Awards Edition 21'

Modern Cases


Farah Elleuch

Background: Covid-19 crisis and consequences on the Oil and Gas industry

Amidst the Covid-19 pandemic, crude petroleum prices have dramatically dropped, especially during March and April 2020, when crude petroleum was trading at a negative price.

Such a massive petroleum price plunge was the result of a combination of the falling demand due to worldwide lockdowns, decrease in human movements, whether between the countries or within each country, and of diminishing storage space due to the oversupply.

From a legal standpoint, the tremendous drop in petroleum prices resulted in contractual emergencies.

On one hand, companies executing supply and/or services agreements were facing force majeure events, hardship situations and even, when relevant, some companies were compelled to go to court for breach of contract actions based on the frustration of purpose.

On the other hand, oil and gas companies and service companies had to make crucial decisions about cost cutting, which led to a huge employee termination wave.

From a tax standpoint, the impact of Covid-19 on oil and gas companies has led to loss planning, tax residency changes due to travel restrictions, and transfer pricing adjustments to deal with lower earning expectations.

The resurrection of Oil and Gas companies: the trend of renewables projects

Amidst the crisis, some National Oil Companies (NOCs) with uninterrupted cash flows and strong asset bases survived the dramatically falling demand and could face the incurred losses without changing their strategies. However, oil and gas service companies acting at an international scale and that were already facing difficulties essentially due to governments’ pressure to ensure an energy transition have been required to engage in strategic changes. Changes included bankruptcies, restructuring and mergers and acquisitions practices. While companies with colossal debts went to court, declared bankruptcy and preferred to restore what remains of their assets, other companies decided to act in a more positive manner and went through restructuring or mergers and acquisitions. However, it was quite challenging to build a commercially-fair deal in such a damaged market.

On the other hand, many other companies including big names with integrated scopes (upstream, mid-stream and downstream), have chosen a more efficient path, which leads to change towards renewable energy. This practice did not specifically emerge with Covid-19 as the oil and gas global market was already being disrupted before the Covid-19 crisis by decarbonization plans and energy transition targets. It is only after Covid-19 hit that the change to renewables became a widespread trend.

Many countries, after Covid-19 became the new norm, reaffirmed their commitment to climate goals in their recent economic recovery plan, which has led to many oil companies taking a step (or more) to add a ‘green touch’ to their existing business models. For the latter, many instruments have been deployed, including the horizontal joint developments between oil companies and renewable developers, vertical agreements between NOCs/IOCs and oil services companies aiming to widen their scope and also to gain in scale by getting governments’ support by engaging in the global eco-centric decarbonization efforts.

Other categories of oil companies might be taking bold decisions by investing consistently or converting totally to renewables. Project finance has been the key motivation to these companies, entitled to create special purpose vehicles to carry out renewable projects on a new balance sheet and separate liabilities.

Not only governments are pushing for decarbonization, but also central banks and international financial institutions