The last two years have witnessed a boom in disputes in the oil and gas sector. A variety of factors has driven this boom, but whatever the cause the outcome is the same for the parties to the dispute: potentially high legal costs, coupled with uncertainty of outcome. A commercial and creative approach to dispute resolution from solicitors can help keep variables to a minimum and reduce costs.
The growth in disputes
The author’s experience, as well as anecdotal evidence from industry participants, indicates that globally, disputes in the oil and gas sector are growing. The reasons for this are myriad, and include:
- Competition for scarce resources and infrastructure: Where a number of industry participants want to access limited oil and gas resources, and/or transport those resources to market via scarce infrastructure, disputes are inevitable as market power and conflicting commercial drivers push parties in opposite directions.
- Joint ventures: The nature of the oil and gas industry means that there are more joint ventures and quasi-joint ventures than in other sectors. That in itself causes tension, as parties who are otherwise competitors and who are often part of worldwide groups who compete with each other have to manage a project together.
- Political and economic instability: Oil and gas resources tend to be found in some of the least politically stable countries in the world. Commercial conflicts arise through governments flexing their economic muscles, often via national oil companies. Countries which have suffered in the economic downturn have tried to nationalise oil and gas assets (directly or indirectly) without compensation, giving rise to investment treaty arbitrations. Western Europe is seeking to reduce its dependence on Russian gas, bringing Western buyers into conflict with Russian suppliers.
- The shale gas revolution: The fracking boom in the USA and elsewhere has released large quantities of relatively cheap gas onto the US market, and shortly into the international market via LNG exports. A knock-on effect is the release of large quantities of cheap US coal into the international market. These factors have changed the energy market dynamics, encouraging parties to attempt to end or renegotiate suddenly uncompetitive supply contracts.
- The boom in gas price review arbitrations: The traditional linkage of the price of gas in long-term supply contracts to the oil price has been weakened due to the emergence of established gas trading hubs; shale gas production eroding the link between oil and gas production; and better LNG facilities increasing liquidity in the gas market. Recently European spot gas prices have fallen relative to oil prices, so gas purchasers have commenced price review arbitrations. Recent awards such as Edison vs. Rasgas and RWE vs. Gazprom Export have disapplied the contractual link to the oil price and spawned a surge in such claims, including recent claims by Eni against Statoil, Edison against Eni and Edison against Gazprom.
Uncertainty and cost, and minimising the impact of a dispute
So the chances of being involved in a dispute have increased. While amounts of money at stake can make fighting a case imperative, litigation and arbitration can cost hundreds of thousands of Pounds to bring to an end. The fact that the decision is in the hands of a third party makes the outcome inherently uncertain. When one adds to that the prospects of adverse publicity and the drain on management time caused by running a case, it is clear that careful and thoughtful management of disputes is required.
The following should be considered in every dispute:
- Funding and cost protection: One can reduce one’s exposure to the costs of a claim to zero by purchasing after-the-event (“ATE”) legal expenses insurance for a premium (which can often be deferred to, and contingent upon, a positive outcome); and obtaining third party funding in return for a share of the proceeds of the claim if successful.
- Effective document management: A large part of the costs of arbitrations or litigation in England is that related to disclosure of relevant documents. Use of effective electronic document management systems incorporating predictive coding, as well as flexible staffing solutions (e.g. low-cost centres), can substantially reduce disclosure costs.
- Early involvement of experts e.g. forensic accountants: Involving an expert at an early stage can save costs in the future, by identifying (for example) issues with establishing the quantum of damages.
- Commercial case management: Legal issues can often obscure the parties’ commercial objectives. Parties and their solicitors should keep these in mind and ask whether each major step or decision furthers their commercial objectives.
- Use of Alternative Dispute Resolution (“ADR”): ADR is often cheaper and quicker than formal proceedings. ADR usually involves a neutral third party assisting the parties to settle their dispute outside of court or arbitration proceedings, e.g. mediation – confidential settlement negotiations brokered by a third party – or expert determination, where an expert makes a binding decision in his area of expertise. Oil and gas disputes lend themselves to ADR, because parties are often in a long-term commercial relationship and/or the issue between the parties is a technical/accounting matter.
In order to assist in delivering the best possible service to its oil and gas clients, Berwin Leighton Paisner offers a uniquely integrated multi-disciplinary service called Integrated Dispute Resolution. As well as legal expertise, industry knowledge and a commercial approach to dispute resolution, clients can benefit from:
- an in-house team of forensic accountants, providing early, instant access to advice on the financial aspects of disputes;
- an in-house forensic technology unit; and
- Lawyers on Demand (“LOD”), a service providing clients with freelance lawyers on a short-term contract basis.
The recent boom in oil and gas disputes shows little sign of ending, which could result in industry participants facing the risk of unexpected costs, diversion of management resources and uncertainty. However, this can be ameliorated by the adoption of best practice, robust risk-management procedures and, if disputes can’t be avoided, creative and commercial case management techniques such as BLP’s IDR offering, which reduce cost and increase flexibility. While you might not be able to avoid a fight, you can avoid a lot of the pain which goes with it.
This article was originally published by Energy Global on 20 May 2014: 'Keeping control: oil and gas disputes'