IDENTIFICATION OF DIRECT EXPROPRIATION UNDER ENERGY CHARTER TREATY AND CHINA’S PRACTICE
Energy, as one of the most important resources in the world, is the cornerstone of human civilization. It plays an extremely important role in people’s livelihood, science, technology and military affairs. In the area of international energy, energy investment, energy trade and environmental protection are the most important issues. The Energy Charter Treaty (ECT), was created to promote cooperation between the energy sectors of different countries and to improve energy trade and investment conditions. After several rounds of negotiations, the ECT was signed in Lisbon on December 17, 1994. The ECT is a broad multilateral agreement in the field of energy, including energy trade, energy investment, dispute settlement, environmental protection and so on, which aims to promote cooperation among the energy sectors of the contracting states, and to improve the conditions for energy trade and investment among and between contracting countries. The first signatories of ECT include the EU and all its member states, most OECD countries and all former Soviet and central European countries. Till now, 54 states and the European Community had ratified or acceded to the ECT, while 61 states and international organizations had signed the charter as observers. The Global Strategy of the Energy Charter promoted by the energy charter in recent years coincides with China’s ‘Belt and Road’ construction not only in geographical scope, but also in policy issues. However, China has only signed the Declaration of International Energy Charter and has not joined the ECT, so our energy enterprises cannot receive the protection of the ECT when they invest overseas. However, when Chinese enterprises reinvest in the contracting states of the ECT, they can be protected by the ECT rules. Therefore, whether China should sign up to the ECT or not, or study the rules of investment protection, especially the rules of expropriation in the ECT, is of great theoretical and practical significance. That is why we formally signed the charter as an observer in 2015.As one of the most important economic activities in the energy field, energy investment is of obvious importance, but there are many risks in its process. It can be divided into commercial risks and political risks. Because of the particularity of energy investment, political risks are the main type that energy investment faces. The fundamental reason lies in the fact that energy is the lifeblood of a country at a time when international relations are deteriorating, governments change, international and civil wars, and geopolitical conflicts are prominent, energy investments are often the first to be regulated or even expropriated by governments. At the same time, with the rapid development of energy technology, the development of new energy resources is bound to bring changes in policies and laws of various countries. With the development of the international economic situation, nowadays large-scale direct expropriation is rare, but since the 21st Century with the shortage of energy supply, many countries still nationalize foreign energy investments through a more subtle way: indirect expropriation. This situation has been a large-scale problem in many Latin American countries, such as Bolivia, Venezuela and other countries. The issue of indirect expropriation is becoming more and more prominent, and the boundary between direct expropriation and indirect expropriation has become an important issue that needs to be clarified urgently.According to the United Nations Conference on Trade and Development (UNCTAD) database, the ECT has been cited in 122 arbitration cases to date, of which 37 are related to expropriation. Excluding cases settled in undisclosed circumstances and arbitration cases at dozens of the same points of contention as a result of changes in Spain’s new energy policy, the expropriation accounted for 80.4 percent of the cases. Thus, expropriation is clearly the biggest political risk in international energy investment.I. DIRECT EXPROPRIATION IN ENERGY INVESTMENTDirect expropriation means that ‘the host country directly deprives the foreign investors of investors’ property rights and nationalizes investment’. In international investment, direct expropriation is often an undisguised measure of the host government, often in the form of direct dispossession or transfer of the investor’s property or interests through the enactment of laws, decrees or other measures, such as the military. Its basic characteristics are openness and clear purpose of the host country’s measures.A. Impact of Direct Expropriation on Energy InvestmentsThe effect of the direct expropriation on energy investors is clear: investors will lose part or all of their overseas investments and their profits. The effects of direct expropriation on the host country, or the consequences of direct expropriation measures imposed by the host country, are mainly reflected in the following two aspects:First, in the host country, expropriation is a double-edged sword. On the positive side, the direct expropriation of foreign investment in the energy sector helps to raise the overall economic level of the country while filling the national treasury. Expropriation would also help to ease geopolitical tensions arising from energy extraction and to establish an independent image of the state or regime. On the contrary, excessive expropriation may worsen the investment environment of the host country and be identified as a high-risk country in various risk rating reports, thus leading to the introduction of foreign investment difficulties, which may have a negative impact on the national economy. Politically, too much expropriation will lead to the decline of the international status of the state due to the breach of trust, and will have a negative impact on international relations and the relationship between the state and international organizations.Second, from an international