How dispute finance can help distressed energy companies around the globe: focus on Australia and Southeast Asia

In part 2 of this 3-part series, Omni Bridgeway turns to Nathan Landis, an Investment Manager based in our Perth office, Shane Taylor, a Business Development Director based in our Sydney office, Marjolein van den Bosch-Broeren, Head of Enforcement for Asia, and Singapore-based Chee Chong Lau, an Associate Investment Manager and Legal Counsel, for their thoughts on the economic climate, how energy sector businesses are faring in their regions, and what those businesses should know about dispute funding as they navigate uncertain times ahead.

Historically low commodity prices, volatile markets, and decreased demand are putting unprecedented stress on energy company finances.

Between January and March, crude oil prices plunged 50 percent and by April, some benchmarks were trading at negative levels. Though oil prices have rebounded somewhat in recent weeks, crude oil is expected to trade down 43 percent from 2019’s per barrel average. Similar declines are anticipated in 2020 for all types of energy, including natural gas and coal.

In previous downturns, companies in the energy sector turned to dispute funding as an effective tool to unlock the value of their litigation assets and dramatically reduce the cost and risk of litigation.


AUSTRALIA
What is the nature of the energy industry and what energy-centric businesses are predominant in your region?

Australia is the largest exporter of coal and natural gas globally. They are the second and third most valuable exports from Australia. The wide ranges to which those different types of energy can be put (e.g., electricity generation, heating or manufacturing) and the variety of customers for those products act as a natural hedge against downturns in any particular export destination or industry.

How has the downturn in the energy sector impacted your region economically? What do you project for the coming months and years?

The downturn has resulted in fewer new development projects, as oil and gas companies defer investment decisions.

The coal industry has suffered the twin setbacks of a decline in coal prices and many large project financiers refusing to participate in new coal projects on ethical grounds. The Carmichael coal mine in Queensland was originally designed to produce 25 million tons of coal per annum, although that has now been scaled back to 10 million tons.

The major players and project developers in oil and gas, which include Chevron, Woodside, and Santos, have been forced to lay off employees. Companies are also faced with oil price pressures, climate change issues, supply chain interruption, and travel/tourism restrictions.

In the coming months, those energy producers that were marginally profitable when commodity prices were much higher are likely to seek some form of creditor protection. Companies will likely place a heavy focus on liquidity management, access to cash and equity raises, or increasing debt facilities to ensure they have sufficient reserves to sustain a prolonged downturn.

In the coming years, the downturn is likely to accelerate the transition from traditional forms of energy towards non-carbon and renewable energy sources.

Do you anticipate that the downturn will result in increased litigation? What kind?

The downturn will result in increased litigation in all facets of the energy sector from disputes between joint venture partners over the future development of projects to disputes over pricing in long-term energy supply contracts.


SOUTHEAST ASIA
What is the nature of the energy industry and what energy-centric businesses are predominant in your region?

The energy sector in Southeast Asia is quite vibrant, both with oil and gas, as well as renewable energy. There are many major agricultural exporters and investors are starting to develop bio-energy as well.

The oil industry is dominated by national energy companies—Petronas in Malaysia, PTT in Thailand, Pertamina in Indonesia. The super majors are generally shifting away from Southeast Asia. Independent exploration and production (E&P) companies continue to steadily grow their businesses.

How has the downturn in the energy sector impacted your region economically? What do you project for the coming months and years?

Many E&P companies in Southeast Asia are re-evaluating business plans, projects and investments.

The development of various oil and gas projects here in Southeast Asia have been or may be deferred, although certain projects are expected to go ahead this year.

Many oil and gas contractors are affected by collapsing oil prices, and it is expected that some may need to restructure or face insolvency. Given the interwoven nature of global supply chains, large-scale insolvencies might lead to trickle down litigations involving the wider markets.

The silver lining? Lower prices for oil-indexed contracts may accelerate the transition from coal to gas in Southeast Asia and may boost the development of LNG-to-power plants. However, this could also see the abandonment or postponement of renewable energy projects in the pipeline.

Do you anticipate that the downturn will result in increased litigation? What kind?

Yes. Many shipyards and contractors are sending or receiving force majeure notices and delaying or cancelling projects on the basis of Covid-19-related disruptions. Not all contracts along the supply chain contain “back to back” force majeure clauses, which might result in litigation.

What should affected businesses know about dispute finance?

Affected businesses will likely aim to conserve cash flow to weather the storm.  Dispute financing can provide much-needed support, particularly if a litigation, arbitration, or judgment enforcement process is expected to be lengthy and costly.

While difficult times may be ahead for companies in the energy sector, dispute finance has proven to be a useful tool to help companies get through the eye of the storm by maintaining cash flow and unlocking previously untapped litigation assets. Indeed, dispute funding could be the key for some companies to sustain themselves through an economic downturn. 

In the final post in this three-part series, we’ll check in with Oscar van Rossum du Chattel, a Senior Case Intelligence Manager based in Omni Bridgeway’s Geneva office, and Jonathan Siklos, a Senior Case Intelligence Manager based in Omni Bridgeway’s Dubai office, about the impact the downturn is having on energy companies in Europe and the Middle East.  To view the first post in the series, which addressed challenges and opportunities arising from the downturn for energy companies operating in North America, please click here.