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COVID-19 and force majeure positions on Oil & Gas industry standard agreements

The consequences of the COVID-19 outbreak for the energy sector have been wide reaching, with issues such as workers self-isolating, rig closures and disrupted supply chains. Several oil and gas companies have become increasingly concerned that this will result in an inability to fulfil their contractual obligations, causing a surge of enquires related to invoking the “force majeure” provision of contracts. As force majeure is a contractual concept under English law (though not under certain civil law regimes), each case has to be regarded on its own individual merits.

In practice, force majeure clauses may have a variety of forms, some of which are further detailed below, but the overarching principle is that an unprecedented event has occurred, which prevents a party from actually performing its contractual obligations (rather than it is more expensive to do so) and typically that force majeure event is the sole cause of the party’s inability to perform. This may clearly be more of an issue where performance is also influenced by the recent crash in the oil price (which would not qualify as force majeure). In addition, the party relying on force majeure would usually have to take steps to mitigate the effects of a force majeure event – the spread of COVID-19, or government announcements regarding the risks, do not in themselves constitute force majeure.

Current events are particularly notable when contrasted against the Ebola outbreak of 2014 where the government controls were similar (and potentially qualified as a change in law causing force majeure) but the impact was much more localised, allowing greater opportunities for international companies in particular to withdraw employees or otherwise mitigate the effects of force majeure.

Force majeure is distinguished from the English common law doctrine of frustration, which requires a more stringent standard of proof to be met, with the requirement being it has become impossible to perform the contract, rather than merely more difficult. For this reason, it is often more feasible to invoke a force majeure provision, provided that the contract allows for it.

There are four considerations to be made when attempting to rely upon a force majeure clause:

  • Are there specific references to “epidemic,” “pandemic,” “acts of God” or “acts of government” in the definition of force majeure event?
  • What are the conditions that must be met in order to invoke the clause?
  • What would the contractual consequences be if the clause were to be invoked? This could include termination of contract, suspension of particular contractual obligations (e.g. take-or-pay liabilities), extensions of time or allocation of losses.
  • Is there any interaction with mandatory local law? It is vital to ensure that enforcing any force majeure provisions would not contravene any legislation in the jurisdiction in which the contract is based.

The table below sets out some of the different applications of force majeure in oil and gas industry standard contracts, varying from the “exhaustive list” approach of LOGIC contracts, to the somewhat more restrictive approach of the AIPN JOA, which covers only “lockouts, and other industrial disturbances.”

Force majeure and COVID-19 in various oil and gas industry standard agreements

Agreement Summary of FM provision Application to COVID-19 and analysis
AIPN JOA
(Article 16)

AIPN UUOA
(Article 18)

The definition of force majeure in the AIPN JOA and UUOA generally mirrors the associated upstream petroleum contract. The affected party should consider force majeure in line with such agreement. One of the specific events listed in the optional provision of the AIPN model contract is “lockouts, and other industrial disturbances even if they were not beyond the reasonable control of the Party.” It is arguable on the commonly received meaning of the term that a lockout can only apply in the context of a labour dispute, though an industrial disturbance would likely be of wider application and may be more useful. 
South Eastern Africa upstream licence
  • Any failure to comply, or delay in complying, with any non-payment obligation (in whole or partially) set out in the [licence] by either Party will be justified and to the extent that such failure/delay has been caused by force majeure.
  • Force majeure means any cause or event beyond the reasonable control of the affected Party, which is the cause of the default or delay in compliance. Force majeure events include epidemics, blockages, public order disturbance, labour disturbance, quarantines and government illegal acts.
One of the specific events listed in the [licence] force majeure clauses is an “epidemic.” COVID-19 has been classified by the World Health Organisation as a pandemic, a further level of materiality, though depending on the circumstances it may be that its local effects (and, most importantly, its effect on the claiming Party) are less severe.

