Forbes | 26 September 2019
Nord Stream 2 sues EU using ISDS
by Dave Keating
The company building the controversial Nord Stream 2 gas pipeline from Russia to Germany under the Baltic Sea today sued the European Union over new gas rules it says are threatening its investments in the project.
The EU revised its gas directive earlier this year, extending the bloc’s gas liberalization rules to projects transporting energy from outside to inside the EU. Previously, the rules applied only to intra-EU projects.
Nord Stream believes the reform to have political rather than economic motives. The pipeline is opposed by Eastern European countries, encouraged by the United States, which say it will increase the EU’s dependence on Russian gas.
Legal experts say it is unlikely the new rules could apply retroactively to the project. Previous efforts to block the pipeline in the European Council of 28 member state governments have failed.
The company is using the Energy Charter Treaty, which contains an investor-state dispute mechanism protecting investments in energy projects against regulatory changes, as the basis of the arbitration request.
Sebastian Sass, Nord Stream 2’s EU representative, said that by amending the gas directive, “the EU has breached its legal obligations under Articles 10 and 13 of the ECT.”
“In particular, the amending directive discriminates against the investment of Nord Stream 2, in breach of the EU’s…obligation not to take such discriminatory action, and it is also in breach of the EU’s obligation to guarantee fair and equitable treatment.”
70% of the pipe has already been laid in the project, with the main section still missing at the center. Denmark has yet to give approval to the pipeline’s course through its territorial waters around the island of Bornholm.
Nord Stream’s use of the Energy Charter Treaty will bolster arguments that the treaty is being used to stop European countries from enacting legislation to lower carbon emissions. In addition to energy security concerns, climate campaigners have said Nord Stream should be scrapped because it will lock the EU into importing gas rather than investing in renewable energy - because it spend so much on gas infrastructure that can be used for decades.
The treaty was originally intended to spur Western investment into energy projects in post-Communist countries. But it has since morphed into something being used by Western investors to sue Western governments. Nord Stream is headquartered in Switzerland.
’These cases prove that the Energy Charter Treaty impedes the EU and its Member States from complying with the Paris Agreement,” said Lora Verheecke, trade campaigner with Friends of the Earth Europe. “The Energy Charter Treaty is a clear and present danger to the urgently needed fossil fuel phase-out.”
Last week German company Uniper brought an ISDS case using the treaty against the government of the Netherlands for its proposal to phase out coal as a source of electricity.
The company owns and operates the Netherlands’s second-biggest power plant has reportedly threatened a case under the Energy Charter Treaty in reaction to the Dutch government’s decision to ban coal-based power generation by 2030.
Dutch newspaper De Telegraaf reported last week that Uniper has warned of a possible ECT claim, saying the policy shift threatens a 2007 agreement with the government to build a Dutch coal-fired plant. The plant, which cost around €1.6 billion opened in 2016 and has an expected lifespan of 40 years.
German energy giant RWE is reportedly also asking for compensation for the expected closure of two coal-based plants in the Netherlands, one of which started operating in 2015 at a cost of €2.8 billion.
“ISDS is a really dangerous tool in the hands of the fossil fuel industry: it allows investors like Uniper to make unfounded claims that risk undermining climate change efforts,” said ClientEarth trade lawyer Amandine Van Den Berghe.
“Experts have long warned governments that fossil fuel companies may want to use ISDS to delay or discourage climate change policies – or to shift stranded asset risk onto states to try and secure payouts. Data indicates that oil, gas, and mining firms launch more international investment arbitration cases than firms from any other sector.”
“Uniper must not try to push the cost of its poor business decision onto the Dutch government,” she added. “While the company may try to claim otherwise, stranded asset risk was clearly foreseeable here – due both to increasingly stringent regulation, and to the structural decline of coal.”
She said the Uniper case should send a strong signal to the EU and its member governments that they need to get out of the Energy Charter Treaty.