A stable and predictable legal framework is a key component in any decision by energy industry players when evaluating international investments, projects, and contracts. Many risks can be managed through sound drafting of commercial agreements, guarantees, insurance, and the like. However, other risks, such as the expropriation of entire projects or assets, the sudden imposition of new and potentially discriminatory tariffs or taxes, or the withdrawal of regulatory incentives, can be harder to guard against. For 25 years, the Energy Charter Treaty (ECT) provided energy companies with an additional layer of protection for many of their investments. For reasons that owe more to politics than anything else, its future is now in serious doubt.
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In addition to affording a series of substantive protections to energy companies from one of the roughly 50 States party to the ECT when investing in another State party, the ECT enables investors to enforce those protections in a neutral forum by means of international arbitration. More than 150 cases have been brought under the ECT, covering a range of issues including unfair offtake tariffs, failure to pay for gas deliveries, closure/cancellation of pipelines, and so on.
Recent times have seen the ECT come under increased scrutiny. A list of countries – including the UK, France, Germany, Spain, and the EU (which had executed the ECT separately) – have all either questioned their ongoing membership of the treaty or announced the intention to abandon it.
Negative sentiment toward the ECT is often couched within a narrative of concern regarding climate change goals. Detractors maintain that the treaty is incompatible with the transition to cleaner, cheaper energy sources, portraying it as a vehicle for protecting the fossil fuel industry at the expense of net zero goals.
In truth, the ECT covers all sectors of the energy industry, from coal to crude to gas to nuclear and, of course, renewables. According to the ECT website, 61.5% of the cases (94 cases) brought under the treaty have been renewables cases (against 54 fossil fuels cases).
A further irony is that this negative sentiment has come about at a time when substantive work to modernise the ECT, including enhanced provisions emphasising States’ rights to regulate in the interests of the environment and climate goals, had nearly concluded. Judging from the current chorus of cynicism, however, these reforms may never gain traction.
One interesting caveat is that the ECT currently has a 20-year sunset clause, meaning signatories should still be bound for two decades after exiting. There is a push to reduce that to 10 years in the draft modernised version of the ECT.
That will buy investors a grace period. Even so, energy players, including those in the gas/LNG sector, will need to evaluate longer term projects and contracts in relevant jurisdictions on the basis that this added layer of protection may well be gone or diminished before long.