Oil & Gas: Protecting your position in a falling market

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With the headlines on the front page of yesterday’s Financial Times predicting an “oil price war” and Brent diving to US$31/bbl at just after 4am UK time on Monday, oil companies and contractors will doubtless be looking to take steps to manage their exposure.

It is important for industry participants and other stakeholders to have legal strategies in place to deal with marketplace changes. Over the past 10 years examples of issues that have arisen in low and falling oil price environments are:

  1. Issues concerning the restructuring of financial indebtedness;
  2. JOA/PSC defaults and disputes caused by inability to pay cash calls or changes in projected returns;
  3. Disputes concerning fields that are becoming uneconomic;
  4. Circumstances where co-venturers cannot raise development and operational funding;
  5. Decommissioning cost issues;
  6. Issues between FPSO owners and their charterer, where the charterer cannot afford the day rate due to the falling oil price;
  7. Cancellation of drilling unit contracts due to changes in drilling programmes caused by oil price falls;
  8. Issues with Governments / NOCs over failure to meet payment obligations under granting instruments and hydrocarbon sales contracts;
  9. Creditors affected by oil trader’s solvency, which may result due to overexposure or failure in hedging statutory;
  10. Difficulty in agreeing natural gas and LNG price reviews, where the existing price is linked to crude oil or oil products;
  11. Insolvent Participants and Operators;
  12. Exposure of grantors of guarantees for legacy projects.

Based on experience in the last oil downturn, here are a few things that you can do today to manage risk.