Member Article

As was recently announced, the European Commission has yesterday (22 January 2014) published its proposal for the regulation of unconventional fossil fuels and notably shale gas.  Whereas both legislative and non-legislative options were on the table, the European Commission has chosen to adopt a non-legally binding “Recommendation” rather than a Directive.  In this note we first indicate how the legal position may nevertheless be affected of those Member States wishing to open up or support shale gas exploration on their territories (Poland, United Kingdom, possibly Belgium); as well as energy undertakings wishing to commence such exploration. We point to the fact that although Recommendations are indeed non-legally binding, they are certainly not legally irrelevant. Subsequently, we also point to the fact that the Commission may not have the competence to adopt this recommendation, and we indicate which action energy undertakings may wish to consider. Finally, we summarize and highlight key obligations contained in the Recommendation and point to their importance for Member States and energy undertakings.

Does the Recommendation affect the legal position of energy undertakings and Member States?

It is a public secret that the text of the recommendation was originally intended to be adopted as a Directive, but that the Commission did not think it politically expedient to make a legislative proposal to that end.  Therefore it adopted a non-binding Recommendation (art 288 TFEU) which nevertheless uses stringent language and tight deadlines: sometimes the language indicates merely “support” for the Member States “should they wish” to explore shale gas resources, at other times, the principles are to be applied as a common basis and are “complementary to” existing Union legislation applicable to high volume hydraulic fracturing projects, and “should be implemented by Member States within 6 months”. To underline the weight to be given to the recommendation, the Commission refers to the Charter of Fundamental Rights of the European Union, including the right to life and integrity of the person, freedom of expression, right to conduct a business, right to property, and high level of health and environmental protection.

From a legal perspective, what weight should be accorded to the Recommendation, and notably the expressions italicized in the above paragraph?

The Member States that choose to explore hydrocarbons through fracking are “are invited to give effect to these minimum principles” within six months from publication of the Recommendation, and will annually inform the Commission of their implementing measures.  The effectiveness of the recommendation will be reviewed after 18 months, and may be followed by legislative proposals that are legally binding should this be considered necessary. This means that once the elections for the European Parliament have passed and a new Commission has been put in place, that legislative action for the end of 2015 is not unlikely. The impact assessment that was published alongside the proposal is in this context important.  In making the choice between diverse policy options (both as regards substance and the non-legislative Recommendation), the impact assessment forms a benchmark which legitimates any action it may take (and has been used as such in Court proceedings in Luxembourg). Therefore, a swift legislative proposal is possible and likely once the Commission establishes in 18 months’ time that the non-legally binding recommendations have proved insufficient. Indeed, the current impact assessment has already explored how the ‘next step’ could be made reality – e.g. a legally binding directive.

Before we reach that stage however, we must query whether Recommendations could presently affect the legal positions of energy undertakings and EU member States. Here we point to case law of the Court of Justice of the EU that Recommendations such as this one are not devoid of legal effect. In particular, in the Grimaldi judgment (C-322/88) where the Court has held that they are not directly effective in the same way as for example a Regulation. However, they are not legally irrelevant:

• ...[Recommendations are] measures which, even as regards the persons to whom they are addressed, are not intended to produce binding effects. Consequently, they cannot create rights upon which individuals may rely before a national court. …

• [I]t must be stressed that the measures in question cannot therefore be regarded as having no legal effect. The national courts are bound to take recommendations into consideration in order to decide disputes submitted to them, in particular where they cast light on the interpretation of national measures adopted in order to implement them or where they are designed to supplement binding [Union] provisions.

This jurisprudence is highly relevant for the proposed recommendation since throughout the text the Commission elaborately refers to the link with existing legislation on waste water treatment, chemicals regulation, worker safety and so on.  It even expressly states that environmental impact assessments should be conducted in line with the principles of the new EU Directive 2011/92/EU, and that tender procedures should be carried out in line with EU legislation. It is therefore beyond doubt that the Recommendation is an interpretative instrument that affects the legal position of Member States and undertakings in the energy sector engaged in shale gas exploration and production.

Is the European Commission competent to adopt this recommendation?