Other events that may be applicable are “quarantines” or “public order disturbance” i.e. the Concessionaire is unable to carry out minimum work obligations due to the lack of manpower caused by a quarantine order issued by the host government.

Northern Africa upstream licence
  • Any event delaying or preventing the performance by a Party of its non-financial obligations under the PSC is considered as force majeure provided that the occurrence of such event or circumstances is:
    • irresistible;
    • unforeseeable; and
    • independent of the will of the party invoking force majeure.

    In exceptional circumstances an extraordinary or supernatural event, foreseeable but irresistible and independent of the will of the invoking Party, may also constitute force majeure. 

Whilst the PSA does not contain a list of specified force majeure events, it is drafted very broadly and states that any event causing the delay/preventing the performance of the affected party can be considered as force majeure, provided that such event is irresistible, unforeseeable and independent of the will of the party invoking force majeure.
Energy Charter Treaty Force majeure means “irresistible compulsion or coercion, unforeseeable course of events, fulfilment of contract.” In the absence of the express inclusion of relevant events such as “epidemics,” “acts of government” or “quarantines” as force majeure events, it is challenging to establish that the non-fulfilment of contractual obligations is impossible.
It may be worth reviewing other applicable provisions in the ECT, such as the stabilisation clause or hardship clause (if applicable). For instance, where a hardship clause is provided, the affected party may be entitled to call for renegotiation of the contract, if the continued performance of the affected party’s obligation has become excessively onerous due to the outbreak of COVID-19.
LOGIC Contract (Clause 12)
Leading Oil & Gas Industry Competitiveness
  • Neither Party is responsible for any failure to fulfil its contractual obligation to the extent that fulfilment has been delayed or temporarily prevented by a force majeure occurrence, which is beyond the control and without the fault or negligence of the affected Party exercising reasonable diligence.
  • Force majeure includes the occurrence of the following: “other natural physical disaster (excluding weather conditions)” and “changes to any general or local Statute, Ordinance, Decree, or other Law, or any regulation or bye-law of any local or other duly constituted authority or the introduction of any such Statute, Ordinance, Decree, Law, regulation or bye-law.”
While the force majeure definition is an exhaustive one, as social distancing is now statutory in a number of countries, to the extent that companies are required to close their operations this may qualify as a change in law.
Beach UK gas sales terms 2015 (Clause 9)
  • Force majeure means any event/circumstance or combination of both beyond the reasonable control of the affected Party (acting or having acted as a Reasonable and Prudent Operator) which results in or causes the failure (including by delay) or inability by the affected Party to perform its contractual obligations, and such failure/inability could not have been overcome by exercising the standard of a Reasonable and Prudent operator.
  • Force majeure includes:
    • in the case of the Seller, the loss, physical inoperability or failure of the Seller’s Facilities but only to the extent that such loss or physical failure has been caused by an event or circumstance beyond the reasonable control of the operator of the Seller’s Facilities acting and having acted as a Reasonable and Prudent Operator which has resulted in the Seller being unable to satisfy its obligations to supply Natural Gas to any Person; and
    • in the case of the Buyer, the loss, physical inoperability or failure of the National Transmission System and any inability of the National Transmission System to receive at the Delivery Point or transport Natural Gas from the Delivery Point.
  • Force majeure does not include:
    • any failure by the Party to the extent that such failure is attributable to the affected Party’s inability to make a profit or achieve a satisfactory rate of return; or
    • the failure by the Seller to tender for delivery Natural Gas to the Buyer as a result of the inability or geophysical failure of any reservoir to produce Natural Gas or the failure of performance, depletion or exhaustion of any reservoir.
The British government has issued new rules on “social distancing” to address the outbreak of COVID-19. Whilst one of the four reasons that one can leave home is travelling to and from work, this is only permitted where such work cannot be done from home. One potential consequence of these restrictions is a lack of manpower at a Seller’s Facilities, though it is questionable whether, as a Reasonable and Prudent Operator, the Seller would order the complete shutdown of its Facilities.

