The Australian Financial Review | 10 November 2022
Huge lawsuits loom over gas market intervention
by Ronald Mizen
Massive compensation claims loom over the Albanese government’s gas market intervention, with lawyers warning price caps and windfall profit taxes could lead to legal action under trade agreements.
But despite multinational energy giants being the most aggressive users of treaties to launch legal actions against countries, ministers are split over the prospect of a lengthy and expensive battle with gas investors.
Known as an investor-state dispute settlement (ISDS) clause, the provision in a number of treaties with key trading partners including the United States, China, Japan and Singapore allow companies with investments in Australia to sue the government for decisions that breach treaty obligations.
Dan Clark, president of ConocoPhillips Australia – a subsidiary of the US oil and gas giant of the same name – left open the prospect the multinational could use ISDS provisions against Australia, but said without specific detail it was not yet possible to fully consider trade agreement implications.
“We are listening carefully to what the Albanese government is saying regarding potential taxes and price caps,” Mr Clark said.
“These conversations are concerning. If put in place, they risk having the opposite effect than intended as they disincentivise investment in Australia, putting even more strain on existing gas supply.”
Treasury on Tuesday gave the green light to intervene in the gas market temporarily, saying it was warranted by exceptional circumstances and was a better approach than measures that would only worsen inflation.
Resource Minister Madeleine King said everything was on the table to deal with gas prices, but solutions needed to be worked through methodically to avoid unintended consequences.
“We all want to maintain our very important trading relationships because this is a country built on international investment and international trade,” Ms King said on Tuesday.
“If you restrict sales to international partners that invested tens of billions of dollars and have really driven the development of an offshore and onshore export industry in gas, well, they would quite rightly be worried about that.”
Senior government sources told The Australian Financial Review the use of ISDS clauses was a major factor is how it would decide to address surging gas prices, but Industry Minister Ed Husic rubbished the suggestion.
“There is absolutely no ISDS risk, and it’s just a self-serving line being put out by the gas exporters,” he said.
Trade Minister Don Farrell will next week detail the Albanese government’s new approach on ISDS clauses. The party’s national policy platform says Labor wants to ban their use in trade agreements.
The Albanese government is considering how best to intervene in the gas market to drive down prices after it was revealed in the federal budget that prices were set to rise 20 per cent this year and 20 per cent next year.
But any move could raise claims of either indirect expropriation, or a breach of fair and equitable treatment trade rules particularly around the legitimate expectations of foreign companies at the time of their investment.
ConocoPhillips owns a 47.5 per cent stake, along with Origin Energy and Sinopec, in Australia Pacific LNG, the largest producer of natural gas on Australia’s east coast. It is known to have initiated three ISDS arbitrations.
Amanda Lees, a Singapore-based partner at King & Wood Mallesons who specialises in cross border disputes and has acted for clients in ISDS actions, said Asian investors were increasingly aware of their treaty rights.
In addition to China-based Sinopec’s investment in Australia Pacific LNG, Malaysia’s Petronas, France’s Total Energies and South Korea’s Korea Gas are all shareholders in Gladstone LNG. Tokyo Gas and the China National Offshore Oil Corporation also hold minor stakes in Queensland Curtis LNG.
“I’m sure they are very conscious of their rights,” Ms Lees said. “It won’t just be ConocoPhillips but other investors as well I’m sure are very conscious of the possibility of perhaps bringing an ISDS claim.
“I think there’s just more awareness in Asia as to the possibility for Asian investors of bringing claims ... [as] claims against their own governments have heightened awareness about ISDS.”
Multinational energy giants are the most prolific users of ISDS arbitration, accounting for about 31 per cent of claims, according to analysis undertaken by International Institute for Sustainable Development.
But some industry sources suggested the use of ISDS could come with social licenses and brand issues, particularly for consumer-facing brands.
Precedent for action
One of Australia’s leading international arbitration experts and executive lawyer at Henry William Lawyers, Max Bonnell, said there was plenty of precedent for government changes that hurt the profitability of investments.
“If you talk about someone who’s built a gigantic amount of infrastructure, say to set up a gas pipeline or a liquefied natural gas processing plant, they committed capital on the expectation they’d get a particular return based on what they knew about the regulatory regime, and if that return is threatened by a discriminatory action then the potential for action exists.”
There is precedent for multinational oil and gas giants to sue governments over decisions that have affected their local investments.
In 2019, an international tribunal ordered Venezuela to pay ConocoPhilips $US8.7 billion for the unlawful expropriation of three oilfields.
Despite being headquartered in Houston Texas, ConocoPhilips was able to use its global footprint to sue Venezuela using ISDS clauses in a bilateral investment treaty the country inked with the Netherlands in 1991.
“Certainly claims like ConocoPhillips-Venezuela are exactly the kind of risk that exists,” Mr Bonnell said.
In 2019, another tribunal awarded the Anglo-French oil and gas company Perenco almost $US500 million in a dispute with Ecuador over the introduction of a 99 per cent windfall profit tax on oil companies.
Labor despises ISDS
Though ISDS clauses were incorporated into two trade agreements under Labor (with ASEAN in 2010 and Chile in 2009) the party has despised them since the Gillard government’s plain packaging laws for tobacco products prompted Philip Morris Asia to seek billions in damages under a long-forgotten investment treaty signed with Hong Kong in 1994.
While Australia defeated the tobacco giant in 2015, taxpayers were still left with a $24 million legal bill, only half of which was paid by Philip Morris.
In its party platform, Labor commits to banning the including of ISDS clauses in all new free trade agreements.
“Labor [does not] support the inclusion of provisions such as investor state dispute settlement clauses that constrain the ability of government to make laws on social, environmental, labour and economic matters,” it says.
“These undermine fair competition, judicial independence and the Australian people’s sovereign right to legislate and implement policies in their interest through democratic processes.
“As such, Labor views these provisions as contrary to the national interest and basic principles of democratic sovereignty and will not accept such clauses in any trade agreements.”
However, proponents of ISDS say it helps more than hinders Australia because it provides protection for local firms doing business overseas in places that present a much higher risk due to political factors.
Indeed, publicly available data suggests Australia has only been sued by an investor on two occasions – Philip Morris in 2012 and ARP Energy in 2017, the latter matter collapsed in 2019 – while Australian firms have pursued foreign governments including Papua New Guinea, Egypt, Thailand, Mongolia, Indonesia, and India, on at least nine occasions.
Two of the matters taken up by Australian firms were resolved in favour of the investor, one in favour of the state, one was discontinued, another settled and the remainder are ongoing.
The exact number of cases is not known as the ISDS arbitration process is controversially highly secretive.