On the Spot
What is the greatest legal challenge of 2015, given the current oil price?
I would expect JV counterparty distress to become a major challenge in a sustained low-price environment, as some players in the industry face a very real insolvency risk. This issue is particularly relevant in the context of joint operating agreements, where one party enters into an insolvency process. A significant number of small to mid-cap players which have been very active in Africa and other developing markets are going to be squeezed between work commitments under their PSCs and a dearth of debt/equity financing. Incidentally, this could also result in the termination and forfeiture of hydrocarbon titles leading to a major shake-up as the relevant countries struggle to find other takers for the vacant blocks.
Emmanuelle Rouchel, Senior Legal Adviser, Perenco
In response to your question on the biggest legal challenge in 2015 due to current oil prices, this time it will be different from the standard results in the past after extended and significant price reductions when the main legal challenge was enforcing “take or pay” contracts. Today it is quite different due to significant build up of debt by many independent shale oil and gas producers as the lenders will be needing to enforce their collateral as many companies are squeezed for liquidity due to negative cash flow with 50% revenue reduction and may be seeking restructuring or court protection in bankruptcy. This process takes 6-12 months to kick in after a significant price fall without measureable recovery as the borrowers need to write down their impaired assets and the lenders ( generally behind the curve) complete their reserve lending base with new reserve studies while looking for some light at end of tunnel. Unfortunately, even with significant political and military instability in the middle east and some oil exporting countries on verge of imploding like Venezuela, Nigeria, Libya and Russia; there is no light for price recovery for short to medium term.
John Hoey, Founder, Tethys Oil
One of the main challenges this year will be to continue to work with contractors to deliver development projects on time and within budget. However it will also be a critical time to continue to encourage new entrants into the UKCS to enable a diverse range of projects to be developed, from a size and technological point of view, in order to recover remaining reserves.
Rachel Hampstead, Legal Counsel, Chrysaor
I would suggest, from a legal prospective, that when the sector becomes more challenging some of the good faith and trust disappears and the parties resort to the more formal documentation that may or may not be definitive enough to resolve the differences; disagreement and acrimony replaces the previous good working relationships and the parties resort to the courts rather than balanced dialogue. It will be a testing time for operators in general and the legal competencies of previous counsel who drafted the documentation and present counsel who must now resolve the parties disputes!
Alastair Beardsall, Executive Chairman & CEO, Sterling Energy Plc
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