Impact of COVID-19 on the oil & gas industry

This article has been prepared following a SurveyMonkey questionnaire titled ‘Covid-19 special call for answers’, which was carried out by members of the IBA Oil and Gas Law Committee. The questionnaire was aimed at gathering insightful cross-jurisdictional information and, therefore, shed some light on the massive impact of Covid-19 and the oil price collapse on the oil and gas industry, acknowledging that Covid-19 and the associated fall in demand was not the only reason for the collapse in price.

Question one: What impact have you seen in your jurisdiction of Covid-19 on oil and gas operations and has force majeure/hardship or similar provisions (contractual or otherwise) been invoked? Do you expect to see litigation cases, or will parties reach an amicable arrangement?

From the very outset of the pandemic, it was crystal-clear that the oil and gas industry would be significantly affected worldwide. As expected, answers submitted by participants confirmed that the unfortunate chain reaction of events alongside market reactions have created a new reality in the oil and gas industry to which all players must become accustomed.

The ‘chain reaction of events’ referred to above, was the drastic measures taken worldwide to mitigate the spread of Covid-19, which led to an unprecedented drop in the demand for oil and a corresponding catastrophic collapse in prices.

In Argentina: ‘the Río Negro, Neuquén and La Pampa Private Oil and Gas Union accepted a 40 per cent reduction in wages’.

In the United States: ‘A number of US oil and gas companies are suffering very low liquidity likely resulting in their inability to service their debt. A potential wave of bankruptcies of cash-strapped companies is thus expected, the latest high-profile case being fracking pioneer Chesapeake Energy that filed for Chapter 11 protection yesterday (Sunday, June 28).’

Nevertheless, according to the answers received, the oil and gas industry is still considered a strategic and essential sector for the economy of most countries. Some petroleum producers have therefore ceased operating during the pandemic not so much as a consequence of government intervention, as is the case in some other sectors, but due to mitigating actions of oil and gas companies in response to the fall in demand for oil.

For instance, in Argentina: ‘According to oil and gas companies, fracking and drilling activity has dropped to zero in all blocks in Vaca Muerta Formation. Operators are facing a production oversupply due to the abrupt drop in demand.’ Whereas in Brazil: ‘Price reductions resulted in main O&G operator (Petrobras) cutting production, hibernating facilities and taking other measures. Petrobras asked for contractual discounts.’

Ecuador saw oil and gas activities suspended not by the Covid-19 pandemic, but rather due to a landslide which interrupted the evacuation of crude oil and clean products. Its operations finally resumed during the first week of May.

In Australia: ‘The gas sector has however been identified as an industry which could assist Australia in moving out from under the Covid-19 economic impacts, a “gas led” recovery is being discussed.’

In the long run, the industry is expected to witness a more conservative and preventive approach from oil and gas companies. This will translate into a general CAPEX reduction (especially in exploration activities), a postponement of M&A deals and new financings, and a general renegotiation of existing financings and commercial agreements.

In this sense, the answer submitted by Canada’s participants seems fairly relevant to a significant number of jurisdictions: ‘Parties have been examining contractual repercussions, counterparty risk and force majeure clauses. To date, and because these issues broadly impact industry, most parties are trying to negotiate acceptable resolution through either informal or formal amendments, versus pursuing litigation. Many companies are facing significant liquidity issues as a result of the commodity price decline and shut-in production and are renegotiating credit agreements, as well as various government relief programs and loans to help them survive until economic conditions improve. To the extent that companies end up in insolvency proceedings, we expect various contractual provisions and commitments will be scrutinised in the receivership case law context.’

When it comes to force majeure and/or hardship, it is quite clear from the questionnaire that this has been a challenging issue in all jurisdictions. This is particularly due to the fact that many contracts do not provide for pandemic-related scenarios and, in any case, the further interpretation of applicable legal and contractual provisions is complicated.

Consequently, the existence of the Covid-19 pandemic is not, in itself, a sine qua non condition to put in motion any force majeure mechanism. The affected party needs to prove that the performance of its contractual obligation is impossible due to the pandemic-related restrictions.

Despite obvious similarities, there are certain aspects which differ from one country to another, such as the forecasts around litigation or the alternative of amicable arrangements. While a notable number of countries are advocating amicable arrangements, a similar number of countries confirm that they expect a high number of litigation cases to arise, specifically in relation to the construction of force majeure clauses. For instance, in the US: ‘Considering current extenuating circumstances affecting both producers and offtakers, it seems unlikely that parties may reach an amicable arrangement and litigation may therefore be inevitable in many, if not most, cases.’

However, the contrasting view related to litigation versus amicable arrangements might be rather subjective and it is likely that only experience over time will provide an accurate answer. The subjective take seems obvious since in certain cases such as the United Kingdom and Nigeria, professionals from the same jurisdiction provided answers which were poles apart.