Oil drilling while in the Energy Charter Treaty is economically reckless

Comment: The UK is opening itself up to repeated lawsuits from foreign oil and gas firms if it passes the Offshore Petroleum Licensing Bill

UK's oil drilling while in the ECT is economically reckless

UK prime minister Rishi Sunak visits a gas power plant in Scotland


Editor’s note: On February 22, the UK government announced it would follow some other European states in leaving the Energy Charter Treaty due to members’ failure to agree reforms in line with net-zero emissions goals. Countries that withdraw from the pact can still be sued by energy firms under a 20-year sunset clause.

The UK is considering a new law which would invite applications for new oil and gas production licenses in the North Sea every year.

This Offshore Petroleum Licensing Bill will not help with the UK’s energy security, reduce bills or serve anything but fossil fuel giants’ short-term profits. 

On top of this, if it passes into law, the UK faces the grave risk of economy-wrecking lawsuits.

This is because the UK is a member of the Energy Charter Treaty (ECT) – a multilateral investment pact which allows investors in energy to sue governments over policies that affect their investments in over 50 countries across Europe and Asia.

Investors weapon

The ECT is the most litigated investment agreement in the world. It contains Investor-State Dispute Settlement (ISDS) provisions which are used by fossil fuel companies to deter, delay or raise the cost of climate policies. 

ISDS enables them to sue governments for billion-dollar payouts over their climate policies, in secretive tribunals outside of national legal systems. 

Weak attempts at reforming the Energy Charter Treaty have failed numerous times over the years, and thus many European countries including Germany, France and the Netherlands have decided to exit over the risks to their climate action. 

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The UK government launched a review of its membership last year and is overdue announcing its outcome. 

Recent research by CommonWealth found that at least 40% of the UK’s North Sea oil and gas licenses are owned by foreign investors, many headquartered in ECT member countries like France or Spain.

If the UK government fails to leave the ECT, foreign investment into North Sea oil and gas means not only a headlong sprint in the wrong energy policy direction, but invites a huge bill even if a future government changes course. 

The Labour Party, which is far ahead in the polls, says it will stop new oil production. An election will be held this year.

Coming clash

Carbon Tracker recently showed that North Sea oil and gas companies are financially planning for far slower energy transition scenarios than governments are working to. 

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As a result, they are setting up a clash between climate policies and their financial expectations, raising the risk of ISDS claims.

Producing the first oil and gas from a field can take more than 18 years. By then, the climate policy landscape will be vastly different.

The 1.5 C warming limit is likely to be passed within the next decade or two, so the imperative to reduce fossil fuel use will be even greater. 

The dearth of long-term thinking in Westminster means policymakers are ignoring the risk of leaving the fossil fuel industry with such a powerful weapon.

An investor using ISDS can claim not only for costs sunk by a government policy but for any future lost profit it expected to earn over a project’s lifetime.

These companies can decry far bigger losses than is reasonable given the fast-moving renewables revolution, and ISDS tribunals are rigged to back them up.

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Facing an ECT claim, any reasonable argument the UK may have developed about the environmental, social – even economic – imperative to phase out fossil fuels will have to be left at the door: it signed up to the fossil fuel giants’ charter, failed to leave it when it had the chance, and breached it. 

So much for the polluter pays: the UK taxpayer will have to bail them out.

Failed reforms

There’s no reforming the deadly oil and gas bill, in or out of the ECT. But remaining a member of the treaty adds an incredulous new dimension of fiscal irresponsibility.

The European Commission is proposing a mass withdrawal to neutralise the Energy Charter Treaty’s sunset clause – which extends the right to ISDS claims for 20 years even after countries leave – among exiting parties. 

If the countries leaving together agree to cancel the sunset clause between themselves, then the benefits of exit are magnified.

Given how many ECT-covered investors in 1.5C-incompatible projects on British soil are European, the UK joining this coordinated withdrawal would eliminate 99% of the ISDS risk – leaving little logical argument to remain bedfellows with climate laggards in a collapsing treaty.

It’s time to rip up the get-out-of-jail-free card that dirty North Sea projects, fast becoming obsolete, have up their sleeve. 

At stake is a chill on policies to address the biggest crisis facing humanity, and an unjust transition that would be billed to the UK public. 

Cleodie Rickard is trade campaign manager at Global Justice Now.

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