Energy Disputes

A col­lec­tion of inter-re­lated activ­it­ies and busi­ness re­la­tion­ships pose a con­sid­er­able chal­lenge to oil and gas in­dustry play­ers. Pro­jects and sup­ply chains are com­plex, while joint ven­tures can be tested by fin­an­cial con­straints and tight­er profit mar­gins.At the same time, oil and gas busi­nesses are at the fore­front of at­ten­tion from many host states and reg­u­lat­ors as a res­ult of (i) the cur­rent in­creas­ing fo­cus on ESG is­sues and en­vir­on­ment­al tar­gets and (ii) the need for the rel­ev­ant gov­ern­ment to use oil op­er­a­tions as a source of state rev­en­ue. In some re­gions, those chal­lenges are ac­com­pan­ied by loc­al con­tent laws and na­tion­al­ist­ic policies which add to the com­plex­ity. In a gen­er­ally harsh glob­al busi­ness en­vir­on­ment made worse by the COV­ID-19 pan­dem­ic, it is lo­gic­al, that in­dustry play­ers would be wary of dis­putes and their pos­sible con­sequences.

What are the key risks that the in­dustry is fa­cing and where are you see­ing the most po­ten­tial for dis­putes? Today, I be­lieve that the main chal­lenge con­sists of align­ing the ne­ces­sary re­duc­tion of risks, costs and im­pacts of ex­ist­ing op­er­a­tions with the de­sir­able in­crease of pro­ductiv­ity and gen­er­a­tion of cash for new in­vest­ments. For the longer term, I think the main chal­lenge that all op­er­at­ors will face is how do you trans­form your hy­dro­car­bon busi­ness in­to something green­er. You can do this by just hav­ing an­oth­er port­fo­lio with oth­er en­er­gies or just by im­ple­ment­ing cer­tain changes in your own oil and gas as­sets. How do you see the force ma­jeure term be­ing ap­plied in the cur­rent cli­mate? What you don’t know is how a pan­dem­ic is viewed by the courts and by the ar­bit­ral tribunals. There’s a lot of jur­is­pru­dence re­gard­ing force ma­jeure clauses, but I think the new com­pon­ent here is the pan­dem­ic. I think that ar­bit­rat­ors and courts will have sym­pathy for the ones who are suf­fer­ing with a pan­dem­ic. Let’s see how they re­act. How li­ti­gi­ous or co­oper­at­ive is the in­dustry right now? I think the in­dustry it­self is quite li­ti­gi­ous, but I think that lit­ig­a­tion is ex­pens­ive. I think that parties are less will­ing, be­cause of the fin­an­cial crisis, to enter in­to pro­ceed­ings to solve prob­lems. I think they will pause and look at the be­ne­fit of hav­ing an ar­bit­ra­tion versus the cost of it, and what they’ll gain from it. You have to look at the long-term pro­spects.

The range of dis­putes that the in­dustry is ex­per­i­en­cing is evolving with the on­set of en­vir­on­ment­al and cli­mate change con­cerns. Cur­rently the in­dustry is de­fend­ing an ever-grow­ing list of cli­mate change cases as act­iv­ists be­gin to be more as­sert­ive, of­ten through ju­di­cial re­view chal­lenges. In 2020, sev­er­al ju­di­cial re­views were brought by en­vir­on­ment­al cam­paign­ers seek­ing to lim­it or pre­vent oil and gas ex­plor­a­tion activ­ity.Al­lied to this, The CMS Oil and Gas Dis­putes Sur­vey re­spond­ents identi­fy protest­or dis­rup­tion as a ma­jor area of risk for oil and gas play­ers. A range of protest ac­tions have oc­curred seek­ing to dis­rupt both on­shore and off­shore oil and gas op­er­a­tions, in­clud­ing in the frack­ing in­dustry.The CMS Oil and Gas Dis­putes Sur­vey par­ti­cipants also ac­know­ledge the risks as­so­ci­ated with tax dis­putes, which arise in large part be­cause in­ter­na­tion­al tax re­gimes re­lat­ing to the oil and gas sec­tor are hugely com­plex and in­creas­ingly so.

