Outrage as Italy ordered to pay out millions to oil investor over Energy Charter Treaty claim

24/08/2022

Outrage as Italy ordered to pay out millions to oil investor over Energy Charter Treaty claim

The huge sum that Rockhopper receives in compensation is almost nine times more than its initial investment
The ECT allows the oil giant to sue for the loss of future profit, not just money actually spent
Other oil and gas producing countries in Europe could face similar compensation claims in future

Brussels, 24 August 2022 – In a case that serves as a timely reminder of the huge power of the fossil fuel industry, the Italian state has been ordered to pay EUR 190m plus interest to UK oil and gas company Rockhopper Explorations, as the company announced. This means the sum actually payable is in excess of EUR 250m. This follows a decision in favour of Rockhopper by an investor-state dispute settlement (ISDS) tribunal under the Energy Charter Treaty (ECT), which is outrageous especially in the climate emergency and energy crisis that we are experiencing.

The case concerns a 2015 decision the Italian government took in response to public opposition and environmental concern, which saw it ban new oil and gas projects within 12 nautical miles of the coast. The huge sum that Rockhopper was rewarded in compensation is significantly more than its initial investment of €29.2 million ($29 million), but controversially the ECT allows the company to sue for the loss of future profit not just money actually spent.

The ECT is a multilateral trade agreement which protects investments in the energy sector. It has been widely criticised due to the controversial powers it gives fossil fuel companies to sue countries over climate protecting measures that affect their profits. Scientists, and civil society groups warn that it is an unacceptable hurdle to climate action. Rockhopper skirted the Italian national legal system and ignored public opinion, but the ECT gives non-domestic companies the power to circumvent national laws by setting up a parallel justice system which only they have access to.

In 2016, Italy became one of the very few countries that have left the ECT in line with what climate activists are asking for, but under a sunset clause, it can still be taken to court for 20 years after its official exit in relation to investments that existed up to then. This is why campaigners urge countries to withdraw as a coordinated group and neutralise the sunset clause, which legal experts say they can do with a legal agreement made between them called an inter-se.

The lawsuit comes to a head just weeks after countries agreed in principle to a new drafting of the treaty which would make small changes but crucially retain significant protection of fossil fuel investments – a move campaigners call greenwashing. Crucially, this case would still have been possible under the new version of the treaty and other oil and gas producing countries in Europe could face similar compensation claims in the future when limiting extraction or enacting other legislation to phase out fossil fuels, hence why climate groups are calling for countries to withdraw from the Treaty.

Cornelia Maarfield, Senior Trade and Investment Policy Coordinator at CAN Europe said: “The Rockhopper case will have a chilling effect on climate policies in other oil and gas producing countries unless governments act now and defuse the risk of future lawsuits. The Energy Charter Treaty reform has failed to restrain the sweeping powers it gives to fossil fuel firms, so they will continue to demand reparations from taxpayers when their business model is questioned. But instead of withdrawing, European governments are breathing new life into this retrogressive treaty. Instead of willingly renewing their membership under a Treaty that puts them under the yoke of corporate power, European countries must reject the ECT reform outcomes and initiate a coordinated withdrawal instead.”

Campaigners in Italy and the UK are outraged that Italy is being penalised for upholding an environmental protection law, and deeply concerned that ISDS, which will not be updated by changes to the ECT, is incompatible with the measures that governments must urgently take to prevent climate breakdown.

Monica Di Sisto, spokesperson of the Italian “Stop Isds” campaign said: “We ask for an immediate meeting of the Italian government to rethink the trade rules that allow the looting of public finances and the violation of the rights of communities, territories and environment as happened with today’s sentence.”

Enrico Gagliano, of the No Triv national network said: “The responsibility for this onerous sentence does not lie with the Italians who stood up against Ombrina Mare. This very high bill must not be paid by the Italian people.”

