Managing the risks
This year’s CMS Oil and Gas Disputes Survey once again highlights the wide range of industry issues and activities that have the potential to lead to a legal dispute. Evaluating the degree of risk in each of these areas is key in determining an effective risk management strategy.
Key finding:
Projects – early engagement and ‘real time’ process improvements will mitigate risk
45% of our survey respondents considered that projects in the oil and gas sector created a high risk of disputes arising. 40% saw this as a medium risk while only 15% felt it presented a low risk. That said, respondents considered that those risks could be better managed through process improvements. 18% of respondents considered that keeping better records would assist and 17% felt that better management of change was important. Other significant factors included earlier identification of risk during the tender process (14%) and better management of supply chain/subcontractors (10%). Addressing these factors can contribute to enhancing processes which, in turn, can help manage the risk of disputes.
The industry experts who took part in our survey highlighted the need for “clearer negotiation parameters” to mitigate the exposure to risks in project contracts. Another respondent, focused on the UKCS market, pointed to “better understanding of changing dynamics in the UK” as a key factor in minimising the risk of a dispute.
As project costs constitute one of the greatest areas of potential financial exposure across the industry, our respondents believe that basic process improvements can drive significant benefits. These improvements are all felt to be within our survey respondents’ control, which indicates that upfront investment in proactively managing a project is likely to be beneficial.
“This finding is consistent with anecdotal experience. Ensuring oil and gas projects have thorough processes for identifying and managing risk during the tender phase, as well as effectively managing and documenting change are key to success in mitigating the potential of a dispute arising. It will also ensure you are in the best position possible in the event of a dispute coming to fruition.”
Valerie Allan, CMS Energy Disputes Partner
Key finding:
Supply chain – better document management would help
Supply chain issues were perceived as not having such a high level of risk in triggering disputes compared to the risks around projects. 19% of respondents thought that supply chain was high risk while a significant 55% of participants thought it carried a medium risk in instigating a dispute. 13% of respondents felt that keeping better records could decrease these risks while 13% also indicated that better management of change was important to mitigate the potential of a supply chain dispute. Earlier identification of risk during the tender phase (11%) and better management of supply chain/subcontractors (19%) were also identified as significant factors in managing that risk.
Key finding:
Joint ventures and regulators – best practice requires early engagement, clear communication, and excellent document management
In relation to dealing with joint venture partners and host governments/regulators, opinions varied depending on differences in geographic location and nature of joint venture partner. 22% of survey participants perceived joint ventures as posing a high risk of disputes, 50% a medium risk, and 28% a low risk. In relation to dealing with governments and regulators, 35% thought this high risk, while an equal number of respondents considered this to be a medium or low risk (32.5% each). In relation to both types of relationship, keeping better records and better management of change were seen as key (20% and 12%, respectively, for joint venture risks, and 24% and 15% for governments and regulators). Additionally, when dealing with governments and regulators, better understanding of local/regional factors was considered important (20%).
A number of respondents highlighted the importance of maintaining dialogue with partners and factors such as better communication and “better management of understanding of the rationale behind the original investment” as critical in mitigating a potential dispute with a joint venture partner.
Key finding:
M&A activity, LNG sales, oil sales – make the dispute resolution method fit for purpose
M&A activity, LNG sales and oil sales were all perceived as being fairly low risk activities. 55% of respondents considered M&A to be low risk, while 50% felt that LNG sales were a low risk and 61% believed oil sales to be low risk. In each of these areas, earlier consideration or use of dispute resolution methods was seen as important.
The war in Ukraine and its impact on the global energy market was only just being felt at the time of our survey. With many European nations, including Germany, now looking to find alternatives to Russian oil and gas, this is likely to have a major impact on both LNG and oil sales going forward.
“The level of risk arising from natural gas and LNG sale and purchase agreements have fluctuated over time. Factors such as market structure and the volatility of commodity prices, both of which have been significantly impacted by Russia’s invasion of Ukraine, play a key role in determining the level of risk. It remains to be seen whether this time next year natural gas and LNG sales continue to be seen as low on the risk matrix.”
Phillip Ashley, CMS Energy Disputes Partner
Key finding:
Early legal team involvement can minimise the risks
Across the board, the one consistent answer was that earlier involvement of in-house/external counsel would assist the better management of disputes. It was amongst the top answers for each area of potential disputes: projects, supply chain, M&A activity, LNG sales, oil sales, joint ventures and dealing with governments/regulators. For managing M&A risk, it was considered the most important factor.
Given that almost all respondents are themselves in-house legal counsel, this may reflect a general sense that such advice is often sought at a later stage than they would consider to be most effective. It could also reflect an appreciation of the complexity and breadth of the activities undertaken across the industry and the benefit of specialist input in managing risks at an early stage.