Risk pro­file, tech­nic­al and reg­u­lat­ory com­plex­ity and fin­an­cial con­straint nat­ur­ally all height­en the po­ten­tial for dis­putes. The CMS Oil and Gas Dis­putes Sur­vey sug­gests that two types of geo­graph­ic loc­a­tions bring with them an in­creased risk of dis­putes.First, ma­ture basins where: (i) ex­plor­a­tion and pro­duc­tion (E&P) is more tech­nic­ally chal­len­ging; (ii) pro­jects are fin­an­cially mar­gin­al com­pared to less ma­ture ‘mega fields’ with a long re­main­ing life; and (iii) there is a pro­lif­er­a­tion of me­di­um sized oil com­pan­ies with few­er re­la­tion­ships to main­tain else­where. These ma­ture basins are re­por­ted as hav­ing a great­er ca­pa­city to raise con­ten­tious clashes. United King­dom has the highest chance of en­ergy dis­putes arising There are likely many con­trib­ut­ing factors. The United King­dom Con­tin­ent­al Shelf (UKCS) is one of the three geo­graph­ic loc­a­tions that rep­res­ents the highest chance of a dis­pute arising, ac­cord­ing to The CMS Oil and Gas Dis­putes Sur­vey par­ti­cipants. A high pro­por­tion of re­spond­ents have op­er­a­tions in the UKCS re­gion and our data in­dic­ates that a sig­ni­fic­ant num­ber of these see it as high risk.As the mar­ket has ma­tured and with hy­dro­car­bon re­serves di­min­ish­ing in more ma­ture fields, op­er­at­ors have been forced in­to deep­er wa­ters where E&P is more tech­nic­ally com­plex and ex­pens­ive. If work­scopes re­quire to be ad­ap­ted be­cause pro­jects do not un­fold as an­ti­cip­ated on the ground, cost over­runs can quickly be­come a real con­cern and the chance of a dis­pute height­ens, both with con­tract­ors try­ing to work to tight budgets and co-ven­tur­ers re­quired to fund what may be cut­ting edge or mar­gin­al pro­jects.The pro­file of as­set own­er­ship in the UKCS has also changed over time. The UKCS re­gion is now in­hab­ited, in part, by smal­ler and me­di­um sized in­de­pend­ent play­ers look­ing to de­vel­op and max­im­ise re­cov­ery from smal­ler or ma­ture in­terests. These oil com­pan­ies are of­ten are fin­anced and struc­tured in a way that is very dif­fer­ent from the su­per-ma­jors that tra­di­tion­ally dom­in­ated the UKCS.

The three geo­graph­ic loc­a­tions iden­ti­fied as highest risk in terms of the pro­spects of a dis­pute arising were: Africa (28% of re­spond­ents, and 60% of those who op­er­ate in that re­gion); the United King­dom Con­tin­ent­al Shelf (UKCS) (37% of all re­spond­ents, and 50% of those who op­er­ate in the UKCS); and Lat­in Amer­ica (17% of total re­spond­ents and 40% of those who op­er­ate in the re­gion).

