Risk mitigation: limiting the fallout

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.

A very small proportion of The CMS Oil and Gas Disputes Survey participants admit to never consulting with internal or external legal teams or contract management groups although only 51% say they will always or often turn to these specialists for help with risk/dispute management strategies.

Naturally addressing a potential area of conflict at an early stage is beneficial as full-blown disputes are expensive and time consuming. Of course, larger organisations and oil majors are often process-led and well equipped and experienced in managing risk and disputes. They have process management embedded within their operations: reducing the risk of disputes and imbedding a process for dealing with potential disputes at early stages. Smaller players often find it more difficult or impractical to operate the type of process management solutions suited to the management of large corporations, which can be effective at risk mitigation but expensive to operate.

Across the board, respondents to The CMS Oil and Gas Disputes Survey identified that relationships remain critical to risk management and that early engagement and communication with counterparties of all types is key – provided it is at the right level, and follows robust internal preparation and a clear understanding of the issues and risks, and also a clear focus on the ultimate goal.

In disputes with contractors, The CMS Oil and Gas Disputes Survey participants identify better management of change in projects and submitting notices within prescribed time limits as the primary strategies to risk mitigation and avoidance.

In disputes arising within joint ventures, respondents point to better management of the relationship with joint venture partners as the key approach. They also single-out the importance of an improved understanding of the local market and region-specific factors. These difficulties can stem from non-operating partners lacking the knowledge of local factors and pushing back on operator proposals. Regular communication and management of the relationship can be especially pivotal to preventing disputes.

Interestingly, when it comes to addressing disputes with host states and regulators, earlier involvement of in-house legal and external counsel is viewed as essential. Local knowledge of laws and regulations, including the application of local content laws, are imperative in avoiding conflict with host states and regulators.

Keeping better records is also seen as vital, in part because under many production sharing contracts or technical service agreements the financial model means that it is vital for oil companies to be able to recover costs.

Like in contentious situations with host states and regulators, when it comes to disputes relating to M&A activity, the early involvement of in-house legal and external counsel is also raised as the key priority, along with prompt consideration of dispute resolution methods. Keeping better records and an improved knowledge of the local market and region-specific factors are also considered to be prudent.

In disputes relating to commodity sales, respondents feel that closer attention should be paid to identifying risks during negotiation of the heads of terms. At the same time, managing change in long-term sale and purchase agreements and keeping better records are seen as key.

Oil and Gas Disputes Survey: Managing disputes risk – the in-house perspective

1. Key Findings of the CMS oil & gas disputes survey
2. Geography: Complex environments deliver financial rewards but higher risks
3. Where do the disputes come from?
4. Interview with Johanna Coelho, Legal Manager, PetroRio
5. Operational problems: activities and relationships that can lead to disputes
6. Elevated risks: newer dangers for oil and gas players
7. Interview with Duncan Holland, Head of Legal, Cairn Energy
8. Risk mitigation: limiting the fallout
9. Interview with Sandra Redding, General Counsel, Seadrill
10. Riding out the storm