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The IBA’s response to the situation in Ukraine
The global oil and gas industry has been hit extremely hard by the Covid-19 pandemic, with demand falling off a cliff. The markets have been thrown into turmoil, with a barrel of Brent dropping to just over $22, its lowest level in close to 18 years. The key American West Texas Intermediate (WTI) benchmark entered negative territory for the first time in history.
The sector had just recovered after taking a battering in 2015 and 2016. By the beginning of 2020, the Brent and WTI indices, which had dipped to around $28 a barrel at the beginning of 2016, were trading at between $60 and $70 and even the high-cost North Sea basin had become profitable again. Then Covid-19 struck, just as the Russians and Saudis entered into a war over price.
The impact on the sector was immediate. Around 51,000 drilling and refining jobs were lost in the United States in March, according to a report from research consultancy BW Research Partnership, while the United Kingdom Oil and Gas Industry Association (OGUK) reckons up to 30,000 North Sea jobs could be lost in the coming months. A survey of the UK organisation’s members found that investment in the sector is likely to fall by up to £4bn over the course of this year while revenues and margins, which had not yet fully recovered from the last downturn, are expected to fall by up to a third.
Chair, IBA Oil and Gas Law Committee
‘With historic low oil and gas prices coming so soon after one of the most severe downturns our sector has experienced, these findings confirm an especially bleak outlook for the UK’s oil and gas industry,’ OGUK Chief Executive Deirdre Michie says.
Paul Stockley, Chair of the IBA Oil and Gas Law Committee and a partner at UK firm Fieldfisher, agrees. ‘The global oil and gas industry is significantly challenged by the combined effects of the Covid-19 lockdown on demand and the recent price war between Saudi Arabia and Russia, which flooded the market with oil at exactly the wrong time,’ he says.
As advisers to the sector, law firms have had to prioritise the services they offer in response to the slump, at the same time as coming to terms with the constraints the pandemic has put on their own operating models. Roger Connon, head of oil and gas at Pinsent Masons’ freelance lawyer arm Vario, says oil sector clients, who previously insisted their lawyers be on the ground in their offices, have finally woken up to the fact that remote advisers can handle their needs just as well.
Given the challenges these clients are now dealing with, such concessions - which are unavoidable due to the pandemic - are unsurprising. Contracts predicated on considerably higher oil prices are having to be renegotiated and litigation is already starting to replace corporate deal activity. A battle is raging in Scotland’s Court of Session, for example, over Premier Oil’s plan to acquire $660m of North Sea assets from BP and Dana Petroleum. Last month Premier Oil won the Court’s backing to proceed with the deals but its largest creditor, Asia Research and Capital Management, has vowed to appeal because it believes the oil price crash makes the deals too risky.
Oil prices have begun to tentatively bounce back from their April lows, with Saudi Arabia’s promise to cut production to its lowest level in two decades, as of June, expected to have a stabilising effect. Despite this, Giovani Loss, a partner at Brazilian firm Mattos Filho and former Chair of the IBA Oil and Gas Law Committee, believes many other legal issues are yet to come as the full impact of global Covid-19 shutdowns becomes clearer.
‘Certain deals are in the interim period between signing and closing, and these deals are generally not suspended,’ he says. ‘There are, however, specific demands related to the Covid-19 pandemic, including contract analysis for force majeure, material adverse effect or other clauses that may be activated considering the current scenario, resulting in potential termination or at least renegotiation of contracts. Litigation related to oil contracts is starting to happen. We should see a big number of restructurings, refinancings or even crisis M&A, taking advantage of market opportunities, happening in the next 12 to 18 months.’
One silver lining expected to come out of the crisis is that net-zero targets set to bring the climate emergency under control will be met well ahead of schedule. This has been brought into sharper focus after air quality across the world dramatically improved when factories closed and vehicles were forced off the roads during various lockdowns. Indeed, the Centre for Research on Energy and Clean Air says 11,000 air pollution-related deaths have been avoided across Europe, while researchers from the Indian Institute of Technology Delhi, and Fudan University and Shenzhen Polytechnic in China, have found that India’s annual death toll would fall by 650,000 if the country’s lockdown pollution levels are maintained.
Yet, while OGUK has committed to accelerating the transition to net zero in light of the current crisis, and while campaign groups such as Greenpeace have said governments should use the oil price slump as an opportunity to reassess existing targets, the downturn could, paradoxically, hamper their efforts.
Stockley notes that while the oil and gas sector ‘is well positioned with the skills, resources and infrastructure to be a driving force behind the energy transition’, the fact its ‘social licence to operate is under threat’ could be a distraction. ‘The sector urgently needs to take steps to reduce its carbon footprint to mitigate that risk,’ he says.
Ultimately, as Loss points out, far from prompting a swifter transition towards cleaner energies, the slump in oil prices could actually deter their use, even if just temporarily.
‘The trend of changes on the energy matrix as a result of climate change is inevitable,’ he says. ‘However, the reduction in oil prices tends to delay such a trend. Since the costs of alternative energy are usually high, when oil prices are low other sources of energy may become uneconomical.’