Oman: OPEC Cuts: What Now For The Supply Chain?

Last Updated: 14 February 2017
Article by Andrew Figgins and Euan Strachan

On Wednesday 30 November 2016, the Organisation of the Petroleum Exporting Countries (OPEC) reached an agreement that committed its members to introduce oil production limits for the first time in eight years. It is hoped that that the deal will aid recovery in the sector and help to address the turmoil that has engulfed the oil and gas industry for more than two years. Initial signs appear to be positive – oil prices appear to have stabilised (at least for the moment), after an initial surge following announcement of the deal, and OPEC's members are taking steps to enforce the production cuts, which appear to be holding. Oman itself has agreed to cut production by 45,000 bpd and the Ministry of Oil and Gas has set daily production quotas for oil producing companies. The Sultanate has also been appointed to a monitoring committee established by OPEC in order to oversee implementation of the cuts in production.

So what does all this mean for those companies operating in the oil and gas supply chain? The general consensus is that oil prices will remain "lower for longer" and that market conditions will remain challenging throughout the short to medium term. In Oman, the good news is that large projects are still being commissioned, demonstrating a continuing commitment to develop the Sultanate's hydrocarbon industry. For example, in November last year BP and Oman Oil Company Exploration & Production signed an agreement with the Omani government to extend the licence area of the giant Khazzan gas field, which will bring the total cost of the project (including its initial phase) to over US$20 billion. More recently, oil and gas services specialist Petrofac has been awarded a US$600 million EPC contract by Salalah LPG SFZCO LLC for the new Salalah LPG extraction project.

Oilfield service providers (and indeed any business connected with the supply chain) will undoubtedly continue to have to battle against a variety of different challenges from payment related disputes, redundancy situations created by cost-cutting measures and general difficulties with cash flow. However, there are certain measures that can be implemented in order to mitigate risk in these areas and, in some instances, opportunities to increase market share may present themselves.

Dentons has operated in the Sultanate of Oman for 35 years (and in the Middle East for over 80 years) and has extensive experience in servicing the oil and gas market for exploration and production clients, as well as those throughout the supply chain. Our experience gives us an understanding of the operational, technical and commercial issues facing our clients. Our associate firm, S&A Law Firm, provides dispute resolution and advocacy services throughout Oman, possessing a deep knowledge in all the main areas of dispute resolution, including litigation, arbitration and mediation.

We have prepared a short summary of practical tips that businesses can apply while operating in the current market:

Distressed counterparties

It is crucial that prompt action is taken if you suspect that your counterparty is in distress. Take note of any rumour or press release that would appear to indicate the onset of an insolvency situation and be prepared to act. Remember that if the counterparty enters an insolvency process then chances of recovery of any outstanding debt will be significantly reduced. For contractors supplying goods, ensure that your terms and conditions provide that title is retained until any outstanding debts are settled.

Dispute resolution

Again, speed is key and initiating court/arbitration proceedings at an early stage will increase the possibility of securing a favourable ruling and enforcement order before the counterparty enters an insolvency situation. However, be mindful of the costs associated with initiating litigation/arbitration proceedings, particularly when pursuing smaller claims. Ensure that notice and dispute resolution provisions contained in any relevant contract are followed in their entirety.

Efficiency

Use periods where workflow is slow to streamline processes and procedures and consider restructuring measures (e.g. closing dormant subsidiaries). Improving efficiency is not limited solely to undertaking cost-cutting and companies that act now to improve their internal processes and procedures will be well placed when market activity picks up.

Opportunities

The current climate will undoubtedly offer opportunities for companies that are bold enough to take the plunge. For example, Oman recently tendered four vacant oil concessions which were relinquished by DNO and Circle Group in 2015, with bidding taking place between 23 October 2016 and 15 February 2017. This presents an opportunity for those exploration and production companies that believe that Oman remains an attractive prospect which will, in turn, provide work for the supply chain. There is also the possibility that entities in which the government of Oman holds a stake will undergo restructuring in order to prepare for eventual privatisation. The Minister of Oil & Gas, H.E. Mohammed Al-Rumhy, told a recent seminar that PDO's logistics arm, in addition to other parts of the business, could be restructured and privatised. Such actions would open the door to attract equity investments by strategic investors or, potentially, initial public offerings.

The on-going crisis has also focused minds in some businesses where succession planning had not previously been given due consideration. Owners and shareholders in some of these businesses are now looking to exit, which opens the door for those oilfield service providers who are playing the long oil game and are keen to increase market share.

These are undoubtedly some of the most testing times encountered by the oil and gas industry but there are signs that the green shoots of recovery may be about to appear. However, despite the positive sentiment surrounding the BP and Petrofac deals highlighted above, it is important to bear in mind that much still needs to be done to address the overall malaise currently overshadowing the oil and gas sector globally and in Oman itself. According to Oman's National Centre for Statistics and Information, investment expenditure on oil production declined 14.6 per cent to RO483.2m (US$1.3 billion) for the first 10 months of 2016. Expenditure on production itself declined by 24.3 per cent from RO346.7 million to RO262.5 million over the same period.

Companies operating within the supply chain will continue to face challenges for the foreseeable future. However, by being proactive, diligent and efficient, these businesses will have the ability to safely navigate the current climate and will be well placed when the market recovers.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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.

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