It is not­able that in The CMS Oil and Gas Dis­putes Sur­vey, re­spond­ents singled out pro­jects and joint ven­tures as the as­pects of their activ­it­ies that bring the highest risk of dis­putes arising.As far as joint ven­ture dis­putes are con­cerned, in more be­nign times, when oil prices were con­sid­er­ably high­er, when the glob­al eco­nomy was grow­ing, and be­fore the oil and gas mar­ket be­came more frag­men­ted, in­dustry play­ers would have been per­haps more likely to avoid dis­putes with a joint ven­turer or re­solve is­sues quickly. Dis­putes with a joint ven­ture part­ner over a re­l­at­ively small mat­ter in a single jur­is­dic­tion might jeop­ard­ise a more luc­rat­ive glob­al re­la­tion­ship. The wider com­mer­cial im­per­at­ives would of­ten vastly out­weigh the gains from a leg­al battle.Duncan Hol­land, Head of Leg­al at Cairn En­ergy says: “In years gone by when the oil price was closer to $100, the banks were freer with their lend­ing, people were less con­strained, and dis­putes were more eas­ily re­solved. People would just meet in the middle.”Now that the mar­ket is more seg­men­ted and with both lar­ger com­pan­ies and in­de­pend­ent play­ers hav­ing tight­er fin­an­cial re­sources, the in­cent­ive to launch dis­putes seems to be great­er. Re­l­at­ively speak­ing oil com­pan­ies simply have more to lose. “Fif­teen years ago, there were very few joint ven­ture dis­putes,” com­ments Phil­lip Ash­ley, a CMS En­ergy Dis­putes Part­ner. He says that in cer­tain re­gions, the fre­quency of these kinds of dis­putes seems to have grown as as­sets are di­vested to smal­ler en­tit­ies and private equity-backed com­pan­ies - that have tight­er profit mar­gins. They also have less ex­tens­ive fund­ing ar­range­ments mean­ing that it may be less straight­for­ward for them to simply ‘meet in the middle’.Also, many of these smal­ler com­pan­ies do not have the kind of ex­tens­ive port­fo­lio that tra­di­tion­al oil and gas com­pan­ies would have had. As a res­ult, there may be less need to bal­ance re­la­tion­ships across mul­tiple joint ven­ture in­terests.Moreover, some joint ven­ture agree­ments were put in­to place dec­ades ago, when ex­plor­a­tion in a par­tic­u­lar area com­menced. That means that they in­cor­por­ate ap­proaches to ac­count­ing and gov­ernance which are no longer re­flect­ive of today’s mar­ket. In some cases the ex­ist­ing con­trac­tu­al ar­range­ments have not fully an­ti­cip­ated the chal­lenges as­so­ci­ated with con­tinu­ing to pro­duce from a ma­ture as­set, or those that arise as pro­duc­tion winds down and the oil field in­fra­struc­ture moves closer to de­com­mis­sion­ing. These his­tor­ic con­trac­tu­al ar­range­ments of­ten also do not ac­count for as­set own­er­ship by com­pan­ies that are struc­tured in a very dif­fer­ent way to the com­pan­ies that car­ried out the ori­gin­al ex­plor­a­tion work. Valer­ie Al­lan, a CMS En­ergy Dis­putes Part­ner, says that court re­cords show a marked in­crease in joint ven­ture cases.It is per­haps not sur­pris­ing that re­spond­ents iden­ti­fied pro­jects as the oth­er key area of risk as re­gards the po­ten­tial for dis­putes to arise. E&P pro­jects re­quire sig­ni­fic­ant fin­an­cial in­vest­ment, some­times (for ex­ample, in drilling ex­plor­a­tion wells) with no guar­an­tee of any re­turn. The work is of­ten be­ing un­der­taken in a dif­fi­cult phys­ic­al en­vir­on­ment and, des­pite ex­tens­ive plan­ning, in many cases (such as ex­plor­a­tion wells) there will be no cer­tainty as to the res­ult. Tech­nic­al com­plex­ity means there is al­ways the po­ten­tial for things to go wrong, and that com­plex­ity is in­creas­ing, for ex­ample, in ma­ture basins where new tech­no­logy is re­quired to de­liv­er bar­rels from deep­er, high­er pres­sure wells. Par­tic­u­larly where pro­jects are to bring new or ad­di­tion­al pro­duc­tion on­line, there will be real com­mer­cial pres­sures to achieve first hy­dro­car­bons as quickly as pos­sible in or­der to fa­cil­it­ate a re­turn on in­vest­ment. Ad­ded to that, the con­tinu­ing low oil price puts sig­ni­fic­ant pres­sure on mar­gins, driv­ing down­con­tract­or rates in an in­creas­ingly com­pet­it­ive mar­ket and leav­ing little con­tin­gency for un­ex­pec­ted events.

What are the key risks that the in­dustry is fa­cing? Where are you see­ing the most po­ten­tial for dis­putes? It is largely about the fin­an­cial situ­ation. Across the in­dustry, we are see­ing more dis­agree­ments even with parties in joint ven­tures, where there may not be a huge amount of money at stake, but com­pan­ies are seek­ing to pre­serve cash and not be tied in­to work com­mit­ments.  What op­er­a­tions are most likely to lead to dis­putes and how are you ap­proach­ing top­ic­al is­sues such as force ma­jeure?  We are in a dif­fer­ent world where some long-term con­tracts and work com­mit­ments of op­er­at­ors don’t make sense any­more and it’s not go­ing to change in the next 12 to 18 months, which is in­creas­ingly lead­ing to dis­putes.Force ma­jeure has taken up a bit of time in the last few months. If you phys­ic­ally can’t op­er­ate, then force ma­jeure is pretty clear, but as re­stric­tions are then re­laxed in some parts of the world while re­main­ing in oth­ers, it can be­come quite com­plex. Par­tic­u­larly in the oil and gas in­dustry where people and equip­ment can be mov­ing around the world. How do you see the im­pact of cli­mate change policies and pri­or­it­ies?  Gov­ern­ments, share­hold­ers and reg­u­lat­ory bod­ies in many coun­tries are look­ing at in­creased reg­u­la­tion in the im­me­di­ate and near-term fu­ture and that will be a key is­sue when look­ing at new pro­jects.  How is the typ­ic­al in-house leg­al team ad­dress­ing these risks in today’s cli­mate? And how might this com­pare to five or 10 years ago? I think there is a gen­er­al trend to more quickly use ex­tern­al coun­sel, be­cause there used to be more dis­putes re­solved am­ic­ably. The tem­per­at­ure has in­creased. We don’t ne­ces­sar­ily end up in court, but we have the po­ten­tial to do so. People can be emotive about dis­putes and it can be­come more tense. What you want is for ex­tern­al coun­sel to see through that and see what the un­der­ly­ing is­sue is. And so it’s about be­ing able to cut through all that noise in these dis­putes and see­ing where the strong points and the weak points are and ask­ing: ‘is this worth pur­su­ing’? We need law­yers to be com­mer­cial while un­der­stand­ing all the key mov­ing parts.  Where do you feel that the in­dustry can im­prove its man­age­ment of risk and dis­putes?  People can keep bet­ter re­cords. A lot of prob­lems arise out of meet­ings where people dis­agreed about cer­tain things and the two parties have re­cords that are wildly dif­fer­ent. Also, clear­er draft­ing at the out­set. Of­ten you have com­plic­ated agree­ments and people are keen to get them con­cluded and signed, even though there is of­ten vague lan­guage try­ing to deal with highly com­plex situ­ations. You need to have these dis­cus­sions early to try and deal with some of the prob­lems be­fore they arise. It’s easi­er to reach agree­ment on a lot of these is­sues when things are am­ic­able.

