AN OPPORTUNITY FOR PROGRESS: CHINA, CENTRAL ASIA, AND THE ENERGY CHARTER TREATY

YODOGAWA PETERSON 3/12/2013 3:18 PM

AN OPPORTUNITY FOR PROGRESS: CHINA,

CENTRAL ASIA, AND THE ENERGY CHARTER TREATY

NORIKO YODOGAWA* AND ALEXANDER M. PETERSON**

I. INTRODUCTION ................................................................................. 112 II. CHINA’S FORAY INTO RUSSIA’S SPHERE OF INFLUENCE TO

OBTAIN HYDROCARBON RESOURCES ........................................... 114 A. Central Asia’s Hydrocarbon Resources .................................. 114 B. Russia’s Domination of Central Asian Hydrocarbon

Resources ................................................................................... 116 C. Chinese Competition................................................................. 120

1. The Central-Asia China Gas Pipeline; Turkmenistani Hydrocarbons ...................................................................... 120

2. Kazakhstani Hydrocarbons ................................................ 121 3. Uzbekistani Hydrocarbons ................................................. 123 4. Pressure on Russia............................................................... 123

D. Sino-Russian Cooperation in Relation to Central Asian Energy Resources is Unlikely .................................................. 125

III. AN INTRODUCTION TO THE ECT .................................................... 127 A. Energy Charter Transit Protocol ............................................. 130 B. PEEREA .................................................................................... 131 C. Trade Amendment .................................................................... 131

IV. APPLICATION OF THE ECT IN CENTRAL ASIA IF CHINA

BECAME A CONTRACTING PARTY .................................................. 132 A. Why China’s Joining the ECT Would Benefit Central

Asian Contracting Parties ......................................................... 132 1. Trade ..................................................................................... 132 2. Transit ................................................................................... 132 3. Investment ............................................................................ 133

* Legal Counsel, Energy Charter Secretariat. L.L.M. in International Legal Studies, New York University School of Law. L.L.B., The University of Tokyo. The author has co-written this Article in her personal capacity. This Article does not necessarily reflect the views of the Energy Charter Secretariat or those of the Energy Charter Treaty Contracting Parties, Signatories, or Observers. The author has made no attempt in this Article to define the legal status of the Russian Federation in relation to the Energy Charter Treaty.

** Associate, Squire Sanders (US) LLP, Tokyo, Japan. L.L.M. in International and Comparative Law / J.D., Cornell Law School. The author has co-written this Article in his personal capacity. This Article does not necessarily reflect the views of Squire Sanders (US) LLP.


112 TEXAS JOURNAL OF OIL, GAS, AND ENERGY LAW [Vol. 8

B. Why China’s Joining the ECT Would Benefit China ............ 138 1. ECT Investment Provisions ............................................... 138

a. Protection Against Appropriation .............................. 138 b. Fair and Equitable Treatment ..................................... 138 c. Prohibition of Unreasonable or Discriminatory

Treatment ...................................................................... 139 d. Most Favored Nation and National Treatment ......... 139

2. Counterbalancing Russia’s Soft Power in Central Asia .. 140 C. Costs to China in Relation to China’s Acceding to the

ECT ............................................................................................. 140 1. Dispute Settlement .............................................................. 140 2. Transit ................................................................................... 141 3. Energy Efficiency ................................................................ 141

V. THE BENEFITS OBTAINED BY CHINA BY JOINING THE ECT

OUTWEIGH THE COSTS ..................................................................... 142

I. INTRODUCTION

On December 14, 2009, the leaders of the People’s Republic of China (China), Turkmenistan, the Republic of Uzbekistan (Uzbekistan), and the Republic of Kazakhstan (Kazakhstan) inaugurated the Central Asia-China Gas Pipeline (CACGP),1 a 1,833 kilometer natural gas pipeline that snakes from Turkmenistan through Uzbekistan and Kazakhstan to China and connects with the Second West-East Gas Pipeline, which, stretching across China, is the longest gas pipeline in the world.2 On November 24, 2011, Turkmenistani gas traveling through the CACGP started to supply Shenzhen, China, making a 6,811 kilometer journey.3 CACGP supply is expected to reach 65 billion cubic meters per year (BCM/y) by December 2015.4 The pipeline is Kazakhstan’s first gas export route that does not traverse the Russian Federation (Russia), and was inaugurated following a diplomatic row between Russia and Turkmenistan regarding hydrocarbon resources.5

The new pipeline presents an opportunity for China to counterbalance Russia’s soft power in Central Asia by acceding to the Energy Charter

1. Central Asia-China Gas Pipeline, CHINA NAT’L PETROL. CORP., http://www.cnpc.com.cn/en/aboutcnpc/ourbusinesses/naturalgaspipelines/Central_Asia－China_Gas_Pipeline_2.htm?COLLCC=849962296& (last visited Nov. 4, 2012).

2. Id. 3. Natural Gas Arrives at Guangdong from Turkmenistan, CHINA NATI’L PETROL.

CORP. (Nov. 25, 2011), http://www.cnpc.com.cn/en/press/newsreleases/Natural_gas_arrives_at_Guangdong_from_Turkmenistan.htm.

4. Id. 5. Andrew E. Kramer, New Gas Pipeline from Central Asia Feeds China, N.Y. TIMES (Dec.

14, 2009), http://www.nytimes.com/2009/12/15/world/asia/15pipeline.html.


No. 1] AN OPPORTUNITY FOR PROGRESS 113

Treaty (ECT).6 The ECT and the Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects (PEEREA) were signed in December 1994 and entered into legal force in April 1998.7 The aim of the ECT and the PEEREA is to strengthen the rule of law on energy issues by creating a set of rules to be observed by all participating parties, thereby mitigating risks associated with energy-related investment and trade, specifically regarding the cross-border transportation of energy resources.8

Russia signed the ECT in 1994 and, without ratifying it, applied the ECT provisionally until 2009, when it announced that it would no longer apply the treaty.9 In 2001, China became an observer of the Energy Charter Conference, the decision-making body under the ECT, but has yet to become a Contracting Party10 of the ECT. Kazakhstan, Turkmenistan, Uzbekistan, and other Central Asian states are Contracting Parties.11 China acceding to the ECT after Russia has left by terminating its provisional application would mean a step towards becoming a meaningful partner in the development of Central Asia as opposed to a mere financier, which would help to counterbalance Russia’s soft power in Central Asia. There are a few costs that China would face by acceding to the treaty, including being subject to dispute settlement by a few Central Asian states that are not already World Trade Organization (WTO) members, enabling investors to use international arbitration, and needing to adhere to certain environmental rules and regulations. These insignificant costs, however, would be more than outweighed by China being able to secure its investments and build a bridge for further progress with its Central Asian partners.

This Article argues that acceding to the ECT is in China’s best interest because the costs to China in acceding to the ECT would be outweighed by the benefits. China would secure profitable, lasting relationships with hydrocarbon-producing states in Central Asia through membership in the ECT. Membership would demonstrate China’s commitment to engage as

6. Energy Charter Secretariat, 1994 Treaty, ENERGY CHARTER, http://www.encharter.org/index.php?id=28 (last visited Nov. 4, 2012).

7. Id. 8. Id. 9. Energy Charter Secretariat, Members & ObserversRussia, ENERGY CHARTER,

http://www.encharter.org/index.php?id=414&L=0#c1338 (last visited Nov. 4, 2012); Russia PM Putin Rejects International Energy Charter, REUTERS (Aug. 6, 2009), http://in.reuters.com/article/2009/08/06/russia-energy-charter-idINL639469220090806.

10. See Energy Charter Secretariat, Members & Observers, ENERGY CHARTER, http://www.encharter.org/index.php?id=61 (last visited Nov. 4, 2012) (listing China as an observer to the Energy Charter Conference); Energy Charter Treaty art. 1, Dec. 17, 1994, 2080 U.N.T.S. 100 [hereinafter ECT] (a “Contracting Party” is a state or a regional economic integration organization that has agreed to be bound by the ECT and for which the ECT is in force).

11. See Energy Charter Secretariat, Members & Observers, supra note 10 (listing Kazakhstan, Turkmenistan, Uzbekistan, and other Central Asian states as Contracting Parties).



a partner for development with Central Asian states, rather than be a mere exploiter of hydrocarbon resources. In addition, China would benefit from the mutually beneficial provisions of the ECT.

Part II of the Article reviews the current status of hydrocarbon resource transport agreements in Central Asia. Part III proceeds to provide a brief overview of the ECT and the application of the ECT in Central Asia. Part IV moves on to explore the likely benefits that Central Asian Contracting Parties would obtain, as well as the likely costs and benefits for China if it joins the ECT. Finally, this Article concludes by finding that China should join the ECT because the benefits of accession outweigh the related costs.

II. CHINA’S FORAY INTO RUSSIA’S SPHERE OF INFLUENCE TO OBTAIN HYDROCARBON RESOURCES

A. Central Asia’s Hydrocarbon Resources

Two countries in Central Asia appear to have substantial hydrocarbon resources: Kazakhstan with crude oil and Turkmenistan12 with natural gas.13 Uzbekistan is also estimated to have considerable gas resources; however, such resources generally are being used to support its domestic demand rather than being exported.14 Kyrgyzstan and Tajikistan, while not major hydrocarbon producers yet, are critical for the transportation of hydrocarbon resources in the region because such hydrocarbon resources are landlocked.15

12. Turkmenistan was ruled by a long-standing dictator, Saparmurat Niyazov, who isolated the country while pursuing a personality cult, until 2006. His successor, Gurbanguly Berdymukhamedov, has allowed a limited opening of Turkmenistan’s energy sector. However, Turkmenistan generally remains closed to outside investors. See 2012 Investment Climate Statement (Turkmenistan), EMBASSY OF THE U.S., ASHGABAT, TURKM. (Feb. 16, 2012), http://turkmenistan.usembassy.gov/ics.html.

13. See, e.g., BP Statistical Review of World Energy June 2012, BP at 6, 20 (June 2012), http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2011/STAGING/local_assets/pdf/statistical_review_of_world_energy_full_report_2012.pdf.

14. See, e.g., id. at 20; Uzbekistan, U.S. ENERGY INFO. ADMIN., http://www.eia.gov/ countries/cab.cfm?fips=UZ (last updated Jan. 19, 2012). But see Uzbek Fuel Reserves Lower than Government Estimates, BP Says, CENT. ASIA NEWSWIRE, June 19, 2012, http://www.universalnewswires.com/centralasia/viewstory.aspx?id=12251.

15. See Kyrgyzstan Energy Sector Review, THE INOGATEPROGRAMME, http://www.inogate.org/index.php?option=com_inogate&view=countrysector&id=54&lang=en (last visited Nov. 4, 2012); Michael J.G. Cain, Takijistan’s Energy Woes: Resource Barriers in Fragile States, WASH. R. OF TURKISH & EURASIAN AFF. (Jan. 11, 2011), available at http://www.thewashingtonreview.org/articles/tajikistans-energy-woes-resource-barriers-in-fragile-states.html. But see Tethys Discovers ‘Supergiant’ Hydrocarbon Reserves in Tajikistan, CENT. ASIA NEWSWIRE (July 19, 2012), http://www.universalnewswires.com/centralasia/ viewstory.aspx?id=12447; Kyrgyzstan, GAZPROM, http://www.gazprom.com/about/production/ projects/deposits/kyrgyzstan/ (last visited Nov. 4, 2012); Tajikistan Strategic Partnership, GAZPROM, http://www.gazprom.com/about/production/projects/deposits/tajikistan/ (last visited Aug. 15, 2012).



