On 23 August 2022, the ICSID Arbitral Tribunal in Rockhopper Italia S.p.A., Rockhopper Mediterranean Ltd, and Rockhopper Exploration Plc v. Italian Republic (ICSID Case No. ARB/17/14) ordered Italy to pay Rockhopper EUR 190 million in compensation plus interest – an amount six times more than the £33m Rockhopper is estimated to have invested in the project.
An anonymous spokesperson for Rockhopper told The Guardian that the tribunal’s award “was on the basis of lost profits rather than the sum invested, so that [the £33m] is not really the metric.”
According to Rockhopper, all costs associated with the arbitration were funded on a non-recourse (“no win, no fee”) basis from a specialist arbitration funder. After payments due to the arbitration funder, Rockhopper expects to retain approximately 80% of the award (assuming full recovery of the award).
Moreover, under a legal agreement with the Falkland Island Government, Rockhopper is prevented from making any form of distribution.
On the arbitration outcome, Rockhopper’s CEO Sam Moody, said: “This positive milestone builds on our recent transaction with Navitas and while work still needs to be done on Sea Lion, we believe after collection of the award, it will make a material contribution towards our share of the development costs.”
“It is a travesty that an oil company like Rockhopper can get this massive payout through secretive tribunals in the Energy Charter Treaty. It is far more than the company actually invested. Fossil fuel companies are making obscene profits in the cost of living crisis and now they also want to make more money when governments actually take action to limit something like offshore oil drilling”.
In his view, this case will have a chilling effect on climate action and there is a need to:
“get rid of this shadowy legal system that poses a threat to the climate – not in ten years time as governments are proposing at the moment, but right now. Our world is burning and we need to be cancelling climate-bomb fossil fuel projects without delay. The UK and countries across Europe should exit the Energy Charter Treaty in a coordinated withdrawal and put an end to the risk of being sued.”
This dispute is one of many submitted to arbitration under the ECT. It clearly reflects the barrier that the protection of fossil fuel investments under the ECT represents for policymakers seeking to adopt measures to reverse climate change.
Yamina Saheb, an ECT official turned whistleblower, who is also the lead author of a UN Intergovernmental Panel on Climate Change (IPCC) working group paper on climate mitigation stated that “[i]f policymakers want to make the EU climate neutral they must withdraw from the energy charter treaty and stop protecting fossil fuel investments. The choice is between climate neutrality and the treaty. We cannot have both.”
In June, the ECT Contracting Parties agreed in principle on the modernisation of the ECT. The modernization draft text, which was communicated to the Contracting Parties by 22 August 2022 for adoption by the Energy Charter Conference on 22 November 2022, introduces a novel “flexibility mechanism” allowing Contracting Parties to exclude new fossil fuel related investments from investment protection and to phase out protection for the already existing investments.
Further, this phasing out of protection will take place within a shorter timeframe than in the case of a withdrawal from the ECT, for both existing and new investments: existing fossil fuel investments will be phased out after 10 years from the entry into force of the relevant provisions (instead of 20 years under current rules), same as new investments made after 15 August 2023.
The envisaged exclusions would not, as a matter of principle, affect investment protection in the territory of other Contracting Parties, unless they opt to apply them vis-à-vis investors from the aforementioned Contracting Parties reciprocally.
According to the European Commission, the new text will also confirm that an investor from a Contracting Party that is part of a regional economic integration organisation (REIO), like the EU, cannot bring an Investor-State dispute settlement (“ISDS”) claim against another Contracting Party member of the same REIO. This should finally bring an end to the intra-EU applications under the ECT that the Court of Justice of the EU has found incompatible with EU law in recent judgments.
In a nutshell, the ECT would continue to protect fossil fuel investments in the EU and UK for 10 years.
Laurence Tubiana, chief executive of the European Climate Foundation and architect of the Paris Agreement on climate change, states that “the Energy Charter Treaty (ECT), is one of the last obstacles standing in the way of Europe’s phase out of fossil fuels. If current negotiations to reform the treaty fail, then the EU must consider a coordinated withdrawal.”
On top of the 'regulatory chill' already caused by the risk of an agreement such as the ECT, the energy crisis generated by the Russian invasion of Ukraine needs to be considered, which has exposed Europe's short-sighted dependence on fossil fuel imports from Russia.
As energy prices and supply fears have increased after Russia’s invasion of Ukraine, European countries have backtracked on their plans to phase out fossil fuels in the immediate future and have become more willing to accept new fossil fuel projects.
According to a Rockhopper press release dated 6 January 2016, in December 2015 the Italian Parliament approved the 2016 Budget Law which reintroduced restrictions on offshore oil and gas activity, including a general ban on exploration and production activity within 12 nautical miles of the coast of Italy. The Budget Law came into force on 1 January 2016.
Based on that general ban, the Ministry of Economic Development decided, in February 2016, not to award Rockhopper a production concession covering the Ombrina Mare oilfield, located within 12 miles of the coast of Italy in the Adriatic Sea. Notwithstanding, as noted by Rockhopper in that press release, they were granted a 12-month extension to the suspension of the Ombrina Mare exploration permit to 31 December 2016.
An abrogative referendum on oil and natural gas drilling was held in Italy on 17 April 2016 to decide whether energy companies should be able to keep extracting oil and gas from more than 40 offshore platforms within 12 nautical miles off the coast until the exhaustion of the reserves.
Although 86% of the voters voted against the continuation of the extraction, the participation of only 31% of those eligible to vote fell short of the 50% threshold needed to make the referendum valid.
On 14 April 2017, alleging that Italy had failed to fulfil the legislative and regulatory commitments made in relation to its investments in the Ombrina Mare oil and gas field, Rockhopper Mediterranean Ltd (British), Rockhopper Exploration Plc (British) and Rockhopper Italia S.p.A. (Italian) submitted the dispute to the International Centre for Settlement of Investment Disputes (ICSID) on the basis of the Energy Charter Treaty (ECT), which entered into force on 16 April 1998, and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), which entered into force on 14 October 1966.
During the proceedings, on 28 March 2018, Italy submitted an Objection to Jurisdiction under Article 41(1) of the Arbitration Rules. The Respondent claimed that the ECT and the ICSID Convention could not provide jurisdiction between nationals of one EU Member State and another EU Member State.
On 26 June 2019, the Tribunal denied Italy’s Intra-EU Jurisdictional Objection.
The ICSID Tribunal was composed of Klaus REICHERT (German, Irish), as President, appointed by Co-Arbitrators; Charles PONCET (Swiss), appointed by Rockhopper; and Pierre-Marie DUPUY (French), appointed by the Respondent.
Rockhopper was represented by King & Spalding, from London, U.K. and New York, NY, U.S.A., and Respondent was represented by the Avvocatura Generale dello Stato (State Attorney General's Office).