Even if the oil and gas in­dustry faces more risk and is prone to more ten­sions, clashes and dis­agree­ments, it does have the means of tack­ling these con­cerns.Over 91% of The CMS Oil and Gas Dis­putes Sur­vey re­spond­ents in­dic­ated that there is room for im­prove­ment in man­aging dis­pute-re­lated risks. Just as the in­dustry is evolving and shift­ing ac­cord­ing to eco­nom­ic, geo­pol­it­ic­al and so­cial changes, so too are the means of ad­dress­ing risks and min­im­ising the chances of dis­agree­ments.

Where are you see­ing the most po­ten­tial for dis­putes?  Whenev­er we see mac­roe­co­nom­ic fin­an­cial chal­lenges in the in­dustry, we see chan­ging pri­or­it­ies for all play­ers, and that leads to a de­sire to find flex­ib­il­ity in ex­ist­ing com­mit­ments, to move in dif­fer­ent dir­ec­tions. Nat­ur­ally that can see an in­crease in dis­putes com­ing through the sup­ply chain, and for long term sup­ply re­la­tion­ships. We see chal­lenges com­ing through an in­creas­ing fo­cus on loc­al con­tent, en­vir­on­ment­al and is­sues arising from in­ter­na­tion­al la­bour mo­bil­ity due to changes in la­bour laws glob­ally. Where do you see the biggest po­ten­tial for dis­putes geo­graph­ic­ally?  We are see­ing op­er­a­tion­al in­ter­rup­tion evenly dis­trib­uted across the globe as we move through the pan­dem­ic. That has been a great lev­el­ler this past year in terms of com­mer­cial dis­putes. Cer­tain so­cial and polit­ic­al pres­sures have over the past sev­er­al years put pres­sure on loc­al con­tent policies in al­most every con­tin­ent. And we’re see­ing ten­sions com­ing through the matur­ing of em­ploy­ment law in cer­tain la­bour mar­kets. As Gen­er­al Coun­sel, where have you felt the most pres­sure dur­ing the COV­ID crisis?  Ini­tially it was the re­lent­less pace of it all, need­ing to solve very new chal­lenges sim­ul­tan­eously, in terms of work­ing loc­a­tions, mov­ing people around in­ter­na­tion­ally, con­tract im­plic­a­tions. As the pan­dem­ic draws out, we are see­ing more fun­da­ment­al im­pacts; per­man­ently changed work­ing meth­ods, loc­a­tions and struc­tures. Which brings op­por­tun­it­ies to re­spond more cre­at­ively in the longer term to the lower de­mand that we are see­ing across the in­dustry through 2021, and po­ten­tially bey­ond. Which activ­it­ies are most likely to lead to dis­putes right now?  Op­er­a­tion­al delay due to COV­ID and force ma­jeure is a really hot is­sue. Move­ment of goods and people across bor­ders and to off­shore loc­a­tions con­tin­ues to be very chal­len­ging.  How are in-house teams typ­ic­ally start­ing to use tech­no­logy?  The use of AI and auto­ma­tion in our sup­ply chain and com­mer­cial agree­ments has huge po­ten­tial to help us man­age risk through stand­ard­isa­tion and great­er align­ment between suites of pro­ject agree­ments across our en­ter­prise. It is the key to cost and time ef­fi­ciency in con­tract­ing. It’s much easi­er for us to run stats on our agree­ments to in­crease con­sist­ency of con­tent, and be able to mon­it­or key met­rics. As an off­shore drilling com­pany, we are hugely ad­ept at de­vel­op­ing and us­ing in­nov­at­ive tech­no­logy. That shouldn’t stop when it comes to our on­shore busi­ness. What in­volve­ment do you typ­ic­ally seek from ex­tern­al coun­sel and in what cir­cum­stances would you look to bring them in?  No mat­ter the cal­ibre of a strong in-house team like Sead­rill’s, in­ter­na­tion­al busi­nesses like ours will al­ways look for qual­ity spe­cial­ist jur­is­dic­tion­al know­ledge. Hav­ing the in­ter­na­tion­al um­brella of ex­tern­al firms, help­ing us ac­cess and man­age loc­al con­tent in emer­ging jur­is­dic­tions and chal­len­ging jur­is­dic­tions, is hugely valu­able. In areas like com­plex dis­pute man­age­ment, law firms are be­com­ing real spe­cial­ists in their abil­ity to handle and pro­cess the volumes of data in­volved and of­fer a more joined-up ser­vice to get all the way through to res­ol­u­tion.

