Energy Charter Treaty seen as incompatible with climate commitments

Summary: France becomes the latest European nation to withdraw from the Energy Charter Treaty (ECT). A collapse of, or a restructuring of, the ECT could accelerate the stranding of fossil fuel assets. Investors need to understand the associated risks and transition plans that Oil and Gas (O&G) companies have in place.

Why this is important: The Investor-State Dispute Settlement could result in legal claims of billions of dollars from fossil fuel producers.

The big theme: If we are to reduce O&G usage, there will be a whole series of costs we as a society may need to face. Some are to do with compensation for stranded assets (an unpopular topic) and some are to do with cleaning up the existing infrastructure. This is a theme that could get material and run for many decades.

Summary of a story from Euractiv:

President Macro announced that France will withdraw from the Energy Charter Treaty as it is “incompatible with the country’s climate commitments” - in particular the 2030 decarbonisation timetable. France joins the Netherlands, Spain and Poland in announcing their withdrawal.

A co-author of the recent IPCC report asked if Brussels would consider withdrawing from the Treaty at the EU level, a request that received support from France’s High Council for the Climate (HCC).

Why this is important

The Energy Charter Treaty (ECT) was originally conceived as a way to protect foreign investments in the energy sector, particularly in the aftermath of the collapse of the Soviet Union. Under the ECT, investors and energy companies from one state are able to sue other member states if they feel that they have been treated unfairly - that is where the troubles began.

A study in May concluded that governments seeking to limit fossil fuel production to reach net-zero emissions globally by 2050 could face legal claims of up to US$340 billion from fossil fuel producers under a mechanism called the Investor-State Dispute Settlement (ISDS). Most ISDS claims could be brought under the ECT. Indeed, in February of 2022, RWE, Uniper and Rockhopper used the ECT to sue four European governments for €4 billion over their climate change policies. Uniper was forced by the German government to drop that lawsuit following a bailout of the company.

In June of 2022, member countries had reached a provisional agreement to reform the mechanism, with countries able to remove protections for existing fossil fuel investments on their territory - 10 years after the revised mechanism comes into force. The scope has also been increased to include hydrogen and synthetic fuels like SAF. However, the 10 year timeline has received criticism for being too long, for example taking us beyond the 2030 UN SDG timeline.

Clearly a collapse of or a restructuring of the ECT could accelerate the stranding of fossil fuel assets and investors need to understand the risks associated with that and transition plans that those companies have in place.

Please read: important legal stuff.