Corrs warns Coalition’s gas reservation plan may breach Australia’s treaty obligations

In the lead-up to this weekend’s Australian federal election, leading independent law firm Corrs Chambers Westgarth has raised concerns over the impact a proposed new east coast gas reservation policy could have on the nation’s trade reputation.

Opposition leader Peter Dutton has revealed a Coalition government would introduce a gas reservation scheme on Australia’s east coast, with gas to be diverted away from LNG export projects and to the domestic markets.

However, Corrs has noted that a question posed in the past—and arising again now—is whether a gas market intervention contravenes Australia’s international obligations under investment treaties it has concluded with countries in the region.

Key election topics

The highly regarded legal firm noted that with the public focus on cost-of-living pressures dominating the political cycle, energy costs and energy security have become key topics of political debate in advance of the federal election.

“The question of whether the Australian export restrictions on LNG amount to indirect expropriation or a non-compensable exercise of ‘police powers’ will be pivotal,” the company wrote.

“The government may argue that the proposed east coast gas reservation policy is necessary to respond to domestic gas shortages and rising energy prices—objectives that could qualify as a legitimate public interest.”

“At the same time, it may be contested whether such measures fall within the traditional scope of police powers, which tribunals have typically linked to public health, safety and environmental protection.”

Breaching obligations

The firm said government intervention in the gas market in the form of export restrictions—be it quantitative restrictions or export levies such as the proposed Gas Security Incentive—could, depending on the manner of implementation and impact, breach Australia’s obligations under its investment treaties and give rise to foreign investors’ right to claim damages.

“Among other protections, most investment treaties require foreign investors to be accorded fair and equitable treatment, which obligation prohibits discriminatory or arbitrary treatment of foreign investors.”

“In some cases, this protects the investor’s legitimate expectations arising from specific undertakings given to the investor that the investor relied upon when investing in the country.”

“Could the policy trigger the right to claim under an investment treaty?”

Specific assessment

“Whether a treaty breach has occurred will ultimately depend on a case-specific assessment, often involving a proportionality analysis,” Corrs added.

“This entails weighing the legitimacy and necessity of the policy objective against the severity of the measure’s interference with the investment and the investor’s expectations.”

Corrs noted that it is too early to tell whether the imposition of the Gas Security Incentive to incentivise domestic supply—or a similar measure—would provide a legal basis for a claim of compensation to foreign investors.

“The government needs to be cognisant not only of bolstering the domestic market but of the reasonable expectations of foreign investors and its own international investment and trade commitments.”