perspective, direct expropriation measures affect not only the relations between the host country and the home country of the investor, but also its relations with other countries. Because of its publicity, directionality and purpose, the direct expropriation will have a great negative impact on the relationship between the host country and the investor’s home country. Especially in the sensitive field: energy. Because many energy enterprises, as state-owned enterprises, represent the interests of investors’ home countries, and expropriation of them will directly affect the energy supply of investors’ home countries, resulting in an energy security crisis. Therefore, the expropriation may lead to a reduction of economic and political exchanges and cooperation between the host country and the investor’s home country, resulting in tension between the two countries and even possibly cause a war.B. Concessions in Energy Investments and Their RevocationA concession agreement is a contractual relationship between the state and the investor in the international energy investment, which is formed by signing the concession agreement. Most scholars regard the licensing agreement as a private bilateral contract between a high-level state body and the concessionaire. Concession mechanisms first appeared in the Middle East at the end of the 19th Century and were used primarily to confirm the control of oil and minerals in the energy-producing regions of the Western countries that were victorious after the First World War and geographically, over time, spreading from the Middle East to Mexico, Venezuela and other countries, until the middle of the 20th Century. Libya was the beginning of the new development in Africa. In terms of energy category, it is obvious that with the development of science and technology and the discovery of new energy sources, the scope of concession begins to expand from oil, which is a traditional energy, to natural gas and even to the photovoltaic category. In terms of concession agreements, the rising national power of energy-producing countries and the declaration of independence of many colonies have shifted the balance of power from inequality, which was initially clearly skewed in favour of investors, to the home countries.As noted above, in the early days of the concession mechanism, the primary role of this special relationship was to ensure that the victors of World War I had a head start in the international energy market. But the European countries at that time because of technological conditions, although gained relatively large advantages and benefits, but compared to the US after World War II the countries exploration and exploitation of oil reserves compared to that of the US added up to a fraction of the US. After the Second World War, the American concession in the Gulf of Mexico did not stop, and the oil exploitation in Iraq, Kuwait, Saudi Arabia and other countries made it a real oil hegemon in the world today. At this stage, the main function of concession agreements is to exploit the country of origin. This kind of exploitation manifests in the low land lease price, the monopoly control of the pricing power and the market, the influence on the country of origin’s internal affairs and diplomacy to some extent because of the country of origin’s fear of the country of investment and the tax dividend. Concession agreements at the time were defined not so much as instruments of investment as somewhat unequal political and economic treaties. However, it has to be admitted that the emergence and development of the concession mechanism has made the world energy economy more active than ever, and laid the foundation for modern international energy market and even the ECT.With the independence of many resource-rich colonial countries after World War II, the development of energy markets in eastern Europe and the turmoil brought about by the collapse of the Soviet Union at the end of the 20th Century, the concession mechanism was further developed. The main trend of the development of the concession agreement is the increase of the income of the host country and the increase of the control capacity of the concession, which started with the rise of Saudi Arabia. The main role of modern concession mechanisms is to transfer some of the risks of the host government to investors and to make it easier for the host country to regulate the industry, while at the same time giving investors more flexibility in financing. This new trend has led to the frequent choice of the host country to withdraw the concession from the investors in the face of greater interests or greater geopolitical conflicts, because of its greater control over the concession.The main way of concession revocation is that the host country directly revokes the concession by issuing a decree, or by issuing a decree granting the same rights exclusively to other subjects. There are two main theories about the state responsibility of concession revocation. The first is the international contract of the concession agreement, which states that the international character of the concession agreement and the unilateral modification of the terms of the contract by the host country, for whatever purpose, is a breach of international obligations and entails international responsibility. Another theory is the contract of the domestic law of the concession agreement, which states that the concession is derived from the domestic law of the host country and is a contract of domestic law, not an agreement between states, so that a modification of the contract under domestic law does not constitute responsibility under the international law.Due to the prevalence of energy state ownership in various countries and the provision of concessions in national laws for the protection of national sovereignty, it is obvious that the domestic law contract of concession agreement is the current mainstream. However, the revocation of the concession by the host country does not preclude