Ten Things Every Energy Lawyer Should Take Into Account

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Olufola Wusu Esq.
08/09/2013

"To be really great in little things, to be truly noble and heroic in the insipid details of everyday life, is a virtue so rare as to be worthy of canonization."Harriet Beecher Stowe

The nature of the Oil and Gas industry industry makes it unattractive for commercial lenders to agree to finance projects embarked upon by smaller companies. Lending is even more uncommon when the project is purely exploration or import based because of the inherent risks involved in participating in such activities. Insurance is also a major issue with premiums constantly on the rise.

The risk involved, the difficulty in securing loans and never ending stream of innovation have led the oil and gas industry to evolve diverse contracts designed to mitigate risk, solve the problem of funding and cover the stream of innovation being birthed by the industry.

So often in life we are beholden to the macro forces that govern the milieu in which we exist, personally, professionally and otherwise. As lawyers, we must take into account not only these great tectonic movements but also the "insipid details"….

Things To Look Out For In An Oil And Gas Contract

"Oil Is Oil" And "Gas Is Gas"

Sometimes when reading contracts and case law, this simple distinction can be lost, especially in contracts and case law that use the words "Oil" and "Gas" seemingly interchangeably. For the lawyer, "gas" often means "natural gas "or "associated gas". Oil "black gold" is refined into a thousand and one finished products including petrol and diesel.

The distinction between oil and gas is quite important and means a lot to our clients and to lawyers as we advise our clients and negotiate contracts on their behalf. Oil and gas are sold in different markets, each with its own distinct set of pricing variables.

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Oil is usually sold in an international market, while gas, by dint of more troublesome transport, is sold more locally in "developed countries". In emerging economies gas is either sold via liquefied natural gas (LNG) or flared, some of it is however sold locally as infrastructure for local sale of gas is in the nascent stages of construction.

However, LNG seems to have changed a part of the formed equation, with gas being sold internationally via LNG vessels. Pipeline development development and control seems to be growing but its fate seems uncertain as Floating LNG has now

Oil And Gas Contracts Are Stories…

Many years ago, energy contracts were sealed with a firm handshake. Nowadays Energy contracts are always in writing. Interestingly, energy contracts are not different from novels in the sense that they tell a story about the agreement that the government and international oil company (IOC)/contractor have arrived at having started their negotiation from the initial negotiating points of the "government’s model contract". A good story has a beginning, middle and an end. A good energy lawyer would know what material to look out for in each part of the document and how to negotiate for the exclusion of some items and the inclusion of others.

Model Contracts Are Initial Negotiating Points.

"Model contracts" are the initial negotiating points from which the Government and International Oil Company (IOC) / contractor proceed in their journey towards a mutually beneficial energy contract. Consequently, negotiating an oil and gas contract requires acumen, knowledge, foresight and plenty of common sense as well.

What are the essential functions of an energy contract?

Firstly, it forces consideration by the host governmentand ultimately the International Oil Company (IOC) / contractor of the issues involved in a particular energy transaction.

It ought to clearly establish the obligations of the parties to each other in a way, hopefully, that will preclude future dispute and will, if a dispute does occur, enable a tribunal better to determine the issues involved, as a result of the clarity of the drafting of the said energy contract.

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Decoupling Of Oil And Gas Prices

Historically there has always being some relationship between the price of crude oil and that of natural gas, that is, barring any unforeseen occurrences like natural disasters etc. Decoupling is usually temporary. However three factors tend to point to a possible permanent decoupling of prices and a possible dip in some areas. They are:

The globalization of natural gas
Specialization in all parts of oil and gas industry by companies
The emergence of Shale Gas.

Key clauses

A basic understanding of key issues like; who are the Parties to the contract? What exactly, is the subject of the Energy contract? What is the preferred Choice of Law? Are the essential safety clause properly worded? What are the provisions for risk allocation and indemnity clauses?

Sound knowledge of key clauses like; Penalty; Termination; Knock For Knock Indemnity (Macondo seems to have brought this clause, in particular, firmly to the fore again); Third Party Indemnity; Force Majeure; National Interest Provisions/ Local Content; Stabilization; Settlement Of Disputes; Choice Of Law; The Umbrella Clause; Abandonment/Decommissioning And Agreed Damages For Pollution

IP/Data Protection in Oil and Gas

Research and operations in the oil and gas industry constantly produce new ideas, procedures, software, equipment and plenty of data, especially in areas bordering on seismic data collection, well enhancement activities and asset optimization.

This innovation has potentially transformed the oil and gas industry from a commodity market to knowledge / innovation / intellectual property-based industry.

In addition, the divestment of assets by oil and gas companies can lead to employee mobility - the kind of employee mobility that usually makes the loss of valuable data or even intellectual property more probable.

It may seem wise for oil and gas companies to pay more attention towards protecting such IP and proprietary information - especially as it concerns former and disgruntled employees.

Contract Review Can Help Strengthen Regulatory Powers

In the developing world, energy contract terms determine how much a producing country earns from it natural resources. In many emerging economies, these contracts can act to strengthen the regulatory power of government to enforce environmental, health and other standards, in areas where they have not already been well

Need for pre-agreed damages clauses for pollution

Basic contract review and negotiation can help stem the tide of pollution and environmental degradation and harsh, retributive post-pollution proclamations by host governments. By making sure energy lawyers negotiate and include clauses that enact stringent but balanced conditions for environmental protection, including stipulating a pre-agreed fine for every barrel spilled,the optimal deterrent can be meted out to operator and contractor alike. Again, the Macondo disaster is the case in point for this.

Emergence of Normative Social Influence In Oil

Social norms refer to the unwritten rules that govern social behavior. Lax enforcement of the law in the area of environmental degradation sometimes results in host community hostility targeted at the operators that are believe to be given a free pass to operators in the realms of industrial pollution. This tendency toward negative descriptive normative social influence is more readily evident in emerging economies.

Region specific nuances

Nigeria, Brazil, Ecuador and China have recently sought to impose huge liabilities on oil companies for pollution incidents. Interestingly, it seems the US Department of Justice tends to want the wrongdoer to ‘bear the sanction’ and hinders attempts to pass the financial burden of a fine to its insurers.