What makes the oil and gas sector such a hotbed for disputes?
July 08, 2014
With extractive industries forming the basis for many of the world’s economies, it’s no surprise that they make fertile ground for disputes. Recent statistics from the International Centre for Settlement of Investment Disputes (‘ICSID’), show that disputes in the Oil, Gas and Mining sector accounted for 25% of all newly registered cases in 2013.
So, just what is it that makes disputes in the oil and gas sector so common? The answer lies largely in the structural features of this industry.
A combination of significant upfront capital investment in exploration and development; assets often being located in politically unstable areas; long lead times, uncertain outcomes; and the sharing of risks and rewards by means of partnerships, cross-border joint ventures and consortia.
Key features of oil & gas disputes include:
- Upfront investment – the forecast for returns can be lengthy.
- Risk sharing – exploration uncertainty & potential changes in government can increase risk.
- Fluctuations in energy prices – oil price is key to recovering considerable pre-production investment.
- Energy assets – resale value of expensive exploration and production assets can be minimal as the cost of moving them is prohibitive and they have no alternative use.
When you’re involved in a dispute you should consider a range of valuation methods to determine the most appropriate way of measuring the damage suffered in each case.
The structural features of the oil and gas sector mean that disputes will happen for the foreseeable future. Companies need to establish a well-defined controls process and ensure that a risk mitigation plan is in place to spot problems early, turn projects around and reduce the likelihood of disputes. If they do happen, experience shows that it‘s important to act quickly and seek expert advice.
For further detail on disputes in the oil & gas sector you can get more detail here.
Have you been involved in a dispute? How did it come about? How was it resolved? Share your thoughts in the comments box below. Or, if you’d like to discuss your situation more confidentially, click here to set up a meeting.