its responsibility under the international law. In the arbitration practice caused by the revocation of the license, in order to guarantee the sovereignty of the host country while protecting the interests of the investors, it is often necessary to analyze the revocation of the concession by the host country, whether the revocation of the concession constitutes expropriation is judged from the point of view of the purpose and influence of the act, and then whether the act satisfies the requirements of the purpose of public interest, non-discrimination measures, due process, and whether the compensatory measures satisfy the applicable law or treaty to determine the legality of the expropriation. This analytical method can not only ensure that the host country is exercising its sovereignty in the face of environmental pollution, geo-conflict and so on, but also protect the rights of investors when they are treated unfairly by their home country. However, due to the different provisions in the applicable laws and treaties, the identification standard cannot be completely clarified. So is the practice of concession-related arbitration under the ECT.II. THE REGULATION OF DIRECT EXPROPRIATION IN ENERGY CHARTER TREATY AND THE EXISTING PROBLEMSThere are various forms of expropriation in the energy field, which can be divided into direct expropriation and indirect expropriation. According to the current cases of expropriation decided by the arbitral tribunal, direct expropriation takes the form of transfer of ownership, which extends to the transfer of the investor’s assets by agreement or by physical means, such as the issuance of a decree; and the other is direct acquisition of assets through violence, threats, etc. Indirect expropriation takes the form of a nibbling expropriation, in which the company intervenes to gradually reduce its investment, or a regulatory expropriation through the exercise of the Police Power.In practice, indirect expropriation occurs more frequently, which is mainly due to the consideration of the future investment environment of the host country. After all, direct expropriation is too obvious and will seriously affect the host country’s investment environment, which will have a great negative impact on foreign investment and economic development in the future.A. Provisions of the Energy Charter Treaty on ExpropriationWith regard to expropriation, article 13 of the ECT provides that an investment by an investor of a contracting party in the territory of another contracting party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation, unless all of the following conditions are met: first, expropriation measures are taken for the purpose of public interest; second, the expropriation measures are not discriminatory; third, the expropriation measures are taken under due process of law; and fourth, accompanied by the payment of prompt, adequate and effective compensation.For concessions, the ECT does not contain too many provisions, only in article 18 on the recognition of national sovereignty over energy resources refers to the contracting governments having sovereignty over the concessions, but the exercise of sovereignty must be in accordance with the rules of international law.In addition, the 24th exception provides for life and health exceptions, resource shortages due to force majeure, and aboriginal interest protection exceptions. However, the article also makes it clear that the exception does not apply to the expropriation clause of article 13.From the text of the treaty, it is easy to see that for indirect expropriation, the ECT adopts the wording of ‘measures having effect equivalent to nationalization or expropriation’, while comparing with modern treaties, it tries to refine the definition of indirect expropriation gradually, the ECT provisions of indirect expropriation are slightly vague. At the same time, as with most treaties today, the ECT divides lawful expropriation into four elements: public interest, nondiscriminatory, due process, and compensatory. It is worth mentioning that the ECT has completely adopted the Hull’s full compensation principle, and the ‘sufficient’ standard adopted the phrase ‘fair market value’, which is consistent with many developed countries in the 1990s.B. Deficiencies in the Expropriation Rules of the Energy Charter TreatyAs the most important international treaty in the field of energy, the ECT is obviously imperfect in the expropriation rules.First of all, the ECT does not make clear provisions for direct expropriation and indirect expropriation, or even a clear distinction between the two, which leads to confusion and confusion in practice. The North American Free Trade Agreement (NAFTA), which came into force in 1994, defines expropriation following the ECT reference standard. Unlike the ECT, the NAFTA clearly states direct expropriation and indirect expropriation, but neither the NAFTA nor ECT clearly defines expropriation. The definition of direct and indirect expropriation in the NAFTA comes from the following arbitration practice. However, in practice, the determination of the boundary has become even more confusing because of the arbitral tribunal’s completely opposite conclusion. Although the horizontal comparison of the NAFTA and other treaties is also characteristic of the times, the detailed explanation of the concepts of direct expropriation and indirect expropriation in the appendix of the BIT model in the US is relatively backward, unable to adapt to both indirect expropriation and its interpretation’s expanding new trend.Secondly, as the energy sector for the treaty, the ECT does not list the specific expropriation behavior, which will make it difficult to reflect the particularity of the energy sector. Similar to concessions, which were the main form of energy investment, the question of how to define them when they were withdrawn could not be reflected in the text of the treaty and could only be left to the discretion of future arbitral tribunals in their