Invited Speech to the Plenary Session "Caspian Sea Resources", Monaco Summit on Energy (Crans Montana Forum in Monaco sponsored by UNIDO).
Recent research on multilateral cooperation and development reveals several ways that international institutions can help to address and resolve common problems. For promoting Caspian energy development, the two most important ways are to increase governmental concern and to enhance the contractual environment.
To increase governmental concern means to facilitate linkages among issues, and to create and disseminate scientific knowledge. In the Caspian region, there has been a deficit in the creation and dissemination of relevant scientific knowledge, because the incentive structure of scholarly specialists is geared to career advancement in their academic niches within universities. This in turn imposes a concern with matters divorced from the immediate and everyday concerns of decision-makers outside the walls of academia. A reflection of this deficiency is the relative lack of scholarly literature on the relationship between the agenda of international energy development and the agenda of international environmental conservation. These issue areas are beginning to be consciously linked in practice, and that tendency must be further emphasized. However, scholars have not in general paid much attention to the systematic integration of these spheres in conceptual or practical terms.
The other major way to promote multilateral cooperation for energy development in the Caspian region is to enhance the contractual environment. This means to provide bargaining forums that both reduce transaction costs and structure decision-making processes. It also means to conduct monitoring of the quality, performance, and policies pertinent to energy development. Taking account of social and economic effects upon the human and natural environment, the Azerbaijan International Operating Company (AIOC) in general emerges as a model of innovative and successful resolution of these issues.
To enhance the contractual environment further means to increase national and international accountability for the policies pursued and for their effects. Without accountability, there is no economic rationality, but only accidental efficiency. The international community has helped to advise the actors in the region concerning the choices that they have. Enhanced citizen participation in the decisions concerning energy development is in the medium- and long-term interest of the governments and consortia. The population in the Caspian region is increasingly literate, increasingly informed, and therefore increasingly politically active. In the case of the AIOC, Azerbaijani citizens trained both in environmental science and energy development have contributed greatly to the integration of these concerns in practice. The AIOC is not properly speaking a "transnational" consortium but a truly "multinational" one, in the sociological sense that its leadership team and their deputies come from a variety of national backgrounds.
The practical consequence of this variety is to alter the decision-making culture. It represents a type of "virtual" participation in policy making by the citizens of the host country. It is related to the model of the small European countries such as The Netherlands, where specialized public interest groups cooperate with ministries for the practical resolution of policy questions, irrespective of legislative intervention. The AIOC example illustrates how private voluntary and nongovernmental organizations can, through intermediaries, work informally with governments and consortia to promote sustainable development. Other energy development consortia in the region have failed to do this, and they have been less successful in implementing their projects.
The rate of increase of citizen participation in general, and the modalities of that participation, differ from culture to culture. However, this overall increase has become a universal law of political and social development. Even the program of the Secretary General for reform of the United Nations invokes this and takes it into account. The example of the Soviet Union shows the fate that awaits those governments that take too long to recognize this law.
The incorporation of citizen participation into the decision-making process does not contradict, but can only guarantee, the successful development and marketing of Caspian energy resources. In the international system after the Cold War, there is no holding back the free flow of information or the ability of people to act on that information. Also the post-Cold War international system is organizing itself not from the top down but rather from the bottom up. In such a context, it is necessary for the newly independent states to have people who can respond quickly to new and unexpected challenges.
Only those who have learned to think and act on their own, thanks to previous opportunities for greater initiative, can adapt policies and strategies as effectively as events will require. Moreover, foreign investors increasingly recognize that their own economic interest requires emergence of an experienced younger generation that will be capable of taking over greater responsibility and carrying on the work of the present-day leaders later in the twenty-first century. Again the experience of the AIOC with its host countries provides an evident example.
It is also necessary that actors in the region clarify their own values in the reciprocal fashion that promotes cooperation on the basis of trust, confidence, and freedom from danger. These are questions of both psychology and politics. Consequently, what is required is political engineering that allows inter-penetration and hence cooperation among the value systems of the diverse actors. I have called this "cooperative energy security." Cooperative energy security has three prerequisites: political stability, the provision of secure transport, and an investment-friendly legal environment. The last two are impossible in the absence of the first. At the same time, political stability does not mean stagnation.
The research I mentioned earlier reveals that the greatest need in Caspian energy development is to integrate all kinds of technical information with the incentive structures of the different actors in the region, and to enable them to evaluate and act upon this information. At present, no one performs this crucial function. Who performs it, and how it is to be performed, is less important than that someone should perform it; however, the same research also suggests who and how might be most effective. This is fundamentally a question of organizational design within the context of the existing ecology of international institutions.
The best solution would be to establish a transnational and international association (not an international organization in the classical and traditional sense) that would perform the key and indispensable function of gathering together large numbers of responsible decision-makers and highly qualified experts, focusing their attention. The best way to move pragmatically towards such an institution may be through a limited series of international conferences like those called in the early 1990s, after the Soviet collapse, on coordination of Western assistance to the newly independent states.
I would call this a EurAsian Oil and Gas Association or EAOGA . It would not create an international bureaucracy like UNCTAD did in the 1970s, nor supersede national authority as the Law of the Sea Treaty sought to do. Nor would EAOGA seek to control natural resources in the newly independent states, or their extraction and sale. The Energy Charter Treaty is a potential point of reference for EAOGA's activity. A key component of EAOGA might be a EaogaBank to track payments and financial arrangements for oil and gas development in the Caspian region, like the Bank for International Settlements tracked German reparations payments after the First World War. Like the Bank for International Settlements, this EaogaBank would not have to be a bank per se and it would not have to have executive authority.
EaogaBank would not duplicate work already performed by other organizations; rather, it would serve as a clearing house to evaluate the experience of others and undertake impartial studies of critical problems that others lack the incentive to address. More important, it could also serve as a problem-oriented analytical center for EAOGA itself. Still further, it could have the potential to impose operational discipline upon banks in the newly independent states. For example, it could be given authority to grant a generally respected international certification or accreditation for financing of oil and gas development. It may be efficient to organize EAOGA along working-group lines, perhaps with provision for ad hoc forums to deal with energy-security issues that the Energy Charter Treaty did not address in sufficient detail.
Since all potential problems of successful energy exploration and development in the whole of Eurasia are present in microcosm in the Caucasus, the Caucasus region provides an opportunity to work out practical procedures and evaluate unexpected obstacles before full implementation of the Energy Charter Treaty: a "trial run," as it were, of EAOGA principles and methods. The proposed Caucasus Investment Bank may be a vehicle for this; but if it is not appropriate for this task, then EAOGA and EaogaBank could be housed in an international institution. It is possible that an existing international organization might accomplish some of the functions of EAOGA if that organization is seen to be credible and impartial by all parties concerned. In that case, its initial activities would not have to be limited to the Caucasus region.
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Material from this speech was incorporated into the 1999 Global Governance article, "Cooperative Energy Security in the Caspian Region: A New Paradigm for Sustainable Development?"