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

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 reserves and is the world's largest oil-producing region. ⁶ It also holds the world's largest natural gas reserves and is the third largest producer of natural gas. ⁷ Naturally, such abundance of resources has propelled the region's recent economic development.

The collapse in demand for oil and gas caused by the COVID-19 pandemic has had a significant impact on the Middle East owing to the region's heavy dependence on oil and gas.To illustrate this, the oil export revenues of Iran-one of the region's most oil-dependent States-fell from USD 6.1 billion (in January 2020) to USD 1.4 billion (in April 2020), leaving a deficit of approximately USD 4.1 billion. ⁸ Consequently, most Gulf States have been forced to adopt a series of extraordinary measures. For instance, the Kingdom of Saudi Arabia ordered its ministries to cut public spending by as much as 30%. It also took the unprecedented measure of tripling the national VAT rate from 5% to 15% overnight. ⁹

In addition, oil and gas companies are also facing a dual shock caused by the recent decline in oil prices.The decision of certain key oil producers (i.e., Russia and Saudi Arabia) to increase their production in early March 2020, together with a crippling fall in demand for oil and gas caused by the COVID-19 pandemic, created an oversupplied market. As a result,West Texas Intermediate (WTI)-the benchmark for US oil-fell below zero for the first time in history. ¹⁰ As for gas, industry experts estimate that global demand will fall twice as much as it did in the aftermath of the 2008 financial crisis. ¹¹

Naturally, this dual shock has had-and is still having-a significant impact on oil and gas contracts in the Middle East. Companies that find themselves on the wrong economic side of contracts have had to suffer the pain of onerous performance. Fortunately, some of those companies might have access to contractual and/or extra-contractual legal remedies which could mitigate that burden.

To view the full article click here

Footnotes

* Graham Coop is a partner at Volterra Fietta. He advises and represents companies, governments and international organisations on international dispute resolution and public international law, with a particular focus on the energy sector. Prior to joining Volterra Fietta, Graham served for seven years as General Counsel to the Energy Charter Secretariat. He is an Honorary Associate of the Graduate School of Natural Resources Law, Policy & Management of the University of Dundee's Centre for Energy, Petroleum and Mineral Law and Policy and a member of the Editorial Committee of the International Energy Law Review and of the Journal of Energy & Natural Resources Law.

** Roberto Lupini is an associate at Volterra Fietta. He advises private entities and sovereign States on contentious and non-contentious public international law and international dispute resolution issues. Prior to joining Volterra Fietta, Roberto was involved in some of the largest oil and gas international arbitration proceedings in Latin America.

1 See, e.g., "COVID-19 in the Middle East and Gulf States: Coping With Historic Demand Drop", Energy Council, 22 June 2020 (last accessed on 30 April 2021), available at: https://www.worldenergy. org/news-views/entry/covid-19-in-the-middle-east-and-gulf-states-coping-with-historic-demand-drop.

2 See, e.g., "Gas 2020 Analysing the impact of the Covid-19 pandemic on global natural gas markets", IEA, June 2020 (last accessed on 30 April 2021), available at: https://www.iea.org/reports/ gas-2020/2020-meltdown.

3 See, e.g., "Middle East imposes further restrictions on public events, closes borders in effort to tackle coronavirus", Arab News, 16 March 2020 (last accessed on 30 April 2021), available at: https://www. arabnews.com/node/1641636/middle-east.

4 By way of example, the Kuwait Petroleum Corporation cancelled a significant number of tenders and contracts in 2020 amid the slump in oil demand caused by the COVID-19 pandemic (See, e.g., "Kuwait Petroleum cancels contracts, slashes expat jobs amid coronavirus oil slump", Al Arabiya, 19 July 2020 (last accessed on 30 April 2021), available at: https://english.alarabiya.net/en/coronavirus/ 2020/07/19/Kuwait-Petroleum-cancels-contracts-slashes-expat-jobs-amid-coronavirus-oil-slump).

5 For the sake of brevity and clarity, this article uses the term "COVID-19 pandemic" in a broad sense. In other words, it is intended to include the related measures, effects and consequences of the COVID-19 pandemic.

6 See, e.g., "Statistical Review of World Energy", BP, 2020 (69th edition) (last accessed on 30 April 2021), available at: https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/ energy-economics/statistical-review/bp-stats-review-2020-full-report.pdf, pages 14 and 17.

7 See, e.g., ibid. pages 32 and 34.

8 See, e.g., "COVID-19 crisis response in MENA countries", OECD, updated 6 November 2020 (last accessed on 30 April 2021), available at: http://www.oecd.org/coronavirus/policy-responses/covid19-crisis-response-in-mena-countries-4b366396/.

9 See, e.g., "Saudi Arabia asked state agencies to implement big budget cuts: sources", REUTERS, 11 March 2020 (last accessed on 30 April 2021), available at: https://uk.reuters.com/article/us-saudieconomy-budget/saudi-arabia-asked-state-agencies-to-implement-big-budget-cuts-sources-idUKKBN 20Y0QA;"Saudi shoppers hit by tripling of VAT rate", Financial Times, 15 July 2020 (last accessed on 30 April 2021), available at: https://www.ft.com/content/f605dada-9c93-49c3-a506-1f75e8104a74.

10 See, e.g., "US oil price below zero for first time in history", Financial Times, 21 April 2020 (last accessed on 30 April 2021), available at: https://www.ft.com/content/a5292644-958d-4065- 92e8-ace55d766654.

11 See, e.g., "IEA: COVID-19 Crushed Global Natural Gas Demand", Power Magazine, 11 June 2020, (last accessed on 30 April 2021), available at: https://www.powermag.com/iea-covid-19-crushedglobal-natural-gas-demand/.

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.