Special Focus on Independent Oil & Gas
Follow changes and proposed further changes in the regulatory landscape closely, getting involved in industry consultations and ensuring they are ready to meet more onerous requirements;
Watch the case law develop – in particular in relation to how “gross negligence and willful misconduct” get interpreted and be ready to revisit the indemnification and cash call provisions in JOAs and contracts accordingly;
Stress-test their contractual arrangements – review them case by case in the light of the specific liabilities and risks that apply and ensure they have a full understanding of applicable laws in the relevant jurisdiction(s) and where responsibility and liability (contractual, civil, regulatory, criminal) would fall in the event of an incident;
Ensure that their contractual arrangements properly cover allocation of all relevant risks and liabilities and allocate reward proportionately to the risks (and if those arrangements cannot be changed, put in place all possible mechanisms to manage and mitigate those risks);
Ensure their contractual arrangements include proper monitoring and communication provisions to ensure risks are managed right through the contractual chain;
Ensure that their contractual arrangements contain workable incident management (as well as dispute resolution) mechanisms that quickly and clearly get the required processes in motion;
Review where they are seconding in employees and their level of control over operational decisions as (certainly in the UK post Buncefield) this can potentially shift the legal risks and liabilities irrespective of contractual provisions;
Review and regularly monitor the financial strength of parties they will depend on for contributions/indemnification, consider whether need to take further steps to secure those contributions.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Paul Watts, Partner and Head, Natural Resources, Baker Tilly
The general mood amongst our independent Oil & Gas clients is positive – the long term economic fundamentals remain strong and there is still no immediate threat to their market share from alternative energy sources. The long term strategic nature of investment in oil and gas plays limits the impact of short or medium term shocks, such as the Eurozone crisis and companies in the sector believe that funding, both private and public, will continue to be available for the right projects in 2012.
Not everything is positive however. We see that the key concern for independents is securing the right projects. There is pressure from a number of directions, notably increased competition from larger players and NOCs in growing economies, particularly China, looking to meet their own growing domestic demands and benefit financially from doing so. This has increased the number of bidders for exploration licenses and development contracts, which makes it more difficult to secure assets at a reasonable price. Some clients have started to experience host governments altering license terms and increasing license fees in response to increasing interest in their assets. As always, geography and politics are fundamental and there is a risk of a ‘race to the bottom’ in developing countries as independents, multinationals and NOCs scramble to secure new assets for the future.
We have been advising clients to overcome these challenges by ensuring they are best placed to secure the right projects. There is no ‘quick fix’ and the solution requires independents to play to their strengths and demonstrate local knowledge, technological innovation and strong systems and controls. Independents need to be able to sell these strengths and offer a partnership-based approach to developing valuable oil and gas assets.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Mike Corley, President, Mercatus Energy Advisors
In 2012, we anticipate that the issues that most concern our clients will be regulatory uncertainty, the economic environment and, in North America, low natural gas prices. Regarding regulatory uncertainty, the list is obviously long but, as it relates to hedging and trading, the ultimate impact of Dodd-Frank (and similar regulations around the globe) is at the top of the list. Ultimately, the question is, will E&P companies be able to continue to hedge in the OTC markets as they have in the past, without facing significantly higher costs or capital requirements? The jury is still out and likely will be for quite some time. We’re also from several clients that they are concerned about potential restrictions or bans related to fracking as this could clearly have a significant impact on many. As far as economic concerns, Europe clearly has a long way to go before we see some sort of stability and the
Drillers and Dealers :::
::: February 2012 Edition
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