Green shoots in the oil and gas market predicted at the start of 2020 have fallen by the wayside. It was meant to be the year when the industry, particularly in Europe, got serious about ESG credentials and planning for a carbon free future.
The oil market has suffered a double blow: the escalating impact on demand from COVID-19, and the promise of a supply side ramp up from Saudi Arabia (following disagreement on a supply cut with Russia, on 8 March). As of 25 March, WTI was around $24 per barrel at spot price, and Brent was at $27 – down from highs of around $75 and $85 per barrel respectively in mid-2018. Given the volatility and structural misalignment of the commodity markets, and the increasing oversupply capacity, prices could bottom out much lower still.
Market participants are now living through an unprecedented period of uncertainty. Reductions to capex, overheads and non-core assets are all likely. Indeed, recent news has seen Shell announce a $5bn+ reduction in planned capex over 2020, whilst in Texas, Halliburton has placed 3,500 workers on a rotating furlough programme. Entire businesses and the livelihoods of thousands of workers and their families are at risk. There are also mounting concerns around security of energy supply, the availability (and safety) of offshore workforces and access to port and other critical infrastructure.
We foresee significant consolidation in the market. Outside of Russia and Saudi Arabia, many E&P players need an oil price at least at $50 per barrel to break even. In the US, it seemed inevitable that 2020 would lead to significant consolidation in the shale industry, even before the latest price crash. There are numerous highly leveraged participants and the ability to refinance in the current market is likely to be limited. Across the globe, we are also likely to see various cost and synergy driven combinations and reorganisations, including licence / acreage exchange arrangements and "smashcos", as businesses are combined in order to cut costs, benefit from economies of scale and put consolidated asset portfolios under the remit of trusted management teams.
The impact on investment into renewable energy is also likely to be negative. An oversupply of cheap oil reduces the financial case for investment into expensive and unproven renewable technology. Distracted IOCs are less likely to focus on decarbonisation and more likely to focus on their continued viability. Government policy will also inevitably have to refocus. We would not be surprised, for example, if the UK government's offshore wind leasing round 4 was delayed significantly. This is due to bring at least 7GW of renewable generation capacity to market.
We are all in this together, and WBD as advisors to the industry have as much at stake and invested as our clients. We need to support the industry and the livelihoods of those involved. In the short term, legal advice may be needed in relation to:
- contractual force majeure, frustration and/or termination rights
- employment, particularly regarding temporary and flexible headcount reduction, consultation periods and associated requirements
- health and safety policy, especially for the offshore workforce
- debt refinancing, rollover and restructuring (using RBL or otherwise)
- solvent restructurings, and insolvency situations (including CVAs and pre-packs)
- dispute resolution, including in relation to JOA / PSC defaults, fulfilling cashcall requirements and in relation to decommissioning liabilities
- M&A advice, including project management of truncated deal timetables
- sanctions / anti-bribery advice, as robust financial controls must be maintained.
WBD has over 20 years of experience in the energy industry, across the entire value chain. We understand the sector and the needs of our clients. We are here to help navigate legal issues in these unprecedented and challenging times.