Oil, which can be shipped by tankers, usually entails less direct commercial and political interaction between buyer and seller states than gas, which is transported mainly over ground through dedicated pipelines or over sea in specialized tankers in liquefied natural gas (LNG) form.16 Shipping natural gas through pipelines requires high-pressure pipelines with compressor stations to repressurize gas that loses pressure due to friction.17 Pipelines generally operate most economically at volumes of about 20 BCM/y or greater.18 Investment in pipeline infrastructure is economically beneficial only if there is reasonable certainty regarding supply and purchase, which generally requires an agreement between two or more states.19

The other method of transporting gas, in LNG form using specialized tankers, is advantageous in that LNG may be shipped to any state and does not require the long-term state-to-state commitments that the pipeline method requires.20 LNG transport is more capital intensive than pipeline transport, however, because shipment in LNG form requires liquefaction plants to turn the gas into LNG, transportation in tankers, receiving and storage terminals, and regasification facilities to reconstitute the LNG into usable gas.21 Accordingly, at relatively short distances of approximately 3,000 kilometers, pipelines are a less expensive option to transport gas than LNG shipments.22

China became the second largest net oil importer in the world behind the United States in 2009, its net total oil imports reached 5.5 million barrels per day in 2011,23 and it seems that China will need to import 79% of the oil it consumes by 2030, a larger increment in oil demand than any other country.24 China’s gas demand increased by 22% year‐on‐year in the first half of 2010, and is expected to reach up to 230 billion cubic meters (BCM) by 2015 and 340 BCM by 2020.25 Even exploiting domestic resources, including unconventional gas, much of China will need substantial gas imports to operate in the near future.26

16. See, e.g., JOHN L. KENNEDY, OIL AND GAS PIPELINE FUNDAMENTALS 24 (1993). 17. See, e.g., id.at 72. 18. Rahul Tongia & V.S. Arunachalam, Natural Gas Imports by South Asia: Pipelines or

Pipedreams, 18 ECON. & POL. WKLY. 1054 (1999). 19. See id. at 1060; Robert E. Hogfoss & Catherine D. Little, Best Time to Invest in Building

Pipelines May Be the Next Few Years, PIPELINE & GAS JOURNAL (Feb. 2009), available at http://pipelineandgasjournal.com/best-time-invest-building-pipelines-might-be-next-few-years.

20. See Tongia & Arunachalam, supra note 18, at 1054. 21. See, e.g., KENNEDY, supra note 16, at 24. 22. See Tongia & Arunachalam, supra note 18, at 1057. 23. Country Analysis BriefChina, U.S. ENERGY INFO. ADMIN. 2 (Sept. 4, 2012),

http://www.eia.gov/countries/analysisbriefs/China/china.pdf. 24. Julie Jiang & Jonathan Sinton, Overseas Investments by Chinese National Oil Companies:

Assessing the Drivers and Impacts, INT’L ENERGY AGENCY 11 (Feb. 2011), http://www.iea.org/ publications/freepublications/publication/overseas_china-1.pdf.

25. Id. at 12. 26. Id. at 11.



China likely will seek to import the oil and gas that it needs from Central Asia. Central Asian oil and gas exports are expected to more than double by 2036, with Kazakhstan mostly exporting oil and Turkmenistan mostly exporting gas.27 Especially in light of the various territorial and sea lane disputes in which China is involved,28 China should seek to import its needed hydrocarbon resources through secure pipelines rather than solely through oil or LNG shipments. Therefore, China should seek to create a lasting, mutually beneficial relationship with the Central Asian states to secure its future energy needs.

B. Russia’s Domination of Central Asian Hydrocarbon Resources

Russian culture, language, and values are instilled in Central Asia.29 Prior to and during the Soviet Union, Russia united the Central Asian states under Russian-imposed ideals.30 Top political leaders, academics, and business people from all Central Asian states, who each had varying individual ethnic, linguistic, and cultural backgrounds, bowed to Russia as a way to increase prosperity for themselves and their nations.31 In effect, all Central Asian states were tied vertically to Russia and did not create strong bonds horizontally with each other.32

The collapse of the Soviet Union highlighted the lack of horizontal connections among the Central Asian states, especially in the realm of transportation infrastructure.33 Central Asian states emerged from the Soviet Union bound by inefficient arrangements that benefited Russia: rail, river, and air transport were linked with Russia and nowhere else, and all oil and gas infrastructure, including all pipelines, ran to Russia.34 At the time of the collapse of the Soviet Union, the only outlet for hydrocarbon resources from Central Asia was via Russian territory and through state-controlled Russian pipelines.35 Russia used this position of

27. See Caspian Oil and Gas Exports are Poised for Take-Off, INT’L ENERGY AGENCY (Mar. 15, 2011), http://www.iea.org/index_info.asp?id=1881.

28. See, e.g., HONGYI LAI, ASIAN ENERGY SECURITY: THE MARITIME DIMENSION (2009). 29. See, e.g., CENTRAL ASIA: ONE HUNDRED THIRTY YEARS OF RUSSIAN DOMINANCE, A

HISTORICAL OVERVIEW (Edward A. Allworth ed., Duke Univ. Press, 3d ed. 1994) (1967) [hereinafter RUSSIAN DOMINANCE].

30. See, e.g., id. 31. See, id. See generally OLIVER ROY, THE NEW CENTRAL ASIA: THE CREATION OF

NATIONS (2000). 32. See THE TRANSFORMATION OF CENTRAL ASIA: STATES AND SOCIETIES FROM SOVIET

RULE TO INDEPENDENCE 247–48 (Pauline Jones Luong ed., 2004) [hereinafter THE TRANSFORMATION OF CENTRAL ASIA]; Edward C. Chow & Leigh E. Hendrix, Central Asia’s Pipelines: Field of Dreams and Reality, in 23 NAT’L BUREAU OF ASIAN RES., NBR SPECIAL REP. 29, 31 (2010), available at http://csis.org/files/publication/1009_EChow_LHendrix_CentralAsia.pdf.

33. See THE TRANSFORMATION OF CENTRAL ASIA, supra note 32; Chow & Hendrix, supra note 32, at 31.

34. Chow & Hendrix, supra note 32, at 31. 35. For example, refineries in eastern Kazakhstan processed West Siberian crude oil then

shipped the oil to Samara, Russia, and states such as Azerbaijan received the oil from Russia



power to continue to dominate Central Asian hydrocarbon resources.36 Russia has not and currently does not allow non-Russian companies to

use its pipelines for transit: “every molecule of oil and gas that enters Russian territory becomes Russian.”37 As oil and gas are the biggest sources of income for Central Asian states bordering the Caspian Sea, Russia sought to use its stranglehold on the transit of such hydrocarbon resources to continue to exercise political and economic influence38 over Central Asia.39

In 1991, certain Central Asian statesincluding Kazakhstan and the Republic of Azerbaijan (Azerbaijan)attempted to open their hydrocarbon resources to Western oil companies such as Chevron Corporation, developing the Tengiz and Korolev oil fields in Kazakhstan, and BP, developing the Azeri-Chiraq-Guneshli oil and associated gas fields in Azerbaijan.40 The Western oil companies saw using the old Soviet pipeline system as the most efficient way to transport low volumes of oil in order to defer capital expenditures on new transportation infrastructure.41

However, Russia thwarted the Western oil companies’ attempts.42 Consequently, Chevron and BP had to pursue more costly and inefficient options; Chevron opted to transport oil from the Tengiz oil fields in Kazakhstan, while BP chose to transport oil from offshore Azeri-Chiraq-Guneshlioil fields in Azerbaijan.43 Chevron eventually bypassed Russia’s

rather than from Kazakhstan itself. Id. 36. See MARTHA BRILL OLCOTT, CENTRAL ASIA’S SECOND CHANCE 193 (2005). 37. ALEXANDROS PETERSEN & KATINKA BARYSCH, RUSSIA, CHINA AND THE

GEOPOLITICS OF ENERGY IN CENTRAL ASIA 27 (2011), available at http://www.cer.org.uk/sites/default/files/publications/attachments/pdf/2011/rp_010-4118.pdf.

38. For example, Russia does not follow international practice by continuing to use the Soviet practice of trading oil by weight instead of volume, which does not adjust for market values of different crude oils based on quality differences. Chow & Hendrix, supra note 32, at 32.

39. See OLCOTT, supra note 36. 40. PETERSEN & BARYSCH, supra note 37, at 28; The History of the Tengiz Field,

TENGIZCHEVROIL, http://www.tengizchevroil.com/en/about/tco_history.asp#1991 (last visited Aug. 16, 2012); Today Kazakhstan, Tomorrow Russia?, BUSINESSWEEK (May 24, 1992), available at http://www.businessweek.com/stories/1992-05-24/today-kazakhstan-tomorrow-russia.

41. Chow & Hendrix, supra note 32, at 31; see Robert V. Barylski, Russia, The West, and the Caspian Energy Hub, 49 MIDDLE E. J. 217 (1995). Chevron Corporation, which was the first major entrant in Central Asia, based its initial plans on production of hydrocarbon resources in Tengiz, Kazakhstan, continuing to travel to Samara, Russia, as had been arranged during Soviet times. “The company made offers to Russian oil pipeline monopoly Transneft to invest in upgrading the capacity of that line and in debottlenecking the Tikhoretsk to Novorossiysk segment of the major Russian export line to the Black Sea, so as to defer costly construction of a new line for initial Tengiz production. Similarly, BP and its partners in the Azerbaijan International Oil Consortium (AIOC) wanted to take advantage of the existing Soviet-era pipeline by reversing the direction of flow so that early oil production from offshore Caspian fields could be shipped via Black Sea by connecting with the same line to Novorossiysk,” a Russian city that sits on the Black Sea. Chow & Hendrix, supra note 32, at 31.

42. Chow & Hendrix, supra note 32, at 32. See Barylski, supra note 41. 43. Chow & Hendrix, supra note 32, at 32. See Barylski, supra note 41. From Tengiz,

Chevron Corporation shipped crude oil by rail and barge to the Black Sea via Georgia and Ukraine. “BP and most of its AIOC partners invested over $500 million in constructing a



continued obstruction by implementing the Caspian Pipeline Consortium (CPC),44 which began operations in December 2002,45 and BP led its partners in the creation of the Baku-Tbilisi-Ceyhan Pipeline (BTC), which started operations in 2006.46 Russia’s refusal to work with new potential partners by opting to keep its stranglehold on the oil resources of Central Asia cost Russia the opportunity to become a cooperative member of a three-way synergy between Central Asian states with abundant oil reserves, Western companies with capital and know-how, and its own energy transportation infrastructure.47

Russia’s monopoly of Central Asian gas resources also slowed its own growth and dampened the Central Asian states’ opportunities.48 For example, for many years, Russia dominated the purchase of Turkmenistan’s vast gas reserves, buying almost all of Turkmenistan’s general output of around 50 to 60 BCM/y.49 In April 2003, Russia and Turkmenistan signed an agreement stipulating that Turkmenistan would supply Russia with gas until 2028, specifically 100 BCM/y from 2010 onward, or a total of 2 trillion cubic meters by 2028.50 Open Joint Stock Company Gazprom (Gazprom), created in 1989 by the Soviet Union Ministry of Gas Industry51 and currently controlled by the Russian government,52 generated significant profits by buying Turkmenistani gas cheaply to supply Ukraine while selling Russia’s own gas to Western European customers at three times the sale price to Ukraine.53 By buying Central Asian gas and shipping it through its own pipelines, Russia prevented the Central Asian states from gaining independent access to

pipeline from Azerbaijan to a new marine terminal in Supsa, Georgia.” Chow & Hendrix, supra note 32, at 32.

44. See Kazakhstan Fact Sheet, CHEVRON 2 (Apr. 2012), http://www.chevron.com/documents/pdf/kazakhstanfactsheet.pdf.

45. JOINT UNITED NATIONS DEVELOPMENT PROGRAMME / WORLD BANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME, CROSS-BORDER OIL AND GAS PIPELINES: PROBLEMS AND PROSPECTS 102 (2003), available at http://siteresources.worldbank.org/INTOGMC/Resources/crossborderoilandgaspipelines.pdf.

46. Chow & Hendrix, supra note 32, at 32; see THE BAKU-TBILISI-CEYHAN PIPELINE: OIL WINDOW TO THE WEST, CTR. ASIA-CAUCASUS INST. & SILK ROAD STUDIES PROGRAM (S. Fredrick Starr & Svante E. Cornell eds., 2005).

47. See Chow & Hendrix, supra note 32; PETERSEN & BARYSCH, supra note 37. 48. See PETERSEN & BARYSCH, supra note 37. 49. Id. at 51. 50. Sergei Blagov, Russia Gas Dreams, ASIA TIMES ONLINE (Jan. 13, 2005),

http://www.atimes.com/atimes/Central_Asia/GA13Ag01.html. Turkmenistan claimed that over the twenty-five-year period, the approximate value to Turkmenistan was $200 billion and the approximate value for Russia was $300 billion. See id.

51. About Gazprom 1989-1995, GAZPROM, http://www.gazprom.com/about/history/ chronicle/1989-1995/ (last visited Feb. 12, 2012).

