How dispute finance can help distressed energy companies around the globe: Focus on Europe and the Middle East

In the last installment of this 3-part series, 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 provide their perspectives 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.

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

Despite being home to three of the super majors (BP, Royal Dutch Shell, and Total), Europe as a continent is more of a consumer than a producer of energy. It is increasingly stepping away from the use of coal and nuclear power (despite France still being a bit of a nuclear champion) and has an extremely hesitant attitude towards fracking. General sentiment in Europe is that the future lies in renewable energy and—to a lesser extent—liquid natural gas (LNG).

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

Home confinement and travel bans throughout Europe due to the Covid-19 pandemic have significantly reduced energy consumption. This has led to lower prices, storage shortages, and refinery stoppages. Average European GDP is expected to shrink by more than 7% in 2020, with the countries in the South of Europe, like Greece and Italy, worse hit than those in the North.

As fear subsides and life returns to normal, demand for energy should recover quickly. However, this demand could stabilize at a lower level should a reduction of demand due to people working from home or refraining from travel continue to persist.

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

The Covid-19 outbreak disrupted supply chains and travel possibilities, which has led to oil rigs working with skeleton crews, so we will initially expect to see increased disputes and litigation around force majeure clauses as companies became unable to fulfil their contractual obligations. 

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

Much of North Africa, Iran, Iraq, and the six states of the Gulf Cooperation Committee (Saudi Arabia, UAE, Kuwait, Qatar, Bahrain and Oman) have economies which depend on oil, despite longstanding trends towards banking, tourism, and logistics in Bahrain and Dubai, and more recent and unprecedented diversification initiatives in Qatar and Saudi Arabia.

The regional energy market is dominated by the regional National Oil Companies (NOCs), such as recently-listed Saudi Aramco, the UAE’s ADNOC and Qatar Petroleum; and the upstream concessions on which they often partner in joint ventures with International Oil Companies (IOCs) such as Shell, ConocoPhillips, BP, and other, smaller NOCs. All the major oil services companies—Schlumberger, Halliburton and Petrofac, to name a new—have highly significant operations in the region.

Recent decades have seen initiatives to diversify away from oil, although much of the diversification remains energy-centric; state-led investment in renewables, made possible by high quality solar and favorable wind conditions, has created jobs and demonstrated geopolitically significant energy predominance to the world.

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

The downturn in the energy sector due to oversupply and lack of demand, and the recent pandemic-related collapse in oil prices, jeopardize the stability of all energy-dependent countries in the Middle East. While some have the financial reserves to weather a period of low oil prices, in the coming months and years, others will need to cut spending and find new ways to raise revenues. In general terms, without the money to invest and explore, and with citizens needing financial support, new energy projects, especially less traditional non-carbon initiatives, are unlikely.

Qatar, Kuwait and the UAE, with small, rich populations and well-stocked sovereign wealth funds, are better placed to shield their citizens from the effects of austerity.

By contrast, Oman and Bahrain, which have higher breakeven oil prices, have already enacted austerity measures and will likely curtail major development projects, which may lead to civil unrest. Saudi Arabia, having seen a huge drop in demand for its oil from China, from the earliest stages of Covid-19, has already mothballed elements of its ambitious Vision 2030 initiative, increased VAT from 5% to 15%, and may continue in the coming months to make cuts to citizens’ accounts.

The downturn will also likely result in an increased number of disputes between parties at all junctures of the intricate supply chain. The energy sector downturn may indirectly lead to fallout in other sectors, as governments which depend on oil rents for distributing largesse can no longer invest in other projects. All industries across the Middle East will be affected.

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

While disputes between partners, both in litigation and arbitration, for breaches of contract or disputed variation orders, are likely to increase, the upshot is that all industry players can look to make opex and capex savings. There may also be a wave of employment litigation, and disputes relating to bankruptcies.

What should affected businesses know about dispute finance?

In an uncertain business environment, dispute finance offers energy-sector companies a way of accessing a claim -effectively an asset - while shielding cashflow from costly litigation, especially since dispute finance is provided on a non-recourse basis. A capable funder will also help manage the dispute, thereby providing the client's executive, legal, and finance teams the bandwidth to navigate the stormy waters of economic downturn and focus on core business issues.

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. 

For information about how the downturn is impacting energy companies in other parts of the world, please visit our previous posts in this series, which focused on North America and Australia and Southeast Asia.