Impacts On Long Term Supply And Service Agreements

We are all wrestling with the ramifications of a volatile oil price and, as lawyers, we are starting to see the early impacts of this new paradigm. Immediate, direct effects such as the cancellation of projects in the oil & gas sector due to economic unviability, and layoffs in areas with higher production costs such as the North Sea, are already starting to seep into the wider economy, and their final impact is still unknown. Questions, such as how net crude importing nations might use the additional funds now in their coffers, and how net exporters such as Venezuela, Nigeria and Russia can fill the income gap, are now at the forefront of global attention. What is certain is that there will be winners and losers, and adjusting quickly to the new climate will be key to survival and success.

Impact on short and long term agreements

Our experience is that a landscape such as the current one can create great pressure for principals and suppliers in relation to both short and long term agreements, and that circumstances may arise in which organisations throughout the supply chain take a commercial decision to walk away from contracts as a result of market conditions. This is particularly pertinent in the context of longer term agreements including rig agreements, Production Sharing Agreements (PSAs), service arrangements and sales/ supply contracts. Decisions to walk away can occur when situations change quickly and unexpectedly, with many parties currently revaluating projects, and in some cases walking away without forewarning.

Such circumstances typically lead to a proliferation of legal disputes between parties and our indications are indeed that the volume of disputes between parties is currently increasing.

By way of introduction to this series of articles, we discuss below, at a high level, some basic measures parties should consider to assist themselves should contractual termination issues, such as those discussed in this article, arise.

Introduction to contractual termination issues

Should a party find themselves facing a contractual termination issue there are some basic points to consider at the outset which may help to put you in the best position possible. These include:

Conduct: Depending on the specific circumstances relating to the potential termination, it may be important not to delay...