Int’l Treaty allows Oil Company to sue Italy for banning oil exploration

Aug 02, 2021 News

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– Guyana could face similar fate

By Carlos Gonsalves

Kaieteur News – According to international media house, The Guardian, Italy could be forced to pay millions of pounds in damages to a UK oil company after banning new drilling near its coast.
This perplexing occurrence was made possible by an obscure legal mechanism which allows fossil fuel companies to sue governments. The suit against the Italian government follows the passage of laws to protect the environment and has sparked outrage amid fears that such cases are slowing down action on the climate crisis.
According to the Guardian, oil company Rockhopper Exploration, based in Salisbury, Wiltshire, bought a licence to drill for oil off Italy’s Adriatic coast in 2014. The media house notes that there had already been a wave of opposition to the project, with protests that drew tens of thousands of people. Within two years, the campaign won over the Italian parliament, which imposed a ban on oil and gas projects within 12 nautical miles of the Italian coast.
Following this decision, Rockhopper fought back using a obscure legal mechanism known as investor-state dispute settlement (ISDS), which allows companies to sue governments for introducing policies that could affect their future earnings. Local reports on the matter had suggested that Rockhopper had spent US$29m (£21m) on the offshore project to date. The oil company lawsuit sought damages of US$275m based on expected future profits from the oilfield, with the company saying that it has “strong prospects of recovering very significant monetary damages” as a result of Italy’s actions.

A look at the Investor State Dispute Settlement mechanism
As aforementioned, the ISDS allows for an investor to sue a State on the ground that a particular policy decision could significantly affect their future earnings. The mechanism was originally devised in the 1950s by a banker and the chief counsel for oil company Royal Dutch Shell, with its original purpose being to protect companies’ investments in newly independent countries, where it was feared that governments might try to wrest back control of their natural resources. The concept gradually took hold and it is now written into thousands of investment treaties worldwide.

Decades later, fossil fuel companies are using it to protect their assets, this time in the face of an oncoming wave of climate legislation that seeks to enact more stringent control and mitigation mechanisms for the impacts of oil and gas exploration. The Guardian highlights that this is achieved by virtue of the fact that ISDS forms part of the Energy Charter Treaty (ECT), meaning energy companies can sue any of the 53 signatory countries – including the UK – if they take action that could dent those companies’ future earnings, such as banning the exploitation of coal, oil and gas reserves.
The German energy company RWE, for instance, is suing the Netherlands for €1.4bn (£1.2bn) over its plans to phase out coal.
Many stakeholders have since contended that cases like these could slow down action on the climate crisis, as governments await the outcome of legal battles that could take years to resolve. Ruth Bergan, senior adviser at the campaign group Trade Justice Movement, says: “People are watching these cases and there is evidence that they look at what is happening elsewhere and it puts the brakes on their own policies. It also just adds a huge price tag to climate action and we can’t afford it.”
Lawyers have also confirmed that governments are acutely aware of the threat of litigation when developing policy. This has been noted by Toby Landau, a top lawyer in ISDS cases who recently 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.”
The Guardian highlights that many signatories have recognized the potential threat the treaty poses to climate action, and points out that France and Spain both want to withdraw from the treaty, but that would not protect them from claims related to past investments. Additionally it notes that Italy left the ECT in 2016 but is being sued under a “sunset clause” that means former members are subject to the treaty for 20 years after they have left.
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. Aim-listed Ascent Resources is suing Slovenia after the country’s environment agency asked it to carry out an environmental assessment (EIA) before embarking on a fracking project, which activists say could pollute critical water sources nearby. The company said six of Slovenia’s government ministries and conservation organizations concluded that an EIA was not required, so the request was “manifestly arbitrary and unreasonable”.
ISDS is considered particularly powerful because a state’s assets abroad can be seized in order to pay any 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 US$1.2bn in damages under ISDS.
Proponents say that by protecting companies from unfair treatment by governments, ISDS encourages foreign investment. The main criticism of ISDS is that the justice it provides is imbalanced because governments cannot sue companies, and it is only open to foreign investors. In the past, the cost of legal fees – which average US$8m a case–, has also made it the preserve of multinational corporations. A number of specialist funders have, however, emerged offering a “no win no fee” service for international arbitrations.
Rockhopper, which used one of these services to bring its ISDS case, has a stock market value of just £42m, so an ISDS award potentially worth hundreds of millions of pounds would be significant for its finances. When asked how the project fits with the International Energy Agency’s warning against investing in new fossil fuel projects, Rockhopper declined to comment.
Some regional stakeholders believe the aforementioned developments spell worrying news for Guyana. Despite the country not being a signatory to the energy charter treaty, it is still liable to be sued under the ISDS legal mechanism, and in fact has already been named as a respondent State under the ISDS, according to the United Nations International Investments Agreement report 2020. The 2001 matter saw UK Company Booker Plc. Suing, and eventually settling with the Guyana Government for over US$ 9,000,000 for a compensation dispute relating to sugar industry.

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