Caught Between A Rock And COVID-19: Sharing The Pain Of Onerous Oil And Gas Contracts In The Middle East

• Published date: 21 October 2021
• Subject Matter: Government, Public Sector, Litigation, Mediation & Arbitration, Energy and Natural Resources, Coronavirus (COVID-19), Energy Law, Oil, Gas & Electricity, Government Contracts, Procurement & PPP, Arbitration & Dispute Resolution, Contracts and Force Majeure
• Law Firm: Volterra Fietta
• Author: Mr Graham Coop and Roberto LUPINI

ABSTRACT

The obligations under many oil and gas contracts have become highly onerous as a result of the COVID-19 pandemic.Whether on the losing or winning side, governments and companies face difficult choices between-on one hand-negotiating a balanced solution to the contractual imbalances created by COVID-19, and-on the other-invoking legal remedies that could potentially mitigate the burden of onerous performance. This article navigates some of those remedies and, in doing so, offers strategic and tactical considerations for parties operating in the Middle East considering whether to revise, suspend and/or terminate their long-term oil and gas contracts.

1 INTRODUCTION

The measures adopted in response to the COVID-19 pandemic have caused an unprecedented global contraction in both oil and gas activities and demand. Oil consumption is estimated to have fallen an unprecedented 25 million barrels per day in the first quarter of 2020.¹ At the same time, the fall in gas consumption in 2020 is expected to bring the largest recorded demand shock in the history of global natural gas markets. ²

The measures adopted in response to the COVID-19 pandemic have had a particular impact in the Middle East due to the region's heavy dependency on oil and gas. Lockdowns, travel restrictions and rig closures are just some of the measures affecting the oil and gas industry in the Middle East. ³ Those measures-together with plummeting oil prices-have made contractual performance for most companies uneconomic or simply impossible. Many oil and gas companies operating in the Middle East have therefore started looking at ways to either renegotiate, suspend or terminate their long-term energy contracts. ⁴

Whether on the losing or winning side, companies (and governments) face difficult choices between-on one hand-negotiating a balanced solution to the contractual imbalances caused by the COVID-19 pandemic, ⁵ and-on the other-invoking legal remedies that could potentially mitigate the burden of onerous performance. This article navigates some of those legal remedies and, in doing so, offers strategic and tactical considerations for parties seeking to revise, suspend and/or terminate their long-term oil and gas contracts in the Middle East.

2 BRIEF OVERVIEW OF IMPACT OF COVID-19 MEASURES ON THE OIL AND GAS INDUSTRY IN THE MIDDLE EAST

It is hard to overstate the importance of the oil and gas industry for the Middle East. The region holds nearly half of the world's proven oil...