France the latest to renounce Energy Charter Treaty

Last week, France announced its decision to renounce the Energy Charter Treaty, becoming the latest in a growing number of European countries to abandon an international agreement that appears to have outlived its usefulness.

The ECT has been in force for nearly thirty years. It was created in 1994, following the disintegration of the Soviet Union. Many of the former Soviet republics are rich in oil, gas and coal, and western Europe had a high demand for those resources. The driving force behind the ECT was a desire to create a framework within which the energy market in the west, and the energy production in the east, could be integrated. The ECT – which deals extensively with trade, traffic and investment in the energy sector – was signed in Lisbon in 1994 and entered into force in 1998. It currently has 51 member states.

Over time, however, many of the parties to the ECT have come to regard its terms as unhelpfully restrictive. The difficulty lies in the investment provisions, which require host nations to treat foreign investors in the energy sector fairly and equitably, and prevents them from expropriating (or extinguishing) foreign investments. Investors who consider that these promises have been breached are able to bring claims through international arbitration. And many of these claims have been very substantial.

The best-known of these is the Yukos case, an action brought against Russia by investors in the Yukos oil company. Between 1996 and 2003, Yukos was a highly successful operation, producing about one fifth of Russia’s oil output. But in 2003, its main shareholder was arrested, the company was served with a massive tax bill it was unable to pay, and Yukos was broken up and its assets given to state-owned entities. Yukos shareholders commenced an arbitration against Russia and were awarded damages of US$50 billion, the largest international award on record (although its enforcement remains an ongoing battle).

The facts of the Yukos case are extreme: a more pressing problem for many western governments is that the investment provisions of the ECT inhibit regulation of the energy sector. Spain, for example, offered very generous subsidies in the solar energy sector (partly in an effort to reduce its dependency on imported gas). When those subsidies were later reduced or withdrawn, investors sued, arguing that they had invested on the basis of a legitimate expectation that the level of subsidy would remain constant. Similarly, governments who wish to regulate for a reduction in greenhouse gases can’t do so without imposing restrictions on the burning of fossil fuels – and the owners of those assets may well be able to argue that they are entitled to compensation for the extinction of their investments. This was the reason French president Emmanuel Macron gave for his decision to leave the pact: that membership of the ECT was inconsistent with “our commitment to reduce carbon emissions”. France is not alone: Spain, the Netherlands and Poland have stated that they will leave the ECT, while Germany and Belgium are considering their options.

The ECT was created partly out of the desire of western countries to secure reliable supplies of fossil fuels from eastern Europe; now that the demand for those fuels is in decline, the treaty seems to have lost much of its purpose.

Australia’s stance on the ECT was curious. It was a signatory to the treaty in 1994, but made its accession to the ECT subject to ratification. But Australia never ratified the treaty, and in September last year it formally withdrew. This means that Australia’s regulation of the energy market is free from the constraints imposed by the threat of investor claims under the ECT. Not entirely free, however, because Australia is still party to more than twenty international treaties that contain investor protection provisions and arbitration clauses. Investors in the energy sector from, say, China or Singapore, could yet take action against the Australian government if regulatory decisions in the sector have a negative impact on their investments. Which means that any decisions the government makes on fuel prices, or the reduction of greenhouse gases, may carry a hidden cost. The Albanese government faces a number of challenges in the energy sector in the near future: whether its actions are inhibited by the threat of investment claims remains to be seen.