Al­though an­oth­er su­per-cycle can nev­er be dis­coun­ted in the oil in­dustry, mar­ket ana­lysts cur­rently con­sider it un­likely that the oil and gas in­dustry will ever ex­per­i­ence the con­di­tions that im­me­di­ately pre­ceded the 2008 fin­an­cial crisis.In that peri­od, busi­nesses were able to gen­er­ate sig­ni­fic­ant profits thanks to skyrock­et­ing oil prices and sig­ni­fic­ant glob­al de­mand. As the green eco­nomy gains fur­ther trac­tion, buoyed by polit­ic­al and so­ci­et­al sup­port, in­ev­it­ably oil and gas play­ers will face chal­lenges. It will not al­ways be easy to pre­serve cor­di­al re­la­tion­ships with joint ven­ture part­ners, con­tract­ors, sup­ply chains and host states.Where ten­sions build, it will be es­sen­tial to have the right meth­ods in place to mol­li­fy fric­tion and un­ease.

The CMS Oil and Gas Dis­putes Sur­vey ex­amined the key drivers of dis­putes and dis­pute man­age­ment in the oil and gas in­dustry, and how sec­tor par­ti­cipants are mov­ing to­wards new ap­proaches to min­im­ise con­flicts and dis­putes. Based on more than 50 re­sponses from seni­or leg­al man­agers and seni­or in-house coun­sel in the oil and gas in­dustry across Europe, the Middle East, Asia Pa­cific, Africa and Lat­in Amer­ica, it provides in­ter­est­ing in­sights in­to how dis­putes arise and are man­aged around the globe.Even be­fore the on­set of the COV­ID-19 pan­dem­ic, the oil and gas in­dustry was fa­cing con­sid­er­able chal­lenges, not least a pro­longed peri­od of re­l­at­ively low oil prices and a glob­al fo­cus on lower­ing car­bon emis­sions and “green” en­ergy.Com­pared with the heights of 2008, pri­or to the glob­al fin­an­cial crisis, when in­ter­na­tion­al oil prices peaked at over US$140 a bar­rel, the US$55 bar­rel price for Brent Crude in late Janu­ary 2021 still looked re­l­at­ively low, des­pite the re­cent par­tial re­cov­ery. Those weak prices con­tin­ue to place con­sid­er­able pres­sures on in­dustry play­ers that are now of­ten op­er­at­ing on his­tor­ic­ally low mar­gins of prof­it­ab­il­ity.It was not al­ways this way. As ver­tic­ally in­teg­rated gi­ants, oil and gas ma­jors were tra­di­tion­ally con­sidered well able to ab­sorb down­sides with­in a broad port­fo­lio of rev­en­ues and part­ner­ships, but today many in­dustry play­ers no longer have that lux­ury. A num­ber of geo­graph­ic mar­kets that were pre­vi­ously dom­in­ated by a few large up­stream oil com­pan­ies have transitioned through di­vest­ments to own­er­ship by a lar­ger group of smal­ler in­de­pend­ent play­ers with more fo­cused port­fo­li­os and a range of fin­an­cial mod­els. With more op­er­at­ors and par­ti­cipants in many oil and gas geo­graph­ic mar­kets, it seems likely that the op­por­tun­it­ies for dis­putes are in­creas­ing. CMS Oil and Gas Dis­putes Sur­vey in­dic­ates that more could be done to pre­vent and mit­ig­ate against ex­pens­ive time-con­sum­ing dis­putes.