Oil firm Rockhopper wins payout from Italian government after drilling ban

The Ombrina Mare oil field is located less than 12 miles offshore from Abruzzo, southern Italy. An arbitration tribunal ordered the Italian government to compensate the UK firm after oil exploration and production within 12 miles of the coast was banned in 2015.Following the ban, the Italian Ministry of Economic Development decided in February 2016 not to award Rockhopper with a production concession covering the Ombrina Mare field.

In 2017 Rockhopper commenced international arbitration proceedings against Italy in order to obtain damages and compensation in relation to its investments in the project. Rockhopper based its claim on the Energy Charter Treaty (ECT), of which Italy is a signatory. The ECT dates back to the 1990s and is designed to provide a cross-border framework for energy sector investments.

According to Rockhopper, the arbitration panel “unanimously held that Italy had breached its obligations under the Energy Charter Treaty entitling Rockhopper to compensation”.

“Governments and regional governments are coming under increasing pressure to implement robust plans to reduce fossil fuel emissions, and those plans often come under scrutiny from environmental organisations and activists,” Michael Fenn of Pinsent Masons said. “The practical impact of implementing those plans can be seen here: the Italian government banning oil exploration meant that Rockhopper effectively lost its investment in relation to the Ombrina Mare project”.

“As governments push on with their plans towards net zero, we are likely to see a rise in the number of multi-million pound claims - such as those by RWE and Uniper - brought by corporates to recover the costs of projects and ‘stranded assets’ that have been rendered obsolete,” he said.

Rockhopper said that all costs associated with the arbitration were funded by a specialist arbitration funder on a non-recourse basis. “After payments due to the arbitration funder, Rockhopper expects to retain approximately 80% of the award,” the company said, and highlighted that further analysis will be required to establish the tax treatment.

Chris Dryland of Pinsent Masons said: “The fact that Rockhopper funded the arbitration by way of third-party funding is an interesting feature of this case. This demonstrates that third party funders are increasingly prepared to provide funding for a broader range of cases - here an arbitration claim against a government - beyond more traditional claims such as for breach of contract.”

Dryland highlighted that third party funding is increasingly being seen as an attractive funding option by a broader range of organisations and businesses, such as PLCs, where the non-recourse nature of third-party finding is seen as a way of protecting the interests of shareholders at no cost to the company.

After the decision of the arbitration panel became public, in a press release Samuel Moody, CEO of Rockhopper, said: “this positive milestone builds on our recent transaction with Navitas and while work still needs to be done on Sea Lion, we believe after collection of the award, it will make a material contribution towards our share of the development costs.”

Sea Lion is a 1.7 billion barrel oil project in the Falkland Islands in which both Rockhopper and Navitas Petroleum are involved.