Although not a significant exporter of oil or gas in global terms, the troubles in Egypt serve to highlight some of the consequences of civil strife on the exploration and exploitation of hydrocarbons. When doing business in emerging markets there are many types of risk and barriers to be considered which may arise from geography and political instability.
Awareness of these risks is critical to negotiating and drafting a contract for an emerging market because it allows you to anticipate and allocate liabilities when negotiating a contract. Emerging market risks are less obvious than those one might typically consider – such as well control or reservoir damage – however they can compromise cash flow, eliminate value, and, in the worst case scenario, jeopardise your bottom line.
Political and civil unrest is very difficult to anticipate and predict in any part of the world. If such risk is unpredictable, it may also be unforeseeable, unpreventable and beyond the control of the parties. If so, it may be prudent to define such risk as a force majeure event (i.e. an event beyond the affected party’s control). By designating civil unrest as force majeure in a contract the parties agree that the affected party will not be liable for any related breach. The contract will typically provide that reduced rates may apply and a right to terminate the contract will arise if the force majeure event subsists for an agreed period.
However, it is not always correct to assume that a party cannot control and reasonably avoid an event of civil unrest. If an operator, for example, has a longstanding relationship with the government or a local community, they could be in a position to manage this risk. If an operator fails to manage the risk properly, the contractor may want the contract to be clearly drafted to provide that force majeure remedies will not apply and the contractor will be protected against any commercial consequences.
It may also be relevant for a party to consider other rights and remedies beyond force majeure. One such right would be the contractor having control of its people and property and the right to take action to remove people and property from imminent danger. This immediate action may be required by a war risks policy. If so, it may be best practice not to assume that force majeure is an adequate remedy.
The threat to property may not only arise from violence in the streets. A threat of expropriation or confiscation of a valuable asset (such as a drilling unit, tanker or floating production and/or storage facility) may be more subtle. It may be evidenced by a strong nationalist sentiment that translates into the threat of an asset being confiscated by physical action or expropriated by legal steps. For example, a government’s position on its sovereign right to hydrocarbons and other natural resources may shift – as a consequence, the government may assert an interest in not only the natural resources, but all other logistics and infrastructure in-country deemed necessary for production.
Indeed, logistics and infrastructure are viewed throughout the industry as a linchpin for safe, stable and successful operations. When a sophisticated and critical item of equipment, such as a blow out preventer, is not fully functional, the operator and the contractor will look to the relevant supply chain and infrastructure to source the services, equipment and materials necessary to fix the problem.
A remote and emerging province may not have ready access to resources, an effective and efficient supply chain or a robust infrastructure. It may be necessary to consider this risk in your contract and consider during negotiation a balanced approach to managing the consequences.
Greg May is a partner and service sector specialist in the oil and gas team of Brodies LLP
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