Doubts can be cast over whether the EU Commission actually has the competence to adopt a recommendation such as this one. Namely, the Recommendation refers to Article 292 TFEU as its legal basisThis provision is found in chapter 2, section 1 of the TFEU on legal acts of the Union, and states that “the Commission shall adopt recommendations in the specific cases provided for in the Treaties”.  In other words it is a purely procedural provision not linked to any policy area, but that for the Commission there should be such an express link.  It furthermore states that the Council can adopt recommendations, on a proposal of the Commission, but for the Council there is no the restriction that the Treaty must expressly provide for such competence to that institution.  For that reason we are of the opinion that the Commission competence to adopt the recommendation may be put into question: neither Article 192 TFEU on environmental policy of the EU, nor Article 194 TFEU on EU energy policy expressly provide the Commission to adopt such a Recommendation.  Indeed, in the past the Court of Justice has held that even non-binding instruments adopted by the Commission may not upset the institutional balance in the Treaties.  Whereas procedurally Member States could more easily attack such an instrument under Article 263 TFEU, private enterprises could also be considered to have standing to attack the recommendation on these grounds.

The Proposal is essentially based on the precautionary principle.

In what follows, we provide a brief overview of the substance contained in the Recommendation.

The objective of the recommendation is to “lay down minimum principles that support Member States in the exploration and production of natural gas from shale formations and ensure that the climate and environment are safeguarded, resources are used efficiently, and the public is informed. While the recommendation does refer to the need to ensure the EU’s security of supply, reduce external energy supply, and stimulate economic growth,  the direct focus of the content of the rules can be linked to health and the environment.  More specifically, the regulatory approach of the recommendation is essentially grounded in the precautionary principle, e.g. given that– according to the Commission – there is very little experience in the EU with hydraulic fracturing and horizontal drilling, it is necessary to tread carefully as regards health and environmental impact of these and related techniques.

The precautionary principle is a powerful regulatory tool which according to the Recommendation should be applied by the Member States to all stages of shale gas exploration: planning, installation assessment, permits, operational and environmental performance and closure, and public participation and dissemination of information. This translates in a number of obligations which are couched in relatively strong language, e.g. “the Member States should…” :

• Ensure that a general strategic environmental assessment s conducted as well as that a project and site - specific environmental impact assessment is conducted.

• Ensure that the environmental impact assessment is in accordance with the new Directive 2011/92/EU before granting any exploration and/or production licenses.

• Provide the public with early and effective opportunities to participate in the strategic and specific impact assessments.

• If permits are granted on a competitive basis, the recommendation refers to the fact that the conditions and procedures should respect EU law and applicable legislation (e.g. equal treatment, transparency and related rules pertaining to public tenders).

• The chosen geological sites should be suitable for exploration and production through fracking, and the recommendation imposes specific requirements as regards the quality of data utilized to make such assessments again in line with the precautionary principle. The assessment of the site should further anticipate behavior of geological layers, identify all exposure pathways, and respect a minimum distance to the fracking zone and groundwater.

• A very elaborate base-line study is required before operations start so as to enable comparison and assessment of actual impact throughout the lifetime of the exploration and production activities.

• The Recommendation aims to set up a system whereby the Commission organizes a process to develop good industry practices among Member States, the involved industries, and environmental NGO’s to manage and reduce impacts and risks associated to hydrocarbon exploration and production.

• Member States should ensure that the REACH Regulation is fully complied with, and that using chemicals should be reduced to a minimum, and that they should not be hazardous where technically feasible.

• Member States must ensure constant monitoring by the operator of their activities against the initial base-line study.

• Potential liabilities of the operators should be backed up by a financial guarantee prior to the start of operations.

• Member States should have competent regulatory authorities that do not have a conflict of interest with the industries involved in exploration or production.

• There are significant information obligations to be imposed on operators, including the chemicals and volumes of water used.

What happens next.

The publication of the Recommendation with accompanying impact assessment is important, but is evidently but a first step. The process that will now ensue must be closely monitored for its impact on your business objectives. To start with, private enterprises and member states must now conduct a thorough interpretative exercise of the impact assessment and the recommendation.  On this basis, relevant long term regulatory strategies must be adapted to set out the appropriate course of action from a legal regulatory and a public affairs perspective. Whereas the first phase should focus on the EU level in this respect, the next step is to ensure appropriate implementation at the national level in a way that matches your interests.