Watch out for invocation of force majeure clause – lawyer warns

…COVID-19 can result in oil companies using clause to extend contracts

The coronavirus pandemic sweeping the world has had a debilitating effect on global oil prices. But there is another risk, with one oil and gas commentator warning that the onset of global events caused by the virus can be used to invoke the force majeure clause in various contracts Guyana has with oil companies.

Force majeure is a contractual clause which allows a company to alter the terms of their contract if events out of their control impact their earnings. In an interview with this publication, chartered accountant and attorney-at-law, Christopher Ram warned of the possibility of this being done to Guyana.
“This is all part of the agreement. We have to be careful, to call on those contractors to confirm prices. Because then they can use that as a form of force majeure, to say oh you have to allow our contracts to run longer,” Ram explained.
“This year, the relinquishment clause kicks in.  I think [companies] can start claiming force majeure and they will want to produce as much as they can, because [these are] their most lucrative contracts.”
A number of oil companies have force majeure clauses in their contracts with Guyana. In fact, many of the contracts were modelled based on a standard format, which the Energy Department had said would be updated in a new model Production Sharing Agreement (PSA).
A case in point is Eco Guyana Atlantic, which owns a 15 per cent working interest in the Orinduik Block. The Orinduik oil block is just a few kilometres from Exxon’s discoveries in the Liza and Payara fields. It is under the administration of Eco Guyana and Tullow, who signed a 10-year Petroleum Prospecting Licence and Production Sharing Agreement with Guyana in 2016.
In Eco’s case, section 24.4 of its contract states that “Where a party is prevented from exercising any rights or performing any obligations under this agreement due to a force majeure, the Minister hereby agrees pursuant to Section 43 of the Act, subject to the proviso therein, that a period of additional time necessary for restoration of damages caused during a force majeure delay shall be added to the time allowed under this agreement for the performance of such obligation and for the performance of any obligation or the exercise of any right dependent thereon and to the term of any license issued pursuant to this agreement.”
Since the novel coronavirus (COVID-19) hit globally, it has had a serious impact not just on lives but also the global economy and specifically, oil. As of April 19, Brent crude has been trading at US$28 a barrel. Brent crude was being traded at US$66 per barrel when Guyana first started oil production in December 2019.
Rystad Energy, a Norway-based research company that has written extensively on Guyana’s oil sector, had projected that the situation will get worse. According to Rystad in a previous missive, the spread of the coronavirus has dealt a blow to the global demand for oil. It noted that in February of this year, the demand for crude dropped by 4.6 million barrels per day. China, where the coronavirus had originated, made up 2.9 million barrels of this cut to demand.
Last week, OPEC (made up of 14 countries but dominated by Saudi Arabia) formed an agreement after days of video conferences with other non-OPEC members, to cut production in an effort to tackle the effects of the coronavirus on demand. It has been reported that US President Donald Trump intervened in brokering the agreement.
The agreement was for OPEC+ to cut 9.7 million barrels a day, while the United States, Brazil and Canada also cut their production. At the time it was brokered, Brent crude was hovering around US$31. On Monday, Los Angeles Times reported that oil futures collapsed to below zero for the first time ever as the deepening economic turmoil caused by the coronavirus crisis left traders desperate to avoid taking delivery of physical crude.
Last month, ExxonMobil had announced that it will seek to scale down its operations, in the wake of the global uncertainty in financial markets caused by COVID-19.