52. Reaching New Horizons: 2011 Annual Report, GAZPROM 135 (May 22, 2012), http://www.gazprom.com/f/posts/51/402390/annual-report-2011-eng.pdf.

53. PETERSEN & BARYSCH, supra note 37, at 29; Jim Nichol, Steven Woehrel & Bernard A. Gelb, Russia’s Cutoff of Natural Gas to Ukraine: Context and Implications, U.S. CONG. RES. SERV. at CRS–2 (Feb. 15, 2006), available at http://www.policyarchive.org/handle/ 10207/bitstreams/4324.pdf.



lucrative western markets. In 2005, Russia announced that it would move to “European market

prices” in its gas sales and started raising prices for countries such as Ukraine shortly thereafter.54 It was not until 2008, however, that Russia offered to pay more for the gas that it bought from Central Asia, and only then due to the increased likelihood of competition.55 After the price for Turkmenistani gas was raised in 2009, European gas demand and prices plummeted with the global economic recession, and a dispute between Russia and Turkmenistan ensued.56

Russia’s greedy guarding of Central Asian hydrocarbon resources has stalled development of critical production and distribution infrastructure in Central Asia.57 The Soviet-era Central Asia-Center gas pipeline, which is controlled by Gazprom and delivers almost all of the gas from Turkmenistan to Russia via Uzbekistan and Kazakhstan, has failed to receive necessary updating and repair, even though the leaders of Russia, Turkmenistan, and Kazakhstan signed an agreement in 2007 stating that such operations would take place by 2012.58 Another example of failure to develop needed infrastructure is the Pre-Caspian gas pipeline, which was proposed to be built on the eastern side of the Caspian.59 The project still seems to be at a standstill, even though Russia, Turkmenistan, and Kazakhstan signed an agreement in 2007 promising that the Pre-Caspian gas pipeline would be developed, and Gazprom and the Kazakhstani and Turkmenistani oil and gas companies signed an agreement in 2008 setting forth basic principles for cooperation regarding construction of the pipeline.60 Russia’s tight grip on Central Asia creates an opportunity for

54. PETERSEN & BARYSCH, supra note 37, at 29; Nichol, Woehrel & Gelb, supra note 53, at CRS–2.

55. PETERSEN & BARYSCH, supra note 37, at 29; Richard B. Andres & Michael Kofman, European Energy Security: Reducing Volatility of Ukraine-Russia Natural Gas Prices, NAT’L DEF. U. STRATEGIC F. 6 (Feb. 2011), available at http://www.dtic.mil/dtic/tr/fulltext/u2/a545411.pdf; Q&A: Russia-Ukraine Gas Row, BBC NEWS (Jan. 20, 2009), http://news.bbc.co.uk/2/hi/europe/7240462.stm.

56. Simon Pirani, Jonathan Stern & Katja Yafimava, The Russo-Ukrainian Gas Dispute of January 2009: A Comprehensive Assessment, OXFORD INST. FOR ENERGY STUD. 10 (Feb. 2009), available at http://www.oxfordenergy.org/wpcms/wp-content/uploads/2010/11/NG27-TheRussoUkrainianGasDisputeofJanuary2009AComprehensiveAssessment-JonathanSternSimonPiraniKatjaYafimava-2009.pdf; Chow & Hendrix, supra note 32, at 35.

57. See Robert M. Cutler, Moscow and Ashgabat Fail to Agree over the Caspian Coastal Pipeline, CENT. ASIA-CAUCASUS INST. (Apr. 8, 2009), http://cacianalyst.org/?q=node/5080.

58. Cutler, supra note 57; Kazakhstan, Russia and Turkmenistan Agree to Renovate the Caspian Gas Pipeline, GOV’T OF THE REPUBLIC OF KAZ., http://en.government.kz/site/news/052007/16 (last visited Dec. 12, 2011); Sébastien Peyrouse, Economic Aspects of the Chinese-Central Asia Rapprochement, CENT. ASIA-CAUCASUS INST. 68–69 (Sept. 2007), available at http://www.silkroadstudies.org/new/docs/Silkroadpapers/2007/0709China-Central_Asia.pdf.

59. Chow & Hendrix, supra note 32, at 35. 60. Chow & Hendrix, supra note 32, at 35; Pre-Caspian Gas Pipeline, GAZPROM,

http://www.gazprom.com/about/production/projects/pipelines/pg/ (last visited July 17, 2012).



China to engage Central Asia as a new partner for meaningful development.

C. Chinese Competition

Whereas Western companies moved to obtain rights to hydrocarbon resources in Central Asia immediately after the collapse of the Soviet Union in the early 1990s, Chinese companies did not attempt to acquire substantial rights until 1997, when China National Petroleum Corporation (CNPC) acquired certain rights to oil and gas fields in Kazakhstan.61 By 2001, in the Tenth Five-Year plan for National Economy and Social Development, China stated that it aimed to take advantage of resources abroad in order to strengthen the Chinese economy.62

1. The Central-Asia China Gas Pipeline; Turkmenistani Hydrocarbons

In July 2007, China and Turkmenistan signed a production sharing agreement for certain gas fields in Turkmenistan, and entered into a gas sales and purchase agreement that envisaged annual deliveries of 30 BCM of gas from Turkmenistan to China through the CACGP until 2037.63 That same month, CNPC and the Uzbek state-owned oil and gas company signed an agreement for the construction and operation of the Uzbek section of the CACGP.64 Later that year, in November 2007, CNPC and the Kazakhstan state-owned oil and gas company signed an agreement regarding the construction and operation of the Kazakhstan-China Gas Pipeline.65

The international, Central Asian section of the CACGP is 1,833 kilometers of two parallel lines (Line A and Line B) with 188 kilometers in Turkmenistan, 530 kilometers in Uzbekistan, and 1,115 kilometers in Kazakhstan.66 Line A started operation in December 2009, while Line B

61. See, e.g., BO KONG, CHINA’S INTERNATIONAL PETROLEUM POLICY 175 (2010). Specifically, China acquired rights to the Aktobe field in Kazakhstan, which included the Zhanazhol oil and gas condensate field and the Kenyiak oil field.

62. Sheng Zhang, The Energy Charter Treaty and China: Member or Bystander?, 13 J. OF WORLD INV. AND TRADE 597, 602 (2012).

63. Flow of Natural Gas from Central Asia, CHINA NAT’L PETROL. CORP., http://www.cnpc.com.cn/en/press/Features/Flow_of_natural_gas_from_Central_Asia_.htm (last visited Jan. 12, 2013).

64. Id. 65. Id. Note that the Kazakhstan-China Gas Pipeline is not the same as the Kazakhstan-

China Oil Pipeline. 66. Id.; Claudia Perez Rivas, Uzbek Energy Company Uzbekneftegas has Formed a Joint

Venture with China National Petroleum Corporation (CNPC) to Build a Pipeline to Bring Gas from Turkmenistan to China, UPSTREAM (Apr. 14, 2008), http://www.upstreamonline.com/live/article152400.ece; Jonathan Davis, Turkmen Break Ground on China Pipe, UPSTREAM (Aug. 30, 2007), http://www.upstreamonline.com/live/article139613.ece; Vladimir Socor, Kazakhstan Expands Gas Transit Pipeline Capacities and Own Exports to China, ASIA TIMES ONLINE (Aug. 16, 2012), http://www.atimes.com/atimes/Central_Asia/NH16Ag01.html.



became operational in 2010.67 As of June 2012, China had imported around 18.4 BCM of natural gas through the CACGP, and the total transportation capacity for CACGP by the end of 2012 should be 30 BCM/y.68 In December 2011, a commencement ceremony was held for Line C of the CACGP, which will follow the same path as Lines A and B, traveling from Turkmenistan through Uzbekistan and Kazakhstan to China, and will increase the supply of natural gas the CACGP brings into China to 55 BCM/y by December 2015.69

Once it reaches western China,70 the CACGP connects to the longest gas pipeline in the world, China’s domestic Second West-East Pipeline.71 Gas from the CACGP is supplied to Shenzhen and Guangzhou in southern China after making a 6,811-kilometer journey from Turkmenistan.72 Construction expanding the Second West-East Pipeline will soon bring natural gas to Hong Kong as well.73 CNPC has also committed to constructing a Third West-East Gas Pipeline, which will provide an additional domestic 5,000 kilometer pipeline network with a capacity of 30 BCM/y to deliver gas received via the CACGP throughout China.74 This commitment was made in May 2012 after a visit from Turkmenistani President Berdymukhamedov to China in November 2011 led to an agreement to increase the supply of Turkmenistani gas to China via the CACGP by 25 BCM/y to a total of 65 BCM/y.75

2. Kazakhstani Hydrocarbons

In addition to the three CACGP lines, the 1,475-kilometer Beyneu-Shymkent line, which China and Kazakhstan agreed to construct in June

67. Construction on Third Line Begins For Central Asia-China Gas Pipeline, PIPELINES INTERNATIONAL (Mar. 2012), http://pipelinesinternational.com/news/construction_on_third_line_begins_for_central_asia-china_gas_pipeline/066998/.

68. Socor, supra note 66; Charlotte Owen, 30 BCM Passes Through Turkmenistan-China Pipeline, OIL & GAS TECH. (June 6, 2012), http://www.oilandgastechnology.net/pipelines/30-bcm-passes-through-turkmenistan-china-pipeline.

69. Line C’s Uzbekistan Section of Central Asia-China Gas Pipeline Starts Construction, CHINA NAT’L PETROL. CORP. (Dec. 16, 2011), http://www.cnpc.com.cn/en/press/newsreleases/Line_Cs_Uzbekistan_section_of_Central_Asia－China_Gas_Pipeline_starts_construction_.htm; Socor, supra note 66.

70. Id. 71. Trunk line of Second West-East Gas Pipeline, the world’s longest, begins operation,

CHINA NAT’L PETROL. CORP., http://www.cnpc.com.cn/en/press/Features/Trunk_Line_of_the_Second_West－East_Gas_Pipeline_begins_operation.htm (last visited Dec. 7, 2011).

72. Natural Gas Arrives at Guangdong from Turkmenistan, supra note 3. 73. Hong Kong Branch of Second West-East Gas Pipeline Starts Construction, CHINA NAT’L

PETROL. CORP. (Mar. 5, 2012), http://www.cnpc.com.cn/en/press/newsreleases/Hong_Kong_branch_of_Second_West－East_Gas_Pipeline_starts_construction.htm.

74. Joint Stock and Cooperation Framework Agreement Signed on the Third West-East Gas Pipeline, CHINA NAT’L PETROL. CORP. (May 31, 2012), http://www.cnpc.com.cn/en/press/newsreleases/Joint_stock_and_cooperation_framework_agreement_signed_on_the_Third_West－East_Gas_Pipeline.htm.

75. Natural Gas Arrives at Guangdong from Turkmenistan, supra note 3.



2010, will also transit gas to China.76 The pipeline will go into operation in two phases and eventually will provide 10 BCM/y to 15 BCM/y of gas when both phases are completed by 2013 and 2015, respectively.77

Aside from the CACGP, CNPC is extremely active in the Kazakhstani energy sector.78 For example, after acquiring a 60.3% stake in AktobeMunaiGasthe fourth-largest oil company in Kazakhstanin June 1997, and obtaining a further 25.12% in May 2003, CNPC now holds 85.42% of the company’s shares.79 AktobeMunaiGas has production licenses for the Zhanazhol, Kenkiyak Oversalt, and Kenkiyak Subsalt oil fields and a contract for an exploration block in Kazakhstan.80 After taking over AktobeMunaiGas, CNPC invested over $1.5 billion in building production, storage, and transportation facilities, and in reconstructing an existing oil and gas processing plant as well as building a new one.81 These substantial efforts and investments have been met with promising results; CNPC and AktobeMunaiGas Corp. obtained high-yield oil flows from various exploration projects in Kazakhstan in 2007.82

Additionally, CNPC acquired PetroKazakhstan in October 2005, and in accordance with an agreement reached with the Kazakhstan Ministry of Energy and Mineral Resources, transferred 33% of its shares in PetroKazakhstan to KazMunaiGazthe Kazakhstan state-owned oil and gas companyin July 2006, retaining the remaining 67% stake.83 CNPC’s acquisition of PetroKazakhstan allowed CNPC to obtain ownership of numerous oilfields and licenses in relation to several exploration blocks.84

In December 2005, the first stage of the Kazakhstan-China Oil Pipeline was completed, stretching 962 kilometers from Atasu in Kazakhstan to Xinjiang in China.85 In July 2009, China and Kazakhstan completed a 792-kilometer extension of the oil pipeline to the far west of Kazakhstan, reaching the Caspian Sea.86 The output of the pipeline is set

76. Socor, supra note 66. 77. Id. 78. See China’s Pipeline Gas Imports: Current Situation and Outlook to 2025, PETROMIN

PIPELINER, Jan.–Mar. 2011, at 6, 8, available at http://www.pm-pipeliner.safan.com/mag/ppl0311/r06.pdf.

