The Energy Charter Treaty’s Protection of 1.5°C-incompatible Oil and Gas Assets
After several years of negotiations to “modernize” the Energy Charter Treaty (ECT), members must decide by June 24, 2022, whether to amend provisions of the treaty, leave it as is or withdraw from it entirely. The ECT is the only international investment treaty with a sectoral focus on energy. It has been ratified by 50 countries, predominantly in Europe, since its signing in 1994, and its aim is to promote and protect energy investments among its member states.
The most controversial aspect of the ECT is the investor-state dispute settlement (ISDS) mechanism, which provides foreign investors the option of pursuing claims for monetary compensation in international arbitration when a government measure negatively impacts their investment.
A recent article in Science from researchers at the Boston University Global Development Policy Center, Colorado State University and Queen’s University in Canada reported that the ECT is the greatest contributor to potential ISDS claims over the forced stranding of oil and gas assets that do not fit in a 1.5°C carbon budget. The authors found that the ECT applies to 19 percent of all treaty-protected oil/gas assets that would be excluded from the International Energy Agency (IEA) Net-Zero by 2050 (NZE) energy transition pathway. The net present value (NPV) of the assets covered solely by the ECT was found to be between $3 billion to $16 billion (depending on the oil price used in the calculation). A further $2 billion to $4 billion worth of projects were “under development” and would need to be cancelled in a more aggressive climate mitigation scenario. However, these findings were based on a methodology with limitations.
A new policy brief by the authors of the Science study addresses some of these limitations in more detail and provides evidence that the original figures are an underestimate of the true extent of the ECT’s protection of 1.5°C-incompatible oil and gas assets.
- Investigations of the corporate structure of two large European oil and gas companies (Equinor and Eni) that are headquartered outside of the ECT indicate that many of their investments in the ECT zone are likely channeled through subsidiaries in the Netherlands (an ECT member).
- Adding the investments of these two companies alone would increase the NPV protected by the ECT by between $1.4 billion to $5.4 billion.
- Governments should assume that even if investments are not currently structured through subsidiaries in ECT member states, they could easily be restructured and therefore all the 1.5°C-incompatible foreign-owned oil and gas assets hosted in ECT states create potential liability:
- Depending on the oil price, the range of possible NPVs for the NZE-incompatible foreign-owned oil and gas assets hosted in ECT states is $17.7 billion to $74.2 billion.
- Depending on the oil price, the range of possible NPVs for the foreign-owned oil and gas assets “under development” hosted in ECT states is $13.7 billion to $37.3 billion.
- Depending on the oil price, the range of possible total NPVs is $31.4 billion to $111.5 billion.
- As the ECT protects far more oil/gas production than any other treaty, the authors concluded in the Science article that it should be prioritized for termination. In the brief, they maintain this conclusion but add that new evidence suggests that the amount of liability to be avoided through termination is much higher.
- Given the evidence that Equinor and Eni are currently enjoying the protection of the ECT even though the countries they are headquartered in either never ratified the agreement (in the case of Norway) or unilaterally terminated it (in the case of Italy), the authors emphasize that an exclusion of intra-European Union (EU) investor-state disputes under a modernized ECT would be insufficient to reduce the risk of disputes arising over oil and gas assets within the EU. Companies will simply restructure their assets using subsidiaries in non-EU countries like the United Kingdom.