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Covid-19 impact on energy and natural resources sector

Posted on: 27 March 2020

In a briefing issued by Quadrant Chambers Chris Smith QC looks at some of the key scenarios and problems that are being grappled with across the energy and natural resources sector.

The impact of Covid-19 on the energy & natural resources sector has been severe and unprecedented. Findings from Oil and Gas UK (OGUK) suggest that 2020 could be the first year since 2009 when the demand for oil has diminished. The oil price, which was already reeling from the Russia-Saudi Arabia price war, has plummeted, exploration and development projects have been suspended, and, as a result, it has been predicted that oil and gas investments in 2020 could be cut by USD 30 billion.

The simple continuation of current operations has proved a struggle. With statistics suggesting that anywhere from 25% to 30% of the world’s population is under lockdown, borders and airports being closed to international travel, and with governments scrabbling to comply with their repatriation obligations, facilities are being manned with reduced, and in some cases skeletal, staffing levels.

Consequently, the following scenarios and problems are being grappled with across the sector:

  • The suspension of exploration and development operations. Drilling commitments found in exploration licences and production sharing contracts are proving either impossible to comply with or economically unviable. Announcements have already been made about the suspension of certain projects (for instance off the coast of Gambia) for this very reason. This will have a knock-on effect on joint operation budgets and work programmes which will need to be rewritten. Furthermore, the low oil price will mean that the ability of parties involved in such joint operations to recoup their expenses as “cost oil” will be significantly curtailed.
  • The prospect of the shutting-in/sealing-off of wells as a result of manning levels on drilling rigs, FPSOs and the like falling below the level required by HSE regulations and the reasonable and prudent operator standard. The initial response to Covid-19 in this respect was precautionary, with operators reducing the number of people working at their facilities as a preventative measure. However, daily reports have now begun to emerge of off-shore workers being diagnosed with Covid-19. To give one example, news broke on 27th March 2020 of a crew member working on a FPSO in the Lancaster field in the West of Shetland area being been evacuated to the mainland and subsequently testing positive for Covid-19 (and one only needs to look at the example of luxury cruise liners to see how easily the virus is capable of spreading offshore). Whilst work on rigs/FPSOs appears to be proceeding as normal for the time being, with the travel restrictions in place and the need to rotate out current personnel, that position could change rapidly.
  • Shipbuilding and offshore construction projects have been or are likely to be halted, whether due to the lack of demand, the need to scale back investment, or the simple unavailability of the work force (or the inability of buyers’ crews to reach newbuilds that are otherwise ready for delivery).

The foregoing will inevitably give rise to disputes. Follow this link to the brieifing in full.

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