In the spring of 2021, Burford Director Jeffery Commission asked a group of trial attorneys, arbitration leads and dispute resolution specialists in the energy sector about major risks and opportunities in the oil and gas industry following the pandemic. Their insights are gathered and excerpted below.
A year after Covid, what are the major areas of concern and opportunity in the oil and gas sector?
Mark Baker: While everyone says that “volatility is the new normal,” in the oil and gas sector volatility has always been the norm. Covid-19 created larger waves in most economies, with the oil and gas sector hit hard by a seemingly perfect storm: The pandemic, a downturn in demand, steep declines in oil prices followed by sharp rebounds, political instability, trade wars and sanctions. Major areas of opportunity and risk post-pandemic are a dichotomy between those who recognize that the world will need oil and gas to fuel its growth and the increased pressures to move quickly toward the energy transition. Related to that is the increased focus on ESG and Business & Human Rights issues along the energy value chain. Also important are the risks associated with political instability and change including to investment regimes and domestic energy policies.
Joe Buoni: Just five or ten years ago, many clients in Houston would recoil if you started talking about renewable or alternative sources of energy. Now, clean energy is an area of growth for traditional oil and gas firms—especially the larger ones. Just recently, we saw a multinational oil company propose a $100 billion investment for a facility that would capture carbon emissions on the Gulf Coast. While this is a response to the concern of climate change, it’s an area of opportunity to generate revenue and capture public attention. Another opportunity is in the consolidation of the traditional oil and gas industry. Last year, Chevron made a large acquisition, as did Southwestern Energy and Devon Energy. There was a recent wave of bankruptcies at the onset of the pandemic in March 2020. Usually, banks and lenders are reluctant to take over the assets of their companies in the face of a downturn. What was unusual was that many lenders were willing to take on assets of oil and gas companies this time around and—since it paid dividends—were getting more than their loans back.
Michelle Gray: One major area of concern in energy litigation is the uncertainty surrounding many of the lawsuits already on file. More than a year into the pandemic, there is still relatively little precedent from courts on some of the core legal questions posed by the pandemic-driven litigation. While most judges have tried to keep their dockets moving through virtual hearings, the vast majority of courts have not been holding trials and, as a result, it is difficult to predict how courts are going to decide many of these core issues that are percolating in pandemic-driven litigation. The lack of case law is also affecting arbitrations; without clear precedent to follow, arbitrators are often inconsistent in their analyses. However, with the US seeing reduced numbers of Covid-19 infections, there are opportunities for resolution of pandemic-driven lawsuits outside the courthouse (or an arbitrator’s conference room). To the extent possible, now is a good time to reassess ongoing litigation and see if a business solution makes sense. Rather than spending money on litigation, it might make sense to renegotiate deals or try and work out settlements—especially if your disputes are pending in a court backlogged due to the pandemic.
In many cases, we are beyond the point in the pandemic where force majeure can serve as a basis for handling commercial disputes, yet we are still feeling the ripple effects of Covid. How are you helping clients manage the continuing uncertainty caused by the ripples?
James Brown: The impact of Covid-19 is still often a key issue for parties. Unlike an event of force majeure having a short duration, the pandemic has continued for well over a year and, with no end in sight, continues to impact projects. I have seen matters where parties are yet to agree on the pandemic’s impact to date and who have had a real difficulty in arriving at a deal on its impact on their contractual obligations and rights. The difficulty arises from having to determine the pandemic’s current and future impact on their projects. Parties don’t want to preclude claiming further extensions of time if circumstances change, especially if they face another lockdown. So, there is that tension, which can make it hard for parties to move forward with a plan on an agreed footing.
Mark Baker: The best way to manage uncertainty is to “know the enemy and know yourself.” Dispute risk audits are an important mechanism, particularly for large corporations with a global reach. They add measurability and predictability, establishing protocols for how to prepare for and resolve disputes from the outset and after they arise. Likewise, careful assessment of counterparties and asset profiles are important, particularly in light of the increasing potential of facing a non-performing or insolvent counterparty along the supply chain. In the long run, these measures can save significant management time and money— and critically, preserve important counterparty relationships.
