ICSID tribunal finds that Italy committed an unlawful expropriation under ECT’s Art. 13(1)

Rockhopper Italia S.p.A., Rockhopper Mediterranean Ltd, and Rockhopper Exploration Plc v. Italian Republic, ICSID Case No. ARB/17/14

Summary

Rockhopper Italia S.p.A., Rockhopper Mediterranean Ltd, and Rockhopper Exploration Plc (the claimants) submitted a claim against Italy pursuant to the ICSID Convention for breach of various provisions of the ECT relating to the denial of a production concession for the Ombrina Mare oil field located off the coast of Abruzzo, Italy.

The tribunal found that Italy had committed an unlawful expropriation and awarded the claimants damages of EUR 184 million, roughly EUR 6.7 million in decommissioning costs, plus interest. In arriving at the damages figure, the tribunal used the claimants’ own pre-acquisition discounted cash flow (DCF) evaluation of the Ombrina Mare field.

The dispute

This case concerned a dispute brought against Italy by the claimants for the denial of Rockhopper Italia’s application for a production concession to exploit the Ombrina Mare oil field. The denial of the application resulted from the passage of Law No. 208 of December 28, 2015, which confirmed the banning of exploitation of “offshore liquid and gas hydrocarbons” in waters within a 12-mile limit of the Italian coast.

In response, the claimants submitted a dispute to ICSID on the basis of the ECT, with three theories of liability: impairment of investment by unreasonable or discriminatory measures, fair & equitable treatment (FET), and unlawful expropriation. The tribunal addressed the expropriation question and concluded that Italy’s denial of a production concession amounted to a direct expropriation for which no compensation was paid. By addressing the expropriation claim, which it resolved by finding a breach, the tribunal found that it was unnecessary to also address the impairment and FET claims.

Italy challenged the jurisdiction of the tribunal on the grounds that Article 26 of the ECT (Settlement of Disputes between an Investor and a Contracting Party) does not apply to intra-EU disputes and prohibits the claimants from requesting relief for the second time for the same dispute in front of this tribunal for a matter already decided by domestic courts. The tribunal rejected both arguments, finding that the nature of the domestic litigation was not of the type that would prevent the tribunal from exercising jurisdiction.

Background

Rockhopper was originally granted an exploration permit to explore the Ombrina Mare field in 2005. After confirming the presence of oil in 2008, Rockhopper applied for a production concession. This was met with protests from the local community, catching the attention of the national government. This led to the passage of Law No. 128 in 2010, which banned all new offshore drilling projects, putting the viability of the project in question. In 2012, an exception to the 2010 law was made for drilling projects that were pending prior to the entry into force of Law No. 128, which would have allowed the granting of the production concession (one of the stated purposes of the law was to avoid contingent litigation that would follow from permit holders such as Rockhopper). This exemption led to another round of civic engagement and political tensions between central and regional authorities, culminating with 10 Regional Councils of Italy proposing a referendum that included a question on the repeal of the exemption. In order to avoid this referendum, the 2015 passage of Law No. 208 removed the exception and caused the Ombrina Mare to be covered by the prohibition. This directly led to the rejection of Rockhopper’s application.

The role that these protests played in the government’s decisions cannot be understated. There is a history of opposition to oil exploitation in the area, with many of the Ombrina Mare activists drawing inspiration from the successful 1971–76 campaign against the Sangro Chimica oil refinery project in the Fossacecia, a city in the Abruzzo region.^[1] In that event, local political alliances came together in opposition to the petrochemical sector, helping to preserve the touristic and agricultural industries of the area.^[2] The Ombrina Mare movement was marked by large demonstrations as part of a larger campaign against oil exploitation in the area, with local activists working alongside environmental organizations.^[3]