For the Buyer to invoke force majeure relief, the Buyer must establish that the force majeure event (i.e. failure to transport Natural Gas from the Delivery Point) is caused by the outbreak of COVID-19, not due to the reduced downstream demand or lower market price. The Buyer is also required to show that there are no alternative means for performing its obligations and it has taken reasonable steps to mitigate or avoid the effects of the force majeure event i.e. whether the Buyer has taken steps to solve the transportation issue.  

Next steps

Given the widespread effects of COVID-19, it is important to clarify whether force majeure is applicable in your contracts and to consider an appropriate legal strategy early. Incorrectly invoking force majeure may itself amount to a repudiatory breach and there might be better contractual ways to deal with the current disruption to your operations. If you are currently negotiating a new contract, or conducting due diligence, you should review carefully any proposed force majeure clause and other contractual terms to consider if risks in respect of COVID-19 are appropriately addressed.

If you have any concerns in relation to your oil and gas contracts or require specific assistance with any of the points noted above, please contact a member of the Dentons Energy team.

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COVID-19 and force majeure positions on Oil & Gas industry standard agreements

Natural Gas Public Company of Cyprus (DEFA) issues request for proposals for €500m LNG import facility

Cyprus’ long standing plans to import gas to the island have taken a big step forward with the release on 5 October 2018 of a request for proposals to design, construct, procure, commission, operate and maintain an LNG import facility at Vasilikos Bay, Cyprus (the Project).

It is interesting to note that (unlike previous tenders for LNG imports to Cyprus) the infrastructure is being tendered for separately to the LNG supply. DEFA expects to issue a request for expressions of interest for LNG supply to the market later this year, with a full RfP to follow in early 2019.

Overview of Project

The RfP divides the Project into three distinct elements:

  • The engineering, procurement and construction of the offshore and onshore infrastructure, including the gas transmission pipeline and associated facilities;
  • The procurement and commissioning of a floating storage and regasification unit (FSRU), through the purchase of an existing FSRU, design and construction of a new-build FSRU, or conversion of an LNG Carrier and, if applicable, provision of a floating storage unit (FSU); and
  • The Operations and Maintenance (O&M) of the infrastructure and FSRU for a period of 20 years.”

The following points are worth drawing out:

  1. the Project must be completed by 30 November 2020;
  2. initially, all gas imported through the facility will be sold on by DEFA to the Electricity Authority of Cyprus (EAC, the state owned electricity company, which owns and operates the Vasilikos power station adjacent to the proposed site of the facility). The Vasilikos plant is currently running on heavy fuel oil, but will burn gas once the Project is complete.
  3. DEFA has incorporated a special purpose vehicle, Natural Gas Infrastructure Company of Cyprus, for the Project. The SPV will contract with the successful bidder for the construction and O&M services; and will own the LNG import facility once constructed;
  4. DEFA will contract directly with suppliers for the LNG supply; and will acquire capacity in the facility from the SPV. The risk allocation between the various agreements that will need to be entered into between DEFA, the SPV, the LNG supplier and EAC will be a critical issue for the success of the project.
  5. DEFA will have an option to take over certain elements of the offshore and onshore O&M services at different stages of the Project;
  6. as part of the onshore infrastructure, the contractor will be required to install a “natural gas buffer solution”. The design of this piece of infrastructure is left for the contractor to propose, but could for example include a pipeline array. The intention behind this requirement is to ensure that the FSRU and pipeline infrastructure is capable of achieving the flexibility of gas supply required to meet the operational requirements of the Vasilikos plant.

Funding

The Project has an approved budget of €300m for the initial capex, and €200m for O&M costs over the 20 year term. The initial capex will be part funded by an EU grant under the Connecting Europe Facility, with the remainder expected to be funded wholly or in part by debt finance. It is not yet clear whether EAC will invest equity into the Project – reference is made to EAC taking up to a 30% interest in the SPV at a later date.

