As an extraordinary year has drawn to a close, our London energy disputes specialists reflect on the lessons learned from 2020, and what they may tell us about the 12 months ahead.
- COVID-19, and its aftermath: the pandemic led to a surge in focus on the law of force majeure, frustration, material adverse change, hardship, conflicts of law, and insurance coverage. Advice in these areas was deployed both in actual and potential disputes, but also in crafting contractual language to allocate risk between parties in the event of further waves of the virus, or future pandemics. 2021 will start to reveal how courts and tribunals approach these concepts, taking into account the unique effects of the crisis. English judgments in (non-energy) cases involving material adverse change provisions (Travelport Ltd v Wex Inc [2020] EWHC 2670) and business interruption insurance (FCA v Arch Insurance (UK) Ltd and others [2020] EWHC 2448) have already begun to sketch out the territory.
- Energy transition: opportunity and uncertainty: already a topic of intense discussion prior to the pandemic, the events of 2020 accelerated the focus on energy transition, and diversification away from fossil fuels. With much of the regulatory architecture for technologies like carbon capture, use and storage (CCUS) and hydrogen still to be designed, companies are seeking to develop their strategies for investment without certainty as to what regulation and incentive regimes may look like: a potential generator of future disputes.
- Renewables: technological challenges: investment in and development of renewables assets continued apace in 2020, with renewables focused companies seeking to exploit reduced costs and increased political appetite for their technologies, and many fossil fuel companies looking to grow in the sector. Disputes in relation to the operation of facilities and satisfaction of performance tests continued - reflecting the teething problems associated with relatively new technology. English cases like Gwynt y Môr OFTO Plc v Gwynt y Môr Offshore Wind Farm Limited and ors [2020] EWHC 850 served as a reminder of the need for careful drafting when acquiring renewable infrastructure (in this case an indemnity claim relating to corroded subsea export cables from a wind farm).
- Upstream oil and gas: a steady stream of cases: the English courts handed down a number of judgments concerning upstream contracts, dealing with issues such as the interaction of obligations in farm-out and joint operating agreements (Apache North Sea Ltd v Euroil Exploration Ltd [2020] EWCA Civ 1397), the status of worked examples in a formula for calculating the hire of an FPSO (Altera Voyageur Production v Premier Oil E&P UK Ltd [2020] EWHC 1891), and the ability of JOA non-operators to remove the operator (Taqa Bratani Ltd and Others v RockRose UKCS8 LLC [2020] EWHC 58). With the oil price remaining low, and differing views between oil companies as to how to develop assets, disputes relating to costs and budgeting, operational decisions and transfer of interests are likely to continue.
- Midstream infrastructure: complicated contracts, and new players: as the oil and gas industry evolves, the trend of energy companies spinning off midstream assets, such as pipelines and storage facilities, to third party investors continues. These investors typically invest with a view to obtaining profitable revenue streams from infrastructure, rather than from extracting and selling oil and gas. This can lead to fresh scrutiny of midstream contracts, and disputes. 2020 saw the English courts handing down judgments in disputes which arose from the complicated, long-term nature of transportation contracts. In Teesside Gas Transportation Limited v the CATS parties [2020] EWCA Civ 503 the English Court of Appeal considered the correct fee due to a pipeline owner for transporting North Sea gas, following a contractual switch from a fixed fee to a cost-based fee. Similarly in Apache North Sea Ltd v Ineos FPS Ltd [2020] EWHC 2081 the High Court considered whether a North Sea pipeline owner could condition its consent to take increased hydrocarbons on payment of an increased tariff.
- Compliance: the energy sector focus: 2020 created new compliance headaches (maintaining systems and controls while employees worked from home; increased risk of fraud; cybercrime), but also concerted focus on longer standing issues. Sanctions remained an area of challenges for energy companies, with the US administration significantly increasing their use, and enforcing authorities – like the UK's Office of Financial Sanctions Implementation which levied a record GBP 20.4 million penalty on Standard Chartered bank – flexing their muscles. 2021 could see a revival of the deal between the US and Iran, in relation to the latter's nuclear programme, resulting in US sanctions relief which may present opportunities, and complexities, for companies wishing to invest in the Middle Eastern state. Active bribery and corruption enforcement against energy and energy services companies continued in 2020, with enforcing authorities coordinating their approach to pursue wrongdoers. Anti-money laundering assumed increased importance, with M&A transactions seen as a particular area of risk. 2021 should see a continuation of this, with particular focus on wrongdoing facilitated by the pandemic's disruption.
- ESG: fertile ground for disputes: environmental, social and governance factors were rarely out of the spotlight in 2020, with financial institutions and governments encouraging companies across sectors to improve their ESG strategies. The energy industry responded, with a focus on the energy transition (see above). But litigation continues in this area. Royal Dutch Shell faced proceedings in the Netherlands, brought by non-governmental organisations seeking orders that Shell reduce its CO2 emissions in line with the Paris Agreement on climate change. Litigation in England in relation to whether a UK domiciled parent company may be liable for acts committed by its locally incorporated subsidiary in its country of operations has been prominent. With some court decisions finding that such a duty of care may exist (Vedanta Resources Plc and Konkola Copper Mines Plc (Appellants) v Lungowe and Ors. (Respondents) [2019] UKSC 20), and others reaching a contrary conclusion, all eyes will be on the UK Supreme Court in early 2021 when it hands down judgment in an energy sector case involving environmental tort claims in Nigeria. A similar claim against an international miner, arising from a dam collapse in Brazil was dismissed earlier in the year as "the largest white elephant in the history of group actions" (Municipio de Mariana v BHP Group plc [2020] EWHC 2930 (TCC)).
- International investment law: the energy industry continues to lead the way: the energy industry has traditionally generated the largest proportion of investment arbitration claims, and 2020 reflected this trend. Further claims were lodged against the Kingdom of Spain under the Energy Charter Treaty, seeking damages following the amendment of renewables subsidiaries from 2012, and further awards were produced by tribunals. Speculation mounted that other states – Ukraine and France – could face similar claims. Meanwhile, proposed amendments to the Energy Charter Treaty to modernise its provisions were debated. Even if these proposed amendments are enacted, investment claims arising from renewables projects are unlikely to disappear, with the energy transition fuelling increased renewables investment, and the potential for future disputes.
- Insolvency and distressed assets: it remains to be seen how the world economy will recover from the pandemic-induced contraction. But already energy companies have suffered from the downturn, with some entering insolvency. 2021 is likely to see continued focus on insolvency risk, with issues arising in relation to the interaction between compulsory insolvency proceedings in courts and private arbitration proceedings, and the effectiveness of contractual protections (like forfeiture provisions) in the light of insolvency law.
- Third party funding: once a niche activity, the evidence suggests that third party funding of claims – both in litigation and arbitration - is increasing. Funders are likely to be active in the energy sector – seeking the "holy trinity" of reasonably high value damages claims, good prospects of success, and a viable path to recovery against the defendant. Funding products are increasingly sophisticated, and can be tailored to suit the particular needs of claimants. For an industry which may be hesitant to allocate cash to litigation, funding may help to unlock value which would otherwise be lost in energy disputes in 2021.
Postscript: we haven't forgotten about Brexit. You can read our energy sector guide here.