The tribunal’s analysis

Jurisdiction is proper

Italy argued that since the claimants requested satisfaction on the same grounds before the domestic courts, Articles 26(2) and (3) of the ECT apply, and consent is not given for a dispute to be submitted to the tribunal under the fork-in-the-road principle (which forces claimant investors to make a choice between pursuing their claims in the host state’s domestic courts or through international arbitration). The tribunal differentiated the nature of that domestic litigation from the dispute at issue here: the domestic litigation was an objection to the requirement that the project obtain an integrated environmental authorization (AIA) before an environmental impact assessment could be signed off on. The rejection of the claim (filed by the previous owner of the site before its acquisition by Rockhopper) confirmed that an AIA had to be obtained as a precondition to an environmental impact assessment being conducted (even if an assessment had already been applied for beforehand). That issue was distinct from the dispute before the arbitration tribunal, which concerned the rejection of the claimants’ production concession and therefore did not prevent the tribunal from exercising jurisdiction.

The tribunal also rejected Italy’s argument that the ECT should not apply to disputes between an investor of an EU member state and another EU member state. In noting that no other tribunal has upheld the objections advanced by any EU member state in connection with the ECT, the tribunal accepted the jurisdictional findings in Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italian Republic, which articulated that EU law should be applied to such disputes, and that there are no contradictions between EU law and the dispute resolution provisions of BITs. Additionally, the tribunal took a limited reading of the CJEU judgment in Slovak Republic v. Achmea B.V.,^[4] finding that an EU member state’s offer to arbitrate is not nullified by that decision.^[5]

Italy committed an unlawful expropriation

The tribunal found that, as a matter of fact, the claimants had a right to be granted a production concession, and the denial of their application constituted an immediate and complete deprivation of the claimants’ investment. In finding this, the tribunal referred to Italian law Decree 484, which states that “within fifteen days from the receipt of the environmental compatibility decree by the Ministry of the environment, (the Ministry of Economic Development [MED]) issues the decree for the award of the production concession.” This compatibility decree was granted on August 7, 2015, and on August 14, 2015, the claimants submitted an application for a production concession invoking Decree 484, which set a deadline for the granting of the concession by August 29, 2015. The tribunal accepted this argument, considering the decree of August 7, 2015, as an “unambiguous demonstration” of Italy’s intention to grant a production concession for the Ombrina Mare field.

Italy made two arguments: (1) the extractive business of the claimants never started and had never been authorized, so there could be no expropriation; and (2) the legal prohibition on offshore oil exploration and subsequent denial of the claimants’ application was a valid exercise of police powers, and therefore any economic impact that they might cause to investors was not compensable. Both points were rejected by the tribunal.

On the first point, the tribunal noted that the expropriatory action was rooted in the denial of Rockhopper Italia’s application rather than of any extractive business. Instead, the focus was on the government’s decision that deprived the claimants of the specific right that they would be awarded the production concession.

The tribunal was also unconvinced by the police powers argument of Italy, finding that the issuance of a positive opinion on the environmental compatibility assessment of August 7, 2015, put an end to any permissible use of the precautionary principle. To the tribunal, the granting of the environmental compatibility decree showed that the environmental issues had already been considered and decided on, and it was no longer permissible to invoke environmental reasons in order to justify a legal expropriation under Sections (a)–(d) of ECT Article 13(1) (which spell out the requirements a sovereign must meet to avoid the consequence of an unlawful expropriation).

Compensation

In finding the standard of compensation, the tribunal looked to customary international law. In adopting the standard of full compensation, the tribunal cited the Factory at Chorzów case: “reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed.” In the current case, the tribunal interpreted full compensation to mean the fair market value of the investment at the time of the expropriation (determined to be January 29, 2016, the date on which the claimants received the letter rejecting their application for a production concession).

The claimants advanced a DCF model that valued the loss of investment at EUR 275 million. Italy objected to the use of a DCF model because the Ombrina Mare was merely an “appraisal-stage” project and since production had not commenced, there were no cash flows being generated. Instead, the respondents preferred a market-based method, under which the Ombrina Mare would be valued at EUR 13 million. While the tribunal noted the difficulties of using DCF as the Ombrina Mare was not a going concern, it nonetheless preferred it to a market-based model, which used Rockhopper’s 2014 acquisition of Mediterranean Oil and Gas (MOG)—the company that originally discovered and developed the field before being acquired by Rockhopper—for EUR 36 million as its main reference point. The tribunal rejected Italy’s valuation method because it failed to take into account the change in circumstance caused by the August 7, 2015, decree that transformed a speculative asset into one possessing legal guarantees from the Italian government.

