What has just happened?
In the wake of the coronavirus pandemic, oil companies around the world have been buffeted by decreased demand and mounting debt. As OPEC forecasts a 6.4 million barrel per day downtick in the global demand for oil[1], the route out of the crisis for oil producers appears to be a treacherous one.
What does this mean?
Dark clouds have gathered for economies that rely on the sustained profitability of fossil fuels. According to S&P, Abu Dhabi’s GDP (50% of which is derived from crude oil) could shrink by 7.5% in 2020[2], with the world bank warning of long-term damage to the potential output of many economies[3].
To combat this, the oil industry is keen to exhibit their plans for reform. BP is one of several companies to express a commitment to renewable energy, with chief executive Bernard Looney setting a target of net-zero emissions by 2050[4].
However, BP faces a serious challenge in implementing a plan for its low-carbon future at a time of economic crisis, while simultaneously appeasing nervous investors who assume a greatly increased risk under their new roadmap. These same investors have watched as the Energy industry’s shared value of the S&P 500 has fallen by 6% in a single decade[5].
Other firms have stressed the importance of agility in responding to the pandemic. Equinor, the Norwegian hydrocarbon producer, will invest a record $10 billion in renewable energy over the next five years[6], a sure sign that COVID-19 has prompted parts of the sector to reconsider its strategy.
In an industry that for years has been a reliable index of economic growth, COVID-19 might prove to be the catalyst for low-carbon change.
How does it impact the legal sector?
For economies that are significantly dependant on the success of oil, the news represents a fiscal fork in the road. The choice between doubling down on oil or investing heavily in the high-risk renewables sector is a stark one, and one which is sure to cause tension in board rooms and cabinet offices across the globe.
One stumbling block to reform could be in the Production Sharing Contracts (PSCs) commonly signed by companies and governments to regulate oil extraction. The terms of these contracts commit both parties to producing a fixed amount of oil, regardless of its price, leaving companies vulnerable to fluctuations in oil’s value. During the pandemic, Firms have turned to force majeure clauses to argue against meeting production targets[7], but governments may be reluctant to detach themselves in the long term from the very agreements that - until recently - formed the cornerstones of their economies.
Legal issues surrounding the safety of employees, such as quarantining rotational staff on rigs and providing PPE[8], have already impacted a sector still reeling from OPEC plus’s price wars in March, when the price of Brent Crude crashed by 30%[9]. In a field that in the past has been plagued by oil spills and environmental disasters, COVID-19 might accelerate the decline of a previously invincible industry.
Yet as the appetite and impetus for clean energy grows throughout the world, law firms should expect increasingly strident lobbying for renewables. Over recent weeks, climate activists have bombarded the American legislature with demands to tax the production of environmentally harmful products like coal and carbon[10].
The tide seems to be shifting in the battle for the oil industry. The desire for reform and for a new, green recovery have never been so prominent in our cultural debate, and oil producers are becoming increasingly conscious of their role in building for the future. It is unclear whether the coronavirus pandemic will push the oil industry to adopt wholesale reforms, but the legal sector must be ready for a dramatic change in priorities.
Written by Jonathan Cook
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References:
[1] OPEC Monthly Oil Market Report, https://www.opec.org/opec_web/en/publications/338.htm, (June 17th, 2020)
[2] Dania Saadi, ‘UAE’s Abu Dhabi GDP To Contract 7.5% On Oil Price Crash, Virus: S&P Global Ratings’, S&P Global, (May 31st, 2020)
[3] ‘The Global Economic Outlook During the COVID-19 Pandemic: A Changed World’, The World Bank, https://www.worldbank.org/en/news/feature/2020/06/08/the-global-economic-outlook-during-the-covid-19-pandemic-a-changed-world, Accessed 20th June 2020
[4] Bryce Elder, ‘Once-Bitten BP Investors Should Be Twice-Shy’, Financial Times, (June 20th, 2020)
[5] The Editorial Board, ‘Big Oil Faces Up To A Future Beyond Petroleum’, Financial Times, (June 15th, 2020)
[6] ‘Equinor “to Surpass” Oil Majors in Renewable Investments’, RE News, (May 29th, 2020),
[7] Matthew Farmer, ‘Hot Waters: The Legal Risks for Investing in Latin American Oil and Gas’, Offshore Technology, (June 8th, 2020)
[8] Erwin Seba, ‘Oil Refineries, Offshore Drillers Face Hurricane Challenges Amid Pandemic’, Reuters, (June 4th, 2020)
[9] Dan Murtagh, Alex Longley, and Jacqueline Davalos, ‘Oil Plunges Most Since 1991 After Producers Embark on Price War’, Bloomberg, (March 8th, 2020)
[10] Stephen Lee, ‘Climate Activists Lobby Congress on Carbon Tax, Coal Town Relief’, Bloomberg Law, (June 18th, 2020)
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.