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Protection of Energy Investments in Turkey: Two Significant Cases

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There are several multilateral investment treaties and conventions which aim to protect foreign investment such as International Centre of Settlement of Disputes (ICSID), the North American Free Trade Agreement (NAFTA), Association of Southeast Asian Nations (ASEAN), and Common Market for Eastern and Southern Africa (COMESA). Given all these multilateral investment treaties, there appeared to be a gap and need for unification which was provided by a unique treaty.

Energy need of Europe and United States and today’s one of the biggest energy producers Middle East and Russia and other countries born after disintegration of theSoviet Union, which needs huge investments in energy production, started to corporate after Cold War period. This corporation has formed a basis for today’s modern energy investment treaty which is called Energy Charter Treaty.

Energy Charter Treaty (ECT or the Treaty) is one of the significant steps towards the liberalization ofenergy market within the frame of forming a legal ground to free energy market assurance. Energy Charter Treaty was signed in Lisbon on 17 December 1994 and entered into force on 4 July 2001 in Turkey. Since then, Turkey is one of the contracting states of the Treaty. After ratification of the Treaty, it was incorporated in to the domestic Turkish Law, therefore it can be applied to any disputes that fulfill the conditions foreseen in Energy Charter Treaty.

There are several energy investment types. Main areas of activity in energy sector and economic activities are described in Treaty’s article 1 which is “Economic Activity in the Energy Sector means an economic activity concerning the exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing, or sale of Energy Materials and Products except those included in Annex NI, or concerning the distribution of heat to multiple premises.” As is seen, exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing, or sale of Energy Materials and Products are regarded as economic activity in the scope of the Treaty. Besides, economic activities are not limited to issues mentioned above so that some activities that are not mentioned in the Treaty, on the condition that this activity is going to related to energy sector, can be regarded as economic activity and benefit from the protection foreseen in the Treaty.

In the Treaty, Energy Investment Contracts are mentioned which are;

  • Energy sources exploration and production contracts (including “product sharing agreements”, “concession agreements” and “risk service agreements”)
  • Energy infrastructure contracts (including “built operate own” or built operate transfer”)
  • Energy materials and products sale contracts.

There are several standards which are foreseen in the Treaty in regard of protecting the energy investments against political risks that investors can face in host country so that several principles that host countries should undertake have been adopted in the international investment agreements. Generally, it is not differentiated among sectors. However, because several sectors such as energy, need more protections than other sectors, several states come together and sign treaties such as “Energy Charter Treaty”. The standards foreseen in the Treaty are:

1- Principle of Investment Promotion and Protection: This principle requires the host contracting country to take active measures against and protect from negative effects that can occur in other contracting states’ investor investment projects. This principle is mentioned in the Treaty however not described detailed in any articles of the Treaty.

2- Principle of Fair and Equitable Treatment: The most significant in this principle is that protecting and not to breach investors’ legitimate expectations. In order to maintain and protect this right generally investors opt in the “stabilization clause”. By this clause, host country undertakes not to amend laws that can breach the contract signed between host country and investor. Even though host country amends laws after the contract signed, these laws have not to be applied in the contract that signed between investor and host country.

3- Principle of Fair Trial Due Process of Law: Right to a fair trial is in fact described in European Convention on Human Rights. While contracting host country making a decision, host country should not behave fair all investors in the country and apply process of law.

4- Principle of equal treatment: Host country shall avoid discrimination against investor in accordance with the Treaty which is one of the significant standards that host country obeys. Discriminatory behavior, according to The Court of Justice, is (i) host country’s behavior must be intentional and result effects to the detriment of investor and (ii) this behavior must provide less protection than the protection provided to a third country investor.

Libananco v. Turkey

In 1988, Çukurova Elektrik AS (CEAS) and Kepez Elektrik TAS (KEPEZ) had authorized to produce, transmit and distribute electricity near in several regions such as Adana and Antalya in Turkey for a period of 70 years. To provide that between Turkish Council of Ministers and CEAS and KEPEZ a service protocol had signed. After these procedures, Danıştay (Council of State) had ratified the protocols and a “contract of concession” was signed between Council of Ministers, and CEAS and KEPEZ. However, in 2003, Ministry of Energy and Natural Resources nationalized CEAS and KEPEZ’s all facilities and their component parts and equipments due to breach of contract of concession and lack of application and continuation of the contract. And finally Ministry of Energy and Natural Resources revoked the CEAS and KEPEZ’s authority.

ICSID’s Libananco Award:

Libananco Holding Co. Limited which is resident in Cyprus claimed that it is a shareholder of CEAS and KEPEZ before nationalization in 2003 and demanded almost USD 10 billion before ICSID tribunal.

ICSID tribunal evaluated the claim whether Libananco was a shareholder and acquired the shares before 2003. ICISID tribunal investigated and evaluated all evidences and heard witnesses and decided Libananco was not an investor in the scope of article 17 and other related articles of ECT.

Cementownia v. Turkey

Related with CEAS and KEPEZ case again Nowa Huta S.A (Cementownia) that is resident in Poland and claimed that Cementownia had acquired an interest in the two Turkish electricity companies prior to the termination of their concession agreements. While the tribunal was investigating this question, ascertained that the owner and the managing partner of the company was Turkish so that the matters complained of involved the Turkish State and Turkish nationals and should operate within the scope of Turkish law.

Finally, the tribunal found for Turkey and decided to dismiss the claim with prejudice. Besides, the tribunal found that Cementownia’s claim was “manifestly ill-founded” and noted that “……intentionally and in bad faith abused the arbitration; and was guilty of procedural misconduct…” and consequently the tribunal sanctioned Cementownia with respect to the allocation of costs and ordered Cementownia to bear cost of the arbitration.

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