‘BAKU INITIATIVE’

STRATEGIC VISION FOR AN ENHANCED ENERGY COOPERATION

BETWEEN THE EU AND THE COUNTRIES OF THE BLACK SEA, CASPIAN BASIN AND THEIR NEIGHBOURS

1. INTRODUCTION

Global demand for energy is increasing. The total world energy consumption is expected to rise by more than 60% by 2030 according to the IEA World Energy outlook. This makes energy an even more important parameter in achieving the economic development, peace, prosperity, security and stability in all the countries.

The EU perspective

The European Union (EU), comprising some 450 million consumers, represents the world’s second largest energy market. Energy consumption in EU has been growing over the last 15 years. Overall energy consumption grew by 10% between 1990 and 2000, while in 2030, total energy consumption is projected to be 15% higher than it was in 2000.

Today, about half of the EU energy consumption is imported and this will grow, by 2030, to 70%. A significant part of these imports are routed through the Eastern Europe and produced in Russia and Central Asia countries. In this context, the EU is highly interested in securing its energy supplies, also in the context of the increasing global competition.

The EU is aware that it must act urgently to the strategic challenge of European energy security. In March 2006, the European Commission issued a discussion paper (Green paper) on an energy policy for the EU, which proposes the main elements for a possible comprehensive European energy policy. The Green paper also emphasizes that the EU needs to speak one voice with its external partners and recognises that the countries of the Eastern Europe, Caucasus and Central Asia play a strategic role in ensuring the security of energy supplies for the EU.

The perspective of the Partners of the EU involved in the Baku Initiative

Despite the fact that the energy situation differs significantly in each of the countries of the Black Sea, of the Caspian basin and their neighbours - depending upon their status of producers, consumers, or transit countries, all are interested in securing energy supplies, avoiding price fluctuations, and attracting investments in the sector concerned.

STRATEGIC VISION FOR AN ENHANCED ENERGY COOPERATION Page 1 of 7 Eastern Europe and the Caucasus are important routes for transport of hydrocarbons, and their importance has grown since the enlargement completed in May 2004. Azerbaijan is an important producer of oil and gas, having a large amount of reserves both offshore in the Caspian Sea as well as on the territory of Azerbaijan, while the remaining countries in Caucasus and Eastern Europe are net importers of gas and oil.

Several thousand kilometres of oil and gas pipelines are currently crossing through the territories in Caucasus and Eastern Europe. This energy infrastructure was built several decades ago as a part of the ex-Soviet Union energy infrastructure network. However, the current condition of the ageing pipelines can be considered neither satisfactory, nor fully secure for ensuring reliable long-term supply flows. Moreover, new infrastructure has been recently contracted or is under consideration in the region, such as the Baku-Tbilisi-Ceyhan oil pipeline and the parallel Baku-Tbilisi- Erzerum gas pipeline.

Central Asia is a very important producer of energy (coal, oil and gas as well as of hydro-electricity). Hydrocarbon reserves, both offshore in the Caspian Sea as well as on the territory of Kazakhstan, Turkmenistan and Uzbekistan are of major importance. In contrast, Kyrgyzstan and Tajikistan are net importers of oil and gas. Kazakhstan’s oil and natural gas reserves are among the largest in the world, whereas Turkmenistan and Uzbekistan mainly possess natural gas. Kyrgyzstan has a vast potential for hydropower production, which is only partly utilized to cover mainly domestic needs.

While each country of the Eastern Europe, Caucasus and Central Asian regions has chosen its own path to internal stability and economic development, the existing regional energy cooperation has not proved so far to be sufficiently developed to maintain a satisfactory functioning of the regional infrastructure established in Soviet times, to ensure security of energy supplies and to minimise environmental impact. Moreover, trade disruptions, as well as a fall-off in investment, have impaired economic growth in these landlocked countries.

