Energy Transition Disputes: What we're seeing and what we're expecting

Introduction

As the world continues to address climate change and the energy industry continues to pivot towards the energy transition, we are seeing a rise in disputes within the energy industry. The range of disputes arising from the energy transition is as broad as the scope that it presents in a world of new energies: from the back end of oil and gas on issues like decommissioning and climate change litigation, through to the investment in new technologies, and new projects coming online as part of the transition to renewable energies. 

This article summarises the key trends that we have seen during 2024, and the trends we expect to see in 2025, as well as into the foreseeable future.

Decommissioning: vast differences in understanding obligations and liability

As focus shifts towards the use of more sustainable and renewable energy sources, the process of safely retiring and dismantling energy-producing assets within the oil and gas economy is crucial. This process is known as decommissioning. It is, by its very nature, a complicated beast; it can involve many stages, including cleaning, decontamination, dismantling, site restoration and post-decommission monitoring.

South East Asian offshore oil and gas fields are expected to require decommissioning worth US$30 billion to US$100 billion by 2030 (per the International Association of Oil & Gas Producers, 2024). Approximately A$60 billion worth of offshore decommissioning activity is expected to occur in Australia over the next 30 to 50 years, with most decommissioning to occur in the next 30 years (per the Department of Industry, Science & Resources, 2023).

As it can be by its very nature a complex, lengthy and expensive process, decommissioning has a real risk of becoming contentious.  Absent careful planning and execution, and a clear understanding of a party’s decommissioning obligations and liability, significant issues can arise.  

The challenges associated with decommissioning affect incoming and outgoing operators alike:

• Outgoing operators can be responsible for ongoing liabilities arising out of decommissioned assets which can, by virtue of limitation legislation and contractual provisions, continue long after the physical decommissioning process has concluded.
• Incoming operators can face the unenviable task of integrating themselves into a complex and uncertain operating environment.  This is coupled with the challenges of ensuring compliance with Environmental and Social Governance considerations in order to minimise the impact of potential reputational damage and financial risk.

Clear definition of post-transition liability is crucial in order to avoid disputes later down the line and ensure that expectations are appropriately managed.

Of growing prevalence across the Asia-Pacific (APAC) are decommissioning disputes arising from poorly defined concession agreements, some of which were first entered into 25 plus years ago and which do not clearly define a party’s decommissioning obligations or liability. At times these disputes can be in the billions of dollars and can be highly contentious given the differences between the parties. This can be complicated by intervening facts including, for example, a State’s retrospective introduction of decommissioning liability legislation, or a dispute as to whether, for example, an outgoing operator is liable only for infrastructure that is no longer usable, or whether that also extends to infrastructure acquired for future and ongoing use.

Disputes arising directly from renewable energies

The flood of investment towards renewable energies – often in new jurisdictions, with new regulations, new technologies and new players – is also creating disputes.  Across APAC, many of these disputes are determined by international arbitration owing to the international nature of the players involved in energy transition and the desire for a neutral and stable forum to hear the dispute, notably led by Singapore.

These disputes cover a broad range of issues including: 

• Reporting obligations under mandatory climate-related financial disclosure.
• Greenwashing enforcement actions by regulators.
• Regulatory disputes, including those relating to carbon capture usage and storage (CCSU), planning and environmental laws, and changes of regulations regarding investment in renewables leading to investor-state arbitrations.
• M&A and joint venture disputes, arising from relationships including, for example, those forming the basis of collaboration in developing new technologies, as well as teaming with a local partner on the ground as a requirement for foreign investment / a project to proceed.
• Intellectual property disputes from energy transition/new technology innovations.
• Construction-related disputes regarding defects on site at renewable projects and with respect to the operation of new technologies.
• Breach of contract, for example where new technologies do not generate sufficient electricity to fulfil energy supply and other related contracts.

Regulatory change and Investment treaty claims

Governments around the world are having to work quickly to make significant regulatory changes in order to facilitate and support energy transition. Those changes can in some circumstances cut against investment treaty protections relating to oil, gas and renewables investments thereby resulting in a rise in investment treaty claims.

A well-publicised example of this to date is the case of Rockhopper Exploration PLC and Others v Italian Republic (ICSID Case No. ARB/17/14) which concerned the Energy Charter Treaty (the ECT). The ECT is an international investment treaty designed to establish cross-border cooperation in the energy industry by protecting foreign investment and trade in energy materials and products, freedom of energy transit and energy efficiency.

In 2017 a UK-registered company, Rockhopper Exploration, together with its Italian-registered subsidiary, issued a claim against Italy seeking damages for what it said were violations of the investor protection provisions afforded to it under the ECT.  The claim concerned the Claimants’ interests in an oil rig for which they were hoping to obtain a production concession from the Italian Government.

The Claimants’ hopes were dashed, however, when in 2015 the Italian Government reintroduced a ban on offshore production of oil and gas within 12 miles of the Italian coastline, within which this rig was located. The Claimants sought compensation for loss of profits and reimbursement of the funds invested in the project. The claim was, in accordance with the provisions of the ECT, submitted to arbitration before the International Centre for Settlement of Investment Disputes (ICSID).

The Claimants were ultimately successful in their claim and awarded damages and decommissioning costs of c.EUR 190 million, plus interest. Italy was found to be in breach of Article 13 of the ECT on grounds that the Claimants had a right to be granted a production concession and the denial of that right deprived the Claimants of their investment and amounted to a direct expropriation for which no compensation had been paid.

Discussions around reform of the ECT to ensure its alignment with climate goals and the transition to renewable energies have been ongoing for some time. A key issue is the extent to which the ECT protects investments in oil and gas and the appropriateness of those protections, in particular in the broader context of encouraging investment in renewable energy and a low-carbon economy. In the absence of significant reform, we may see States withdrawing from the ECT in an attempt to step further away from traditional energies.

Conclusion and predictions for 2025 and beyond

It is important to remember that energy transition is still in its infancy, despite the progress made to date. Energy transition is the future and the form in which it takes is still open to discussion and debate. With change comes differences of opinion and, in turn, disputes.

How things play out in 2025 and beyond will be informed by a number of factors, including in particular political and regulatory change, and the development of new technologies to efficiently harvest and distribute renewable energies.

In the short to medium term, we anticipate that we will continue to see transition related disputes of the types mentioned above. Across APAC these disputes may be more prevalent in countries where the political and regulatory goalposts are shifted more frequently, and where new players in new technologies are more prevalent.

Longer term it is possible that energy transition related cases could tail off as the renewable energy landscape stabilises and matures, both from a development and a regulatory perspective.

Those operating in the energy industry, across the myriad of roles whether as an operator, investor, supplier, owner, or regulatory authority, will do well to keep themselves in the know of this fast-evolving landscape. Knowledge is, after all, power.

Our expertise

With offices in many of the world’s major arbitration centres, including London, Paris, Geneva, Dubai, Hong Kong and Singapore, we are ideally placed to work with you both to prevent and to resolve disputes as they arise, whatever the law, language, rules, industry sector, or subject matter of that dispute may be. Our dedicated multicultural and multilingual specialists conduct arbitrations under both civil and common law systems and regularly act in arbitration-related domestic court proceedings.

Whether you are a state, a state-owned entity, a sovereign wealth fund, a corporate, a sports federation or authority, private business or individual, our strategically focused specialists will work alongside you through every aspect of any arbitration. Please contact Peter Brabant or your usual Charles Russell Speechly LLP contact if you would like to get in touch.