Why can Ascent Resources demand half a billion euros from Slovenia?

Slovenia Posts English | 19 August 2022

Why can Ascent Resources demand half a billion euros from Slovenia?

On Monday, the British company Ascent Resources, which is involved in the extraction of oil and natural gas, launched an arbitration dispute against Slovenia, which was not a surprise. The company announced the lawsuit against Slovenia in 2020, after Arso requested an environmental impact assessment for pumping gas by stimulating wells in Petišovci. More surprising is the amount of compensation that Ascent is demanding from Slovenia, as it amounts to half a billion euros. Back in March last year, in the announcement of the lawsuit against Slovenia, Ascent estimated that it had been damaged for 120 million euros. The significantly higher compensation claim is also expected to be a result of the current gas price hikes. What else has changed in the meantime? In April, the National Assembly, with broad support, completely banned the process of hydraulic fracturing for the extraction of natural gas in Slovenia. Many other European countries have already introduced the ban before us, including Great Britain, where the Ascent company is based.

According to Ascent, however, the change in the mining law is the reason for such a significant increase in the damage estimate. “The company’s compensation claim against the Republic of Slovenia was filed after a complete ban on hydraulic stimulation for the extraction of hydrocarbons came into force, which affected the amount of compensation,” they explained to MMC.

The Energy Charter Treaty (ECT) allows a private company to sue a country that has decided to change the legislation following an established democratic process. Slovenia is also among the 53 signatory countries of the ECT through the EU. The Energy Charter Treaty was signed in 1994, and its purpose at the time was to protect companies from Western countries that were starting “risky” energy investments in the newly formed countries of the former Eastern Bloc.

Many provisions of the ECT are completely outdated today. According to the European Commission, the ECT has become the most litigated investment treaty in the world. Most disputes based on this treaty take place within the EU, meaning that a claimant from one EU member state files a dispute against another EU member state.

Andrej Gnezda, who has been dealing with the pitfalls of free trade and investment agreements at Umanotera for a long time, emphasizes that the ECT primarily protects investments in energy, which are problematic due to the climate crisis. “These investments are mainly in fossil energy sources, which we must abandon due to the climate crisis. Premature abandonment of investments in fossil resources or closure of fossil fuel power plants could be very expensive for the signatories because of this Treaty.” In the EU, Great Britain and Switzerland alone, the ECT is said to protect investments in fossil energy sources worth 344 billion euros. But since the Treaty allows the investor to sue for lost potential profits from these investments, the actual amount of damages could be much higher , warns Gnezda. A good example is the just-initiated arbitration proceedings against Slovenia. Ascent, which according to its own statements invested around 50 million euros in the gas plant in Petišovci, today demands half a billion euros.

Renewal of the Energy Charter Agreement

The EU is also aware that the effects of the Treaty on the Energy Charter have become unacceptable, which is why negotiations on the revision of the Treaty were concluded in June of this year after two years. The member states will decide on the possible signing of the revised version of the ECT in November. Among other things, the revised Treaty should respect the right of member state governments to make systemic and legislative changes required by climate change. The revised ECT should thus also be harmonized with the Paris Agreement and European environmental goals. According to the Commission, new investments linked to fossil fuels will no longer be protected, and protection for existing investments in fossil fuels would expire within ten years.

But according to non-governmental organizations, the renewal of the Treaty is not enough. “According to the proposal, investments in fossil resources would remain protected for another 10 years after the adoption of the modernized Treaty. The process of its adoption could take several more years, which means that fossil resources would remain protected for at least another 15 years, which is unacceptable from the point of view of the climate crisis.“, Gnezda is convinced. He also points out the duplicity of the EU, which on the one hand promises to fight the climate crisis, but at the same time, at a time when we are already strongly feeling the consequences of this crisis in the form of heat waves, extreme drought, raging fires and storms, we are still insists on protecting the investments in fossil resources that are driving this crisis.”The EU will have to decide whether to protect the profits of energy companies or our climate,” he adds and believes that Slovenia should propose to leave the ECT. Italy left the ECT in 2015, and Spain, France, Poland and Germany are also expected to leave.

Why did Italy leave the ECT?

In May 2017, the British oil and gas company Rockhopper filed a lawsuit against Italy because the country did not grant it a concession to drill for oil in the Ombrina Mare oil field in the Adriatic Sea. Indeed, in 2016, the Italian parliament banned the introduction of new oil and natural gas extraction near the coast. Among the reasons for the ban were the high earthquake risk, the protection of the environment and tourist activities, and strong opposition from the local residents. Although the company Rockhopper has not even started producing oil in the Adriatic Sea, it is demanding more than 40 million euros in sunk costs and between 200 and 300 million euros in damages, because it will be deprived of roughly that much potential earnings due to the oil extraction ban.

In the Italian case, the timeline is also interesting. Italy withdrew from the ECT in 2015, and Rockhopper filed a lawsuit against the country more than two years later. Despite the country’s withdrawal from the ECT, the company’s lawsuit is enabled by a clause that non-government activists call the “zombie clause”. The state can be sued twenty years later for the investments made by the companies before leaving the ECT.

The former Minister of Infrastructure Jernej Vrtovec, during Slovenia’s presidency of the EU, did not want to propose Slovenia’s exit from the ECT on the European floor. It will be known in November at the latest how the government of Robert Golob will take a position on the renewed Treaty on the Energy Charter. “The ECT is incompatible with the Paris Agreement, and due to the interference with the primacy of EU law, it is very likely also with European law. It enables absurd lawsuits for dizzying sums, as we see in the case of Ascent. Therefore, it only makes sense for Slovenia to withdraw from the ECT together with the other EU members -yes, and this is also what he proposes when the EU Council considers the modernization of the ECT,” Gnezda is convinced.

The article is in Slovenian