Why an oil firm’s legal win is bad news for climate action
Offshore oil platforms are seen at the Bouri Oil Field off the coast of Libya August 3, 2015. Oil prices lurched 5 percent lower on Monday to their lowest since January, taking global benchmark Brent below $50 a barrel as weak factory activity in China deepened a commodity-wide rout. REUTERS/Darrin Zammit
Climate researchers are concerned about the impact of an international energy treaty, under which UK-based oil firm Rockhopper was awarded over 190 million euros.
Kyla Tienhaara is a Non-Resident Research Fellow with the Boston University Global Development Policy Center and Rachel Thrasher is a Researcher with the Boston University Global Development Policy Center.
In a decision that could have a chilling impact on climate policy in Europe and around the world, a panel of three arbitrators has unanimously awarded UK-based oil firm Rockhopper more than 190 million euros in compensation for the Italian government’s refusal to grant it an offshore oil concession.
The dispute originates in Italy’s efforts to ban oil drilling within 12 nautical miles of the coast. Local opposition to oil and gas exploration, particularly in the aftermath of the Deepwater Horizon oil spill in the Gulf of Mexico, resulted in an initial halt to offshore oil concessions in 2010. The freeze on concessions was temporarily lifted in 2012. Rockhopper would have been aware of this history when, in 2014, it acquired Mediterranean Oil & Gas (a company with an exploration permit that had been denied a concession) for £29.3 million. In December 2015, the Italian government re-introduced the ban on coastal concessions, and in response, Rockhopper brought a claim against Italy under the Energy Charter Treaty (ECT) in 2017.
The ECT is an investment treaty signed in 1994 that originally aimed at increasing investment in the energy sector. It currently has 50 member countries, predominantly in Europe. Like other investment treaties, it includes the highly controversial investor-state dispute settlement (ISDS) process, which allows foreign investors to bring claims against governments when policies negatively impact them. In ISDS, investors can make claims for compensation that are many times what they initially invested.
This means fossil fuel companies can profit from legal claims against climate policies. These companies will then likely re-invest some of these profits in further fossil fuel projects—for example, Rockhopper says its award will help finance the company’s drilling plans in the Falkland Islands.
While there are thousands of bilateral investment treaties, most of which provide access to ISDS, the ECT is the most utilized by investors. Italy recognized the problems with ISDS prior to Rockhopper launching its case and withdrew from the ECT in 2016. Unfortunately, a “sunset clause” in the treaty provides continuing protection for existing investments for 20 years.
There is huge potential for more Rockhopper-type disputes under the ECT and other investment treaties. In a study we published in Science earlier this year, we showed that 19% of oil and gas projects that are incompatible with a 1.5C pathway for mitigating the impacts of climate change are protected by treaties. This amounts to $340 billion in potential awards for oil and gas companies. In a further policy brief, we demonstrated that 19% is likely an underestimate, as corporations are easily able to restructure their investments to access treaties with ISDS, and are being advised by law firms to do so.
The Rockhopper ruling sends a chilling message to governments: if you cancel oil and gas projects in line with climate science, you could end up having to pay hundreds of millions, or even billions, in compensation.
It comes as members of the EU contemplate whether to accept the deal for a “modernized” ECT or to make an exit. The European Commission is arguing that the ten-year phase out for protection of fossil fuels assets in the EU and UK is sufficient to align the ECT with the Paris Agreement.
This is a critical decade for climate action and the modernization deal is too little, too late. A coordinated withdrawal from the treaty that neutralizes the sunset clause for those leaving would be far preferable. Such a withdrawal would likely substantially reduce protection for assets in the EU and the UK.
It isn’t just the EU and the UK that need to act. There are thousands of investment treaties threatening climate action that provide no public benefits. A coordinated plan to terminate them as quickly as possible is urgently needed.
With so much at stake, the international community cannot afford to ignore the dangers of ISDS any longer.
Any views expressed in this opinion piece are those of the author and not of Context or the Thomson Reuters Foundation.
LATEST ON CONTEXT