2. PROSPECTS FOR ENHANCED ENERGY COOPERATION BETWEEN THE EU, THE BLACK SEA, CASPIAN BASIN AND CENTRAL ASIA REGIONS

The EU is one of the main players on the global energy market and one of the leaders in terms of investment and new technologies in the energy sector. It has one of the world’s largest and most integrated energy markets, and is a reliable energy consumer. The countries of Eastern Europe, Caucasus and Central Asia, either as transit countries or due to their producing, are well placed to meet increasing Europe’s energy needs. At the same time, they are facing important challenges to develop their infrastructure, either to satisfy their domestic energy requirements, or to increase their production and/or transport capacity. The negative environmental impact of their energy industries is also an issue which is not sufficiently addressed up to now.

Defining a mutually acceptable energy cooperation policy, based on the recognition of complementarities and the identification of common interests, is therefore of paramount importance.

STRATEGIC VISION FOR AN ENHANCED ENERGY COOPERATION Page 2 of 7 On the occasion of the Energy Ministerial Conference held in Baku on 13 November 2004, which involved the Black Sea and the Caspian Littoral States and their neighbours1, it was agreed that enhanced energy cooperation should be sought, with a view to preparing the ground for the progressive integration of the Black Sea and Caspian Sea energy markets with the EU internal energy market. Indeed, the establishment of a pan-European integrated energy market would serve and secure the interests and needs of all parties.

Energy cooperation between the EU and its partners can be used to improve the overall consistency of energy policies and increase their convergence, enhance the security and the diversity of energy supplies, improve the environmental sustainability of the regional energy systems and contribute to larger investment flows in the energy sector. The issue of security of transportation of the Caspian oil and gas resources towards European countries, be it transiting through Russia or via other routes such as Iran and Turkey, is also to be considered, in the light of its importance for the development of the countries of the Caspian region and for securing energy supplies in the consumer countries..

3. IMPLEMENTING AN ENHANCED ENERGY COOPERATION The EU and Eastern Europe, Caucasus and Central Asia countries in implementing enhanced energy cooperation face the following strategic energy challenges:

Promoting transparency on energy markets; Ensuring new investments in oil and gas producing and transit countries; Ensuring a diversified energy mix with an increased use of low-carbon energy sources; And for some countries, increasing reliance on imported energy.

Recent developments changing the world energy landscape (high energy prices, threats to the security of energy supplies and climate change) have underlined the magnitude of this task. To tackle this efficiently the countries of Eastern Europe, Caucasus and Central Asia as well as the EU need an appropriate cooperation mechanism based on enhanced energy, trade, development and environment cooperation.

The ‘Baku Initiative’ offers an effective response to the above challenges. Established as a new cooperation initiative, it is aiming at the progressive integration of the Black Sea and Caspian Sea region energy markets with the EU markets. Such a process implies progressively converging our energy policies on issues of trade, transit and environmental rules as well as standards. This would create predictable and transparent energy markets, capable of stimulating investment and economic growth as well as security of energy supply for the EU and its regional partners.

As agreed on the occasion of the Baku Energy Conference in November 2004, the participating countries would develop further energy co-operation with the objective of: Harmonising the legal and technical standards with the aim to create a functioning integrated energy market in accordance with EU and International legal and regulatory framework;

1 Namely Azerbaijan, Armenia, Georgia, Iran (as observer), Kazakhstan, Kyrgyzstan, Moldova, Russian Federation (as observer), Turkey, Turkmenistan, Ukraine and Uzbekistan.

STRATEGIC VISION FOR AN ENHANCED ENERGY COOPERATION Page 3 of 7 Enhancing the safety and security of energy supplies extending and modernising the existing infrastructure, substituting the old and dangerous power generation infrastructures with environmentally-friendly power generation infrastructures, developing of new infrastructures and implementing a modern monitoring system of their operation; Improving energy supply and demand management through the integration of efficient and sustainable energy systems; Promoting the financing of commercially and environmentally viable energy projects of common interest, which will be identified according to pre-defined criteria.

Within this framework, the EU will provide both a short-to-medium term and a long- term assistance to the participating countries. This assistance will support the implementation of the proposed enhanced energy cooperation, recognising that the ultimate objective remains the progressive convergence of the energy policies of the Black Sea and Caspian basin countries and their neighbours with those of the EU.

3.1. Short-to-Medium-term Assistance

This assistance is provided through the ongoing and the upcoming projects at both regional and national level.

