MARKET COMMENTARY 09
IMPACT ON BUSINESS If the squeeze on profitability continues, the widely expected increase in claims and disputes seems inevitable. As one of our survey respondents put it, keeping cash flowpositive, deferring large investments andminimising operating costs is essential. Changes to operational arrangements as a result of cost-cutting, the shelving of planned projects and lack of investment in existing operations, could all have amajor impact on relationships across the supply chain. According to our survey, the cancellation or breaking of agreements is expected to be the biggest cause of disputes for 86% of respondents, followed by companies or suppliers becoming insolvent and unable to fulfil their obligations (81%). Two-thirds (67%) think payment issues will be amajor trigger for claims and a third (31%) see failure to performobligations to the required standard or timeframe as a critical pressure point.
BUSINESS RESPONSE Current attitudes to litigation/arbitration in the industry have changed significantly over the past 12 to 18months. As a result of the financial pressures faced by the industry, companies are far more bullish than they used to be. There is, as a result, significantlymore contentious correspondence between parties, some of which ultimately leads to the commencement of proceedings. Some of themost common flash points for disputes include non-payment of invoices, termination of contracts (purportedly for cause but in fact for convenience), declarations of forcemajeure and JV/PSA disputes. Clearly, any decision to commence proceedingsmust be carefully risk assessed bymanagement and legal. The direct costs of litigation/arbitration are significant, not tomention the hidden costs of extensivemanagement time, reputational issues etc. The stakes are high, particularly if the dispute is under English lawwhere the loser will almost always be ordered to paymost of the winner’s legal costs. At the same time, companies are often facedwith the stark choice of either having to write the amount in issue off/pay the sumdemanded or litigate/arbitrate. Inmany situations the onlyway forward is to commence proceedings and then seek to resolve the dispute byway of alternative dispute resolution, such asmediation. A key issue to consider before commencing any proceedings is whether any judgment/award can be enforced. In international disputes this is a very complex issue which needs to be addressed at the outset, to avoid pouring goodmoney after bad.
T HE R E I S E X P E C T ED T O BE A N I NC R E A S E I N C L A I MS A ND D I S P U T E S O V E R T HE C OUR S E OF 2016 . DO Y OU BE L I E V E T H I S A C T I V I T Y W I L L P R EDOM I N A N T LY BE T HE R E S ULT OF :*
81% Companiesorsuppliersbecoming insolvent andunabletoperformobligations 86% Cancelling or breaking of agreements 67% Payment issues 1% Changes in regulations and non-conformance 3% Employment claims 4% Usual business operations 31% Failure to performobligations to the required standard or timeframe
HOW IS THE OIL & GA S INDUSTRY MANAGING ITS CONTRACTORS AND SUPPLIERS?
*Respondents were asked to select amaximumof three answers
WHE R E DO Y OU E X P E C T T HE M A J OR I T Y OF D I S P U T E S T O A R I S E ?
83% UP S T RE AM (exploration and production) 13% MI DS T RE AM (transportation, storage, wholesale marketing)
32% Renegotiating contracts
42% Closelymonitoring activities of supply chain and aware of stress points
21% Pre-emptively reviewing contractual obligations and performance
5% No action as all necessarywork has been done
5% DOWNS T RE AM (refining, processing, marketing and distribution)
*The survey was published in February 2016. Survey respondents included a cross-section of senior professionals working within the global oil & gas industry.
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