After a ban on new drilling along its coast, Italy may be required to pay damages in the millions to a UK oil firm.
This case has caused outrage over the secretive international tribunals where fossil fuel companies can sue governments to pass laws protecting the environment. There are fears that these cases slow down climate action. This raises concerns that the UK could be at risk from oil companies suing to stop green policies. This could potentially slow down climate action.
Rockhopper Exploration, which is based in Salisbury (Wiltshire), purchased a license to drill for oil off the Adriatic coast of Italy in 2014. The project was already met with opposition from tens to thousands of people. The campaign won the support of the Italian parliament within two years. They banned oil and gas projects within 12 nautical miles of the coast.
Rockhopper used an obscure legal procedure called investor-state dispute resolution (ISDS) to fight back. This allows companies to sue governments for adopting policies that could adversely affect their future earnings. According to reports, Rockhopper has spent $29m on the offshore project (PS21m) and is seeking damages of $275m based upon future oilfield profits.
According to the company, it was advised by Italy that it had “strong prospects” of recovering substantial monetary damages as a result.
Devised in the 1950s by a banker and the chief counsel for oil company Royal Dutch Shell, ISDS was designed to protect companies’ investments in newly independent countries, where it was feared that governments might try to wrest back control of their natural resources. It was adopted by thousands of investment agreements.
Despite decades of being in business, fossil fuel companies continue to use it to safeguard their assets against climate legislation.
This is because ISDS is part of the energy charter treaty, (ECT), which means that energy companies can sue any 53 signatory countries – even the UK – if they take actions that could affect their future earnings such as prohibiting the exploitation of oil and coal reserves.
RWE, a German energy company, has sued the Netherlands for EUR1.4bn (PS1.2bn), over its plans to eliminate coal.
These cases could slow down the response to the climate crisis as governments wait for the results of legal battles that could last years. Ruth Bergan, the senior advisor at Trade Justice Movement, said: “People are looking at these cases and there’s evidence that they look elsewhere and it puts the brakes in their own policies. It just adds an enormous price tag to climate action, and we cannot afford it.”
While the UK has not yet been sued under the ECT, an analysis by Investigate Europe shows it is the most vulnerable of all the countries in Europe, with more than PS120bn worth of fossil fuel infrastructure owned by foreign companies. Bergan believes there are concerns that the UK might delay or weaken climate change legislation to avoid being sued.
Lawyers have confirmed that governments are aware of the possibility of litigation when developing policies. Toby Landau, a top QC in ISDS cases, said in an interview with the London School of Economics: “As a practitioner, I can tell you that there are states who are now seeking advice from counsel in advance of promulgating particular policies in order to know whether or not there is a risk of an investor-state claim.”
There have been lengthy talks aimed at reforming the treaty, which resumed this month, but a leak of diplomatic cables suggests they face failure. France and Spain want to leave the treaty but it would not protect them against claims regarding past investments. Italy has left the ECT in 2016 but is currently being sued under a “sunset” clause that states former members will be subject to the treaty for twenty years after they leave.
Several London-listed companies have recently launched lawsuits under ISDS, including mining companies Anglo American and Glencore, which are suing the Colombian government after they were banned in 2017 from exploiting part of a huge opencast coalmine because of its impact on the environment.
After Slovenia’s environment agency requested that Ascent Resources conduct an environmental assessment (EIA), Ascent Resources, listed on Aim, sued Slovenia. The EIA could have been used to determine if the project would be harmful to water resources.
Ascent stated that six of Slovenia’s ministries and conservation organizations concluded that an EIA wasn’t required, so Ascent claimed the request was “manifestly arbitrarious and unreasonable”.
ISDS is particularly powerful as any state’s assets can be taken abroad to pay damages. Scottish oil and gas company Cairn Energy, for example, is attempting to seize the planes of state-owned Air India after India was ordered to pay the company $1.2bn in damages under ISDS.
ISDS advocates argue that foreign investment is encouraged by the protection of companies against unfair treatment by governments. Guillaume Croisant is a managing associate at Linklaters. He says that ISDS arbitrations are a powerful tool for foreign investment.
ISDS’s main flaw is its inability to provide justice. Companies cannot sue governments and the system is not available to foreign investors. In the past, the cost of legal fees – which average $8m a case – has also made it the preserve of multinational corporations. However, there are a number of specialist funders that offer a “no win, no fee” service for international arbitral proceedings.
Rockhopper, who used one of these services for ISDS, has a stock value of only PS42m. An ISDS award worth hundreds of millions of Pounds would be significant to its finances.
Analyst at stockbroker Arden Partners Daniel Slater says any windfall would “tremendously help” fund Rockhopper’s Falklands project. This is an untapped oilfield that contains 1.7bn barrels. If burned, it could produce approximately one-and-a-half times the annual UK greenhouse gas emissions, according to Ember.
Asked how that project fits with the International Energy Agency’s warning against investing in new fossil fuel projects, Rockhopper declined to comment.
