Oil & gas contract renegotiations soar
Pressures stemming from the transition from fossil fuels, capital constraints and COVID-19 are forcing industry participants to reassess their contracts
In this volatile climate, companies in the oil & gas and petrochemical sectors are increasingly finding their approach to contracting no longer makes sense for them or their counterparties. Many are hesitant to enter into major new contracts that contain terms long considered customary. Actual or threatened breaches or defaults under a wide variety of industry contracts are climbing, with bankruptcy restructuring (or even liquidation) looming as a real threat to once sacrosanct contracts.
Filing a lawsuit to enforce the contract as written is not always the best answer in these situations. So companies have sought to address their challenges through the strategic renegotiation of a range of industry contracts.
Factors behind the trend
The upsurge in renegotiations results from a few dynamics:
- The prospect of an accelerated transition away from fossil fuels, particularly in Europe, and the regulatory and political risks associated with climate change policies worldwide have had an impact
- COVID-19 has led to significant market disruption and uncertainty in the energy sector—on both the supply and demand sides—resulting in sometimes dramatic imbalances in commercial positions that previously were considered secure
- The industry faces unprecedented capital constraints due to shifting investor sentiment. In Europe, the shift is largely due to environmental concerns. In the US, it results from waning enthusiasm for the shale revolution due to lackluster profits and a wave of oil & gas bankruptcies. And in some resource-rich countries, it is due to declining income attributable to the current low oil prices
These trends touch all aspects of the oil & gas industry, from exploration and production to transportation and trading to the downstream sector, which includes liquefied natural gas (LNG) and petrochemical projects. They affect companies, investors, financial institutions and governments.
Challenges and opportunities
The renegotiation of major contracts will likely be integral to the energy sector for the foreseeable future. Industry participants should view renegotiations as chances to reset the legal and commercial relationship, enabling it to survive and thrive in the longer term. Renegotiations can result in better deals for both sides—at least when compared to the risk inherent in the status quo.
This excerpt is based on our July 22 webinar, Reshaping Equilibrium Across the Oil and Gas Value Chain—New Terms vs New Disputes (or Both).