practice. The emergence of contradictory cases similar to the NAFTA would bring great difficulties and uncertainty to the future dispute settlement for the contracting states and the arbitral tribunal.In addition, section 24 of the ECT clearly states that exceptions such as environmental protection do not apply to the expropriation clause, this leads to the host country not being able to invoke the ECT to justify its own expropriation for humanitarian and environmental protection purposes. As a result, the ECT has become one of the most stringent investor protection treaties at present, which greatly weakens the host country’s authority to manage the economy and imposes a heavy burden on the host country.It is true that the ECT has been in effect for more than two decades and cannot fully foresee the future development trend of international economy and international law, but the ECT has not yet revised the expropriation clause, which is bound to have a negative impact on the interests of contracting parties.
III. THE STANDARD OF DIRECT EXPROPRIATION IN ARBITRATION PRACTICE
The arbitration cases of direct expropriation under the ECT are fewer than those of indirect expropriation, and there is only one case that the tribunal concluded the host state’s behavior constituted direct expropriation. However, the arbitration tribunal clearly pointed out that this case is a typical case of direct expropriation, therefore, it is of great research value. The case in question is Ioannis Kardassopoulos v. Georgia (Kardassopoulos v. Georgia).A. Kardassopoulos V. GeorgiaMr. Ioannis Kardassopoulos and Mr. Ron Fuchs (the claimant), two oil traders from Greece and Israel respectively, set up Tramex International Inc. (Tramex). In 1991, in consultation with the Ministry of Industry of Georgia and obtaining its Power of Attorney for the development of the oil pipeline from Azerbaijan to the Black Sea via Georgia, the government of Georgia set out the concession for the development and transportation of three specific oil fields in Georgia following a joint venture between Tramex and the state-owned Georgian company SakNavtobi. In 1992, Tramex signed a joint venture agreement with SakNavtobi to create GTI Limited (hereinafter referred to as GTI) to carry out oil extraction and transport activities. At the request of Georgia, which then undertook energy sector reform, GTI obtained oil concessions awarded by the government of Georgia. The concession consists mainly of the refurbishment or construction of five oil transport railways and their subsequent use rights. In 1994, Tramex began to seek economic and technical support, in the course of which Tramex obtained information about the intention of the Azerbaijan International Oil Corporation (AIOC) to use the GTI pipeline for oil transport and notified SakNavtobi of the matter. In 1995, the Minister of Justice of Georgia informed SakNavtobi that the concession had lapsed due to incomplete registration procedures for GTI. Later that year, Georgia signed an Oil-distribution protocol with Azerbaijan and set up a state-owned company, the Georgian International Oil Corporation (GIOC), to link up AIOC’s Oil operations. During this period, the claimants have been trying to contact the government of Georgia to try to join the new energy delivery system or to take a stake in the GIOC, but have received no positive response. In 1996, the government of Georgia adopted Decree No. 178, the final provision of which cancels ‘all rights previously granted by the government of Georgia to any party that is incompatible with this decree’. This ended the rights of Tramex and GTI under an earlier concession granted by Georgia.After the termination of the right on the concession, the claimant had on several occasions requested compensation from the government of Georgia, and the government had on several occasions authorized an independent international auditing body to account for the loss of Tramex, but due to the change of regime and the negative attitude of the government, the claimant has never been compensated. The claimant therefore filed an application for arbitration with ICSID claiming that the actions of the government of Georgia constituted expropriation.As to whether the acts of the government of Georgia constituted expropriation, the tribunal held that the GIOC, which the government of Georgia had established in GTI operations similar to those of the GTI, had preceded the issuance of Decree No. 178, and that after the issuance of Decree No. 178, the rights under the concession of GTI were transferred to GIOC, thus, the intention of the government of Georgia at the time of the creation of the GIOC was to expropriation GTI’s license and thus constituted a expropriation. And for its legitimacy, mainly according to article 13 of the ECT listed in the four elements to judge.The tribunal first analyzed whether Georgia’s conduct had a purpose of public interest. The tribunal considered that the development of Georgia’s pipeline infrastructure was essential to the country’s political independence in the region and its economic development, and given the geopolitical and economic problems that pervade Georgia in the 1990s, the agreement with the AIOC is intended to ease the political and economic tense, not be the result of factional struggles. The tribunal therefore considered that the expropriation fulfilled the requirement of public interest.Second, whether it is a non-discriminatory measure. The tribunal found that, although the concession of GTI had been denied and transferred to GIOC, it had at the same time undermined the interests of Tramex and SakNavtobi, which had subsequently entered into a partnership with another foreign entity, AIOC. In other words, this is not an act of discrimination against foreign investors like Tramex or Mr. Kardassopoulos, but rather the act of reaching agreements with different foreign investors after establishing a better trading arrangement. The court therefore did not find that Georgia had