UK: Oil Price Volatility - Risks And Opportunities In 2015 - Update 3

Last Updated: 10 February 2015
Article by Philip Mace

Update 3 - Legal issues arising in the E&P sector

In recent years, Africa and other developing markets have been a major focus for a significant number of small/mid cap E&P companies. However, with oil prices at their lowest for over five years, and indications that they may stay at this level for some time, E&P companies and the governments of the countries where they conduct their exploration and production activities are now assessing their options.

For small/mid cap players the prospects for raising substantial capital either through debt or equity financing are extremely tough or non-existent. At the same time, E&P companies are bound by the work commitments agreed to in their contracts with host governments (in most cases production sharing contracts (PSCs)), and perhaps budgets approved before the extent of the price fall was known. Unsurprisingly, insolvency and consolidation in the sector is now occurring as companies face the possibility of not meeting the PSC conditions and the prospect of their subsequent termination and forfeiture.

From the government's perspective it could be the case that by causing the incumbent to forfeit its PSC or licence, the government would find itself with a block which no new entrant is willing to take on, or for which potential new entrants request reduced work commitments and extended exploration periods. In short, the government could be swapping delays on the part of the existing PSC holder for potentially longer delays and reduced work commitments. Certainly for the duration of any gap, the government will not be paid any applicable rental fees or contributions to their training and development budgets as required under the PSC. These payments are often important sources of hard currency particularly in countries where oil and gas production has yet to start. Also companies that are forced to exit will lay off all locally hired staff and contractors and the resulting unemployment may not be short-lived with the attendant political cost and implications.

As it is not necessarily straightforward for a government to enforce its rights and achieve a quick and easy clean break, there may be an opportunity for the renegotiation of commitments.

Resulting legal issues:

  1. Limitations on, or consents required due to, a change of control, asset disposal or the creation of security:  this is an issue applicable to both debt and equity financing depending on the structure and the creation and/or enforcement of any security.
  2. Solvency:  is the company insolvent either under legislative definitions or as defined by any contractual undertakings? Have any prior covenants been breached as a result? Do breaches cause cross defaults under any other agreements and what are the implications?
  3. Employment issues:  are redundancies required? What is the process? How can terms of employment be amended to minimise redundancies? Do employees automatically transfer to the buyer of an asset, and if so, what are the consequences?
  4. Corporate and directorship issues:  what are the duties of directors? What is their personal liability? Will any personal liability of directors be covered by D&O insurance? What corporate authorisations are required for transactions and/or commercial renegotiations?
  5. Contractual and commercial issues:  how can you be sure that renegotiation of contractual terms is binding and effective? What local approvals are required? Are there any regulatory issues, for example, is competitive retendering required? Does a sustained drop in the oil price constitute, or could it lead to, an event of force majeure, and if so, would any relief be available as a result?
  6. Litigation:  is any protection available through investment treaties? How can the chances of a successful arbitration litigation be maximised? What is the best way of trying to ensure that enforcement of an award or judgement is achieved? Does litigation or the threat of it cause any agreement warranties to be breached and if so what are the consequences and how are they most effectively mitigated?

Fundamentally, oil companies and investors will be assessing the ongoing viability of financing their investments. Whether the decision is made to raise equity, debt, a combination of the two, manage the portfolio or renegotiate contracts or commitments, the considerations highlighted above will be prominent in the thinking of all company directors and senior managers. To make the best possible decisions, expert legal advice will be required.  Our lawyers are experts in their chosen practice areas who focus their practices in the oil & gas sector. They have previously dealt with all the issues now faced by companies, shareholders and governments in the oil & gas sector and are therefore uniquely placed to provide cost effective, focused and value-adding legal advice. Please click here for further information on our global oil & gas group.

This update is the third in our series on the impact of oil price volatility. To read the previous update, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.