Official website of the President of Russia

Presented by Russian Vice-Prime Minister Victor Khristenko and European Commission Director-General Francois Lamoureux

Brussels/Moscow May 2002

Introduction

A year after the initiative was launched and following the submission of our joint Synthesis Report based upon the work of the EU and Russian energy experts, the EU-Russia Summit of October 2001 agreed on the future direction of the Energy Dialogue between the European Union and the Russian Federation. The Joint Statement from the Summit recognised that the exploratory phase of the Dialogue had been completed and listed a number of issues from our Report on which progress could be achieved both in the short term and over the medium term in the next, operational stage of the Dialogue.

Since the Summit, we have met on three occasions; in December 2001 in Moscow, in March 2002 in Brussels and more recently again in Moscow in May 2002. We can report progress in all the areas identified for action in the short term at the Summit, as well as in some of those identified as requiring further examination. This clearly demonstrates that the Dialogue has effectively moved into its concrete, implementation phase.

Progress on the themes agreed at the summit

1. Improvement of the energy production and transport legal framework.

To attract investments in the short term, we recognise the importance of swiftly completing the legal framework for Production Sharing Agreements (PSA), in particular the secondary legislation and the relevant amendments to the tax code. We agree to charge our experts to prepare a concise joint report on the current state of play and the proposals in the current draft legislation. This report should be submitted in time for consideration before the NovemberOctober EU-Russia Summit.

Over the longer term, we believe that consideration should be given to exploring other legal frameworks for implementing energy projects in order to facilitate entrepreneurial activity in energy exploration, production and transportation sectors, for example through the creation of Joint Ventures and concessions.

We also underline the importance of appropriate rules, existing or to be developed, in order to provide a framework governing non-discriminatory access to the energy transport networks.

2. Security of the transport networks.

Both parties have agreed, in the framework of an observatory, to collaborate to ensure the safety and security of the energy transport infrastructure. In particular, we note that technical assistance will be agreed in 2002 and provided in 2003, in the framework of TACIS and a continual assessment of the rehabilitation and investment needs for improving the safety and efficiency of the hydrocarbon export network both inside and outside Russia will also be funded. The early identification of gas leaks and dangerous or under-performing gas transport infrastructures will have a positive environmental impact by reducing the leakage of gas into the atmosphere, increase the utilisation of the existing capacity and improve the security of energy supplies of both Russia and the European Union.

We also welcome the understanding reached with Gazprom to construct an EU-Russia gas certification centre for testing and adopting modern, efficient, gas related technologies.

We also recognise the potential for a regional satellite accident prevention monitoring system for the oil and gas infrastructures involving all the countries of eastern European, Central Asian and the Caucasus. Such a surveillance system could make use of the Russian GLONASS and the future European GALILEO navigational systems. The feasibility of such a system will be studied in the framework of TACIS.

3. Legal security for long term supplies

Providing a secure legal framework and regulatory environment for the supply of gas is of fundamental interest to both the E.U. and Russia. Detailed discussions are continuing, with a particular emphasis on long-term contracts for gas. Both the E.U. and Russia consider that these contracts have not only underpinned investments in Russia in new capacity in the past, but will remain necessary in the future. The Commission has made it clear that long-term take-or-pay gas contracts are indispensable. The Commission will, together with Russia in the context of the dialogue, closely monitor the developing situation, and the Commission is determined to ensure that contractual and regulatory conditions continue to exist that enable the financing of the major investment necessary to ensure future E.U. gas security of supply.

Considerable progress has been made in agreeing how to amend or delete the so-called ”destination clauses“ in future contracts, and both the E.U. and Russia have underlined their determination, and the importance of reaching a mutually agreeable solution to this issue for existing contracts.

Russia raises the issue of possible E.U. or Member State import limits on energy resources. We propose that a group of experts of Russia and the E.U. including experts from the Member states, should examine this in detail with all parties concerned.