violated the non-discriminatory element of the ECT expropriation clause.Third, whether to act in accordance with the due process. The tribunal found that there was sufficient evidence of a violation of due process by Georgia. In 1995, when Tramex entered into partnership discussions with Brown & Root with the full knowledge and approval of Dr. Tevzadze and other Georgian officials, the government of Georgia is negotiating with the AIOC on the same rights under the concession held by Tramex through GTI. In any sense, the expropriation by Georgia cannot be considered to have been carried out in accordance with the due process, since the procedure involved the expropriation of the investment of Mr. Kardassopoulos in order to acquire the rights to GTI. Moreover, in the view of the tribunal, the respondent did not give Mr. Kardassopoulos a reasonable opportunity within a reasonable time to have his claim unquestionably heard, which, in the view of the tribunal, did not meet the requirements of that standard. The tribunal therefore found that Georgia’s expropriation of Mr. Kardassopoulos’ investment was inconsistent with paragraph 1 of article 13 of the ECT, requirement of the due process.Fourth, whether prompt and full and effective compensation. On the issue of compensation, the tribunal noted that the government of Georgia had not paid Mr. Kardassopoulos compensation for his expropriated investment, let alone that compensation could be considered ‘prompt, adequate and effective’. The court was not persuaded by the Georgian side and the tribunal therefore found that the Georgian expropriation did not meet the requirement of prompt, adequate and effective compensation.When it comes to whether the measures taken by the government of Georgia to revoke the license are direct expropriation, the tribunal held that the case was a typical case of direct expropriation. Decree No. 178 issued by Georgia deprived GTI of its rights in the early oil pipelines and of the benefits of Mr. Kardassopoulos’ investments therein. The tribunal also found that the deprivation was not a bona fide exercise of state security powers. However, the arbitral tribunal in the present case did not analyze in its award why the acts of the government of Georgia constituted direct expropriation rather than indirect expropriation, but merely concluded. In the end, the tribunal awarded damages against Georgia totaling 15.1 million USD for the expropriation of the claimant’s investment.This case is the only one regarding concession revocation deemed as direct expropriation under the ECT, there is no analysis on the boundary between direct expropriation and indirect expropriation in the final judgment. The reasons must be attributed to the lack of clarity in the ECT Expropriation clause and the lack of provisions on the nature of concession revocation. The ECT cannot provide similar cases for comparative research, but other treaties can be brought in discussion to expand the scope of arbitration practice to better analyze the criteria for the ECT direct expropriation rules.B. Practices of Other International Investment ArbitrationThere are a number of cases in which the dispute over the withdrawal of the concession has been identified as expropriation. According to the UNCTAD database, apart from two decisions annulled on issues of jurisdiction and fairness of the trial, there were four cases in which the revocation of a concession in the energy sector was concluded as expropriation. Although the subject matter of the dispute is the withdrawal or deprivation of the concession, different approaches have emerged in the arbitration of international investment disputes under other international investment agreements.1. Quiborax v. Bolivia. — In Quiborax v. Bolivia, the arbitral tribunal relied on the bilateral investment agreements between Bolivia and Chile in determining the expropriation. The Expropriation terms and the ECT are similar, using the same four elements to determine whether the expropriation is lawful.The judgment first held that the deprivation of the concession by the defendant through the act constituted expropriation, and then the physical surrender of the concession by the claimant constituted a direct expropriation, therefore, the claimant cannot obtain the expected return on investment is an indirect expropriation. The judgment in this case on direct expropriation is the same as the South American Silver v. Bolivia, follows a similar pattern, using ‘physical return’ as the criterion for direct expropriation.In terms of its legality, first of all, the arbitral tribunal held that the expropriation in the present case was not the proper exercise of the right to public security, but that this did not prevent it from being in the public interest, however, since the expropriation in Bolivia clearly violated the due process rule, there was no discussion; secondly, the arbitral tribunal found that Bolivia had never allowed the claimant to comment on the decree before issuing the decree revoking the concession, therefore, due process requirement is not met; as to the discriminatory measures, the tribunal held that the act only deprived the claimant of the concession and the company of the other country that was granted the concession at the same time was not affected by the act, the expropriation was therefore discriminatory and Bolivia did not provide compensation to the claimants. The tribunal therefore concluded that the expropriation was illegal.2. Copper Mesa v. Ecuador. — This case involved a number of mine concessions that were revoked in different ways and were analyzed by the arbitral tribunal on a case-by-case basis. The arbitral tribunal’s approach in this case was essentially the same as in other cases, but the specific criteria varied because of the different provisions of the applicable treaties.The tribunal first analyzed the divestiture of the concession in the Junín mining area. First, under the Canada-Ecuador bilateral agreement, direct expropriation is judged by