This document proposes creating a Middle East Energy Community (MEEC) based on the European model of economic integration. The MEEC would initially focus on jointly managing oil and gas production/transportation to improve regional stability, resolve disputes over resource ownership, and encourage investment/trade. It would establish a new regional entity and legal framework to oversee the energy sector while respecting states' sovereignty. The goals are to reduce dependence on oil revenues, encourage political reform, and enable peaceful development in the region. The MEEC could eventually integrate other industries and partner with the EU, US, and other interested parties to further promote regional stability and prosperity.

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A MIDDLE EAST ENERGY COMMUNITY
By David Harrison and Philip Ward (*)
Introduction
Proposals for greater regional integration and unity in the Middle East are not new. Some projects,
such as the Gulf Cooperation Council and the Arab League, are already in hand. This paper proposes
a method for going further, and using the EU model of economic integration as a means of
reinforcing regional stability and also political reform. The aim is to improve regional economic
prospects, release economic potential through increased trade and investment, provide a stable
background for resolution of the Arab-Israeli dispute, encourage the peaceful development of the
Iranian energy sector, and also assist the re-entry of Iraq into the regional economy. All of these are
of urgent importance.
The initial mechanism proposed for doing this is by using the lever of the oil and gas industry,
because this is a major part of the Middle East economy. The principles can, however, equally be
extended to water and to other subjects of wider regional interest.
Two of the three founding treaties of the European Communities were based on energy (the
European Coal and Steel Community and Euratom): the question now is whether the European
experience might prove to be of wider use and application.
The move to European unity took place only after two immensely destructive wars between the
founding states. It is to be hoped the countries of the Middle East can learn from the costly mistakes
of Europe and perhaps, like Europe, start on a new path.
Key Principles
Oil and gas reserves in the Middle East region are at present exploited purely on a national basis. In
the oil sector large vertically-integrated state controlled companies predominate. Gas development is
more recent, and is growing rapidly, but again exploitation is on a national basis, with regional
projects such as the proposed Gulf Cooperation Council gas grid remaining blocked. Ownership of
resources depends upon the chance geographic distribution of reserves, with some countries with
large populations but little oil and gas envying those in the opposite position. Ownership of
resources has been a divisive rather than unifying factor, has already led to war (the Iraqi invasion of
Kuwait), to continuing ethnic and religious tensions linked to the location of reserves, as in Saudi
Arabia, Iraq and Iran, and also to persistent internal distortions of power.
In the graphic words of Mussab Hassan Al-Dujaili (the former Iraq Opec governor, and now chief of
the Iraq State Oil Marketing Organisation), writing in the Financial Times in February 2005:
"It is therefore worth reminding members of the new [Iraqi] assembly that oil leads to
dictatorship, and that the monopolisation of oil revenues by previous Iraqi governments was
the root cause of tyranny, war and the fragmentation of Iraq's territory and people.

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Take the most virtuous of governments, brought to power by democratic means, and give it
huge oil revenues. I bet that within three years this same government will be just as corrupt
as any authoritarian regime in the developing world, because a politician who can finance
his economic and social policies, his police force and an army with natural resources no
longer needs to raise taxes or listen to the people."
What is now proposed is to move beyond this regional tendency, much as in post-war Europe policy
was set to reverse the war-time concentration of heavy industry, particularly in Germany, which also
contributed to geopolitical tension.
Oil and gas, for the Middle East, can in a way be compared to coal and steel in post-war Europe: the
source of wealth but also the occasion of dispute and conflict. In Iraq the disputed status of Kirkuk is
linked to the discovery of oil in the early part of the twentieth century, just as in Europe
disagreements in the past over the status of the Saar and the Ruhr have been connected to the
ownership of coal and steel assets. And just as disputes over the status of the Ruhr, Alsace-Lorraine
and the Saar became meaningless in Europe once a new approach was taken, in the shape of the
European Coal and Steel Community, so in the Middle East the proposed creation of a new Energy
Community would render disputes over the physical location of oil and gas assets meaningless and
so help stabilise the region as a whole.
In specific terms what is proposed is placing regional oil and gas production and shipment under
common control, subject to an institutional and legal framework providing all the necessary
safeguards for participating states, and for the peoples and businesses of the region.
This is not a utopian project. It draws on methods and principles which have been used in Europe for
several decades.
Such an Energy Community would comprise those states which wish to join it, but would be open to
all others in the region.
Although the initial focus is on oil and gas, the principles can be extended to other economic sectors
where there are common regional interests. The promotion of regional stability and growth can be
expected to involve a growing integration of a variety of economic sectors in the Middle East, much
as in Europe a spectrum can be traced from the original primary industries of coal and steel to all
other goods and services. With increased economic prospects and stability capital held outside the
region can be expected to return, creating further openings for employment. For these reasons no
Middle East state should be excluded in principle from joining the Energy Community.
The Institutional and Legal Framework
As in Europe, a gradual, step by step approach could be taken. It will be for participating states to
decide the timetable for moving from one step to the next.
Existing property rights in the Middle East will not be affected by the Energy Community.
However, in those areas which come under the jurisdiction of the Community the exercise of those
rights would become subject to common rules.
There are essentially two areas to consider. These are the new institutional arrangements of the
Community, and also its legal system. Both would be addressed in detail in the same treaty between
participating states.
The institutional arrangements will involve at their heart a new entity responsible for safeguarding
the common regional interests of the Community. These interests would be defined in detail in the
treaty itself, but would be likely to include overseeing the exploitation of oil and gas reserves