This technical assistance is composed of more than 15 projects, that are either ongoing, or will be launched in the near future over 2 years, with a total budget of over 40 million €.

The main objectives of these ongoing and upcoming projects are: To support the gradual convergence of the energy policies of the Black Sea and Caspian basin countries and their neighbours with those of the EU; To develop and adopt a strategy for the harmonization of technical standards and practices in the gas and oil sectors; To enhance the attraction of funding for new infrastructure and the rehabilitation of the old existing infrastructure; To embark on common energy efficiency and renewable energy policies and programmes; And to use the existing INOGATE Programme structures for facilitating the objectives of this enhanced energy co-operation.

3.2. Long-term Assistance

The EU is currently implementing a new “European Neighbourhood Policy” (ENP). Seven ENP Action Plans are in force already, including with some of the ‘Baku Initiative’ partners such as Moldova and Ukraine and their implementation is underway. Preparation of Action Plans with five other partners including Armenia, Azerbaijan and Georgia has started.

The energy sections of the ENP Action Plans are in line with the regional initiatives including the ‘Baku Initiative’ and the activities of the INOGATE Programme and outline the priorities for cooperation both in the bilateral and regional context such as: – enhancement of energy dialogue; – convergence of energy policies and legal/regulatory frameworks (e.g. with the EU internal electricity and gas market); – development of energy networks;

STRATEGIC VISION FOR AN ENHANCED ENERGY COOPERATION Page 4 of 7 – promotion of energy efficiency and use of new/renewable energy sources; – nuclear safety; – and (sub) regional cooperation.

The results achieved thorough the present work programme should feed in the European Neighbourhood Policy process, as appropriate, and vice-versa.

As regards Central Asia, the EU has recently launched an EU-Central Asia regional political dialogue to promote better cooperation with this important region. The ‘Baku Initiative’ will complement and reinforce those aspects of the dialogue that are relevant for energy cooperation. This will permit to fully associate Central Asia in the regional cooperation frameworks developed by the EU. If appropriate, Central Asia countries will participate in the EU assistance projects aiming to implement the agreed objectives of the ‘Baku Initiative’.

4. ESTABLISHING A ROAD MAP TO ENHANCE ENERGY COOPERATION AND PROMOTE AN INTEGRATED ENERGY MARKET

It was agreed that the implementation of the ‘Baku Initiative’ will take place through four working groups established at the Baku Energy Ministerial Conference.

The four working groups consist of nominated representatives of the participating countries and the European Commission. They have been established to implement the ‘Baku Initiative’ objectives and address the following issues: 1. Prepare proposals of actions and procedures necessary for the development of multi-annual working programme of agreed measures, aiming at facilitating the creation of harmonized hydrocarbon and electricity markets. 2. Address the safety and security of energy production, transportation and supplies by assessing the work that has already been done up to date and proposing additional measures in this area, including on rehabilitation of electricity and hydrocarbon infrastructures and interconnections. 3. Pursue sustainable development by addressing energy efficiency, energy savings and renewable energy issues, as well as the environmental aspects of energy production, transportation and use, with a view to bringing the energy markets of the Black Sea, Caspian Littoral States and neighbouring countries in line with the standards of the European Union. 4. Facilitate investments in energy projects of common interest by firstly identifying specific projects of common interest according to pre-defined criteria, and promoting their financing by IFIs and/or the private sector.

To take concrete steps towards the implementation of these priorities, the Working Groups will define a “Road Map” outlining concrete activities to be undertaken over the period of 2006-2008. The schedule and mandate of their proposed work programme is the following:

During 1st year (2006) the overall aim is the preparation of a “Road Map” setting out the long-term vision for the new energy co-operation, which could be endorsed by an Energy Ministerial Conference to be held in November 2006. This “Road Map” should depict the political willingness of all countries to actively participate in the enhanced energy cooperation and to proceed to work towards a common goal of improving the convergence of energy policies. The “Road Map” will define the main methodology, procedures and

STRATEGIC VISION FOR AN ENHANCED ENERGY COOPERATION Page 5 of 7 time frame of concrete actions that will be implemented by the participating countries.