Michelle Gray: As there is still a lot of uncertainty, especially as employees return to offices or navigate a new normal with work-from-home policies, companies will need to continue to be flexible without completely waiving their legal rights—and that balance is difficult. If you are dealing with a business relationship that is governed by a contract, you should know what your legal rights are and ensure that you aren’t doing anything that would be considered a waiver of those rights. Read the contract and, if needed, amend agreements. Do not proceed under the prior contract without memorializing what new terms you have agreed to. Similarly, as they deal with employees, companies need to make sure they are explicit about expectations and that any new policies are in writing to avoid headaches down the road.
The supply chain is a significant source of risk and uncertainty for the oil and gas sector even in the best of times, and the last year’s events have further exacerbated that harsh reality. Can you address how you are helping clients navigate the heightened risk and uncertainty in their supply chains? What are the tools when it comes to commercial disputes?
James Brown: Covid-19 has caused parties and their legal advisors to scrutinize force majeure clauses much more closely than before. Parties in the last 18 months have had to grapple with these clauses and apply them to seek to excuse contractual failures or extend the time that they have for performance. Often, the shortcomings in clauses agreed pre-pandemic became apparent. One way we are addressing the heightened current risks in supply chains is by including liquidated damages clauses in contracts and making sure that such clauses are prepared to be enforceable and as free from the potential for disputes to arise as possible. The pandemic has served as a driver to really focus on sharpening these clauses in new contracts.
Michelle Gray: Litigation related to supply chain problems can be difficult. Oftentimes, supply chain contracts will contain provisions waiving or foreclosing consequential damages, and depending on underlying facts, lost profits or significant damages may be considered consequential and thus precluded. When negotiating contracts with vendors or others in your supply chain, it is helpful to be as clear as possible about what damages you want to preserve should issues arise in the future. If you are already in a dispute arising from the stall to your supply chain, read any contracts you have and make sure to understand what legal avenues are available to you.
Mark Baker: Globalization of markets has led to supply chains which extend across multiple borders. As the pandemic highlighted, the oil and gas sector needs to take a cold, hard look at risks to their supply chain and ensure mechanisms are in place to assess and mitigate disputes risk. Supply chain disputes are as complex as the supply chains themselves, and often require fast cross-border solutions. International arbitration provide a flexible, efficient and effective framework to resolve these disputes.
Joe Buoni: We make sure clients are aware of counterparty risks and disruptions from not just the pandemic, but also from other forces including weather disruptions and one-off events. In Texas, for instance, there was a huge supply chain disruption following the storm in January 2021— and in just one week, the cost of electricity exploded, which ultimately proved to be a contributing factor to a number of bankruptcies and litigations. Understanding the risks and weaknesses within the industry is key to resolving them. We also want to make sure that companies understand the financial costs associated with litigations and bankruptcies. There are huge costs involved, and many clients face deal fatigue and are less eager to spend money on lawyer fees to deal with unresolved claims post bankruptcies.
Managing risk in multi-tier oil and gas ventures can be a huge challenge, especially where the work—and even certain vendors and partners—are based in geographies with real potential for economic and political instability. When problems arise, how do you see them playing out in the arbitration space, either in treaty or commercial disputes?
Mark Baker: I cannot say this enough—dispute risk management is all about data and preparation. Now, sophisticated parties take a close look at the disputes risk profile of a project and structure in bespoke mitigation mechanisms—both contractual and treaty based. This should be done at the very outset of a transaction and during the life cycle of a project. The nature of oil and gas, indeed energy more generally, is such that disputes risk is generally higher than most other projects. But it is simply a matter of preparation and mitigation. Put yourself in the best position, with the best tools to hand to avoid, resolve or win disputes decisively and efficiently.
The past year’s challenges seem to have “shaken loose” issues that may always have existed in the energy business, but now are much more apparent. What legal and commercial risk topics are on client radars today that were not as apparent before the pandemic?