We also note, with satisfaction, the meeting of Russian and Commission experts on the general issue of energy trade which took place on 22 April 2002 in Brussels, at which problematic issues were identified. The Parties have agreed that such consultations should continue with the objective of addressing existing issues and a view to creating a more transparent and favourable treatment of energy flows between the Russian Federation and the EU.

4. New strategic transport infrastructure of common interest

In our discussions, we have agreed on the importance of increasing the multiplicity of transportation routes. This will enhance the security of energy supplies by reducing the threat of bottlenecks and the repercussions should a problem arise in any particular part of the network. While it is clear that the projects we have identified in our Synthesis Report as being of ”common interest“ will remain a matter for private sector decisions based upon economic and commercial judgements and on the authorities of the States involved, it is necessary to facilitate the practical realisation of these projects.

For this reason, we have mandated a high level team of independent experts to assess each project of potential ”common interest“. They will consult the interested parties to clearly define the technical requirements, the level of financing necessary and the time scales envisaged. Evidently it will be vital to the success of this work to concentrate only on those projects of clear mutual interest that will enhance the security of energy supplies of the EU and to ensure the close co-operation of all the public authorities and companies involved. The assessment prepared for each project must be as complete and accurate as possible.

For the limited number of projects selected, the high level team of independent experts will then assist in promoting the financing of the investments required through ”round tables“ consisting of the Governments involved, financial institutions, the private financial sector and the energy companies.

In parallel, we have mandated these experts to design a specific and practicable scheme to mitigate the residual non-commercial risks associated with the limited number of projects selected. This could be achieved either through the establishment of a specialised Investment Guarantee Trust or through other comparable arrangements involving appropriate International Financial Institutions and regional banks, export credit agencies, the authorities of participating countries and private sector insurers and investors.

We have confirmed the understanding on the quickest launch of the activities of the group of experts to develop, together with the companies, the projects of ”common interest“ and we have recommended that all assistance necessary for the work to be successfully concluded should be provided by the parties concerned.

5. Energy efficiency

In order to give practical and achievable objectives to the challenging task of improving the rational use of energy and promoting energy saving, it has been agreed that pilot projects be carried out in two climatically different regions of Russia – Arkhangelsk and Astrakhan.

For each region, a number of immediate priorities have been identified:

In the Astrakhan Oblast, the construction of a connecting pipeline from the local ”TEZ-2“ gas-fired power plant to the hot water distribution system in the city would permit the hot water currently wasted by the power plant to be used in the city, thereby reducing the demand on the city’s district heating plants. The overall improvement of the district heating system, both in the distribution system and in the use of heat in the individual houses, also appears to offer a significant potential for energy savings. The addition of a 130 MW CCGT (Combined Cycle Gas Turbine) to the existing 100 MW ”GRES“ gas-fired combined heat and power plant, including waste heat utilisation, and the construction of around 10 small, decentralised gas-fired Combined Heat and Power (CHP) plants in towns throughout the region.

In the Archangelsk Oblast, efficiency improvements in the outdated and badly maintained domestic heating system (boilers, distribution system, equipment in houses) could be very cost effective since most of the region uses large amounts of expensive (due to high transportation costs) coal and fuel oil. Feasibility studies show that conversion to biomass, which is locally available from timber, pulp and paper industry would offer very attractive investments with a pay back period of less than 3 years. Energy savings and switch towards locally available biomass seems to be both economically and environmentally the best options.

We agree that the Russian Ministry of Energy, together with the regions in question, will request a technical assistance programme to be financed under the TACIS programme 2003. The formulation of the programme will reflect the outcome of the missions to the regions.

We agree to consider the extension of the energy efficiency programmes to include the Kaliningrad Oblast.

The potential of the Kyoto Protocol to offer economic incentives for energy savings and improved energy efficiencies is significant. This calls for the earliest possible ratification of the Kyoto Protocol by all participants.

Once the Protocol is in force, any co-operative project in energy savings or improved energy efficiency which ”generates“ a reduction in CO2 emissions, will allow the resulting CO2 credit to be transferred to the investor (for example in the EU) in accordance with the modalities in the Protocol. This possibility will create an additional economic incentive for such projects over and above the incentive of the value of the energy saved.