the permanent divestiture of the investor’s investment, which is not a legitimate exercise of the host country’s security and regulatory powers, and is not a matter of an exception clause specified in the agreement. In its actual determination, the tribunal found that Ecuador’s concession termination policy of 2008 had ‘almost completely’ extinguished the investor’s investment and was not a legitimate exercise of security and regulatory powers, and was not subject to an exception clause, therefore, it constitutes expropriation.Then, unlike the other cases, the arbitral tribunal in this case is not analyzed according to the four elements of the applicable treaty. The arbitral tribunal first stated that the specific provisions did not give the arbitral tribunal the right to judge the purpose of the public interest and therefore did not analyze it. But the tribunal’s analysis of the due process and compensation measures showed that Ecuador did not give investors the right to review without any compensation. The lack of due process and compensation measures would make Ecuador’s withdrawal of the concession an illegal expropriation.With regard to the Chaucha concession, the tribunal found that Ecuador had invalidated the investor’s concession through a ‘defect of ownership’ clause, which constituted an indirect expropriation, however, since this action does not fall within the scope of outright termination of the concession by decree discussed here, it will not be discussed here.It is noteworthy that in the present case the element of non-discriminatory measures, which is frequently found in other practices, has not been mentioned owing to the limitations of the text of the treaty. At the same time, the arbitral tribunal’s determination of the direct expropriation of the Jun ín mining area is obviously somewhat ambiguous, although the criterion of direct expropriation has been cited at the beginning of the analysis, however, the analysis of the concession in the Chaucha mining area directly shows that the indirect expropriation is different. In the final determination of the Jun ín mining area, only the expropriation is mentioned, and it is not clearly indicated that the expropriation in this case is a direct expropriation.3. Bear Creek Mining v. Peru. — This case is applicable to Canada and Peru’s FTA, the arbitral tribunal through the provisions of the agreement, mainly through three elements to identify indirect expropriation. That is, Act No. 032 of the Peruvian government, which deprived the claimants of their concessions, had ‘economic effects’ on the applicants’ investments; interfered with the investors’ expectations of their investments; and that Act No. 032 was domestic law and was not a ground for violating the FTA. The act of Peru therefore constitutes an indirect expropriation. In the case of direct expropriation, the tribunal stated that since Act No. 032 constituted indirect expropriation, there was no need to test whether it constituted direct expropriation, as it would not alter or increase the result of indirect expropriation.As for the legality of indirect expropriation, according to the agreement, the arbitral tribunal also decided through four elements. First, the tribunal held that since Act No. 032 was intended to quell social unrest and therefore met the public interest requirement; the government of Peru had not provided the claimant with the necessary pre-warning and participation prior to its promulgation and had not allowed the claimant to provide an opinion, it is therefore inconsistent with the principle of due process under the agreement; Moreover, Act No. 032 does not contain any provisions relating to compensation and therefore the indirect expropriation is unlawful, there is no need to discuss whether or not they are discriminatory measures.At the same time, the tribunal noted that the available evidence did not support the claimant’s link to the unstable situation in Peru and was therefore not a legitimate use of the right to security.C. The Deficiency of Energy Charter Treaty Expropriation Rules in Arbitration PracticeComparing Kardassopoulos v. Georgia with other similar cases, it is not difficult to see that, while the elements for determining the legality of expropriation are basically the same, the determination of the nature of expropriation, namely whether the conduct of the host country constitutes a direct expropriation or an indirect expropriation, there is a big difference. Similar to the Copper Mesa case, the tribunal of Kardassopoulos v. Georgia does not provide a detailed analysis and interpretation of the attribution of expropriation to the host country because of the restrictions on application of the treaty. But considering the ECT is a special treaty in the field of energy, it would be unsatisfactory for the arbitral tribunal to be unable to make a detailed analysis on the basis of the text when it was cited. At the same time, comparison of Quiborax v. Bolivia and South American Silver v. Bolivia attributed the revocation of the concession agreement to indirect expropriation; Kardassopoulos v. Georgia’s decision of deeming such acts as direct expropriation was apparently due to the lack of clarity in the ECT’s definition of direct and indirect expropriation.Not only in Kardassopoulos v. Georgia, the lack of clarity in the definition of direct and indirect expropriation in the ECT has also led other cases under the ECT to a more cautious approach to indirect expropriation by the arbitral tribunal for some time, the expropriation was interpreted more narrowly, adopting a concept so-called ‘almost’ direct expropriation, with an emphasis on the degree of interference with the day-to-day management and management of investments. This makes the ECT more and more difficult to adapt to the international law for the expropriation interpretation of the new trend, which may cause issues in future ECT applications.IV. THE INFLUENCE OF ENERGY CHARTER TREATY EXPROPRIATION RULES ON CHINASince the 21st Century, with