Michelle Gray: As lawsuits play out, I anticipate that we will see courts taking very nuanced approaches on a case-by-case basis. The words “force majeure”, once obscure, are now in vogue. Plaintiffs seeking to hold defendants accountable will blame non-performance on poor management and other avoidable factors, while defendants will blame it entirely on the pandemic. Therefore, I suspect causation will become a highly contested issue in force majeure litigation. Outcomes will depend on the specific language of the force majeure clause and whether the resulting harm was largely attributable to the pandemic or whether causation can be pinned on something else. I also anticipate that transactional attorneys will be revamping force majeure clauses in their contracts; we can expect to see those clauses more fulsome and fleshed-out in future agreements.
Mark Baker: It’s fair to say that most of the challenges in the energy business have been on everyone’s radars pre-pandemic. Supply chain risks have always existed. During the challenges of the past year, however, there was (for good reason) a heightened focus on risk, so perhaps that is why these issues appear to have been shaken loose. The common thread for all these issues is that collectively and individually, these present complex macro and micro level risks to navigate and require a deep understanding of the client, sector, markets, disputes and trends developing in each.
James Brown: The pandemic has given rise to numerous contentious issues for clients and this has made them really focus on how the resolution of disputes in new contract they are entering may play out. The heightened perceptions of risk and potential that currently exist, combined with an ever-increasing focus on avoiding dispute-related costs, has driven a renewed focus on making sure that dispute resolution provisions work. There is also a focus on the potential to limit litigation and arbitration costs, especially by the inclusion of multi-tier provisions that, for example, provide for internal discussions, carving out of issues for resolution by technical experts and even mediation as a precondition to the commencement of any claims.
Joe Buoni: The outlook is better now than it was a year ago. Pricing and production levels have picked up over the past few months. However, the problem of oversupply has plagued the industry over the last decade and there’s concern that the current pricing could be artificially high.
Are you seeing any policy trends emerge from the Biden administration that will impact the energy industry? How would you suggest clients be thinking about them?
Mark Baker: President Biden’s day-one executive order mandating the US rejoin the Paris Agreement was a pretty clear statement of intent in his administration’s energy priorities. The clear trend is a strong focus on emissions reductions and a push towards a comprehensive energy transition. This will mean a boost to clean energy, renewables, electric vehicles (and by association, mines and commodities), related infrastructure and technologies. For the oil and gas sector, the policy trends are more restrictive with additional hurdles to navigate. Given the status of federal lands both on and offshore, much can still be done by regulation. This creates real sector opportunities for those holding leases already granted and relatively insulated from rule and regulatory regime changes. We are advising clients to be flexible, nimble and looking to take advantage of the plentiful opportunities in the energy sector that disruption of this scale and speed offers, but also be alive to the risks and how they can be mitigated.
Mark Baker is a Global Co-Head of International Arbitration at Norton Rose Fulbright and a member of the Firm’s Global Supervisory Board. He practices in the areas of complex commercial arbitration, investment arbitration, business litigation and alternative dispute resolution.
James Brown is a partner in the dispute resolution team in the London office of Haynes and Boone. He has more than 19 years of experience as a disputes lawyer, with a primary focus on litigating and arbitrating complex, high-value engineering and construction disputes for international clients operating in the shipping and offshore oil and gas sectors.
Joe Buoni is a litigation and bankruptcy partner in Hunton Andrews Kurth’s Houston office. He represents clients across many industries, but his practice focuses on the representation of energy companies, financial institutions and private equity funds, including their portfolio companies.
Michelle Gray is a trial attorney and founding partner at Fogler, Brar, O’Neil and Gray. She has consistently been named a Texas Rising Star since 2016, and in 2021, Super Lawyers named her to both the Texas “Up and Coming 100” list and the “Up and Coming 50 Women” list. Michelle is on the Board of Child Advocates, a non-profit organization that mobilizes court-appointed volunteers to represent the needs of abused and neglected children.
Jeffery Commission is a Director with responsibility for overseeing Burford’s underwriting and investment activity in investor-state and international commercial arbitration. Prior to joining Burford, he practiced litigation and arbitration with Shearman & Sterling and Linklaters and was a Senior Associate in international arbitration at Freshfields.