Negotiating an energy deal under TTIP: drivers and impediments to U.S. shale exports to Europe.

• Author: Espa, Ilaria
• Position: Transatlantic Trade and Investment Partnership

1. INTRODUCTION

   The problem of global security of energy supply is growing in importance with the escalation of conflict between Russia and Ukraine. Interruptions of gas supplies to Ukraine by Russia threaten to cause devastating energy shortages not only in Ukraine but also in those E.U. Member States, which are dependent on the gas supplies from Russia via Ukrainian pipelines. In this regard, diversification of E.U. energy sources may be facilitated by U.S. exports of gas to Europe in view of breaking the Russian stranglehold on energy supplies.

   Yet, this solution currently faces geopolitical, legislative and technical barriers to energy trade between the European Union and the United States and is associated with social and environmental costs. The European Union and the United States need considerable investments into building the necessary infrastructure for transporting gas from the United States (e.g. liquefied gas terminals, regasification terminals, requalification of refineries, etc.). (1) Changes are also required in the U.S. legislation to allow exports of energy resources (e.g. elimination of various forms of export quantitative restrictions, such as bans and non-automatic licensing procedures). Furthermore, an increasing role of the United States as a major energy exporter faces opposition of the long-established world energy suppliers in a context of shrinking oil prices, whereas domestically it confronts different sectors of the U.S. society with contrasting political economy interests. (2) Environmental concerns about the impacts of shale oil and gas exploitation also figure prominently in the debate.

   The on-going negotiations of a free trade agreement between the European Union and the United States-the Transatlantic Trade and Investment Partnership ("TTIP") (3)--present an opportunity to speed up the dismantling of some of these barriers. Along with the evident gains for the European Union, the opening of E.U. energy markets for U.S. shale gas would also benefit the United States, which is experiencing shrinkages of shale gas prices caused by oversupplies in the internal market. (4) The mutual interests in energy trade could pave the way for the materialization of a TTIP chapter on energy and raw materials. (5) Furthermore, given the lack of international rules on energy trade, the negotiations between the European Union and United States create a unique opportunity to adopt a legal framework for trade in energy products and raw materials that has never existed before and could later be plurilateralized.

   This paper explores some of the thorniest legal, geopolitical, and economic issues that need to be taken up by TTIP negotiators for the promotion of a secure and sustainable trade in energy between the United States and European Union. It is organized as follows: Section II gives an account of the most recent developments in the TTIP negotiations on energy; Section III examines the link between a possible legal framework for energy trade under TTIP and other energy-related regional and international fora; Section IV critically assesses the negotiating positions of the European Union and the United States in light of their reciprocal energy profiles and needs; Section V offers an overview of the critical items most likely to be on top of the TTIP agenda on energy based on a comparative analysis of energy provisions in E.U. and U.S. legislation and in light of the both parties' interests; Section VI discusses the main driving forces and inhibiting factors capable of facilitating or rather impeding a successful conclusion of an energy trade deal between the United States and the European Union; and Section VII provides concluding remarks.

2. TTIP NEGOTIATIONS ON ENERGY

   In June 2013, the twenty-eight Member States of the European Union provided the European Commission with a mandate for negotiating TTIP with the United States. (6) Since then, TTIP negotiations have been carried out in regular rounds focusing on the elimination of tariff and non-tariff barriers to transatlantic trade and facilitation of mutual investments. The negotiations are closed to the public. Yet, the parties, especially the European Union, make their positions on major subjects of negotiations known in press releases, statements of government officials, (7) and initial position papers. (8) Moreover, at the beginning of January 2015, the European Commission published a bulk of E.U. textual proposals, which include the legal language and binding rules the European Union is pushing for during TTIP negotiations, but exclude sensitive documents regarding market access, quotas and tariffs, as well as proposals on regulatory coherence and sustainable development, which first need to be agreed with the E.U. Council and Parliament. (9) From the available documents, it is clear that energy is an important part of TTIP negotiations. (10) The European Union seeks to include in the TTIP a separate chapter on trade and investment in raw materials and energy, including coal, oil and oil products, gas, and electricity. This proposal features prominently in a non-paper on raw materials and energy drafted by the European Commission Directorate-General for Trade on September 20, 2013. (11)

   Referring to the lack of international disciplines on trade in energy and raw materials, the European Union supports the inclusion of legally binding commitments regarding these issues in TTIP. (12) In particular, seeking to promote fair competition in the energy sector, the European Union proposes rules prohibiting trading and export monopolies, preventing dual pricing, and facilitating transit and access to energy transport facilities. (13) It also proposes to ban local content requirements in support schemes for renewable energy. (14) TTIP rules on energy would also guarantee access and national treatment to enterprises of one party established on the territory of the other party in matters of prospecting, exploring, production, purchase, sale, import, and export of raw materials and energy. (15) A general exception is foreseen for measures necessary for the safe operation of the energy networks, subject to the requirement that such measures are not applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination. (16) The E.U. position is that such an open, stable, predictable, sustainable, transparent, and non-discriminatory legal framework for traders and investors in raw materials and energy, agreed in the transatlantic context, could serve as a model for subsequent negotiations involving third countries. (17) The European Union has also declared that energy efficiency and the promotion of renewable energy are fundamental aspects of the energy policy of the European Union and the United States, both having a shared interest in improving global governance in the area of renewable energy. (18) The TTIP should therefore support the promotion of renewable energy and energy efficiency and guarantee the right of each party to maintain or establish standards and regulation concerning energy performance of products, appliances and processes, while working towards a convergence of domestic standards or the use of international standards where these exist. (19)

   While striving to fix fair competition rules in bilateral energy trade with the possibility for their further multilateralization in the future, the European Union is also pushing for the abolition of U.S. export restrictions on energy goods, including crude oil and gas, in order to increase U.S. imports of energy into the European Union. (20) Exports of energy goods to the other party would be made automatically compliant with any conditions and tests foreseen in the parties' respective legislation for the granting of export licences. (21) Through liberalization of the U.S. export regime for energy, the European Union seeks to increase diversification of its energy imports and improve energy security, currently undermined by the threats of discontinuation of gas supplies from Russia in the midst of the Russia-Ukraine conflict. It is this part of the U.S.-E.U. energy negotiations that will be addressed in the following sections.

3. DEALING WITH ENERGY TRADE UNDER FTAS

   While a recent generation of Free Trade Agreements ("FTAs") covers a broad area of issues, often additional to what is covered by the World Trade Organization ("WTO") Agreement (e.g. competition, government procurement obligations for developing countries etc.), energy issues are usually not separately addressed in FTAs. This may have different explanations. On the one hand, there is a perception that as part of national security interests, the regulation of the energy sector is traditionally in the hands of sovereign national governments, and international trading rules have nothing to say on how energy should be traded. On the other hand, it is argued that energy is just another good or economic sector, and thus it falls within the scope of the WTO Agreement and is subject to the general rules of international trade (market access, most-favoured nation treatment, national treatment etc.) like all other goods or economic sectors. (22) Accordingly, energy trade is regulated by general FT A provisions applicable to trade in goods and services. (23) At the same time, the proponents of the latter view usually also agree that the international trading rules of the WTO are poorly designed to meet the current needs of the energy sector. (24) The reason for this is partly the difference between the regulatory needs of trade in energy and those of other goods and services. While the General Agreement on Tariffs and Trade ("GATT")/WTO rules traditionally put the emphasis on market access (i.e. liberalisation of import regimes), the needs of the energy sector are more on the side of supply pushing for the liberalisation of export regimes. (25)

   1. Energy under E. U.-Signed FTAs and Sectorial Agreements

      The...