ExxonMobil Initiates ICSID Arbitration Proceedings against the Netherlands Over the Closure of the Groningen Gas Field

 Executive summary: 

On 30 September 2024, ExxonMobil filed an arbitration claim against the Netherlands at the International Centre for the Settlement of Investment Disputes (ICSID), challenging the government’s decision to cease gas extraction in the Groningen field. ExxonMobil argues that the decision, made to prevent earthquake risks, violates its contractual rights and disproportionately impacts its investments under the Energy Charter Treaty (ECT). This case highlights the tension between state measures for environmental protection and energy companies' rights, which have led the European Union to decide to withdraw from the ECT. The EU withdrawal is set for next year. Meanwhile, ExxonMobil is reportedly suing through a Belgian entity, bringing the case into the realm of intra-EU disputes, which EU courts have previously ruled as incompatible with European law.

On 30 September 2024, ExxonMobil initiated arbitration proceedings against the government of the Netherlands before the International Centre for the Settlement of Investment Disputes (ICSID) in Washington in relation to the Dutch government's decision to halt gas extraction in Groningen.

ExxonMobil filed the claim under the Energy Charter Treaty (ECT), from which the European Union has recently decided to withdraw. However, the EU withdrawal decision will not take effect until next year.

According to ExxonMobil, the early closure of the Groningen field to protect residents from earthquakes related to gas extraction violates contractual agreements with the Dutch government, arbitrarily and disproportionately affects its interests and infringes on its investment rights under the ECT. Therefore, the company is seeking compensation from the Dutch authorities for the vast gas reserves left unextracted.

Since the start of gas extraction in Groningen in the mid-1980s, more than 1,700 earthquakes of varying intensity have struck the area, causing severe damage to inhabitants’ property, which led to massive and prolonged protests by the region's inhabitants.

As a result of the popular demands, not only was the obligation of the operating company (Nederlandse Aardolie Maatschappij (NAM), an Exxon Mobil and Royal Dutch Shell joint venture) to pay  compensation for damage to the property of residents of the province of Groningen established, but also the government announced in September 2019 the end of gas extraction in Groningen field  by mid-2022 to limit seismic risks in the region, with gas only to be extracted thereafter in the event of extreme weather or unforeseen circumstances.

This claim is a reflection of the problem currently faced by the States to take measures to meet climate, environmental, work and social targets, which led the European Union to decide to withdraw from the ECT. 

Energy companies have been using the arbitration clause provided for in Article 26 of the ECT as a tool to dissuade States from adopting any protectionist measures that may affect their rights, investments and profits. 

As stated by specialized researcher Bart-Jaap Verbeek, the Investor-State Dispute Settlement (ISDS) tool allows energy companies to "block or weaken necessary climate policies, or to pass on the costs to society as a whole. That makes ISDS a roadblock to a just transition and it should be abolished as soon as possible”.

According to Dutch media, ExxonMobil would be now suing the Netherlands through a Belgian investment company, which would give the dispute an internal EU character. In this regard, the European Court of Justice ruled in 2021 that ‘intra-EU disputes’ based on the ECT are not compatible with European law, a decision that was later confirmed by Germany's highest court in the case between RWE and the Netherlands.

Background

The Groningen gas reserve  is the largest onshore natural gas reserve in Europe. It was discovered in 1959 by Exxon Mobil and Royal Dutch Shell, which were in charge of its exploitation through a joint venture, Nederlandse Aardolie Maatschappij (NAM).

Since extraction began in 1963, the field has been central to the economy and well-being of the Netherlands. Some 93 % of the Dutch population relied on this gas for heating and cooking, as do many people in Germany, Belgium and northern France.

However, decades of extraction reduced the pressure on the subway rocks containing the gas, causing them to shrink, which caused the ground to sink almost a foot and earthquakes to occur.

Since the mid-1980s, the region has experienced more than 1,700 earthquakes of varying magnitudes, damaging thousands of homes and causing significant property losses.

The State Supervision of Mines confirmed that these earthquakes are directly related to gas extraction. 

