.

There are still many issues to be hammered out in the Transit Protocol, Peshkov said. Once they are resolved, Russia can confidently go ahead and ratify the treaty. "I can't say when that time will come," he said. "But I can say that we've moved ahead since last spring."

Energy Department officials have pushed for treaty accession because it would attract billions of dollars in foreign investment urgently needed by Russia's oil and gas sector.

The global majors agree. "Our company very much supports the Energy Charter," said Martin Frestl, Shell's head for Kazakhstan. "With an instrument like that, laws can be reviewed and regulations can be put in place. Kemper is on a good ticket to fight for it."