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(possibly including drilling licences); developing and rationalising energy infrastructure (refineries
and pipelines) on a regional basis; promoting regional investment and trade; ensuring the application
of the agreed legal system by participating states; and advising on disputes. This new entity will
belong to and be staffed by the participating states, but must be given real autonomy to carry out its
agreed tasks. A dialogue with participating states where new policy questions arise is also likely to
be necessary, as is recourse to a means of legal review by those affected by acts and decisions of the
new entity.
The method of operation of the new entity would be for discussion, but if the model of the original
High Authority of the European Coal and Steel Community is taken as an example, this entity would
have powers, on behalf of the Community, to ensure an orderly oil and gas supply to the market; to
ensure the maintenance of conditions to encourage firms to expand and improve production
potential; to promote a policy of using resources rationally, so avoiding their exhaustion; to promote
improved working conditions and standards of living for workers; to promote the growth of trade;
and to promote the orderly expansion and modernisation of production and the improvement of
quality.
The new entity would also have powers, similar to the High Authority, to prohibit restrictions on
trade within the Energy Community; to prohibit measures or practices which discriminate between
producers, purchasers or consumers; to prohibit subsidies or aids granted by participating states
which distort the Community; and to prohibit restrictive practices which tend towards the sharing or
exploitation of markets.
The legal system for the Energy Community would also be defined in the treaty. One possibility
would be to adapt and codify the legal order which has already developed under the EU system,
which has over the years addressed many similar regional issues. A codified version could avoid
irrelevant or unnecessary EU legal developments, and concentrate instead on key legal principles
which can be found in the EU treaties, secondary legislation and the case law resulting from several
generations of legal judgment within the EU. Examples are the economic integration principles
covering the freedom of movement of goods, services, capital and persons (with any necessary
transitional or safeguard mechanisms, including possibly giving preference to firms and capital of
Community origin); anti-trust, merger control, state aid and public sector procurement rules; the
principle of non discrimination on grounds of nationality, religion, ethnic origin or sex (again,
possibly subject to safeguard mechanisms in agreed cases); the protection of human rights; and in
particular the crucial principle of direct effect (that is, the possibility of relying on the law of the
Community to enforce rights and obligations in any court within the region of the Community).
This principle of direct effect is at the heart of European economic integration, and would be vital to
the success of a Middle East Community. It provides a channel for dealing with disputes between all
parties – individuals and firms, as well as states – which fall within areas covered by the Energy
Community, and helps ensure that such disputes become subject to a common legal process rather
than the cause of conflict.
A very great body of jurisprudence has already grown up in the EU as a consequence of the kinds of
regional disputes which are likely to arise in a future Community. It would be possible, at least in
the early years of the Community, to devise procedures under which courts in the Middle East, if
considering Community legal disputes, could if they wished take into account parallel EU law in
similar circumstances. A Middle East regional appeal court might be envisaged, and also as
necessary references to the European courts for legal opinions, or, even perhaps, the option of
references to the European Commission as a neutral arbiter on new or technical points (if this was
helpful).
Relationship with Participating States

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Although the legal system of the Energy Community, which is common to its members, would be
governed by legal principles concerning rights and obligations within its jurisdiction, this would not
in itself alter the internal political or legal systems of participating states. Participating states would,
therefore, remain free, as now, to organise their internal political and legal systems as they wish.
It is, however, likely that over time a progressive alignment on the common norms of the Energy
Community would take place. This is because, firstly, participation in the decision-making
institutions of the Community will tend to develop a habit of increased co-operation, and, secondly,
the application of direct effect will create a growing body of mutually understood principles,
progressively widening in scope.
Such a development would be entirely in line with, and indeed likely to reinforce, the many political
initiatives to promote democracy and pluralism in the region. As the European experience has
shown, it is perfectly possible to combine high levels of ethnic, cultural and linguistic diversity
within a common system. Enhanced regional economic stability through the Community would be
likely to help individual participating states carry forward internal reforms.
Relationship with Opec
Membership of the Energy Community would, however, at least as far as oil pricing is concerned,
not easily be compatible with current Opec practices. (Similar difficulties do not arise in the gas
sector.) Agreements by producer countries within the Opec framework to limit oil output so as to
maintain a particular target or reference price are in principle not compatible with prohibitions on
restrictive practices. The norm within the Energy Community would instead become the usual one
in market economies, which is that prices and output targets would be set by individual firms, which
may be public or private, operating within a competitive environment, without consultation with
other parties.
There are, however, ways of addressing this problem.
One possibility is for a transitional period during which the rules of the Energy Community
gradually replace those of Opec. Such transitional periods have frequently been used in Europe, for
example when aspects of the various EU treaties themselves came into effect, or when new member
states join. Within the EU the practical enforcement of anti-trust rules has itself also been a gradual
process, developing over the years.
Another possibility is for the new entity, like the High Authority of the European Coal and Steel
Community, to have powers to intervene on pricing, within certain parameters. For example,
although in the Coal and Steel Community there was a prohibition on various forms of unfair and
discriminatory pricing, the High Authority retained reserve intervention powers, in consultation with
member states, to fix maximum coal and steel prices and also, in a situation of "manifest crisis", fix
minimum coal and steel prices, and production quotas. Similar reserve powers, to be used in
exceptional circumstances, and subject to various controls, might be granted to the new entity.
A third possibility is for safeguard mechanisms to be invoked by any participating state in a crisis,
where vital national interests are at stake. What constitutes such vital interests would be for
agreement between participating states.
Finally, recent ideas put forward in the context of the EU-GCC energy dialogue for reform of
primary and secondary trading on the oil market could, if implemented, have a positive impact on oil
price formulation within the Energy Community.
Relations with the Rest of the World

