Posted: 01 Oct. 2020 8 min. read

Energy & Resources sector: Keeping the gears moving

Uncertainty and change can often lead to disputes arising between parties. In the energy and resources sector, the complex regulatory landscape and the requirement for long term capital investment in third-party relationships may result in a significant number of large and complex disputes.

Unpredictable demand, disrupted supply and macroeconomic fluctuations can lead to:

  • counterparty default, where operating partners are falling into financial difficulties and failing to pay invoices or meet cash calls;
  • failure in fulfilment of contractual obligations, with parties looking to obtain relief from contractual obligations and/or trigger force majeure clauses;
  • termination of licences by host states, on the grounds of economic distress or default on licence agreements;
  • price review disputes, where parties seek to force an adjustment to contracted pricing and tariffs; and
  • decommissioning disputes, with some parties seeking to bring forward decommissioning dates or dates for posting of security under decommissioning agreements.

The quantification of losses
Coming to an amicable settlement is often preferable in terms of cost as well as the ongoing and future business relationship. However, despite best efforts, disputes are sometimes unavoidable.

Whether differences are resolved by negotiation or more formal procedures, claims (and defence of claims) need to be supported by the establishment of legal liability, causation and the quantification of losses.

Establishing causation and calculating any losses can be complex:

  • How do you separate losses when they relate to more than one isolated issue i.e. to decouple the financial effect of each issue?
  • How do you determine the timing between the loss and recovery, given that projections for the business may no longer be appropriate in a time of significant uncertainty?
  • How much of the loss has been or may be mitigated i.e. what is the optimal commercially justified measure?
  • What future price assumptions do you apply in the calculation, given commodity and resource price volatilities? What is the effect of any changes in state-imposed volumes, pricing or royalties?
  • How do you account for pre-emption right clauses and what value is attributable to a licence in the event of a default under a partner or licencing agreement?
  • In price review disputes, how do you resolve conflicting interpretations of the contractual formulae?
  • In the event of a sudden and unexpected change in commodity prices, how do you determine whether decommissioning costs and dates need to be revised?

The challenges and complexities often lie in the assessment of the most appropriate assumptions to be applied in a loss quantification model.

The key to a good third-party contractual relationship is clarity in the contract. Like a gear in a machine, contracts determine the speed, direction and movement of the relationship. When the gears break and stop functioning as intended, many complex and inter-related questions need to be answered in order to repair the damage or, in this case, to quantify the loss.

When it becomes apparent that there is potential for a contract to buckle and falter, contracting parties are most often best served by pre-emptively addressing the potential areas of contention in order to minimise the impact and disruption. Taking pre-emptive action and seeking advice at the earliest stage possible from in-house teams, legal and/or commercial experts with a deep working knowledge of the industry will help parties plan for and navigate the challenges and set them on a path to obtaining the best possible results for their stakeholders. So maybe now is a good time to shift gear, look at your contracts in more detail, and put a plan in place to negotiate any required changes to them, helping to ensure your relationships continue to remain strong now and in the future.

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Key contacts

Matt Brewer

Matt Brewer

Director

Matt is a director in Deloitte Forensic’s Disputes and Investigations team and a highly experienced dispute resolution practitioner. He has a particular focus on the Energy & Resources and Industrials sectors and leads Deloitte Forensic’s Energy & Resources disputes practice in the UK, bringing together a breadth of disputes, valuation, industry, economic and modelling expertise. During a forensic career spanning more than 20 years, Matt has advised clients, and their legal advisers, in a multitude of matters including commercial, investment, contractual and transactional disputes across a wide range of industries and sectors. He has amassed wide-ranging experience of litigation, arbitration, determination and mediation processes. In particular, Matt has been instructed as an expert in commercial arbitrations as well as English litigation and has testifying experience.

Timothy Johnson

Timothy Johnson

Director

Timothy Johnson has considerable experience across a number of industries where he led multiple expert assignments in the context of international arbitration proceedings, primarily in the energy and aerospace sectors. He has worked on matters relating to some of the world’s largest energy contracts. He has extensive experience of analysing the financial provisions of complex cost recovery and profit sharing mechanisms. In particular, he has worked on numerous European gas pricing disputes, examining and modelling the price escalation formulae and termination clauses. His energy related disputes experience has also encompassed examining the accounting treatment and available cost allocation methodologies for the apportionment of shared costs, either between different hydrocarbon types, or between contract parties in numerous high value gas pricing disputes. His aviation and aerospace experience includes the assessment of damages relating to aircraft procurement, pre-delivery financing, buyer furnished equipment, VVIP aircraft, and loss of profits relating to both passenger and cargo airlines.