79. CNPC in Kazakhstan, CHINA NAT’L PETROL. CORP., http://www.cnpc.com.cn/en/cnpcworldwide/kazakhstan/ (last visited Jan. 3, 2013).

80. Id. 81. Id. 82. Id. 83. Id. 84. Id. The PetroKazakhstan assets included full or part ownership of eleven oilfields and

licenses for five exploration blocks covered by thirteen exploration and development contracts. 85. Michael Clarke, China’s Integration of Xinjiang with Central Asia: Securing a “Silk Road”

to Great Power Status?, 6 CHINA AND EURASIA F. Q. 89, 106 (2008). 86. Kenkiyak-Kumkol Section of Kazakhstan-China Oil Pipeline Becomes Operational,

CHINA NAT’L PETROL. CORP. (July 14, 2009), http://www.cnpc.com.cn/en/press/newsreleases/2009/Kenkiyak_Kumkol_section_of_Kazakhstan%EF%BC%8DChina_Oil_Pipeline_becomes_



to double by 2013.87

3. Uzbekistani Hydrocarbons

CNPC currently operates two different oil and gas cooperation projects in Uzbekistan.88 CNPC signed a production-sharing contract in August 2006, which provided for exploration and development of oil and gas deposits in 12,000 square kilometers of the Uzbekistan area of the Aral Sea with a consortium comprising of CNPC, Uzbekistan’s Uzbekneftegaz, Russia’s Lukoil, Malaysia’s Petronas, and South Korea’s Korea National Oil Corporation.89 This was in addition to the oil and gas exploration agreement that CNPC signed with Uzbekistan National Oil/Gas Group Corporation in June 2006, which covered five land exploration blocks covering a total area of 34,000 square kilometers in Uzbekistan.90

4. Pressure on Russia

China used its economic strength to extend a bridge into Central Asia.91 The CACGP struck an economic blow to Russia.92 The CACGP was the first, and so far is the only, major international gas pipeline to break Russia’s stranglehold on Central Asian gas transport.93 It was also China’s first major gas import pipeline.94 China offered Central Asian states loans for economic stimulus and energy investments during the recent global financial crisis to further expand its influence in Central Asia.95 Specifically, China loaned $10 billion to Kazakhstan in April 2009 in return for certain ownership rights of a large Kazakhstani oil producer.96 A few months later, China announced it was making a $10

operational.htm; China, Kazakhstan Agree on Sino-Kazakh Oil Pipeline Extension to Caspian Sea, EMBASSY OF THE REPUBLIC OF KAZ., http://www.kazakhembus.com/archived_article/china-kazakhstan-agree-on-sino-kazakh-oil-pipeline-extension-to-caspian-sea (last visited Apr. 19, 2012).

87. Lucy Hornby & Chen Aizhu, China, Kazakh Pipeline Expansion on Hu Visit Agenda, REUTERS (June 4, 2010), http://in.reuters.com/article/2010/06/04/china-kazakhstan-pipeline-idINTOE65307A20100604.

88. CNPC in Uzbekistan, CHINA NAT’L PETROL.CORP., http://www.cnpc.com.cn/en/cnpcworldwide/Uzbekistan/ (last visited Jan. 3, 2013).

89. Id. 90. Id. 91. See PETERSEN & BARYSCH, supra note 37, at 40. 92. See id. at 43; see also Fabio Indeo, Russia and China in Central Asia: Growing

Geopolitical Competition, ISTITUTO PER GLI STUDI DI POLITICA INTERNAZIONALE, Oct. 2010, at 1, 7, available at http://www.ispionline.it/it/documents/PB_199_2010.pdf.

93. PETERSEN & BARYSCH, supra note 37, at 42. 94. See id.; China Trumps Russia in Turkmen Gas Buy, OIL & GAS EURASIA (Dec. 14, 2009),

http://www.oilandgaseurasia.com/tech_trend/china-trumps-russia-turkmen-gas-buy. 95. PETERSEN & BARYSCH, supra note 37, at 42. 96. Eugene Tang, China, Kazakhstan Sign $10 Billion Loan-for-Oil Agreements,

BLOOMBERG (Apr. 16, 2009), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aRkoxDWplmJY.



billion loan to the Shanghai Cooperation Organization (SCO)97 to assist members during the economic crisis.98 China further committed $4 billion to Turkmenistan to assist in the development of Turkmenistan’s largest gas field, the South Yolotan gas field, in June 2010,99 followed by another $4.1 billion loan to Turkmenistan in April 2011.100

The CACGP and loans from China highlighted Russia’s comparative weakness as an economic partner. To compete with China, Russia signed an agreement with Turkmenistan to purchase 50 BCM of gas during 2009101 and also promised to start paying more for Turkmenistani gas in early 2009.102 As European gas demand fell in 2009 with the economic recession, however, Russia no longer needed the Turkmenistani gas.103 While Russia was pressuring Turkmenistan in April 2009 to reduce the amount of gas Turkmenistan provided, there was an explosion on Turkmenistan’s gas pipeline supplying Russia.104 In response, Gazprom ceased importing gas from Turkmenistan entirely.105 Due to the interruption of gas supply, Turkmenistan lost income of between $7 billion and $10 billion, approximately a quarter of its annual gross domestic product.106 Turkmenistan initially insisted that the blast was caused by Gazprom’s violation of the gas supply agreement between Russia and Turkmenistanand indicated that it planned to seek financial compensationbut later dropped the allegations.107 China exploited the dispute, granting Turkmenistan a $4 billion loan to develop the South

97. A non-governmental organization that seeks to address political and economic issues in Central Asia, China, and Russia, composed of China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. Backgrounder: Shanghai Cooperation Organization, SHANGHAI COOPERATION ORG. SUMMIT 2012 (Jun. 7, 2010), http://www.scosummit2012.org/english/2010-06/07/c_13337029.htm. See generally Chien-Peng Chung, China’s Approaches to the Institutionalization of Regional Multilateralism, 17 J. OF CONTEMP. CHINA 747 (2008).

98. China to Provide 10-Billion-Dollar Loan to SCO Members, XINHUA (June 16, 2006), http://news.xinhuanet.com/english/2009-06/16/content_11552439.htm.

99. China in Central Asia: Riches in the Near Abroad, ECONOMIST (Jan. 28, 2010), http://www.economist.com/node/15393705.

100. China Lends Turkmenistan $4.1B in Return for Future Gas, CENT. ASIA NEWSWIRE (Apr. 27, 2011), http://www.universalnewswires.com/centralasia/viewstory.aspx?id=3923.

101. Isabel Gorst, Russia Welcomes End to Turkmen Gas Dispute, FIN. TIMES (London) (Dec. 23, 2009), http://www.ft.com/intl/cms/s/0/20dfe82e-ef69-11de-86c4-00144feab49a.html.

102. Gazprom Pays More for Turkmen Gas – Business – International Herald Tribune, N.Y. TIMES (Sept. 5, 2009), http://www.nytimes.com/2006/09/05/business/worldbusiness/05iht-gazprom.2700002.html. “In 2006, Turkmenistan sold most of its gas to Russia at not much more than $50 per 1,000 cubic meters. In early 2009 it sold its exports at the European price of over $300 per 1,000 cubic meters.” China Trumps Russia in Turkmen Gas Buy, supra note 94.

103. Gorst, supra note 101. 104. Sergei Blagov, Russia Struggles to Revive Energy Ties With Turkmenistan, EURASIA

DAILY MONITOR (D.C.) (Dec. 15, 2009, 8:28 PM), http://www.jamestown.org/programs/edm/single/?tx_ttnews%5Btt_news%5D=35839&tx_ttnews%5BbackPid%5D=485&no_cache=1.

105. Id. 106. Deidre Tynan, Turkmenistan: Gas Flows Again to Russia, While Discontent Simmers,

EURASIANET.ORG (Jan. 13, 2010, 7:00 PM), http://www.eurasianet.org/departments/insight/articles/eav011410.shtml.

107. Blagov, supra note 104.



Yolotan gas field in Turkmenistan, even though Gazprom was interested in cooperating with Turkmenistan to build a pipeline from South Yolotan to link into a new pipeline from Central Asia to Europe.108

Despite China’s economic inroads into Central Asia based on its willingness to invest money, China does not enjoy the linguistic and cultural dominance in the region that Russia maintains.109 China must convince Central Asian states that it is committed to a long-term relationship with Central Asian states to counterbalance Russia’s soft power in the region. China’s becoming a Contracting Party of the ECT would signal to Central Asian states that China is willing to undertake binding policy decisions in the interest of being a mutual partner in relation to energy development rather than a mere exploiter, and would be a step towards China becoming a leader in Central Asia.

D. Sino-Russian Cooperation in Relation to Central Asian Energy Resources is Unlikely

Stroytransgaz, a Gazprom subsidiary, built the Turkmenistani stretch of the CACGP.110 While some commentators have noted that such action suggests that Russia would rather cooperate with China than with the West,111 Russia’s cooperation is likely a symptom of its vying to stay connected with Central Asian hydrocarbon production and to keep China from replacing Russia in its position as financier and overseer.112 Therefore, Russia is more likely to compete than cooperate with China.

Russia’s lack of cooperation with China in the energy sector is evidenced by the glaring lack of Sino-Russian cross-border energy infrastructure.113 For example, an Irkutsk to China gas pipeline that was proposed in Soviet times did not begin to be realized until BP bought half of a Russian oil company in 2003 and the merged company started to take

108. Gorst, supra note 101; China in Central Asia: Riches in the Near Abroad, supra note 99. 109. See, e.g., RUSSIAN DOMINANCE, supra note 29. 110. Turkmenistan Ends Building its Gas Pipeline Section to China, PJSC STROYTRANSGAZ

(Oct. 23, 2009), http://www.stroytransgaz.com/press-center/smi/itar-tass/2009_10_23. 111. See Chow & Hendrix, supra note 32, at 38 (arguing that “[t]he Russian attitude seems to

be, if Central Asian gas is to be exported by a route other than Russia, it is better for the gas to go east than west, where it would compete against Russian gas in its primary European market.”) (citing Marat Gurt, Russian Company Wins Turkmenistan Pipeline Tender, REUTERS (Feb. 19, 2008), available at http://in.reuters.com/article/2008/02/19/turkmenistan-china-idINL194546920080219).

112. Cf. Igor Danchenko et al., One Step Forward, Two Steps Back? The Realities of a Rising China and Implications for Russia’s Energy Ambitions, BROOKINGS, Aug. 2010, available at http://www.brookings.edu/~/media/Research/Files/Papers/2010/8/china%20russia%20energy %20downs%20hill/08_china_russia_energy_downs_hill.pdf (describing China’s growing dominance in the energy transit sector and possible responses by Russia).

113. See, e.g., id.; Henry J. Kenny, China and the Competition for Oil and Gas in Asia, 11 ASIA-PACIFIC REV. 36 (2004); Stephen J. Blank, The Eurasian Energy Triangle: China, Russia, and the Central Asian States, 12 BROWN J. WORLD AFF. 53 (2005).



action.114 Even after BP entered the picture, an argument between BP and its Russian partners regarding the control of gas exports stalled the project for more than five years.115 Subsequently, BP announced that it would sell its stake in the company in June 2012.116 Despite years of mutual agreements and negotiations between Russia and China, and a surge in sales of Russian oil to China, there is a lack of cross-border infrastructure needed for cost-effective delivery of oil and gas from Russia to China.117 This lack of cross-border energy infrastructure highlights the fact that China and Russia have not engaged each other as meaningful partners in the energy arena.118

Furthermore, strategically, Russia should not welcome China as a competitor for Central Asian hydrocarbon resources. Only Russia enjoys the cultural and political dominance necessary to guide Central Asian states in their decisions regarding the exploitation of hydrocarbon resources,119 and even if Russia was willing to cooperate with China in certain circumstances by lending backing to China’s projects in Central Asia, Russia would lose the ability to obtain leverage by exercising such backing if it supported China as an equal power in the region. Russia’s value is derived from a unique position in the hearts and minds of Central Asians, something that China cannot buy, even if China economically dominates Russia. Cooperating with China could damage Russia’s most valuable asset by sharing Russia’s reputation in Central Asia with China.