Leah Sullivan, campaigner at War on Want said: “It is indefensible that the UK’s trade and investment agreements enable fossil fuel companies to penalise countries for taking the right steps for the climate and environment. The UK must remove ISDS from its trade deals and leave the Energy Charter Treaty as soon as possible. The ECT is also a threat to climate action in the UK – if a future government decides to reverse new coal and oil projects it could leave the UK taxpayer open to huge compensation claims.”

Notes to editors:

On the background to the case in Italy – more info here, and a summary of criticism of the case here:

In 2015, after a large citizen mobilisation, the Italian government banned oil drilling in waters within 12 miles of the coast, effectively banning the Ombrina Mare project, which is 4 miles off the coast.
In 2005 the oil company Mediterranean Oil & Gas had received an exploration permit for the Ombrina Mare oil field and subsequently discovered oil in 2008. The company then applied for a production concession, which was never granted by the Italian authorities.
In 2014, Rockhopper bought the oil company Mediterranean Oil & Gas for GBP 29,3 million.
The company went to court in Italy to obtain the licence, but lost its cases and the subsequent appeal. It later took the case to a tribunal under the ECT.
The case is funded on a no win no fee basis by a litigation fund called Harbour Litigation Funding. They have a useful page on social responsibility.

On the ISDS proceedings

Rockhopper has reportedly asked for US$275 million, while claiming to have invested about US$29 million (US$23 million for predevelopment and US$ 6 million for decommissioning) (Source), this equals about EUR 29.2 at current EUR-US$ exchange rates.
Rockhopper was awarded €190 million “plus interest at EURIBOR + 4%, compounded annually from 29 January 2016 until time of payment. Even if ignoring EURIBOR and only taking into account a 4% interest rate, the sum payable at the end of 2022 already exceeds €250 million (CAN Europe’s own calculations).

On the three arbitrators:

- Chair: Klaus Reichert, has mostly been nominated by investors in the past.
- Nominated by investor: Charles Poncet, was an arbitrator in the infamous Yukos case, almost always nominated by the investor.
- Nominated by Italy: Pierre-Marie Dupuy, the fourth most active arbitrator in ECT cases, usually nominated by states. He said in an interview “Yes, there should be an increase of cases related to climate reforms…”

Other notable points

The Italian State Attorney warned: “A defeat in this arbitration would be extremely serious, because it would give other companies whose 12-miles extraction projects have been blocked the desire to emulate Rockhopper.” (Source)

On the Energy Charter Treaty

Every EU member state apart from Italy is a member of the ECT but under a ‘sunset’ clause Italy can still be taken to court for 20 years after its official exit from the Treaty in 2016.
The Energy Charter Treaty is a multilateral investment agreement, which as of 2021 is ratified by 53 countries including the EU. It was agreed in the 1990s and protects foreign investments in the energy sector.
Under the ECT regime, foreign investors can sue states for almost any decision that impacts the investor’s expected profits – including for climate protection.
These claims are dealt with through a system of arbitration known as investor-state dispute settlement (ISDS). ISDS sets up a parallel justice system of private arbitration tribunals, composed of party-appointed lawyers, circumventing national courts.
The ECT already generated at least 135 investor-state arbitration claims, making it the world’s most litigated investment protection agreement. Notable cases in addition to Rockhopper v Italy include RWE v. Netherlands, Ascent Resources v. Slovenia, Vermilion v. France
Fossil fuel infrastructure protected by the ECT regime is estimated to have a value of €345 billion.
61 coal-fired power plants are currently protected by the ECT – hanging a cloud of uncertainty over phase-out from even the dirtiest of fossil fuels.
The ECT makes climate policies more expensive and legally risky, the International Institute for Sustainable Development (IISD) has warned that it risks undermining the outcomes of COP 26.
As the latest IPCC report clearly reminds us, the clock is ticking on climate change. The IPCC report explicitly warns that the ECT and ISDS can have a chilling effect on climate policies, but ECT parties, including the EU, are wasting time with negotiations to ‘modernise’ the ECT – even though there are very clear signs the talks are failing and the treaty cannot be reformed in line with the Paris Agreement and the Green New Deal