However, due to the difficulty of replacing Groningen gas and the negative impact that reduced production would have on the local economy and the national budget, extraction continued over the years. Protests and complaints by the region's inhabitants intensified and the issue became part of the political agenda.

In 2015, the Afdeling Bestuursrechtspraak Raad van State (the highest administrative court) ruled that gas production should be reduced in order to avoid further risks for the inhabitants.

Following this decision, the Dutch Government reduced production to the minimum necessary to satisfy domestic demand and the export contracts signed.

The government also announced a new compensation and reparation scheme for earthquake victims. 

In May 2019, another strong earthquake occurred in Groningen. Faced with popular demand, in September 2019, the government announced that it aimed to stop extraction completely by mid-2022, as iarbnews reported here.

On January 2022, the Dutch Cabinet earmarked an additional 250 million euros for the subsidy scheme in the Groningen earthquake zone, so that all those residents who should receive the 10.000 euros to improve their homes will be able to avail themselves of it.

However, the conflict between Russia and Ukraine has exposed Europe's dependence on Russian energy resources and has triggered a scramble for the remaining scarce energy sources available. 

In this context, policymakers in all major EU countries were being forced to backtrack on their ambitions to reduce fossil fuel use in order to curb climate change.  

According to a document submitted to the Dutch Parliament by research institute TNO, 20 % of the gas the country imports is supplied by Russia. 

The Russian-Ukrainian conflict and its effects on gas prices and availability apparently led to a change in attitude among the locals in Groningen, who were reportedly in favour of continuing gas extraction. 

Sixty-one percent of the 3,000 Groningen residents surveyed by a national newspaper said that they would support higher local production if it reduced dependence on Moscow.  

Likewise, in another survey conducted by a Dutch public television program at the end of February, 63 % of the more than 21,000 people consulted replied that they would support resuming Groningen extraction in the event that Russia decides to interrupt its gas exports to Europe.

At that time, it was thought that the popular support reflected in those polls could serve as a platform for the Dutch government to decide to continue pumping gas from the Groningen field.

Nevertheless, although gas extraction continued beyond the scheduled date of October 2022, finally, in April 2024, the Netherlands officially stopped drilling at the gas field in Groningen.

 Previous Arbitration

On 25 June 2018, Shell and ExxonMobil reached an agreement (the Heads of Agreement, AoH) with the Netherlands on the phasing out of gas production from the Groningen field, the deployment of gas storage facilities, the handling of damage and reinforcement and the financial settlement robustness of NAM. Later, on 9 September 2019, the parties signed another Interim Agreement (IA).

According to a letter sent by the State Secretary for Mining J.A. Vijlbrief to the House of representatives, after Shell and ExxonMobil considered that the balance in the AoH and the IA had been disrupted by the accelerated reduction of gas production, the parties attempted to reach a joint arbitration request in 2020. As this attempt failed, and after long and unsuccessful discussions at various levels on new replacement agreements, in December 2023, Shell and ExxonMobil initiated arbitration proceedings before the Netherlands Arbitration Institute (NAI) to obtain compensation to restore the balance in the AoH and the IA.

This previous arbitration request covered the following issues: the determination and payment of the compensation owed by the State under the AoH and the IA; the impact of the losses incurred by NAM through GasTerra; the conditions and limitations agreed in the AoH with respect to the on-charging to NAM of costs for damage control and reinforcement tasking; the specific transparency and monitoring obligations with respect to the aforementioned costs as agreed in the AoH; the agreement in the AoH that without production of gas from the Groningen field from NAM, no capacity will be requested; the agreement in the Heads of Agreement about the expiry of the guarantees provided by Shell and ExxonMobil in view of the termination of gas production from the Groningen field; the depletion of the underground gas storage facility in Norg; and the relationship between the new financial agreements made with the State in the Heads of Agreement and the State's intention to impose a solidarity contribution on NAM under the Act on Temporary Solidarity Contributions.

While the arbitration proceedings are in principle confidential, Dutch government officials confirmed that the new ICSID claim shows a lot of similarities with the existing one before de NAI.