Key issues

From our team’s experience of working on similar projects in Cyprus, key issues for the success of the Project may include:

  1. credit support to be provided by Cyprus stakeholders (DEFA / EAC / the government) and the successful bidder. It is interesting to note that the government of Cyprus will be issuing a government guarantee to support the debt financing;
  2. the possibility (and timing) of DEFA selling gas to other buyers in the future, and the implications for EAC’s gas take from the facility;
  3. EAC’s ability to pass through the costs it incurs by generating electricity from gas to electricity consumers under the Cypriot regulatory regime;
  4. the flexibility of gas supply required to meet the operational requirements of the Vasilikos plant (see the previous comments regarding the buffer solution). This will be particularly important given the expected trend towards increased levels of renewable generation and consequential impact on required flexibility of thermal plants on the system;
  5. the impact of additional delivery points for piped gas to other buyers/plants;
  6. the expected timeframe for the conversion of the Vasilikos plant’s turbines to gas, and commissioning of the gas-firing equipment;
  7. impact of any electricity system operator requirements – e.g. regarding new electricity market rules in Cyprus.

Dentons: Cyprus / LNG experience

Dentons has unparalleled experience of working on LNG projects in Cyprus, having advised DEFA for a number of years on the potential long term import of LNG to Cyprus, and subsequently on shorter term interim gas supply arrangements; and MECIT on the commercialisation of the Aphrodite Field in the Cyprus EEZ through the development of a proposed onshore LNG liquefaction and export project at Vasilikos.

The team has a particular focus in advising on international LNG import projects. Team members are advising, or have advised on, LNG import projects in Ghana, the Caribbean, Jamaica, Pakistan, Jordan and Malta.

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Natural Gas Public Company of Cyprus (DEFA) issues request for proposals for €500m LNG import facility

Talking points in the solar market

A Dentons team from the UK, Germany, the Netherlands and Turkey had a good day at Intersolar Europe towards the end of June, which is a great conference for meeting old friends and making new connections.

For those who didn’t make the trip to Munich, here are a few thoughts on the key talking points.

  • Solar PV is clearly a very healthy industry – there were over 850 exhibitors, spread over 6 exhibition halls. The panel manufacturers were particularly impressive, with Canadian Solar, SMA and others having large stands.

 

  • Key new target markets in Europe include Ireland (with a subsidy policy decision expected to be announced imminently); Spain (driven by merchant sales and PPAs, rather then Government tenders); and France (where the industry is increasingly being seen as a Government priority with its #PlaceAuSoleil plan).

 

  • Competition remains fierce, with Q-Cells (Hanwha) announcing its new half-cell technology (winning the conference award for innovation), and a number of suppliers (e.g. Jinko and First Solar) marketing panels with increased efficiency.

 

  • Storage attracts attention, but is still not part of the mainstream – the focus was much more towards smart vehicle charging (with the conference running alongside the Smarter-E convention), than having batteries within the home itself (or indeed on a commercial scale).

 

  • There is continued uncertainty regarding the future of solar panel anti-dumping – the current EU measures expire in September, though there is the possibility of a further review (extending existing minimum import prices for at least a year). The EU restrictions also have potential to be part of a global trend, with the US currently reviewing its position on solar cells and modules with the possibility of a 25% tariff.

 

  • There is quite a bit of concern about the recent sudden withdrawal of Chinese subsidies. Given the huge growth in new domestic projects in recent years this perhaps points towards greater exports and falling prices (together with the possibility of a limited number of panel supplier insolvencies). There may be some local government subsidies available, though many projects will be put on hold.

We have been seeing a number of these issues first-hand on our current projects. Do get in touch if you would like to discuss any of them.

