What are Energy Disputes?
These are disputes that come up in the energy sector, which relates to a breach in a contractual agreement by one or any of the contracting parties.
Energy Disputes in the Times of Global Pandemic: A Global Arbitration Review
The effects of the covid-19 pandemic, especially in the oil sector came unexpectedly. This is a sector with participants in for the long term and who’ve weathered bleak circumstances such as the crash of oil prices in 2014/2015.
Occurrences such as the fluctuation in oil prices are a commonality in the oil sector, but the effect of the covid-19 pandemic was a different ball game entirely.
The pandemic saw a huge drop in the demand for oil commodities, as well as a significant and simultaneous drop in oil prices.
This came at an unfortunate time when the production of oil was at its peak, and it led to extreme measures being taken to curb the effects of the sudden halt in the demand and consequential production of oil commodities.
It put a strain on contractual and commercial relationships, and disputes became a common occurrence when contractual agreements were not being upheld. Hence, a corresponding increase in the demand for arbitration became prevalent.
This article will be looking at a global arbitration review of these energy disputes that came up during the covid-19 pandemic.
Types of Energy Disputes in Times of Global pandemic
The effects of the covid-19 pandemic were predicted to be long-lasting, hence measures had to be taken to deal with the disputes that were sure to occur, given the circumstances. Let’s look at some of these disputes, and how arbitration played an important role in their resolution.
Due to the long duration of the pandemic, contracting parties were forced to look for measures by which they could cushion the effects of the pandemic and be relieved from contractual agreements. These measures included filing for a force majeure, insolvency, termination due to frustration, review of or suspension of contracts.
This was particularly so because the energy sector majorly consisted of jointly owned assets, so, with the ushering in of the pandemic, it brought along with it a corresponding increase in the occurrence of disputes, either between owners and operators of these assets or between co-owners themselves.
A force majeure is defined as an unforeseen circumstance or event that affects the terms of a contractual agreement. Before the covid-19 pandemic, a heavy drop in oil prices was not considered a “force majeure”, because it was associated with normal business risks.
Force Majeure are unique to each contractual agreement and therefore have different interpretations. But the covid19 pandemic, a different approach to what is to be considered a force majeure was born.
Many contracts that were without the force majeure clause were frustrated during the covid19 pandemic. This was because of the impossibility of carrying out operations and no compensatory medium to cushion the losses incurred.
A frustrated contract can lead to termination, though this would be an extreme measure agreed upon by the contracting parties when all other options have been exhausted.
Insolvency and liquidity
Companies operating on a high cost of operations and low ROI filed for bankruptcy during the early and most severe phase of the pandemic. This was because it was almost impossible to carry on with operations otherwise.
The covid-19 pandemic triggered a lot of calls for the review, suspension or termination of contracts, due to insolvency by one of the contracting parties. Hence, insolvency, restructuring, and consensual settlements were common occurrences during the pandemic.
These are disputes that come up between investors and the state, where the state is a contracting party.
The covid-19 pandemic saw to the enforcement of new laws by the state to ease the effects of the pandemic. These laws were not particularly favorable to the investors, who are most times private companies or individuals with the sole aim of making a profit. Hence, these investors had to look for the provisions of stability in their agreement, as well as the protection of their investments amongst other treaties available for recompense.
Storage of oil commodities
This constituted a source of a dispute during the pandemic, because, as demand for oil products drew to a screeching halt, there was no corresponding notice to stop oil production. Hence, onshore storage capacities were utilized to the maximum, and crude oil had to be stored in offshore locations which resulted in a significant hike in prices for this storage.
Producers had to pay consumers to help them store their products
Natural gas price drop
While the prices of oil and gas have not always correlated over time, the covid-19 pandemic saw a significant drop in the price of gas as well. Purchase and sale of gas agreements have always had price review mechanisms that allow for a change in the price of gas periodically (like, every couple of years,) or when the market changes, that is, when the price is no longer competitive or fair.
With the abrupt drop in market price during the covid-19 pandemic, buyers sought ways to take advantage of the situation by pushing for price reviews, while sellers sought to hold their ground still.
Due to the pandemic, severe restrictions were put in place, including total lockdown, to curb the spread of the pandemic. Only essential services were allowed to operate.
Countries like Canada, Australia and the UK had to list oil production as an essential service, because it was indeed an essential service, and restrictions in the number of working personnel, could easily constitute a problem. Still, operations were adversely affected, albeit the influx of cash because of the limitation of operations during a lockdown situation, as the health and safety of the workers had to be considered as well.
This was a source of some disputes regarding working conditions for, “reasonable and prudent operations” and “standard oil practice” requirements for operators.
From the article, we could see a global arbitration review of some of the disputes that came up during the pandemic.
At Rattsakuten, we specialize in resolving disputes such as these by using standardized arbitration methods. We are a team of specialized lawyers in International arbitration, given that the energy sector is made up of mostly international parties.
Hence as energy disputes become a commonality in the sector, arbitration is almost always the proffered method of resolution.
Need an initial consultation regarding matters of energy disputes in the energy sector? Why not give us a call now, or contact Rattsakuten here.