During 2nd year (2007) the overall aim is the implementation of the agreed Road Map. This includes setting up of mechanisms and institutional framework necessary for such implementation. If appropriate, a more detailed schedule of activities should be drafted. Finally during the 2nd year a monitoring body will be proposed by the INOGATE Technical Secretariat and agreed as the mechanism for following up the implementation procedure of all the agreed actions and measures.

During the 3rd year (2008) the overall aim is monitoring of the implementation of all the agreed actions and measures, the establishment of sustainable implementation mechanisms for the future and the evaluation of three-year procedure, in order to define any deviation or gap that should be rectified.

5. COMMITMENTS & RESPONSIBILITIES All parties involved in each of the four Working Group’s activities and tasks are strongly committed to implement and support the agreed activities and tasks aiming to reach the agreed objectives.

All parties are committed to treat the information they receive during their involvement in the Working Group’s activities as confidential.

5.1. European Commission The European Commission is committed to support the Working Groups’ activities and to examine carefully the Working Groups’ proposals, projects and recommendations, with the aim: – to facilitate the gradual convergence of the energy policies of the Black Sea and Caspian basin countries and their neighbours with those of the EU; – to facilitate and increase trade and investment flows in the rehabilitation of existing, and development of new, energy transportation infrastructures linking Eastern Europe, Caucasus and Central Asia to the EU; – to enhance the operational safety and security of energy supply within the Eastern Europe, Caucasus and Central Asia regions and to the EU.

5.2. INOGATE Secretariat The INOGATE Technical Secretariat, being the coordination mechanism, is committed to co-ordinate and guide the activities of the four Working Groups, fully support the Commission officials chairing the Working Groups, assist the European Commission in planning and organising the Working Group meetings in a timely manner, provide logistical and administrative support, prepare and disseminate all required documentation before and after Working Group meetings and provide technical assistance through EU and local experts to the Working Groups, in an effort to ensure the effective work of the Working Groups.

5.3. Working Group members The beneficiary countries are expected to assign qualified, experienced and productive personnel that have a good knowledge of the topics of the Working Group to which they are assigned.

STRATEGIC VISION FOR AN ENHANCED ENERGY COOPERATION Page 6 of 7 Each beneficiary country is expected to authorize that Working Group members disclose and present the information regarding its energy sector required for the proper performance of the Working Group’s tasks.

Each Working Group member is expected to present their country’s policy and strategy on the topics under discussion and to have the authority to propose actions and measures, as well as to undertake commitments on the issues to be decided.

Each Working Group member is expected to provide his / her best services and expertise, as required to ensure a fruitful cooperation with all the rest Working Group members and meet the Working Group’s objectives.

The Working Group members are expected to be present in all the meetings of the group, as well as to be adequately prepared to participate and contribute in productive meetings.

Each Working Group member is expected to be the contact point with the involved Ministries in his / her country and to retrieve the required information and documentation for the execution of his / her tasks, as well as for the proper performance of the WG’s tasks.

5.4. Country Coordinators Each country has appointed up to four representatives, one for each working group and one of these appointed as Country Coordinator. The Country Coordinator is the general contact point for their country with reference to their inputs to the ‘Baku Initiative’. The role of the Country Coordinators is important to the successful implementation of the agreed objectives of the ‘Baku Initiative’ because they will ensure the proper support for all agreed activities within their respective Energy Ministries. The effectiveness of the Country Coordinators will be directly proportional to the level of authority and overall commitment of the nominated individual.

The Country Coordinators are responsible for the following: ƒ Coordination of the working group members of his/her country. ƒ Monitoring the activities of the working group members of his/her country. ƒ Securing the participation of the group members of his/her country in the relevant working groups meetings. ƒ Coordination of all required actions for the preparation of the annual ministerial meetings, i.e. preparation of the agendas in co-operation with the rest Country Coordinators, secure the assignment of the national delegations, the participation of the ministerial officers and other relevant issues. ƒ Providing all required logistical and administrative support for the annual ministerial meetings. ƒ Supporting the works of the 4 Working Groups, within their administrations, by providing services required for the working groups. ƒ Serving as a liaison point in their country for potential investors and key decision makers in government and the oil, gas and electricity sectors.

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