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Talking points in the solar market

Bankability issues with Solar PV leases in emerging markets

In any solar PV development in emerging markets (whether in Africa, Latin America or elsewhere) attention is immediately drawn to project revenues. Government or utility tender packages focus on mark-ups to power purchase agreements with the offtaker, the strength of any government support agreement, and the terms of any other credit support. It is not uncommon for a project to be well advanced before the developer turns to the “less exciting” project agreements, with land rights frequently one of the most problematic. The site may be split over dozens of parcels of land (many of which are either stuck in probate or not properly registered), the model form of lease may be unintelligible, or the land sporadically crossed by grazing animals.

Most project stakeholders are either invested and actively interested in the success of the project (e.g. the offtaker), or experienced and sophisticated counterparties (e.g. EPC contractors) – the lessor(s) of land rights may be less equipped to quickly agree the required documents.

Recently we have been working on a number of solar PV projects across Africa in jurisdictions with a limited track record of international project finance. Key areas in which we often find that a landowner’s model form of lease does not provide sufficient protection for the project are listed below. Although we have used terminology that will be familiar to lawyers used to common law systems, the same issues arise – and should ultimately be capable of being resolved – in any legal system.

Term 

The term of the lease should be sufficient to cover the asset life of the project, the term of key approvals (e.g. the generation licence, planning permission) and any decommissioning period (whether after an early termination or expiry of the term).  If asset life is extended then ideally the lessee will also have the option to extend the term of the lease.

Pre-conditions/early obligations 

The lease rental payments are ideally structured in such a manner that they are not payable until all government authorisations and permits and third party consents required for the development and operation of the project have been obtained. If early works are required (e.g. an environmental impact assessment) in order to be granted the necessary permits then the lease will need to cater for this or such works will need to be authorised under a separate lease, lease option or licence.

Easements  

If the route of the cable connecting the project to the grid is not included in the site and the Lessor has rights over the relevant land, the Lessor should grant the Lessee and any third party nominated by it easements over the land as required for the connection of the solar PV plant to the relevant electricity transmission lines. Similar rights may also be needed to allow a route from the site to the public highway for construction and maintenance. For these purposes it is critical to confirm that all local land which may be required for an easement is in the control of the Lessor.

Permitted Use  

The Lessee should be allowed to carry out activities related to, in connection with, or for the purpose of, the design (including site appraisal), construction, operation (including export of power), maintenance and decommissioning (and handover, if applicable) of the solar PV plant.

The site subject to the lease should also be sufficient for project use, i.e. it should cover the solar PV panels, ancillary equipment (including e.g. inverters, CCTV and substations).

Lessor’s covenant  

The Lessor should not do or permit to be done any act which has or may have the effect of reducing or interfering with the capability of the power station to generate its maximum potential of electricity. This may extend to limiting rights to cross the site, including prohibiting the grazing of livestock (to the extent not needed by the Lessee to avoid grass cutting), and providing assurances that neighboring land will not shadow the site (e.g. with new buildings or trees).

To the extent that the Lessor is a government agency it may also be reasonable for it to provide assurances that third parties (e.g. local farmers) will not attempt to access the site, possibly alongside local content and/or community benefit provision to ensure local support.

Pre-existing liabilities 

The Lessor should be liable for, and should indemnify the Lessee against, any pre-existing liabilities associated with the site (e.g. environment liabilities). Where possible the Lessor may also need to do its own property searches and title checks (e.g. to check there is no compulsory purchase order affecting the site).

Termination 

Ideally the Lessor shall either have no right to terminate the lease, or its termination rights should be restricted to failure to pay rents (if not cured within a reasonable period upon notice) – remedies for other breaches by the Lessee should be compensation rather than termination.

Direct Agreement

The Lessor will need to covenant that it will at the request and reasonable cost of the Lessee enter into a direct agreement with any lender providing financing for the project such that the lender has a right to step in and novate before the Lessor exercises its rights under the lease, including any right to terminate the lease (if any) or re-enter the site.

The authors are grateful to Gillian Goldsworthy, Senior Associate in the Real Estate team of Dentons’ London office, for her assistance with this piece

 

 

 

 

 

 

 

 

Bankability issues with Solar PV leases in emerging markets