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From the outset close co-operation with the EU is likely to be needed to set up the Community. The
EU could give very great assistance in terms of drawing up the treaty, creating institutions and
providing judicial co-operation. The existence of a large body of EU case law could be valuable in
giving guidance (and therefore certainty) over parallel disputes within the Community (much as in
EU member states the adoption of domestic competition laws has been rendered easier by drawing
on already existing EU case law). No doubt the EU would stand willing to assist in many practical
ways.
Over the longer term the Community and the (enlarged) EU would be likely to grow closer. When
the point is reached that similar economic rights and obligations prevail in the two regions
discussions about the terms of future arrangements will simplify.
Other regions of the world with an interest in Middle East stability, such as the US, India and China,
could equally be expected to support the Community, in a variety of ways.
The Community itself may want to develop new forms of relationship with bordering Central Asia,
and countries such as Azerbaijan, Kazakhstan and Turkmenistan with large fossil fuel reserves.
Stimulating Regional Investment
One fruitful area for the Energy Community to work on would be stimulating much needed
increased investment in production capacity, pipeline infrastructure and economic diversification
programmes in the Middle East. This could comprise both private inward investment and directly
raising new capital.
Firstly, improved regional stability will be likely to render the Middle East more attractive for
private investment, whether from indigenous capital held abroad returning to the region or from
other external sources, including, but not limited to, private or state-run oil firms. The rules under
which such increased inward investment can take place could be drawn up by the Community, and
then implemented by the new entity.
Second, in addition to having powers to regulate inward investment, the new entity could, like the
original European High Authority, have its own financial resources and also powers to raise capital
on behalf of the Community, from public and private sources. If, like the High Authority, capital
could be raised on terms more advantageous than those available to individual participating states
(because better investor guarantees could be given), a channel could then be opened to direct finance
on a potentially large scale into the regional oil and gas industry, and also to related economic
sectors.
A banking arm of the new entity could, for example, take on the underwriting and vetting of large,
technically complex, capital-intensive projects of particular regional interest, so providing
transparency and high quality professional advice.
A regional approach to investment would also allow an overall view to be taken of under-investment
in reserves, refineries, pipelines and port infrastructure, so encouraging flows to countries where at
present investment is minimal.
In the gas sector, for example, the development of the projected Gulf Cooperation Council gas grid
appears a priority, allowing inter-connection of gas producer and gas consumer countries in the
region, and thus stimulating the market for gas for electricity power generation, and so indirectly
many other forms of economic activity.
A further approach would be to promote energy sector diversification (that is, to move beyond pure
oil and gas production into developing related economic sectors like petro-chemicals and plastics,

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thus creating new employment opportunities), and also regional renewable energy programmes,
such as solar power, to provide a counterbalance to fossil fuels. Linked water desalination schemes
may also be developed.
Conclusions
The method proposed in this paper cannot, of course, be imposed from the outside on the Middle
East. It merely offers, for consideration, a possible way of moving beyond a situation which is
generally thought to be blocked, and an improvement on mechanisms such as those of Opec which
are economically and politically distorting, and not working well. It will be for countries in the
region to take matters further, perhaps initially within a framework such as the Gulf Cooperation
Council.
Negotiating and agreeing the legal texts to give effect to these proposals would remain entirely
within the hands of countries in the region who wished to participate, and so many points of detail
could be addressed at that stage.
It is by no means necessary that the European model be transposed directly. Indeed it may be
possible to improve on it, in the light of experience.
Irrespective of the details, the Community approach has many merits. The peaceful resolution of the
Arab-Israeli conflict; the political and economic regeneration of Iraq; and the promotion of political
and economic reforms in a wide number of countries in the region will all be rendered easier if
regional stability itself can be assured. An Energy Community designed to do this, in an even-
handed way, owned and operated by the countries of the region, tolerating differences and
promoting justice and common values, could have a crucial part to play.
April 2006
(* David Harrison is an EU/competition lawyer and Philip Ward an investment banker. They write
here in a personal capacity.)