DISPUTES IN THE ENERGY SECTOR
CD: Could you provide a brief overview of some of the common causes of dispute within the energy sector?
Droog: Within the energy sector the scale, interrelatedness and risk of many projects, joint ventures and long term operations creates the potential for disputes. For example, economic changes can cause projects to get delayed or cancelled which in turn can trigger a number of potential disputes. Additionally, operational and environmental challenges can create possible regulatory disputes. Incidents can often lead to a variety of disputes, including among joint owners, with governmental authorities, against contractors, and at times with insurers.
Knowles: Activity in the energy sector is always heavily impacted by the price of crude oil and oil products. The oil price has a certain element of volatility to it and, as with any other sector, volatility can lead to contractual tension. The last 18 months has seen an unprecedented collapse in the oil price. We have also moved into a very soft market, which will likely be further softened by the potential lifting of the Iranian sanctions and the possible return of Iranian crude to the oil market over the next six to 18 months. This level of change brings us back to volatility. Many upstream players have entered into long-term contracts not modelled on today’s oil price. Many projects in the exploration development sector will not have been modelled on today’s oil price. In some cases, these contracts and projects are no longer commercially viable, leading to further tensions and disputes.
Baily: The causes of disputes within the energy sector can be incredibly varied. We regularly see disputes arise as a result of delays or escalating cost of works, operational performance failures, environmental or health and safety incidents, a change in the economics of a contract or a change in the commercial strategy of a joint venture partner. Equally, we see disputes concerning actions by host states, political unrest or sanctions regimes. At the moment, disputes between operators and service companies – for example, drilling contractors and oilfield service providers – are quite common. The recent judgment of the English Commercial Court in Transocean vs. Providence Resources relating to delays in drilling an appraisal well, is an example.
Oct-Dec 2015 issue
Chevron; Clyde & Co LLP
Herbert Smith Freehills LLP
Petrobras America Inc.