Coronavirus: the impact of the oil price crash on the contractor community

Out-Law Analysis | 24 Apr 2020 | 9:43 am | 6 min. read

The oil industry is currently facing the twin threats of the coronavirus, or Covid-19, pandemic, and a low oil price. In turn, this situation is posing challenges to the contractor community. As the saying goes: when oil companies sneeze, contractors catch a nasty cold.

Oil majors need to respond swiftly to ensure their reputation for reliable dividend distribution and highly leveraged mid-caps must act quickly to ensure the immediate survival of their business.

Cutting costs from the supply chain will often be seen as the most obvious and least painful way to save money. The process is playing out in different ways, so how can the contracting community respond and what other issues are contractors having to consider in this new environment?

Health and safety

Embedded in the DNA of the oil industry is safety. There have been too many tragic accidents for that not to be the case. This has created a highly collaborative approach between operator, contractor and the supply chain.

In many parts of the world the relevant requirements are supported by statute and highly effective enforcement agencies such as the Health and Safety at Work Act and the Health and Safety Executive in the UK. Alongside such legislation, employment law such as the Equality Act in the UK will often place a duty on the employer to take care of the health and well-being of the workforce.

Even if this is not the case, global health and safety standards adopted by the industry create an effective normative environment – ideally the costs of compliance should benefit from tax relief or cost recovery under exploration and production contracts with the host government. Contractors will be keen to ensure they share in any such recovery and relief enjoyed by their client.

Two of the most pressing issues encountered by oil companies and contractors in the current environment are around employee health, and site security. The ability to maintain social distancing on site, particularly offshore sites, can be challenging.

Regulators in many jurisdictions, including the Oil and Gas Authority in the UK, have made it clear that they will have no hesitation in shutting down sites where this is not achieved. Oil companies must ensure they are in regular communication with their regulator and industry bodies.

Contractors and operators need to be prepared by ensuring they have clearly identified contractual rights and contractual processes and exercised or reserved them as needed.

Yet minds operating collectively can often find a solution when individually it is more difficult and more costly, with examples including contractors and operators sharing medical facilities and transport arrangements.

Oil companies should maintain full, accurate and detailed records of the steps taken to maintain site security and employee well-being. The records should also be appropriate in language and opinion, given the possibility of scrutiny by the regulator or the courts.

The employer-contractor relationship

Oil companies are employing a range of approaches to the issue of cost-cutting. Some have sought to impose a blanket percentage cost cut on all their contractors, whilst others have adopted a more nuanced, collaborative message – often the more effective approach.

Contractors and operators should plan for the worst and strive for the best. Among the worst-case scenarios is a relationship breakdown accompanied by expensive litigation. Parties need to be prepared by ensuring they have clearly identified contractual rights and contractual processes and exercised or reserved them as needed.

Records must stand up to scrutiny and a forensic approach must be taken to identifying and quantifying losses suffered due to the consequences of Covid-19 and any alleged contractual breach.

Oil companies and contractors have a symbiotic relationship, and well-advised oil companies and contractors are seeking legal solutions which maintain a mutually productive relationship, not least to ensure that when prices do rise, there is a well of good will and loyalty. It is usually beneficial if language is non-confrontational and moderate.

The workforce

Unfortunately, cost-cutting often means losing staff. Governments around the world are offering support to assist employers to maintain their workforce as much as can be possible, for example through furloughing schemes like the Coronavirus Job Retention Scheme in the UK.

HR and legal functions should follow announcements closely and companies should try to be part of the industry conversation - and look for ways to engage staff. Furloughed staff are, for example, permitted to do volunteering work in the UK: that is good for them, good for corporate reputation and good for the wider community.

Separately, in some jurisdictions, employees are required to hold a permit or similar document to enable them to travel to work whether to offshore locations or otherwise. These should be checked diligently. Working visas may lapse when government labour departments are working reduced hours or not at all. It is critical to anticipate this. Some governmentshave put measures in place to grant relief in this regard. The UK has said that if an individual cannot leave the UK due to travel restrictions or self-isolation then their visa will not expire until 31 May. The UAE government has said that all UAE residency visas, entry permits and Emirates ID's expiring from 1 March will remain valid until 31 December. But not every country has put measures like these in place.

Working from home creates risks: there is greater risk of data leakage so IT security systems must be reviewed to ensure they are sufficiently robust. Employees need to be coached to be even more mindful of confidentiality considerations. An obvious example is an employee sharing an apartment with employees or advisors of competitors or counterparties. The obligation of employers to provide a safe system of work will generally apply whether the employee is home working or on site. Employees must be made to feel sufficiently supported to ensure their workplace environment is suitable.

Force majeure

For the unwary there is a mistaken assumption that Covid-19 results in contractual force majeure, resulting in suspension of performance of the contract, termination of the contract, or some type of cost share between the operator and contractor depending on the terms of the contract.

Under English law, and in many other common law jurisdictions, force majeure does not form part of general law – the defence only exists if and to the extent it is provided for in the relevant contract.

We are already seeing force majeure claims of the contractor being questioned or rejected by the operator or employer, on the basis that the fact of Covid-19 is not an force majeure event, or even if it is such an event it has not prevented the contractor performing the contract, that the force majeure notice provisions were not followed or that the contractor did not mitigate the force majeure consequences.

All the above are common issues in a contractual force majeure clause. so immediately upon experiencing an event that might constitute force majeure, and certainly before issuing any force majeure process, it is critical that companies understand the detailed requirements and time limits of the contract and act accordingly.

Joint venture partners

When contractors are acting in an unincorporated joint venture and have joint and several liability to an exploration and production company, it is instructive to note that the impact of a Covid-19 force majeure event on one joint venture partner may not necessarily absolve the other joint venture partner from liability to the exploration company under the principal contract. It will depend on the interpretation of the main contract.

Parties may seek solace in joint venture provisions which provide that a partner cannot claim force majeure, unless an force majeure event has actually occurred under the principal contract, but this misses the point.

Insurance may not cover losses arising from failure to perform a contract due to the Covid-19 pandemic. Business interruption insurance is unlikely to help – it would usually respond where the underlying clause is property damage or loss only. Contractors will need to work with their insurance team to determine whether their insurance cover may help.

Interruption to the supply chain may well be an issue. Naturally it would be judicious to refer to the contract to determine rights and remedies in the event of failure to or delay in supplying. Supply chains should be stress-tested and alternative suppliers identified where there may be a weakness. Contractors should keep in close contact with suppliers so any difficulties can be identified early, and necessary measures taken.

When contractors are repurposing their manufacturing facilities to produce chemicals, personal protection, medical equipment and sanitisers they must ensure that they have the design and process rights needed to manufacture the product – this may mean obtaining a licence from the relevant design or process owner.

Companies should do their due diligence on the product liability laws in the jurisdiction to which they will be supplying. Health and safety laws will apply as they would do as if carrying out normal day-to-day business manufacturing. Employment contracts should be reviewed to ensure they provide for such change in work.

It is too early to draw any lasting conclusions on how current events may affect how contractors operate, their relationship with lenders and companies higher and lower in the supply chain and the terms upon which they contract.

What is clear is that there is an undercurrent of change in the both the role of business and its responsibilities to the wider community. There are some who suggest this may even impact the ability of companies to rely on their strict legal rights.

Given the spotlight placed on commercial behaviour, in an increasingly socialised Covid-19 environment, it is even more important to identify collaborative solutions which avoid business failure and protect jobs. It is quite possible that the need to act with greater consciousness and purpose may outlast the current confinement, given the wider challenges associated with climate change.