New and old challenges facing the oil and gas sector

By Suzanne Hopkinson, Brodies LLP

The oil and gas sector must deal with the challenges posed by the coronavirus pandemic
The oil and gas sector must deal with the challenges posed by the coronavirus pandemic (photo: Brodies LLP)

The oil and gas sector is currently being hit on two fronts: first, by the global impact of the coronavirus pandemic and secondly, by the fall in oil price. Following failed talks between Saudi Arabia and Russia to stabilise the oil price following the fall in global demand, in March the price nosedived. OPEC+ talks were resumed and, on 12 April, cuts in output of 9.7 million barrels per day were agreed. Despite this agreement being reached and supported by the US, it was widely anticipated that the cuts would not be enough to address the diminished global demand, and, by 22 April, oil had hit an 18-year low with Brent having sunk below $20 per barrel.

Businesses operating in the UKCS will face similar challenges as those addressed following the 2014 downturn. There will, however, be new dimensions to consider and manage in the coming weeks, including complications presented by associated limitations on storage capacity.

In the immediate term, the effects on exploration and production operations are being felt. Ongoing project schedules are being reviewed – and some projects cancelled if no longer viable. Planned summer shutdowns are being delayed until there is clarity on the extent of the implications for the industry. Once again, businesses will have to make renewed cuts to expenditure and headcount.

New working arrangements
Sector participants have reacted quickly and put arrangements in place to safeguard employees, with many now working from home and those needed in the workplace adopting appropriate social distancing measures. A key part of safekeeping employees has been the transportation of workers offshore and putting relevant processes in place if an individual has, or is suspected to have, COVID-19 whilst offshore. The relative impact on the offshore workforce is yet to be determined but it seems the down-manning of platforms and FPSOs is almost inevitable for some, not only due to cost cutting but also the impact of international travel restrictions on the workforce, and efforts to mitigate the impact of the virus on staff.

The reduction in personnel numbers offshore and the shutting-in of production may also be necessary to ensure ongoing compliance with health and safety regulations and to enable the operator to adhere to established industry standards. It is important to note that despite the COVID-19 situation, there is no relaxation of applicable health and safety laws and regulations in the UK. As a result of changes made to working arrangements onshore and offshore, additional risk assessments may be needed. Insurance policies should also be reviewed to verify adequate cover is in place for any change in working circumstances.

Force majeure and frustration
Where offshore activity is postponed or deferred, production levels will be impacted. With global demand for oil significantly decreased from this time last year, some oil refineries at capacity and the lack of visibility regarding future offshore activities, production may have to be shut in and, in many cases, operators may have to re-visit dates for cessation of production, leading to earlier than expected decommissioning.

In terms of contractual review, operators and supply chain participants will be establishing whether any force majeure provision could be relied on in current contracts, to provide relief. Careful consideration should be given on a case-by-case basis to determine whether obligations under the agreement have been made impossible or hindered and, if so, to identify the reason for it. If an agreement includes a force majeure provision, the specific terms of the agreement must be complied with, including any obligation to promptly serve notice of the force majeure event and to mitigate its impacts. The law of frustration may also have a role to play, although the bar for successfully claims is set very high.

Companies in the throes of negotiating M&A transactions may need to revisit the price and any exclusivity arrangements, to take into account any reduction in pace to conclude the transaction. Where deals have been signed but not completed, parties may consider relying on a material adverse change provision. This may also apply to financial agreements and some commercial arrangements which have not yet completed.

Looking ahead
Companies should also take the time to consider the support packages offered by the Government to ease the impact of COVID-19, including the loan schemes and Job Retention Scheme. Guidance is continually evolving, so check regularly for any changes. New practices have been adopted to accommodate home working, including the use and validity of electronic signatures and the application for deadline extensions in order to comply with corporate governance requirements as the AGM season is in full swing.

One final thought as we navigate our way through these challenging times, is the importance of keeping records of decisions taken during this period, together with the reasons behind them. Businesses may have to adapt or agree expeditious changes to their current practices or business terms. By way of example, amendments to existing customer agreements may be agreed between parties but not documented given applicable time constraints. However, despite arrangements within and between businesses continually evolving, Undoubtedly, there will be a significant increase in the number of disputes once this period of intense change ends. Clear records will have an important role to play in any dispute resolution process, and crucial to the future of the industry.

Suzanne Hopkinson, Director, Brodies LLP
Suzanne Hopkinson, Director, Brodies LLP