EU Withdrawal from the Energy Charter Treaty: A Legal Minefield for Energy Investor
The European Union and several of its largest economies, including France, Germany, Spain, the Netherlands, and Poland, have withdrawn from the Energy Charter Treaty. They claim the treaty is outdated and incompatible with their climate policies. Despite their exit, the treaty’s twenty-year sunset clause means investors can still bring claims against these states for decades.
For energy investors in oil, gas, and renewables, this withdrawal does not mean legal protections have disappeared. It means the rules are shifting, and those who move strategically will be the ones who protect their assets and maximize their leverage.
Why This Matters to Energy Investors
The EU’s withdrawal does not eliminate the protections the treaty provides. The sunset clause ensures that investments made before a country’s withdrawal remain covered for twenty years. If a government imposes new taxes, cancels permits, or undermines an investment, investors still have the right to seek compensation through arbitration.
This is not just theory. Italy withdrew from the treaty in 2016, yet it was ordered to pay €190 million to Rockhopper Exploration after banning offshore drilling. That ruling confirmed that governments remain liable under the treaty long after they leave. Investors still have enforceable rights, but the window to act is narrowing.
The EU is trying to create an agreement among withdrawing states to prevent companies from using the treaty’s protections. Whether arbitration tribunals will respect such an agreement is uncertain, but it is clear that investors with strong legal strategies will be in the best position to protect their assets.
What This Means for CIS and Non-EU Markets
While the EU is pulling out, many key markets remain fully covered by the treaty. Countries such as Kazakhstan, Azerbaijan, and Turkmenistan still uphold its protections. Switzerland and Japan remain committed, meaning investors from these jurisdictions still have access to full treaty rights.
Russia has never ratified the treaty, but past cases, including the massive Yukos arbitration, have shown that companies operating in Russian energy markets may still be able to bring claims under provisional application. Investors with exposure to these regions must carefully assess their legal options before changes in the treaty’s application create further uncertainty.
Two ongoing cases in Ukraine, Modus Energy International v. Ukraine and Ostchem Holding v. Ukraine, highlight how investors continue to rely on the treaty even in high-risk environments. If you have energy assets in Ukraine or other CIS states, the treaty remains a critical tool for protecting your investments.
Regulatory and Tax Risks Are Escalating
The EU’s exit from the treaty coincides with a wave of new regulatory and tax policies that directly impact energy investors. Governments are introducing windfall taxes, canceling permits, and pushing aggressive climate policies that restrict fossil fuel investments.
The legal uncertainty surrounding the ECT withdrawal has not stopped investors from bringing claims under the treaty:
- Rockhopper v. Italy. Italy was found in violation of the ECT for banning offshore oil and gas drilling. The tribunal awarded €190 million in damages, despite Italy’s exit from the ECT.
- Klesch v. Denmark, Germany, and EU. UK-based Klesch is challenging the EU’s windfall profit tax on energy companies, arguing it is “arbitrary and punitive.”
- ExxonMobil v. Netherlands. ExxonMobil has initiated arbitration over the Groningen gas field phase-out, with potential damages in the billions.
- GreenX Metals v. Poland. Two tribunals awarded GBP 183 million (ECT) and GBP 252 million (BIT) to the investor after Poland denied mining rights.
These cases illustrate that even withdrawing states remain vulnerable to claims due to the sunset clause.
However, this is not the first time when the ECT’s Investor-State Dispute Settlement (ISDS) mechanism’s application was challenged in relation to the intra-EU disputes. Notably, 2010 Energoalians Ltd. (Komstroy’s predecessor-in-interest) v. Moldova case, which later evolved into Republic of Moldova v Komstroy case in 2021, played a pivotal role in EU’s withdrawal from ECT. When the Court of Appeal of Paris referred the case to CJEU, the latter, following the reasoning in Achmea BV v. Slovak Republic (2008) found that it has jurisdiction to give a preliminary ruling in a dispute that has little or no connection to the EU legal order and that the intra-EU application of the ECT’s investor-state dispute settlement mechanisms is incompatible with EU law. Thus, despite that the CJEU’s decision had no legal impact on the future rulings of the arbitral tribunals formed in accordance with Art. 26 ECT, it still played an important role in strengthening anti-ECT tendencies within the EU.
Additionally, two recent and currently pending cases, Modus Energy International B.V. v. Ukraine (2021) and Ostchem Holding Ltd. V. Ukraine (2022), first one relating directly to the renewable energy sector, both highlight the historical reliance of investors on the ECT, and the extent to the withdrawal of the EU from ECT would increase legal uncertainty for all investors.
What Energy Investors Should Do Now
Energy investors operating in Europe or CIS markets need to take action before legal and regulatory conditions become even more challenging. Now is the time to assess your exposure, prepare for arbitration if necessary, and ensure that you are fully using the protections available under the treaty.
Governments are not waiting to impose new policies, and investors should not wait to respond. If you have concerns about your energy investments and the impact of the EU’s withdrawal, now is the time to develop a legal strategy. The companies that act early will be the ones that control the outcome.
If your business is facing regulatory pressure, investment disputes, or new taxation measures, let’s discuss how to protect your assets and enforce your rights.
This alert is for informational purposes only and does not constitute legal advice. For specific guidance on how these developments may affect your investments, please consult legal professionals specializing in investment arbitration and treaty law.
The legal alert is prepared by Andrii Chornous, Partner, Iryna Nahorniak, Senior Associate, and Yelyzaveta Frolkis, Junior Associate.