Oil and Gas Disputes Survey: 2021-22

The “energy trilemma” and increased risk

The first, and perhaps most important global theme, is that the world’s oil and gas industry currently finds itself at the centre of an energy trilemma as it seeks to transition towards sustainability whilst ensuring security and affordability of supply remain intact. Getting to grips with these three challenges simultaneously is extremely difficult, especially at a time when a cheap and (until recently) widely used source like Russian gas is being phased out across Europe. As a result of this perfect storm, trilemma issues are increasingly serving as a central driver for risk in the oil and gas sector.

While a transition to sustainability has been the major challenge in recent years (with particular pressure in some jurisdictions on the industry’s ‘social licence’ to operate in the face of significant public climate change concerns), issues around energy security and affordability are now coming to the fore globally, driven primarily by the war in Ukraine. Linked to the need to increase security and ensure affordability, moving forward, we see a greater potential for risk and disputes within the fabrication and construction markets which support the energy industry, with many projects now being accelerated to increase non-Russian market supply of hydrocarbons at a time when supply chains are still recovering from the impact of Covid-19-related shutdowns. Historically, cost escalation and project delay are common factors behind oil and gas disputes. With the above pressures, set against the background of rising global inflation, these are set to become even more significant concerns.

Other issues of importance

• LNG prices were high prior to the Russian invasion of Ukraine, likely due to an existing undersupply, but also suggesting that issues of affordability may have begun to arise this year in any event.
• Although our survey highlights a lower perceived risk of climate change action compared to last year’s survey, protestor activities continue to present a serious threat to the industry as they increase in the UKCS and across other global markets. Climate change-related protests are unpredictable and the activities being carried out can raise significant health and safety risks for oil companies, leading some to seek relief through court injunctions.
• There is further scope for disagreements between joint venture partners on investment decisions, especially where owners of an asset have different trilemma perspectives or solutions. We would also anticipate an enhanced risk of regulatory challenge to any new developments where government consent or involvement is required.
• Oil and gas industry projects operate on a long timeframe where important investment decisions are typically made many years in advance. A clear and settled tax regime is therefore vital to the industry. This has, however, become a significant area of concern as we witness increasing pressure on governments to levy additional burdens on an industry seen to be continuing to make significant profits. While many would argue that it’s right for governments to provide public support to help offset rising energy costs, windfall taxes such as the Energy Profits Levy imposed by Westminster in relation to UKCS activities impact on energy investment and can further contribute towards security and affordability issues.
• The potential for disputes within the oil and gas industry also continues to be impacted by the changing nature of the companies operating within the market. Many of the large upstream oil companies’ operations have now been transferred to smaller independent players with more focused portfolios and a range of financial models.

As ever, managing these issues and, where possible, mitigating the prospect of a legal dispute is a key priority albeit one where most respondents believe there is room for improvement. Our survey shows once again that more could be done to prevent and mitigate against expensive time-consuming disputes.