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The Modernisation of the Energy Charter Treaty: So Close, And Yet So Far

The Modernisation of the Energy Charter Treaty: So Close, And Yet So Far Background Image

By Louise Woods, Sophie J. Freelove, and Simon Michau*

On 22 November 2022, the Energy Charter Conference is expected to vote on the proposed modernisation of the Energy Charter Treaty (the “ECT” or the “Treaty”), following an agreement in principle reached on 24 June 2022, after years of negotiations led by the EU Commission.

Yet the fate of the proposed modernisation is now uncertain.

As of the date of writing, seven European Union (“EU”) Member States (Poland, Spain, The Netherlands, France, Germany, Slovenia, and Luxembourg) have announced their intention to withdraw from the ECT,1 and have successfully blocked the EU Council vote in favour of the modernisation, and are now leading calls for the withdrawal by EU Member States and the EU itself as a block.

The Modernisation of the Treaty

The main criticism levied against the ECT, and one which has been widely broadcast recently, is the investment protection afforded to investors in traditional fossil fuel projects, which critics argue unduly burdens countries trying to shift from traditional fossil fuel projects to renewable energies.

Negotiations to modernise the ECT had been led by the EU Commission, whose mandate was to bring the Treaty in line with the 2015 Paris Agreement and limit, or end, the protection of fossil fuel investments. Among the proposed amendments are a new ‘flexibility’ mechanism that would allow the EU and the UK to phase-out the protection of existing fossil fuel investments under the ECT after 10 years, and a review mechanism aimed at ensuring the ECT would keep up with technological and political developments.

However, some have argued that the amendments did not go far enough.

The EU Member State exodus

While the EU Commission had previously indicated that it still supported the amendments to modernise the Treaty, the EU Council vote (which would approve the EU voting in favour of the modernisation, as the EU is a signatory (“Contracting Party”) in its own right) was already delayed twice last week and has subsequently failed to reached the required qualified majority approval from EU Member States, having been blocked by the withdrawing EU Member States on 18 November 2022. Not voting in favour of the modernisation will now likely put pressure on the EU Commission to organise a coordinated EU withdrawal from the ECT.

However, in its present form, the Treaty has a 20-year sunset clause, meaning investments retain protection for 20 years after a country’s withdrawal from the ECT. The recent Rockhopper case against Italy offered a case in point: in August 2022, an International Centre for Settlement of Investment Disputes (“ICSID”) tribunal awarded the British oil and gas exploration company €190 million in damages due to Italy’s refusal to grant it a production concession following the discovery of hydrocarbon deposits, in light of new restrictions on exploration and production introduced in Italy during the authorisation process. A claim under the ECT was launched in 2017 and despite Italy having withdrawn from the ECT in 2016, it was still bound by the 20-year sunset clause.

For now, the EU Commission is seeking to delay the vote on the modernisation, and to remove it from the agenda of the ECT Summit taking place on 22 November, while it tries to reach a compromise with the withdrawing countries. The Secretary of the Energy Charter Committee has so far indicated that the vote will go ahead; however, a unanimous vote of the Contracting Parties present and voting is required to reform the ECT.

It currently remains to be seen whether the withdrawing countries will still participate in the Energy Charter Conference’s vote, whether any additional countries will announce their withdrawal from the Treaty before the vote takes place, and how the EU developments will impact the vote to modernise the ECT more generally, particularly given other countries (such as Uzbekistan, Japan and Kazakhstan) have previously indicated a reluctancy to reform.

We will continue to carefully monitor developments.

* Simon Michau is a trainee in our London office

1 Italy had previously withdrawn from the Treaty in 2016.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.