International organizations in the region also fail to provide a forum for cooperative engagement of Central Asian hydrocarbons. The Collective Security Treaty Organization is focused too specifically on military issues to be an effective forum for cooperation.120 The SCO is not an effective forum for cooperation because Turkmenistan is not a member.121 Also, the SCO has not yet proven itself as a forum in which members may negotiate economic agreements with the detail necessary for cross-border energy investment, let alone the ability to have the shared practice, precedent, and insight of numerous members from around the world to affect rulemaking and adjudication like the ECT, because the SCO is limited in its geographic scope for membership and

114. Chow & Hendrix, supra note 32, at 37. 115. Id. 116. BP announces plans to sell stake in TNK-BP, BBC (June 1, 2012),

http://www.bbc.co.uk/news/business-18292483. 117. Danchenko et. al., supra note 112, at 2. 118. See id. 119. See, e.g., RUSSIAN DOMINANCE, supra note 29. See also OLCOTT, supra note 36. 120. A security organization composed of Russia, Belarus, Armenia, Kazakhstan,

Kyrgyzstan, Tajikistan, and Uzbekistan. See Alexander I. Nitkin, Post-Soviet Military-Political Integration: The Collective Security Treaty Organization and its Relations with the EU and NATO, 5 CTR. ASIA-CAUCAUS INST. & SILK ROAD STUD. PROGRAM 35, 35 (2007).

121. THE SHANGHAI COOPERATION ORGANIZATION, http://www.sectsco.org/EN/ (last visited Jan. 6, 2013).



does not have a secretariat capable of administering such agreements.122 Furthermore, China likely would be reluctant to use the SCO because doing so would offer Russia a comparatively stronger voice than if China approached energy investment issues through the global Energy Charter forum. The SCO has only five member states, including Russia and China, whereas fifty-one states and the European Union have joined the ECT.123

Even putting politics aside, it would not be efficient for the SCO to try to reinvent the wheel regarding cross-border energy investment institutionalization rather than using the established Energy Charter system. Central Asia does not pose any special issues that the ECT could not handle. Accordingly, China could use the gap left by Russia and showcase its difference from Russia by acceding and adhering to the ECT to become a meaningful partner for development in Central Asia.

III. AN INTRODUCTION TO THE ECT

The ECT, which was signed in December 1994 and entered into legal force in April 1998,124 seeks to provide a framework for cooperation in the energy sector.125 The ECT is open to membership by any state or regional economic integration organization, as opposed to private entities, and to date the ECT has been signed or acceded to by fifty-one states, including Azerbaijan, Kazakhstan, Kyrgyzstan, Turkmenistan, Ukraine, and Uzbekistan, as well as the European Union and European Atomic Energy Community.126 The ECT covers the whole energy value chainfrom exploration to end-useand all energy products and energy-related equipment; furthermore, it is the only legally binding agreement of its kind that deals with intergovernmental cooperation in the energy sector.127

States or regional economic integration organizations that have ratified or acceded to the ECT are referred to as Contracting Parties.128 Contracting Parties with energy resources can use the ECT to attract investment, protect downstream interests, and ensure reliable transportation of energy.129 Energy-importing Contracting Parties can use

122. Id. 123. Id. See Energy Charter Secretariat, Status of Ratification of the Energy Charter

Treaty, ENERGY CHARTER, http://www.encharter.org/fileadmin/user_upload/document/ECT_ratification_status.pdf (last visited Aug. 15, 2012) (listing signatories of the ECT).

124. ECT, supra note 10, art. 44; Energy Charter Secretariat, 1994 Treaty, supra note 6. 125. Energy Charter Secretariat, 1994 Treaty, supra note 6. 126. Energy Charter Secretariat, 1994 Treaty, supra note 6. See Energy Charter Secretariat,

Status of Ratification of the Energy Charter Treaty, supra note 123. 127. Id. 128. ECT, supra note 10, art. 1(2). 129. Energy Charter Secretariat, Frequently Asked Questions, ENERGY CHARTER,

http://www.encharter.org/index.php?id=18 (last visited July 22, 2012).



the ECT to protect their investments and secure the supply of energy resources.130 All countries benefit from the ECT’s measures to encourage the efficiency of energy production and use and to minimize related negative environmental impacts.131 China became an Observer of the Energy Charter Conference, the decision-making body for issues related to the ECT,132 on December 17, 2001.133 Observers have the right to attend all meetings of the Energy Charter Conference and of its subsidiary groups, and receive all related documentation, reports, and analyses, as well as to participate in the working debates that take place within the Energy Charter process.134

Russia signed the ECT in 1994 but has never ratified it to date. Russia agreed to provisional application of the ECT and PEEREA pending ratification when it signed the treaty.135 However, this provisional application ended on October 18, 2009, in accordance with Article 45(3)(a) of the ECT, after Russia’s notification to the Depository on August 20, 2009 that it did not intend to become a Contracting Party.136 Although not subject to the provisional application of the ECT or PEEREA, Russia still has an obligation to adhere to the provisions of the ECT regarding investment protection and dispute settlement in relation to investments made in its territory on, or prior to, October 18, 2009.137

The ECT focuses on four main areas: (1) protecting foreign investments against key non-commercial risks, based on the extension of national treatment (NT) or most-favored nation (MFN) treatment (whichever is more favorable); (2) providing non-discriminatory conditions for trade in energy materials and products, as well as energy-related equipment where applicable, based on WTO rules to ensure reliable cross-border energy transit flows through pipelines, grids, and other means of transportation; (3) resolving disputes between Contracting Parties, and, in the case of investments, between investors and host states; and (4) promoting energy efficiency and minimizing harmful environmental impacts.138

If a Contracting Party fails to amicably settle a dispute concerning its alleged breach of the ECT’s investment protection provisions or the

130. Id. 131. Id. 132. See ECT, supra note 10, art. 34. 133. Energy Charter Secretariat, Members & Observers, China, ENERGY CHARTER, supra

note 10. 134. Energy Charter Secretariat, Frequently Asked Questions, supra note 129. 135. See ECT, supra note 10, art. 45(1); Energy Charter Secretariat, Members & Observers,

Russia, supra note 10. 136. Energy Charter Secretariat, Frequently Asked Questions, supra note 129; see ECT,

supra note 10, art. 45(3)(a); Energy Charter Secretariat, Members & Observers, Russia, supra note 9.

137. ECT, supra note 10, art. 45(3)(b). 138. Energy Charter Secretariat, 1994 Treaty, supra note 6.



application or interpretation of the ECT, such Contracting Party may be subject to the ECT’s dispute settlement mechanisms.139 The key dispute resolution provisions are in Part V of the ECT: Article 26 (investor-state disputes); Article 27 (state-state disputes); and Article 28 (conditions for the application of Article 27 to trade-related disputes for which there is a more specialized dispute resolution procedure).140 The investor-state arbitration stipulated in Article 26 provides a choice of forum among the International Center for Settlement of Investment Disputes, a sole arbitrator or an arbitral tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law, and an arbitral proceeding under the Arbitration Institute of the Stockholm Chamber of Commerce.141

In effect, breaches of the ECT, including breaches of contracts that become breaches of the ECT under the umbrella clause (the last sentence of Article 10(1)),142 are subject to the ECT’s dispute settlement mechanisms.143 The disputing parties, as well as the arbitrators and tribunals, may have to consider certain standing and jurisdiction requirements, but those are outside the scope of this Article.144

The ECT also includes a unique conciliation procedure to deal specifically with disputes over transit that may be invoked by Contracting Parties, and is faster and less formal than taking a dispute to arbitration.145 Under this procedure, an independent conciliator is appointed in order to assist the parties in reaching an agreement.146 If an agreement is not reached within ninety days of the conciliator’s appointment, then the conciliator must decide interim transit tariffs for a period of up to twelve months while negotiations between the parties continue.147 The aim of this procedure is to reduce the risk of interruptions to transit flows while an agreement is reached.148 The Secretary General of the Energy Charter Secretariat has a role in appointing the conciliator in such case, but, apart from this specific

139. ECT, supra note 10, art. 26(1), 27. 140. Id. art. 26(1), 27(1), 28. 141. See id. art. 26. 142. ECT, supra note 10, art. 10(1). The states listed in Annex IA to the ECT do not allow

disputing parties to refer their disputes concerning the umbrella clause to international arbitration. Id., art. 26(3)(c).

143. ENERGY CHARTER SECRETARIAT, THE ENERGY CHARTER TREATY: A READER’S GUIDE 26 (2002), available at http://www.encharter.org/fileadmin/user_upload/Publications/ECT_Guide_ENG.pdf. See ECT, supra note 10, art. 26.

144. See e.g., INVESTMENT ARBITRATION AND THE ENERGY CHARTER TREATY (Clarisse Ribeiro, ed., 2006).

145. Energy Charter Secretariat, Frequently Asked Questions, supra note 129. 146. Id. 147. ECT, supra note 10, arts. 7(7)(c)–(d); Energy Charter Secretariat, Frequently Asked

Questions, supra note 129. 148. Energy Charter Secretariat, Frequently Asked Questions, supra note 129.



instance, the Secretariat itself is not involved in dispute settlement.149 The ECT seeks to promote and direct investment in Contracting

Parties, “cataly[zing] economic growth by means of measures to liberalize investment and trade in energy.”150 Article 2 confirms that the ECT aims to create a “legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits.”151 The ECT does not create investment opportunities by forcing open access to resources or defining a certain market structure, but once an energy investment is made between two Contracting Parties, the ECT provides a stable interface between the foreign investor and the host government.152

A. Energy Charter Transit Protocol

The ECT also promotes reliable international transit flows.153 The ECT includes an obligation on the Contracting Parties to facilitate energy transit across their territory, in line with the principle of freedom of transit, and an obligation to secure established transit flows.154 However, the ECT does not oblige any Contracting Party to introduce mandatory third party access to transit facilities.155 In relation to transit tariffs, the ECT only requires that such tariffs be non-discriminatory and that there not be any unreasonable delays, restrictions, or charges on energy materials and products in transit.156

Negotiations on an Energy Charter Transit Protocol aimed to clarify the operational meaning of “freedom of transit.”157 Negotiations within the Energy Charter process to establish a Transit Protocol began in 2000, and agreement on certain critical issues was reached in 2002; however, that progress was followed by a suspension of negotiations in 2003.158 Subsequently, in October 2011, the European Union presented a new common position with regard to the negotiations on the draft Transit Protocol and argued that it no longer appeared opportune to continue such negotiations.159 Taking this into consideration, the Energy Charter Conference repealed the mandate for negotiations of the Transit Protocol

149. ECT, supra note 10, art. 7(7)(b); Energy Charter Secretariat, Frequently Asked Questions, supra note 129.

150. ECT, supra note 10, pmbl. 151. Id. art. 2. 152. Energy Charter Secretariat, Frequently Asked Questions, supra note 129. 153. Id. 154. ECT, supra note 10, art. 7(1), (5). 155. ENERGY CHARTER SECRETARIAT, supra note 143, at 29. 156. Energy Charter Secretariat, Frequently Asked Questions, supra note 129. 157. Id. 158. Energy Charter Secretariat, Transit Protocol, ENERGY CHARTER, http://www.encharter.

org/index.php?id=37&L=0 (last visited Aug. 6, 2012). 159. Id.



at its 22nd Meeting, held on November 29, 2011.160 If the negotiations are reset and the Transit Protocol is finalized, it could significantly impact hydrocarbon resource transport arrangements in Central Asia.