We note with satisfaction that the EU is financing two projects to facilitate the technology transfer of relatively low cost methods to improve the efficiency and environmental performance of conventional coal-fired power plants in Russia and to assess the perspectives for rebuilding/rehabilitating them.

6. Technology co-operation

We both recognise that reinforcing energy research and technology co-operation is a key element for deepening the Energy Dialogue. Since the creation of an EU-Russia Energy Technology Centre (ETC) will act as a catalyst and a focus for increasing such co-operation, we consider it a major priority. The ECT should have at its disposal all premises and equipment required to perform its function and to permit conferences, workshops etc.

We confirm the understandings reached at the 2001 Brussels EU-Russia Summit on the establishment of the ETC in Russia, either in Moscow or in Saint Petersburg, in premises provided by the Russian authorities together with the required infrastructure. Funding from the European Commission will be provided for an initial period of three years.

The Parties will sign in the nearest future a Memorandum of Understanding which ensures the ETC inauguration before the end of this year.

Other areas of mutual interest.

Recognising the importance of developing the Energy Dialogue towards a real Energy Partnership, our discussions have identified a number of other issues on which fruitful discussions and joint analyses between our experts could be very productive.

1. Interconnection of electricity networks and trade in electricity

We welcome the signature in Warsaw on 20 March 2002, in the framework of a conference on the EU-Russia Energy Dialogue, of the Protocol on close co-operation between the CIS Electric Power Council (CIS EPC) and the Union of the Electricity Industry (EURELECTRIC) as an important step forward. It is encouraging that there is a willingness by the two Parties to make progress in promoting interconnections of the electricity systems. Russia believes that a synchronous operation is the best technological solution.

The EU stresses that a number of preconditions need to be fulfilled before a substantial trade in electricity can take place, such as reciprocity in market opening, cost-based pricing, environmental protection and a high level of nuclear safety comparable to that which exists in the EU Member states.

Russia indicates that the safety assessment of units in nuclear power plants is the exclusive responsibility of the national supervisory body (GosAtomNadzor) exercising its activities on the basis of national regulations developed in accordance with generally recognised international standards.

We believe that a prior examination with RAO UES of the prospects for interconnection and trade in electricity, the actual and potential bottlenecks and the technical issues related to the interconnection of the Russian electricity system with that of continental Europe should be undertaken.

2. Joint assessment of the oil market

In the context of the uncertainties and significant price fluctuations that we have seen on the international oil market, and the negative impact this has had both on the Russia and EU economies, we recommend that a constructive dialogue on this issue would be beneficial to both Parties.

The two Parties consider that it is essential that a regular dialogue is developed between producer and consumer countries. Such a dialogue could address

the possible options for increasing market stability and include issues such as jointly assessing developments on the international oil market as well as the policies with respect to enhancing supply security and forming reliable market price indicators. In this context, we believe that it would be interesting to examine the role that stocks could play in helping to reduce market volatility.

3. Trade in nuclear materials

We recognise that, over the last decade, the question of the trade in nuclear materials has been a delicate issue between the EU and Russia.

The European Commission stresses in the light of possible increasing supplies available from Russia, the EURATOM Supply Agency has applied a policy of ensuring a diversification of the sources of supply of natural and enriched uranium through quantitative limits to imports. Russia stresses that qualitative limitations in trade of nuclear materials between Russia and the EU are discriminatory.

However, with the context of the nuclear market having changed significantly in Russia, as it has in Europe, combined with the perspective of the enlargement of the EU in the near future, a reassessment of the EURATOM Supply Agency’s long term supply policy is necessary. Indeed, some of the candidate countries have intergovernmental agreements and long term supply contracts with Russia which need to be respected, in conformity with Article 105 of the EURATOM Treaty.

Recognising the importance of this issue, we agreed in accordance with article 22 of the PCA and in the context of EU enlargement, to find a mutually acceptable solution.