the development of China’s economy, China’s development strategy has changed from a simple introduction of capital into the two-way development of capital import and export, especially in the field of energy. On March 28, 2015, the National Development and Reform Commission, the Ministry of Foreign Affairs and the Ministry of Commerce jointly launched the vision and actions for jointly building the Silk Road Economic Belt and Sea Route of the Silk Road, ‘infrastructure connectivity’ has been identified as a priority area for the Belt and Road, with special emphasis on ‘strengthening cooperation in energy infrastructure connectivity’. The energy resources extraction, the energy infrastructure construction will become China’s overseas investment key point. The increasing amount of overseas investment by state-owned enterprises, such as China Power Grid, reflects the change of China’s development strategy. As a big energy producer and a big energy consumer at the same time, China needs to pay close attention to the changes of domestic politics and domestic situation in the host country of overseas energy investment, and at the same time, as a host country of investment, it should also be a friendly gesture for overseas investors.In the context of the expansion of two-way investment, disputes are inevitable. Although there are few disputes concerning the expropriation of China, the losses caused by the risks in other fields cannot be ignored. The post-investment management is very important for the introduction of investment. In the aspect of overseas investment, many cases show that the risks our investors encounter overseas are real, and our investors need more comprehensive protection in the international law. At present, China has not joined the ECT, which results in China’s overseas direct investment cannot receive the protection of the ECT investment rules. If Chinese companies need the ECT protection, they can only choose to set up an entity in the ECT member states and invest through it, which is too complex and there are additional risks. In the face of these current situations, whether China should join the ECT has become an urgent problem to be solved.A. Pros and Cons of Adapting the Energy Charter Treaty Expropriation Rules in ChinaAs a signatory to the declaration of the International Energy Charter and an ECT observer state, we are clearly interested in deepening our cooperation with the Energy Charter Organization and are considering formally signing the ECT. In this context, from analyzing the ECT expropriation rule, we can clarify the pros and cons for the choice of whether to sign the ECT.1. Positive Impact. — First of all, the ECT expropriation rules for investor’s protection are very strict. Under the background of advocating ‘going out’ in China, it will provide strong legal protection for overseas investors when they face disputes. Most of China’s overseas energy investment is energy extraction and processing by state-owned enterprises based on building factories overseas, so it will involve the issue of concession basically. Considering uncontrollable political risks, China is required to have more powerful and detailed international treaties to protect the legitimate rights and interests of enterprises when they face expropriation overseas. In contrast, the strict protection of the ECT expropriation rules for investors can also promote China’s energy sector to attract foreign investment. The investment promotion effect of the ECT is not only reflected in the expropriation rules of the ECT, but also reflected in other provisions of investment protection. A solid dispute settlement mechanism will also make energy investors more inclined to invest in the contracting states, this is also in line with our ‘Belt and Road’ initiative.Secondly, joining the ECT will help China to improve the expropriation clause in domestic law and other international treaties. Although the ECT has been issued for a long time, but the expropriation rules on the legal expropriation requirements and its compensation standards are still not out of date. In view of China’s current provisions on expropriation are not comprehensive, and the provisions on expropriation in the international agreements that China has signed are inconsistent or rather vague, the author believes that with the aid of the ECT’s expropriation rules, it will play a positive role in guiding the expropriation content in China’s domestic law and other international treaties in the future.Finally, the ECT which has been signed for more than 20 years, some of the expropriation rules have become a little outdated, which is mainly reflected in that the indirect expropriation provisions cannot be effectively applied to the expansion of the trend. The focus of future ECT development is to revise the content which does not accord with the development trend of international law. At this point, China can actively participate in the perfection of the ECT rules, and strive to take the initiative in global energy governance.2. Negative Impact. — From the perspective of the industrial structure of attracted foreign capital, the ECT expropriation rules on China’s negative impact are mainly reflected in the host country’s obligations. The lack of strict investor protection and exception clauses in the ECT expropriation rules will greatly affect the macroeconomic regulation and control of our economy and environmental protection measures. Many developed countries are now shifting their highly polluting industries to developing countries through international investment, particularly in the energy sector, in this respect; the ECT expropriation rules are obviously not friendly to the investment host country.From the perspective of new energy reform in China as a host country for investment, there are some scholars who are against the ECT. They argue that the ECT imposes a cost on governments in regulating the response to climate change, making energy affordable, and protecting other public