B. PEEREA

Article 19 of the ECT requires each Contracting Party to strive to minimize, in an economically efficient manner, harmful environmental impacts arising from energy use.161 The PEEREA was negotiated, opened for signature, and entered into force at the same time as the ECT, April 16, 1998.162 The PEEREA requires its participating states and regional economic integration organizations to formulate clear policy aims for improving energy efficiency and reducing the energy cycle’s negative environmental impact.163 In relation to the PEEREA, the Energy Charter process provides Contracting Parties with information regarding good environmental practices and a forum in which they can exchange dialogue on experiences and policy advice on energy efficiency issues. At this forum, the parties to the PEEREA are encouraged to highlight some aspects of national energy efficiency strategies, such as taxation, pricing, environment-related subsidies, and other mechanisms to finance energy efficiency objectives.164

C. Trade Amendment

The ECT’s trade provisions, which were initially based on the trading regime of the General Agreement on Tariffs and Trade (GATT), were modified by the adoption in April 1998 of a set of amendments (Trade Amendment) to the ECT to bring the provisions into line with the rules and practices of the WTO, particularly the principles of transparency and non-discrimination.165 In addition, the Trade Amendment extended the ECT’s trade rules to energy-related equipment, such as pipeline pipes, turbines, furnaces, etc., and thus, it ensures that investors will have access to equipment of their choice on a non-discriminatory basis, both in terms of MFN treatment and NT.166 It is not mandatory for Contracting Parties to the ECT to also accede to the Trade Amendment.167

160. Id. 161. ECT, supra note 10, art. 19(1). 162. Energy Charter Secretariat, Energy Efficiency, ENERGY CHARTER,

http://www.encharter.org/index.php?id=37&L=0 (last visited Aug. 6, 2012). 163. Energy Charter Secretariat, 1994 PEEREA, ENERGY CHARTER, http://www.encharter.

org/index.php?id=27&L=0 (last visited May 6, 2012). 164. Id. 165. Energy Charter Secretariat, 1998 Trade Amendment, ENERGY CHARTER,

http://www.encharter.org/index.php?id=26&L=0 (last visited Jan. 12, 2013). 166. ENERGY CHARTER SECRETARIAT, supra note 143, at 15. 167. See Energy Charter Secretariat, Status of Ratification of the Trade Amendment

to the Energy Charter Treaty as of August 2012, ENERGY CHARTER, http://www.encharter.



IV. APPLICATION OF THE ECT IN CENTRAL ASIA IF CHINA BECAME A CONTRACTING PARTY

A. Why China’s Joining the ECT Would Benefit Central Asian Contracting Parties

1. Trade

Under the ECT, China would ensure non-derogation from the GATT and Related Instruments (Article 4), and trade-related investment measures being consistent with Article III or XI of the GATT (Article 5(1)).168 As a WTO member, China already has assumed an obligation to ensure the above GATT rules in its relationships with many of the ECT Contracting Parties.169 Furthermore, although it is not mandatory for a Contracting Party to accede to the Trade Amendment, it appears likely that China also would accede to the Trade Amendment due to its adherence and successful use of the WTO system.170

With regard to the relationships with non-WTO member states that are ECT members,171 which critically include Kazakhstan, Turkmenistan and Uzbekistan,172 Article 29 of the ECT incorporates the GATT discipline into China’s trade in energy with those states.173 Accordingly, China’s becoming an ECT Contracting Party would permit such non-WTO member states that are ECT Contract Parties to use the ECT’s trade-dispute settlement mechanism to enforce disputes with China, which they would not be able to do via the WTO. The ability for non-WTO members to have a proven and effective system for dispute settlement with China is an invaluable benefit of the ECT.

2. Transit

Article 7(1) of the ECT says “[e]ach Contracting Party shall take the necessary measures to facilitate the Transit of Energy Materials and Products consistent with the principle of freedom of transit.”174 China’s becoming subject to Article 7 of the ECT would be beneficial to the

org/fileadmin/user_upload/document/Trade_Amendment_ratification_status.pdf (last visited January 12, 2013).

168. ECT, supra note 10, arts. 4, 5(1). 169. See, e.g., Understanding the WTO: The Agreements, WORLD TRADE ORG.,

http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm1_e.htm (last visited Jan. 4, 2013). 170. See generally Mary Amiti et al., CHINA’S GROWING ROLE IN WORLD TRADE (Robert

C. Feenstra & Shang-Jin Wei eds., 2010). 171. These states are Azerbaijan, Belarus, Bosnia and Herzegovina, Kazakhstan,

Turkmenistan, and Uzbekistan. Energy Charter Secretariat, 1998 Trade Amendment, supra note 165.

172. Id. 173. See ECT, supra note 10, art. 29. 174. Id. art. 7(1).



landlocked Central Asian states by ensuring that the hydrocarbons shipped to China are not stopped upstream on the way to China. In this regard, China’s accession to the ECT would make China a much safer destination to send hydrocarbon resources than Russia, where “every molecule of oil and gas that enters Russian territory becomes Russian.”175 Also, Central Asian Contracting Parties would benefit from the ECT’s streamlined dispute settlement mechanism, specifically prepared for transit disputes.176 In particular, for ECT Contracting Parties that are not WTO members, ECT’s transit-dispute settlement mechanism would present the only available source of uniform dispute settlement with China regarding transit.177

3. Investment

China has concluded a bilateral investment treaty (BIT) with forty-nine states178 of the fifty-one states that are Contracting Parties or Signatories of the ECT, including Kazakhstan,179 Kyrgyzstan,180 Turkmenistan181 and Uzbekistan.182 Theses BITs, however, do not provide nearly as much protection to investors as is afforded under the ECT.183

While the details of the specific BITs between China and Kazakhstan, Kyrgyzstan, Turkmenistan and Uzbekistan have not been made public,184 in most of the BITs concluded in the 1980s and 1990s, China did not agree to provide for NT185 or allow referral of investor-state disputes to

175. PETERSEN & BARYSCH, supra note 37, at 27. 176. See ECT, supra note 10, art. 7. 177. See id. art. 7(7)-(8); Understanding the WTO: Settling Disputes, WORLD TRADE ORG.,

http://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm (last visited Jan. 4, 2013). 178. See Total Number of Bilateral Investment Agreements Concluded, U.N. CONFERENCE

ON TRADE & DEV. (June 1, 2012), http://archive.unctad.org/sections/dite_pcbb/docs/bits_china.pdf.

179. Entered into force on August 13, 1994. Id. 180. Entered into force on September 8, 1995. Id. 181. Entered into force on June 4, 1994. Id. 182. Entered into force on September 1, 2011. Id. 183. See Zhang, supra note 62, at 603, 610 (“[T]hough China has entered into BITs with all

members from CIS [Commonwealth of Independent States] . . . [they are] rather simple and could not provide sufficient protection of foreign investment . . . . On the contrary, the investment protection and promotion provisions of the [ECT] are much more complicated and comprehensive.”).

184. See Total Number of Bilateral Investment Agreements Concluded, supra note 178. 185. See Agreement Between the Government of the People’s Republic of China and

the Government of the Republic of Albania Concerning the Encouragement and Reciprocal Protection of Investments, China-Alb., Feb. 13, 1993, available at http://unctad.org/sections/dite/iia/docs/bits/china_albania.pdf [hereinafter China-Alb.]; Agreement Between the Government of Australia and the People’s Republic of China on the Reciprocal Encouragement and Protection of Investments, Austl.-China, July 11, 1988, available at http://unctad.org/sections/dite/iia/docs/bits/australia_china.pdf [hereinafter Austl.-China]; Agreement Between the Government of the People’s Republic of Bulgaria and the Government of the People’s Republic of China Concerning the Reciprocal Encouragement and Protection of Investments, Bulg.-China,



an ad hoc arbitral tribunal186 for disputes other than those related to the amount of compensation for expropriation.187 In contrast, in the BITs

June 27, 1989, available at http://unctad.org/sections/dite/iia/docs/bits/china_bulgaria.pdf [hereinafter Bulg.-China]; Agreement Between the Government of the People’s Republic of China and the Government of the Republic of Croatia Concerning the Reciprocal Encouragement and Protection of Investments, China-Croat., June 7, 1993, available at http://unctad.org/sections/dite/iia/docs/bits/china_croatia.pdf [hereinafter China-Croat.]; China and Denmark Agreement Concerning the Encouragement and Reciprocal Protection of Investments, China-Den., Apr. 29, 1985, available at http://unctad.org/sections/dite/iia/docs/bits/china_denmark.pdf [hereinafter China-Den.]; The Government of the People’s Republic of China and the Government of Estonia, China-Est., Sept. 2, 1993, available at http://unctad.org/sections/dite/iia/docs/bits/china_estonia.pdf [hereinafter China-Est.]; Agreement Between the Government of the People’s Republic of China and the Government of the Republic of Georgia Concerning the Reciprocal Encouragement and Protection of Investments, China-Geor., June 3, 1993, available at http://unctad.org/sections/dite/iia/docs/bits/china_georgia.pdf [hereinafter China-Geor.]; Agreement Between the Government of the People’s Republic of China and the Government of the Hellenic Republic for the Encouragement and Reciprocal Protection of Investments, China-Greece, June 25, 1992, available at http://unctad.org/sections/dite/iia/docs/bits/china_greece.pdf [hereinafter China-Greece]; Agreement Between the Republic of Hungary and the People’s Republic of China Concerning the Encouragement and Reciprocal Protection of Investments, Hung.-China, May 29, 1991, available at http://unctad.org/sections/dite/iia/docs/bits/china_hungary.pdf [hereinafter Hung.-China]; Agreement Between the Republic of Lithuania and the People’s Republic of China Concerning the Encouragement and Reciprocal Protection of Investments, Lith.-China, Nov. 8, 1993, available at http://unctad.org/sections/dite/iia/docs/bits/china_lithuania.pdf [hereinafter Lith.-China]; Agreement Between the Government of the People’s Republic of China and the Government of the Mongolian People’s Republic Concerning the Encouragement and Reciprocal Protection of Investments, China-Mong., Aug. 26, 1991, available at http://unctad.org/sections/dite/iia/docs/bits/china_mongolia.pdf [hereinafter China-Mong.]; PRC, Norway Agreement on Mutual Protection of Investments, China-Nor., Nov. 21, 1984, available at http://unctad.org/sections/dite/iia/docs/bits/china_norway.pdf; Agreement Between the Government of the People’s Republic of China and the Government of the Polish People’s Republic Concerning the Reciprocal Promotion and Protection of Investments, China-Pol., June 7, 1998, available at http://unctad.org/sections/dite/iia/docs/bits/china_poland.pdf [hereinafter China-Pol.]; Agreement on the Mutual Protection of Investments, China-Swed., Mar. 29, 1982, available at http://unctad.org/sections/dite/iia/docs/bits/china_sweden.pdf [hereinafter China-Swed.]; Agreement Between the People’s Republic of China and the Republic of Turkey Concerning the Reciprocal Promotion and Protection of Investments, China-Turk., Nov. 13, 1990, available at http://unctad.org/sections/dite/iia/docs/bits/china_turkey.pdf.

186. Some of China’s bilateral investment treaties (BITs) do not provide any investor-state dispute settlement mechanism. E.g., Hung.-China, supra note 185; China-Pol., supra note 185; Agreement Between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China Concerning the Promotion and Reciprocal Protection of Investments with Exchanges of Notes, U.K.-China, May 15, 1986, available at http://unctad.org/sections/dite/iia/docs/bits/uk_china.pdf [hereinafter U.K.-China]. Other of China’s BITs provide that either party to the investment dispute may resort to domestic court proceedings. E.g., China-Alb., supra note 185, art. 8(2); Austl.-China, supra note 185, art. XII(2)(a); China-Croat., supra note 185, art.8(2).

187. China-Alb., supra note 185, art. 8(3); Austl.-China, supra note 185, art. XII(2)(b) (when both parties agree, disputes in general may also be submitted to ad hoc arbitral tribunal); China-Croat., supra note 185, art. 8(3); China-Den., supra note 185, art. 8(3); China-Est., supra note 185, art. 8(3); China-Geor., supra note 185, art. 9(3); China-Greece, supra note 185, art. 10(2) (when both parties agree, investment disputes in general may also be submitted to ad hoc arbitral tribunal); Hung.-China, supra note 185, art. 10(1); Agreement Between the Government of the People’s Republic of China and the Republic of Iceland Concerning the Promotion and Reciprocal Protection of Investments, China-Ice., Mar. 31, 1994, available at http://unctad.org/sections/dite/iia/docs/bits/china_iceland.pdf, art. 9(3); Lith.-China, supra note 185, art. 8(2)(b) (referring disputes to the International Centre for Settlement of Disputes (ICSID) rather than to ad hoc arbitral tribunals, and when both parties agree, investment



concluded in the 2000s, China agreed to the implementation of both such matters,188 which suggests that China has a positive attitude towards modernizing its BITs. This inference is supported by the fact that China has renegotiated its BITs with Germany,189 the Netherlands,190 and Switzerland.191192 Nevertheless, it should be noted that all the BITs that

disputes in general may also be submitted to the ICSID); China-Mong., supra note 185, art. 8(3); China-Pol., supra note 185, art. 10(1); Agreement Between the Government of the People’s Republic of China and the Government of the Republic of Slovenia Concerning the Encouragement and Reciprocal Protection of Investments, China-Slovn., art. 8(3), Sept. 13, 1993, available at http://unctad.org/sections/dite/iia/docs/bits/china_slovenia.pdf; U.K.-China, supra note 186, art.7(1).

