Depending on how clauses in the contracts are drafted, force majeure may excuse the operator if it does not uphold its end of the agreement in regard to performance and delays, and it may even allow them to terminate a contract. However, the bar is set high. To invoke the clause, it must be physically or legally impossible for the company to meet its contractual obligations. New Producers Group discussions concluded that the COVID-19 pandemic was deemed likely to present a legitimate force majeure event in most jurisdictions, but that the oil market crash was not. In other words, poor commercial returns of a project cannot justify excusing an oil company from its contractual obligations. In calculating force majeure, governments and investors will seek to determine what work is impossible versus delayed as well as when and how to lift force majeure. Significantly, economic arguments are not considered in this calculation.
For governments facing a possible invocation of force majeure clauses, the New Producers Group suggested the following responses:
- Determine policy goals, such as whether to help operators to begin production sooner or to make room for different operators;
- Understand the scope of authority to grant relief under law, licences, regulations and agreements as well as the procedural requirements;
- Communicate with the operators to understand what they require, their plans and what measures are at their disposal; and
- Assemble the necessary documentation to demonstrate compliance, in anticipation of a possible dispute.
Understanding and adapting to the new normal: Scenario planning
There are more unknowns than knowns in the outlook for oil and gas beyond COVID-19. It remains unclear how long the pandemic and the disruption will last, how much of the loss of oil and gas demand is permanent or simply deferred, and how deeply the industry will be reshaped. Policy is the key to tackling many of these unknowns. National policies and international cooperation will have a determining impact on the duration and intensity of the global health crisis. Policy will also guide individual and industry behaviour when it comes to remote work, transport, and investment in energy efficiency or alternatives to petroleum. The degree of public recovery spending that is committed to the low-carbon economy and to the principle of ‘building back better’ will also play an important role. Technology breakthroughs are crucial to setting the pace of the energy transition, with regard to hydrogen, battery storage, and carbon capture, storage and use, for instance.
In order to structure the group’s thinking about the impact of COVID-19 and the oil price crash on the outlook for hydrocarbons and alternatives, the New Producers Group developed two different scenarios in May 2020 (revised in June) that created different outcomes for 18 months down the road, by the end of 2021. It was clear to the participants that each scenario depended on a different set of behaviour and policy choices. Of the surveyed participants who attended the meeting on 4 May, 81 per cent indicated that in scenario B, which focused on global cooperation, the public in many regions would likely want to build ‘a new, sustainable economy’, rather than focus on ‘economic growth regardless of its costs’. Meanwhile, 62 per cent thought that if scenario A, which envisioned a regional, nationalist approach came to pass, that public funds would tend to be spent on ‘rescuing old, “polluting” industries’.
Scenario A: Regional Dominoes
In this scenario, the COVID-19 pandemic hits regions and continents in succession over 18 months, starting with Asia, then Europe and North America, followed by Central and South America, Africa, Eurasia and returning to hit several regions or continents again in 2020 and in 2021.
The world broadly responds with national rather than international measures. Most countries, including major consumers of all forms of energy, adopt variations of supposedly temporary lockdown policies as the key strategy for reducing the spread of the virus. These include restrictions on the movement of people and trade, and tariffs on goods and commodities. There are widespread national retrenchments and limited international cooperation on managing the pandemic (i.e. scientific collaboration on vaccines, governmental assistance in managing the healthcare crisis in other regions or cooperation in managing economic consequences). At the end of the 18-month period, the pandemic is not resolved.
Many countries try to mitigate the economic effects of the lockdowns with massive interventions of government-financed cash, which reverse previous austerity programmes. But the global economy is hard hit by a recession, with a reduction of per capita GDP of 15 per cent across 80 per cent of countries. The oil price is extremely volatile during these 18 months, with an average of $20/b for Brent.
Debt is an overriding concern for developing countries, with limited access to finance and development aid budgets severely curtailed. Energy self-sufficiency is radically pursued in some large import-dependent countries, while others try to capitalize on bargain fuel prices for the short term.
Scenario B: Global Cooperation
In this scenario, the COVID-19 pandemic is a broadly global event, with some regions worse hit than others, but none insulated from its impacts. The first wave of contagion is contained in most countries in 2020. Half of the world is hit by a second wave in 2021, but it is less severe than the first. There are several initiatives to coordinate the management of the pandemic (notably with the development and distribution of a vaccine) and the pandemic is stopped.
Most countries impose restrictions on the movement of people, but these are limited in time and borders are not closed to trade. Over the whole period the developed world produces and consumes less. Those countries and industries that grew rapidly over the last 70 years are reluctantly switched to a slower track. The world is in recession, with 80 per cent of countries having an average per capita GDP reduction of 5 per cent. The oil price averages at $40/b for Brent.
Eighteen months into this scenario, aid and development finance are more constrained but increasingly aim at the dual objectives of fostering green growth and progress on nationally determined contributions (NDC).
Impact on the energy transition
Three meetings in the Fostering Resilience series focused on the impact that COVID-19 and the oil price crash could have on the pace and outcome of the energy transition and appropriate government strategies to anticipate and adapt to these changes. These discussions examined the prospects for the ‘oil versus alternatives’ and ‘gas versus alternatives’ transitions, and considered how they fared under the two scenarios.
Some underlying assumptions about trends in motion before the pandemic hit shaped how various speakers interpreted the outcomes under each scenario.
Some underlying assumptions about trends in motion before the pandemic hit shaped how various speakers interpreted the outcomes under each scenario. One was optimistic about oil demand growth, while another expected that peak oil demand had already been reached. Leila Benali, chief economist at Apicorp, warned attendees ‘not to trust economists, who are not used to modelling pandemics, acts of war or natural disasters that occur simultaneously and cause deep disruptions to the economy’. As another speaker noted, the pandemic is ‘such an important, civilisational event that it throws energy models (developed to predict the course of the energy transition) out the window’. Participants therefore aimed to discipline themselves to rethink assumptions and conclusions.
NPG discussions concluded that the Regional Dominoes scenario would lead to a ‘broken oil market’, where volatility would make it difficult to invest in oil upstream. But it is also likely that in this scenario all investment would be challenged and indeed there were unresolved questions about how the rest of the petroleum value chain (e.g. petrochemicals, refining), EVs and biofuels would fare in comparison to upstream oil.
The Global Cooperation scenario would lead to a stronger recovery and give way to a ‘repaired oil market’, which would send clearer price and risk signals for investment in oil alternatives. In one speaker’s view, those signals would be enough to allow the energy transition to proceed at a quicker pace than before the pandemic. Some argued that lower gas prices in this scenario also make the bridge from oil to alternatives more affordable. But further discussions concluded that the future of gas in the energy mix depended more on policy signals than the market.
There was overall agreement that ‘boom time’ was over for the oil sector, even in the Global Cooperation scenario. It is clear that there will be fewer projects and that they will be the ‘easier’ ones (in terms of the investment framework for instance) with lower costs and risks. One industry strategist highlighted that offshore and deep offshore have produced decent returns and would continue to attract frontier exploration investments where the prospects are good. In addition, companies will be more selective in identifying these and total exploration budgets will stay low.