Ultimately, the tribunal settled on Rockhopper’s own valuation of the Ombrina Mare field at EUR 184 million prior to its acquisition of MOG. The tribunal preferred this method due to the competing interests (Rockhopper’s desire to acquire MOG at a lower price) surrounding its creation, which the other proposed valuations lacked.

Conclusion

The Rockhopper decision highlights a couple of issues with the current state of ISDS. Firstly, while the tribunal does acknowledge the presence of environmental concerns in the case, the opinion itself ultimately sidesteps the critical environmental and social considerations which were so central to the government’s decision.^[6] The reframing of the policy issue as a matter of political tension between central and regional authorities paints a limited picture of an event involving a region and people with a long history of climate advocacy, with legitimate environmental concerns, and a government’s actions that were motivated by responsiveness to those concerns. For other countries that are considering withdrawing from the ECT, cases like this cast doubt on the extent to which tribunals will consider actions taken pursuant to legitimate environmental reasons in their full context. In this case, a fuller consideration of the factual background leading up to the Italian government’s actions might have returned a different answer on the lawfulness of the expropriation, in which case the FET claim would have been considered, and the legitimate expectations of the investor would have been taken into account.^[7] Given the factual background, the individual opinion of Professor Pierre-Marie Dupuy notes that it “would have been almost impossible to conclude … that Rockhopper could reasonably and legitimately expect a positive response.”

Secondly, the usage of DCF valuation for investments that are not going concerns brings up an issue which has received much attention and debate as of late. Usage of valuation methods like DCF have been seen as overly speculative and partly responsible for the marked rise in the amounts of damages being awarded in the last couple of decades.^[8] As more countries engage in energy transition plans, uncertainty over tribunals’ usage of income-based valuation techniques, especially for investments with no track record of profitable operations like the Ombrina Mare, could make the realization of these plans costly.

Note

The tribunal was composed of Klaus Reichert (president), Charles Poncet (appointed by claimants), and Pierre-Marie Dupuy (appointed by respondent).

Author

Dihu Wu is an International Law Fellow at IISD and J.D. candidate from the University of Michigan Law School.

Notes

[1] Cernison, M. (2016). The No Ombrina/No Triv protests in Abruzzo: Organisational models and scales of action. Cosmos Working Paper Series. https://cosmos.sns.it/wp-content/uploads/2018/01/Cernison_No_Oil_Abruzzo.pdf, at 2.

[2] Ibid.

[3] Ibid., at 13.

[4] See also Fouchard, C., & Krestin, M. (2018). The judgment of the CJEU in Slovak Republic v. Achmea – A loud clap of thunder on the Intra-EU BIT sky! Kluwer Arbitration Blog. https://arbitrationblog.kluwerarbitration.com/2018/03/07/the-judgment-of-the-cjeu-in-slovak-republic-v-achmea/

[5] The one deviation from this jurisdictional trend happened in the June 2022 Green Power K/S and SCE Solar Don Benito APS Vs. Kingdom of Spain case, in which a Stockholm Chamber of Commerce tribunal denied jurisdiction over an intra-EU claim by taking a more expansive view of Achmea, finding that application of Article 26 of the ECT is incompatible with the EU treaties and therefore cannot serve as a basis for a unilateral offer of arbitration for an investor to accept.

[6] Mazzotti, P. (2022). Rockhopper v. Italy and the tension between ISDS and climate policy

A missed moment of truth? Völkerrechtsblog. https://voelkerrechtsblog.org/de/rockhopper-v-italy-and-the-tension-between-isds-and-climate-policy/

[7] Ibid.

[8] Bonnitcha, J. & Brewin, S. (2020). Compensation under investment treaties. IISD Best Practices Series. https://www.iisd.org/system/files/publications/compensation-treaties-best-practicies-en.pdf at pg.1