188. Agreement Between the People’s Republic of China and Bosnia and Herzegovina on the Promotion and Protection of Investments, China-Bosn. & Herz., arts. 3(1), 8(2), June 26, 2002, available at http://unctad.org/sections/dite/iia/docs/bits/china_bosnia.pdf [hereinafter China-Bosn. & Herz.] (disputes are referred to the ICSID rather than to an ad hoc arbitral tribunal); Agreement Between the Czech Republic and the People’s Republic of China on the Promotion and Protection of Investments, Czech-China, arts. 3(1), 3(2), 9(2)(c), Dec. 8, 2005, available at http://unctad.org/sections/dite/iia/docs/bits/China_czechrep.pdf [hereinafter Czech-China]; Agreement on the Encouragement and Reciprocal Protection of Investments Between the Government of Republic of Finland and the Government of the People’s Republic of China, Fin.-China, arts. 3(2), 9(2)(c), Nov. 15, 2004, available at http://unctad.org/sections/dite/iia/docs/bits/china_finland.pdf [hereinafter Fin.-China]; Agreement Between the People’s Republic of China and the Federal Republic of Germany on the Encouragement and Reciprocal Protection of Investments, China-Ger., arts. 3(2), 9(3), Dec. 1, 2003, available at http://unctad.org/sections/dite/iia/docs/bits/china_germany.pdf [hereinafter China-Ger.]; Agreement Between the Government of the People’s Republic of China and the Government of the Republic of Latvia on the Encouragement and Reciprocal Protection of Investments, China-Lat., arts. 3(2), 9(2)(b) Apr. 15, 2004, available at http://unctad.org/sections/dite/iia/docs/bits/China_Latvia.pdf (disputes are referred to the ICSID rather than to an ad hoc arbitral tribunal); Agreement on the Encouragement and Reciprocal Protection of Investments Between the Government of the People’s Republic of China and the Government of the Kingdom of the Netherlands, China-Neth., arts. 3(3), 10(3)(b), Nov. 26, 2001, available at http://unctad.org/sections/dite/iia/docs/bits/china_netherlands.pdf [hereinafter China-Neth.]; Agreement between the Government of the Russian Federation and the Government of the People’s Republic of China on the Promotion and Reciprocal Protection of Investments, Rus.-China, arts. 3(2), 9(2)(c), Nov. 9, 2006, available at http://unctad.org/sections/dite/iia/docs/bits/russia_china_ru.pdf; Agreement Between the Swiss Federal Council and the Government of the People’s Republic of China on the Promotion and Reciprocal Protection of Investments, Switz.-China, arts. 4(2), 11(2)(b), Jan. 27, 2009, available at http://unctad.org/sections/dite/iia/docs/bits/Switzerland_China_new.pdf [hereinafter Switz.-China].

189. See China-Ger., supra note 188 (renegotiated BIT signed on Dec. 1, 2003, replacing the previous BIT signed on Oct. 7, 1983); Total Number of Bilateral Investment Agreements Concluded, supra note 178.

190. See China-Neth., supra note 188 (renegotiated BIT signed on Nov. 26, 2001, replacing the previous BIT signed on June 17, 1985); Total Number of Bilateral Investment Agreements Concluded, supra note 178.

191. See Switz.-China, supra note 188 (renegotiated BIT signed on Jan. 27, 2009, replacing the previous BIT signed on Nov. 12, 1986); Total Number of Bilateral Investment Agreements Concluded, supra note 178.

192. It appears that China also renegotiated its BITs with Belgium and Luxembourg, Bulgaria, France, Portugal, Romania, Spain, and Sweden, respectively, considering the fact that the United Nations Conference on Trade and Development’s country-specific list of BITs shows a signing date in the 2000s while its database of the texts of BITs displays those signed in the 1980s and 1990s. See Agreement Between the Government of the People’s Republic of China and the Belgian-Luxembourg Economic Union on the Reciprocal Promotion and Protection of Investments, China-Belg.-Lux., June 4, 1984, available at http://unctad.org/sections/dite/iia/docs/bits/china_belg_lux.pdf; China-Bulg., supra note 185;



were concluded in the 2000s and are publicly available include a provision that China could require the investor to exhaust domestic administrative review procedures before using the BIT-based dispute settlement proceedings.193 This condition for consent to arbitration is not allowed under the ECT.194

Accord Entre le Gouvernement de la Republique Française et le Gouvernement de la Republique Populaire de Chine Sur L’Encouragement et la Protection Reciproques des Investissements, Fr.-China, May 30, 1984, available at http://unctad.org/sections/dite/iia/docs/bits/france_china_fr.pdf; Acordo Entre o Governo da República Portuguesa e o Governo da República Popular da China Sobre a Promoçío e Protecçío Mútua e de Investimentos, Port.-China, Feb. 3, 1992, available at http://unctad.org/sections/dite/iia/docs/bits/china_portugal_por.pdf; Agreement Between the Government of the People’s Republic of China and the Government of Romania Concerning the Encouragement and Reciprocal Protection of Investments, China-Rom., July 12, 1994, available at http://unctad.org/sections/dite/iia/docs/bits/china_romania.pdf; Acuerdo Para la Proteccion y Fomento Reciproços de Inversiones Entre el Reino de España y la Republica Popular de China, Spain-China, Feb. 6, 1992, available at http://unctad.org/sections/dite/iia/docs/bits/spain_china_sp.pdf; Agreement on the Mutual Protection of Investments, China-Swed., Mar. 29, 1982, available at http://unctad.org/sections/dite/iia/docs/bits/china_sweden.pdf; Total Number of Bilateral Investment Agreements Concluded, supra note 178. In addition to these states, it should be noted that Japan signed a trilateral investment agreement between itself, China, and South Korea on May 13, 2012, although this new trilateral agreement does not replace the BIT between China and Japan signed on August 27, 1988. Agreement Among the Government of Japan, the Government of the Republic of Korea and the Government of the People’s Republic of China for the Promotion, Facilitation and Protection of Investment, Japan-S. Kor.-China, art. 25, May 13, 2012, available at http://www.mofa.go.jp/announce/announce/2012/5/pdfs/0513_01_01.pdf.

193. See China-Bosn. & Herz., supra note 188, art. 8(2) (either party may require exhaustion of its domestic administrative review procedures); Czech-China, supra note 188, art. 9(3) (only China requires exhaustion of domestic administrative review procedures); Protocol to the Agreement on the Encouragement and Reciprocal Protection of Investments Between the Government of Republic of Finland and the Government of the People’s Republic of China, art. 9, Nov. 15, 2004, available at http://unctad.org/sections/dite/iia/docs/bits/china_finland.pdf (only China may require exhaustion of domestic administrative review procedures); Protocol to the Agreement Between the People’s Republic of China and the Federal Republic of Germany on the Encouragement and Reciprocal Protection of Investments, to art. 9, Dec. 1, 2003, available at http://unctad.org/sections/dite/iia/docs/bits/china_germany.pdf (only China requires exhaustion of domestic administrative review procedures); Protocol to the Agreement Between the Government of the People’s Republic of China and the Government of the Republic of Latvia on the Promotion and Protection of Investments, art. 9, Apr.15, 2004, available at http://unctad.org/sections/dite/iia/docs/bits/China_Latvia.pdf (only China requires exhaustion of domestic administrative review procedures); Protocol to the Agreement on Encouragement and Reciprocal Protection of Investments Between the People’s Republic of China and the Kingdom of the Netherlands, art. 10, Nov. 26, 2001, available at http://unctad.org/sections/dite/iia/docs/bits/china_netherlands.pdf (only China requires exhaustion of domestic administrative review procedures); Protocol to the Agreement Between the Government of the Russian Federation and the Government of the People’s Republic of China on the Promotion and Reciprocal Protection of Investments, art. 9, Nov. 9, 2006, available at http://unctad.org/sections/dite/iia/docs/bits/russia_china_ru.pdf (either party may require exhaustion of its domestic administrative review procedures); Protocol to the Agreement Between the Swiss Federal Council and the Government of the People’s Republic of China on the Promotion and Reciprocal Protection of Investments, art. 11(2)(a), Jan. 27, 2009, available at http://unctad.org/sections/dite/iia/docs/bits/Switzerland_China_new.pdf (only China may require exhaustion of domestic administrative review procedures).

194. “Subject only to subparagraphs (b) and (c), each Contracting Party hereby gives its unconditional consent to the submission of a dispute to international arbitration or conciliation in accordance with the provisions of this Article.” ECT, supra note 10, art. 26(3)(a) (emphasis added). The exceptions allowed under this provision are: the Investor’s having already submitted



Based on the aforesaid trends observed in China’s BITs, it appears likely that China’s BITs with Kazakhstan, Kyrgyzstan, Turkmenistan, and Uzbekistan, all signed in 1992, do not include the full protection of investments included in China’s BITs signed in the 2000s. If this is true, these Central Asian states stand to benefit a great deal from having China subscribe to the ECT and thereby extend more beneficial terms regarding NT and investor-state arbitration for disputes other than those related to the amount of compensation for expropriation. In addition, China’s accession to the ECT would mean that investors would not be required to exhaust domestic administrative review procedures before using treaty-based dispute settlement proceedings. These newly incorporated changes would serve to protect the above mentioned Central Asian states’ investments in energy transport infrastructure, ensure enforcement of investors’ rights, and require that China treat such investments with a certain degree of fairness.

Even if China’s BITs with these Central Asian states do provide for the full protection of investments to the same extent as those signed in the 2000s, China’s accession to the ECT would still benefit these states through the ECT’s definition of investor. The definition of the term “Investor” under the ECT is, in terms of corporate or institutional investors, “a company or other organization organized in accordance with the law applicable in that Contracting Party.”195 This definition requires only the incorporation under the laws of the host state, unlike the definition of “investor” used in China’s BITs, which usually requires actual presence in the host state’s territory.196

The ECT’s broad definition of “investor” could enable a national or company of a non-ECT member state to enjoy protection under the ECT by making an investment via a holding company incorporated under the laws of another state that is a Contracting Party.197 Although there is a

its dispute to a domestic court; and the dispute arising from the umbrella clause. ECT, supra note 10, art. 26(3)(b)-(c). A number of China’s older BITs include the abovementioned exception of previous submission to a domestic court. However, China might be willing to give up this exception for accession to the ECT, as several recent BITs allow the investor who has submitted its dispute to a domestic court to withdraw from the court proceedings and to resubmit it to arbitration. E.g., Czech-China, supra note 188, art. 9(4); Fin.-China, supra note 188, art. 9(3). In any event, China may maintain the abovementioned exception of previous submission to a domestic court under Article 26(3)(b) of the ECT.

195. ECT, supra note 10, art. 1(7)(a)(ii). 196. Not only the BITs signed around 1992, the year in which China signed BITs with

Kazakhstan, Kyrgyzstan, Turkmenistan, and Uzbekistan, but also more recent BITs require actual presence by including, in the definition of an investor, a requirement to be “domiciled,” “having seat,” “having registered office” or “hav[ing] their seat, together with real economic activities” in the territory of the host state. E.g., China-Alb., supra note 185, art. 1(2)(b); Hung.-China, supra note 185, art. 1(2)(b);China-Greece, supra note 185, art. 1(3)(a), 1(3)(b); China-Ger., supra note 188, art. 1(2)(a), 1(2)(b); China-Lat., supra note 188, art. 1(2)(a)(ii), 1(2)(b)(ii); Switz.-China, supra note 188, art. 1(2)(b).

197. JESWALD W. SALACUSE, THE LAW OF INVESTMENT TREATIES 188 (2010); Nils Eliasson, 10 Years of Energy Charter Arbitration, MANNHEIMERSWARTLING 21 (June 6, 2011),



caveat that the denial of benefit clause in Article 17(1) of the ECT might apply to such case,198 this broader possibility of protection under the ECT could benefit the Central Asian states. For example, even though the United States does not have a BIT with China, if a U.S. company wanted to make an investment in the construction of a new pipeline similar to the CACGP, the company could establish a holding company in, say, Kazakhstan and have the holding company invest in China so that such investment benefits from ECT’s protections.199 In this hypothetical, the investment would be made in China and not Kazakhstan, but the holding company incorporated in Kazakhstan would have some economic activities and generate tax revenues.