interests. At the same time, the ECT has been used to attack environmental restrictions on heavily polluting power plants, ban climate-damaging new fossil fuel projects, cut soaring electricity prices and correct the failure of energy privatization. One particular concern is the urgent need to move away from fossil fuels and towards wind, wave and solar power, which requires bold regulatory action by governments, and it will cut into the profits of some of the world’s biggest oil, gas and coal companies. But because of the ECT’s vast geographic scope and the nearly unlimited rights it grants to investors in the energy sector, it can be argued that the ECT is more dangerous to public finances, public interest policies, and democracy than other international investment treaties. This view is a little extreme, but the absence of the ECT expropriation exception clause will really tie our hands in the energy reform, and the promulgation of the new domestic law may invite overseas investors to resort to the arbitral tribunal, hindering the development of new energy in China.B. China Should Consider Signing the Energy Charter TreatyFrom the analysis of the ECT expropriation rules, it is not difficult to see that joining the ECT is more beneficial than harmful to China. After extending the field of vision to the whole ECT and including the future cooperation with the Energy Charter Organization, we can draw a clear conclusion: China should sign and formally join the ECT. There are three main reasons for this:First, the Energy Charter Organization has a positive attitude and welcomes China to join the ECT. As Secretary General of the Energy Charter, Rusnak has visited China many times and expressed his hope that China will join the ECT. Rusnak visited China in 2018 after China officially signed the International Energy Charter Declaration in May 2015 and became an ECT observer state, ‘China has become an important oil and gas importer and is playing an increasingly important role in the international energy market,’ he said, adding that he hoped China would join the organization as soon as possible. As the world’s second largest economy entity after the US, we plan to spend one trillion on energy investments over the next few decades. If a major economic power such as China uses the ECT arbitration mechanism as a means of settling disputes and protecting energy investments, other countries and investors may also be inclined to join the Energy Charter and thus make the ECT as an important mechanism to protect its energy investment. Such action would effectively enhance the status of the ECT, thus having more resources to provide reliable international law-level investment protection and better dispute settlement mechanisms for energy investments. Therefore, the Energy Charter Organization is eager for China to join the ECT and play a role in promoting its modernization.Second, joining the ECT will help China’s economic development and better implement the Belt and Road Initiative. Long before China officially signed the Declaration of the International Energy Charter and became an observer state, Rusnak spoke highly of the Belt and Road Initiative during his visit to China, and the future cooperation between China and the ECT expressing an optimistic view. China’s energy two-way investment has developed rapidly, especially in the countries along the Belt and Road, whether it is direct energy investment, energy construction projects or energy exploitation, all have played a great role in promoting the development of China’s energy system, therefore, joining the ECT will provide strong legal protection for our overseas investors. Correspondingly, the strict protection of the ECT to investors can also promote the attraction of foreign investment in the field of energy in China. The investment promotion effect of the ECT and the sound dispute settlement mechanism will also make energy investors more inclined to invest in the states parties. Its role in promoting energy trade is also the most comprehensive of the current international agreements. In addition, the ECT for environmental protection and the impact of the energy charter organization on new energy, can promote the development of clean energy in China, for the future of clean energy-oriented International Energy Pattern.Thirdly, joining the ECT will help China participate in international energy governance better. The ECT has become the international treaty with the largest number of participants in the field of energy. With the change of the world economic structure, the modification of the ECT will be put on the agenda. In fact, in 2010, the Energy Charter Organization adopted a document entitled Road Map to modernization of the Energy Charter Process; in July 2019, the European Commission also launched the ECT revision negotiations. However, the ECT is a signatory of many international treaties, but the leadership of the signatory countries is a little lax. Among the five permanent members of the UN Security Council, the UK and France are not in a leading position in the world energy market due to the size of their own markets, while Russia has signed but not ratified the ECT. China is the same as the US, both are observers of the ECT, and have not formally signed the accession. From the point of view of the major energy-producing countries, the United Arab Emirates, Saudi Arabia, Venezuela and other countries also choose to take the wait-and-see measures as observers. In this context, the ‘leadership gap’ that the energy charter faces makes its ‘member-driven’ system appear somewhat inadequate. At the same time, some Chinese scholars have recently written to the energy charter organization, citing the provisions of China’s bilateral treaties and free trade agreements for comparative analysis, to achieve China and the ECT’s common development in the future. In this context, joining the ECT will strive for great initiative for China, thus improving China’s position in the international energy market.