B. Why China’s Joining the ECT Would Benefit China

1. ECT Investment Provisions

With regard to the two ECT Contracting Parties with which China does not have BITsthe Republic of Ireland and the Principality of LiechtensteinChinese investors would obtain protection of their energy-related investments in these states under the ECT. In addition, the higher security in investment climate that China must ensure under the ECT would encourage investment in China. The ECT’s main investment protection provisions are summarized below.

a. Protection Against Appropriation

Under Article 13 of the ECT, a host state may not expropriate foreign-owned property or investments, or take a measure tantamount to expropriation, unless the measure is: (1) conducted for a purpose in the public interest; (2) not discriminatory; (3) carried out under due process of law; and (4) accompanied by payment of prompt, adequate, and effective compensation.200

b. Fair and Equitable Treatment

Article 10(1) of the ECT sets forth a flexible “fair and equitable treatment” clause. In relation to past arbitral awards, the tribunals interpreted, or at least left room for interpreting, the unfair and inequitable treatment prohibited by this provision to include: breaching legitimate expectations created by the state and relied upon by the

available at http://www.sccinstitute.com/filearchive/4/41105/Report%20Ten%20Years%20of%20ECT%20Arbitration,%2030%20June%202011.pdf; see RUDOLF DOLZER & CHRISTOPH SCHREUER, PRINCIPLES OF INTERNATIONAL INVESTMENT LAW 54 (2008).

198. See SALACUSE, supra note 197. 199. See Total Number of Bilateral Investment Agreements Concluded, supra note 178. 200. ECT, supra note 10, art. 13(1).



investor;201 failing to maintain a stability of legal framework;202 acting without transparency;203 acting in an unreasonable or irrational way;204 and failing to provide an opportunity for the investor to be heard or otherwise denying justice.205

c. Prohibition of Unreasonable or Discriminatory Treatment

Article 10(1) of the ECT also stipulates that investments “shall[] enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal.”206

d. Most Favored Nation and National Treatment

Kazakhstan, Turkmenistan, and Uzbekistan, which are not WTO members, do not provide China with the benefit of MFN treatment and NT in the WTO’s easily enforceable multilateral treaty format. In addition, in the case of Kazakhstan and Turkmenistan, since China’s BITs with these states were signed in 1992,207 it is likely that they did not provide for the fullest protection of investments. The ECT provides for this benefit for energy-related investments. The ECT’s MFN provision prohibits states from discriminating against investors on the basis of nationality and requires states to provide equally favorable treatment to all investors no matter their nationality.208 The ECT’s NT provision requires a host state to treat foreign investors and their investments no

201. Plama Consortium Ltd. v. Bulgaria, ICSID, Case No. ARB/03/24, Award, ¶¶ 175–76 (2008), available at http://www.encharter.org/fileadmin/user_upload/document/Plama_Bulgaria_Award.pdf; Mohammad Ammar Al-Bahloul v. Tajikistan, SCC, Case No. V (064/2008), Partial Award on Jurisdiction and Liability, ¶¶200–02 (2009), available at http://www.encharter. org/fileadmin/user_upload/Investor-State_Disputes/Partial_award_-_Mohammad-Tajikistan.pdf; Ioannis Kardassopoulos and Ron Fuchs v. Georgia, ICSID, Case No. ARB/07/15, Award, ¶¶435–52 (2010), available at http://www.encharter.org/fileadmin/user_upload/Investor-State_Disputes/Award_-_Ioannis_Kardassopoulos_vs_Georgia.pdf; Electrabel S.A v. The Republic of Hungary, ICSID, Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, ¶ 7.140 (2012), available at http://www.italaw.com/sites/default/files/case-documents/italaw1071clean.pdf. See AES SummitGeneration Ltd. and AES-Tisza ErömüKft. v. Hungary, ICSID, Case No. ARB/07/22, Award, ¶¶9.3.6–9.3.26 (2010), available at http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC2853_En&caseId=C111.

202. Plama Consortium Ltd., Case No. ARB/03/24, supra note 201, ¶ 177; AES Summit Generation Ltd. and AES-Tisza ErömüKft., Case No. ARB/07/22, supra note 201, ¶¶ 9.3.27–9.3.30.

203. See AES Summit Generation Ltd. and AES-Tisza ErömüKft, Case No. ARB/07/22, supra note 201,¶ 9.3.36.

204. Electrabel S.A., Case No. ARB/07/19, ¶ 7.142; see AES Summit Generation Ltd. and AES-Tisza ErömüKft, Case No. ARB/07/22, ¶¶ 9.3.36–9.3.37.

205. Petrobart Ltd. v. Kyrgyzstan, SCC, Case No. 126/2003, at 75 (2005), available at http://italaw.com/sites/default/files/case-documents/ita0628.pdf; Al-Bahloul, Case No. V (064/2008), supra note 201,¶ 221.

206. ECT, supra note 10, art. 10(1). 207. Total Number of Bilateral Investment Agreements Concluded, supra note 178. 208. ECT, supra note 10, art. 10(3).



less favorably than its own nationals and companies in similar circumstances.209

2. Counterbalancing Russia’s Soft Power in Central Asia

China must make substantial progress to be perceived by Central Asian states as more than a mere economic tool. Russian language, culture, and values permeate every corner of Central Asia, and even where not accepted, are dominating forces that must be addressed.210 Russia became the dominant power in the region by exerting economic, cultural, and then political power.211

China is making the proper inroads into Central Asia by first securing itself as a partner capable of beneficial economic relations.212 Up until this point, however, China has not made a significant multilateral binding commitment that it will continue to be a beneficial economic partner. Central Asian states that saw positive economic development from the Soviet Union, and later Russia, only to find that such development was limited in light of what could have been, should now be looking for a partner that is willing to give more than one-off promises and investments in infrastructure that may or may not lead to partnership as opposed to mere exploitation. Central Asian states should want a partner that is willing to bind itself in front of the international community as a state that is willing to emerge as a partner for mutual development. Costs in relation to acceding to the ECT are insignificant compared to the gains that China would receive, not only in terms of the ECT protection itself, but also in what such a move would symbolize: when Russia steps out of a multilateral framework that is beneficial enough for most Central Asian states to be members, China steps in as a leader for positive change.

C. Costs to China in Relation to China’s Acceding to the ECT

1. Dispute Settlement

By becoming a Contracting Party, China would be subjecting itself to ECT dispute settlement procedures with Central Asian states, including non-WTO members that otherwise would not have available dispute settlement recourse under an international framework.213 However, as China is an active and successful user of the WTO’s dispute settlement system,214 such exposure to dispute settlement under an international

209. Id. art. 10(7). 210. See, e.g., RUSSIAN DOMINANCE, supra note 29. 211. See, e.g., id. 212. See, e.g., supra Part II.C.4. 213. See ECT, supra note 10, arts. 7(7), 27, 29(7). 214. See, e.g., Mary Amiti et al., supra note 170, at 325–33.



framework would not likely pose much of a threat.

2. Transit

Article 7 of the ECT could be troublesome for China, as it obliges Contracting Parties to take measures necessary to facilitate transit of energy consistent with the principle of freedom of transit and to secure established energy flows.215 Transit countries also are under an obligation not to interrupt or reduce existing transit flows, even if they have disputes with another country concerning this transit, unless the relevant contract so provides or the relevant court or conciliator authorizes such interruption.216 However, Article V of the GATT has already provided for freedom of transit, and, as a WTO member, China already is subject to this provision.217 Therefore, although Article 7 of the ECT elaborates some rules specifically related to energy transit,218 it would not impose too much of a burden on China.

3. Energy Efficiency

ECT Article 41 provides that the terms for accession of each applying state shall be approved by the Energy Charter Conference.219 At its 4th Meeting on December 7, 1999, the Energy Charter Conference “noted” the policy for the expansion of the Energy Charter process.220 This policy says: “[t]he basic conditions for accession [] involve [] the acceptance of . . . the obligations contained in the Energy Charter Treaty and the Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects.”221 Thus, each accession to the ECT that has taken place to date includes an agreement to adhere to the PEEREA.222 As such, if China acceded to the ECT, it almost certainly would be

215. See ECT, supra note 10, art. 7. 216. See id. art. 7(6). 217. General Agreement on Tariffs and Trade 1994, art.5, Apr. 15, 1994, 1867 U.N.T.S. 187,

33 I.L.M. 1153 (1994). 218. The ECT explicitly covers grid-bound energy transport. ENERGY CHARTER

SECRETARIAT, supra note 143, at 29. The ECT introduces a certain type of national treatment obligation “that may not be present in GATT Article V.” Energy Charter Secretariat, Trade in Energy: WTO Rules Applying under the Energy Charter Treaty, December 2001, at 37.

219. ECT, supra note 10, art. 41. 220. Energy Charter Secretariat, Summary Record of the 4th Meeting of the Energy Charter

Conference held on 7 December 1999 (CC 162), Jan. 27, 2000, at 9. 221. Energy Charter Secretariat, Expansion of the Energy Charter Process (CC 146), Nov.

15, 1999, Annex 2, at 1. 222. Energy Charter Secretariat, Members & ObserversMongolia, ENERGY CHARTER,

http://www.encharter.org/index.php?id=407#c1324 (last visited Jan. 6, 2013). The Former Yugoslav Republic of Macedonia acceded to the Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects (PEEREA) several months later than its accession to the ECT. See Energy Charter Secretariat, Members & Observers, the Former Yugoslav Republic of Macedonia, ENERGY CHARTER, http://www.encharter.org/index.php?id=303#c931 (last visited Aug. 6, 2012).



required to adhere to the PEEREA.223 The PEEREA requires the Contracting Parties that have ratified or

acceded to it to formulate strategies and policy aims for improving energy efficiency and reducing various environmental impacts.224 Creating and adhering to such strategies and policy aims could be a challenge for China, but doing so would improve China’s global image, underline its commitment to long-term development of Central Asian hydrocarbons, and create mutually beneficial and sustainable relationships with Central Asian states. Furthermore, under China’s Twelfth Five-Year Plan for National Economy and Social Development for the period from 2011 until 2015, China is committed to making environmentally sustainable growth a top priority.225

V. THE BENEFITS OBTAINED BY CHINA BY JOINING THE ECT OUTWEIGH THE COSTS

China has made inroads to developing Central Asian hydrocarbons by investing in long-term infrastructure and extending loans that are favorable to China’s partners in Central Asia.226 China should capitalize on its investment by having the ECT protect the infrastructure that it is building and its continued purchases of Central Asian hydrocarbons. China’s acceding to the ECT also would counterbalance Russia’s soft power in Central Asia because China would be stepping into the ECT, a treaty that is beneficial to most Central Asian producer states, after Russia has stepped out. China’s making a binding multilateral commitment to adhere to the ECT, and thereby not unilaterally harm Central Asian Contracting Parties in the energy arena, would mean a step towards becoming a meaningful partner in the development of Central Asia, as opposed to a mere financier.

The insignificant costs that China would face by being subject to dispute settlement by a few Central Asian states that are not already WTO members, allowing energy-related investors to use international arbitration without exhausting domestic administrative review procedures, and formulating certain environmental policies and programs, would be outweighed by China’s being able to secure its investments and foster a strong position with its Central Asian partners.

223. See Energy Charter Secretariat, About the Charter, ENERGY CHARTER, http://www.encharter.org/index.php?id=7&L=0 (last visited Jan. 12, 2013).

224. Energy Charter Secretariat, THE ENERGY CHARTER TREATY AND RELATED DOCUMENTS: A LEGAL FRAMEWORK FOR INTERNATIONAL ENERGY COOPERATION (2004), available at http://www.encharter.org/fileadmin/user_upload/document/EN.pdf.

225. See Zhang, supra note 62, at 611 (citing Cory Lam, 12th Five Year Plan Hailed as ‘Greenest’ FYP in China’s History, CHINA BRIEFING, Apr. l5, 2011).

226. See PETERSEN & BARYSCH, supra note 37, at 42.

Documents

AN OPPORTUNITY FOR PROGRESS: CHINA, CENTRAL ASIA, AND THE ENERGY CHARTER TREATY