Low Oil Price Environment: Insolvency and Default Issues in Upstream Oil and Gas

Transcription

1 Low Oil Price Environment: Insolvency and Default Issues in Upstream Oil and Gas

2 Pre

3 Now

4 Today s seminar Low oil price environment: context; impact and results Default and insolvency Forfeiture and related issues Companies in distress: key legal issues, administration Impact of insolvency on stakeholders, key issues and role of OGA/DECC 4

5 Low oil/gas price environment Disputes / Defaults Within JVs, transporters and shippers, operators and contractors, contractors and subcontractors Focus today is principally on defaults within JVs, but we ll touch on the others In 2015/2016 we have seen, and been involved in a number of defaults and forfeitures of JOA interests unprecedented since Westoil 5

6 Low oil/gas price environment results Also now seeing insolvencies: Iona Energy and First Oil so far. CMS closely involved in both insolvency processes - as advisor to the companies and then the administrators. Valuable insights into the limitations of the insolvency process in O&G sector. Key is interaction of financial distress with JOA default provisions and the positions of the various stakeholders in insolvent default scenarios. Under-explored law the coming together of (1) oil and gas contractual law (principally JOAs), (2) insolvency law and (3) regulatory overlay/influence. 6

7 Oil and Gas Contract Law Position 7

8 Default / insolvency JOA Default failure to pay invoice or cash call by the due date Is insolvency a JOA default in itself? o Normally no but consider position under any DSA (giving rise to cross default under JOA) o A JOA default for failure to pay will also likely be a cross-default under any DSA Number of defaults triggered by failure to post first security due under DSAs Normally insolvency is a ground for operator removal under JOA Issues under other upstream field agreements (e.g. TPAs etc.)? not necessarily as often insolvency of whole group is required for possible counter-party termination payments will be covered under JOA? Sales agreements? Insolvency is ground for OGA to partially revoke the licence. Note harder definition than DSAs. 8

9 Joint Operating Agreements Default process Process Process triggered by service of default notice by Operator o Obligation to serve o Consider when default starts when payment is missed or when notice is served (often relevant to notice periods for seizing production/forfeiture) If Operator is in default normally the JV partner with the most equity can exercise default rights Operator to advise non-defaulting JV partners of the default Non-defaulting JV partners will be required to fund amounts in default but operator arrange funding meantime debt then owed to JV parties in those capacities Cure through payment plus interest 9

10 Joint Operating Agreements Default process Voting rights o Typically lost during period of default (OCM decisions binding on defaulting JV partner) o Can t vote the defaulting JV partner into changes to the JOA Data and information o Typically entitlement is suspended during period of default 10

11 Joint Operating Agreements Default process Production entitlement o Typically defaulting JV partner s production entitlement is allocated to non-defaulting JV partners if default is not remedied within a certain period o Sometimes express that no right of recovery for defaulting JV partner if default is remedied o What production can be seized - from what point until what point? Won and saved, allocated, in storage? o Consider issues where entitlement is allocated by a third party (for example, for lifting at a terminal) review of lifting and sales arrangements is key 11

12 Joint Operating Agreements Default process Forfeiture o Model form JOAs (OGUK and AIPN) contain forfeiture provisions o Typically if default is not remedied within fixed period (normally days) the non-defaulting JV partners have the right (but not an obligation) to acquire the defaulting JV partner s interest o Forfeiture normally for zero consideration (JOA may provide for forced sale - option in OGUK model JOA) o Often provided that if no JV partner(s) forfeit the defaulting JV partner s interest the participants are deemed to have abandoned joint operations 12

13 Joint Operating Agreements - Default problems Dispute as to invoice? Challenge as to whether a default at all was (i) budget (ii) AFE and/or (iii) contract award properly submitted and approved under JOA? 13

14 Joint Operating Agreements - forfeiture problems Execution To effect forfeiture there will need to be a transfer o Will/can the defaulting JV partner (or the administrator) sign the novations? o If the JOA includes a POA can this be relied upon by the Operator? Documentation o Often provided that forfeited JV partner will remain liable for decommissioning costs (and sometimes other costs). But consider: impact of typical novation provisions value of these provisions if forfeited JV partner is insolvent 14

15 Joint Operating Agreements - forfeiture problems Challenges Often asserted that forfeiture clauses: o Offend the rule against penalties o In the context of an insolvency, fall foul of (i) anti deprivation rule and/or (ii) pari passu rule (sub-rules to general principle that parties can t contract out of the statutory insolvency regime) Defaulting JV partner (or the administrator) may argue that forfeiture clause is subject to power of English courts to grant equitable relief from forfeiture 15

16 Is JOA forfeiture a penalty? Cavendish Square Holding BV v. Talal El Makdessi [2015] UKSC 67 Primary vs. secondary obligations law against penalties will apply to the latter True test is whether imposes detriment on contract breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation appropriate alternative to performance Commercial context Proportionality and logicality Calculation difficulties Judged at time of making contract 16

17 Is JOA forfeiture otherwise challengeable? Anti-deprivation rule? Belmont Park Investments v BNY Corporate Trustee and Lehman Brothers Special Financing [2011] UKSC 38 deliberate intention to evade the insolvency laws - commercially sensible transaction which is entered into in good faith should not be unwound because of the anti-deprivation rule. Equitable relief? equity will typically consider it to be contrary to policy of law to enforce forfeiture where purpose can be achieved other ways at the time of breach. BUT existence of grace period could dissuade court from exercising its discretion. 17

18 Joint Operating Agreements - forfeiture problems Value to be recovered? Depends on JOA wording: If production is taken and default subsequently cured, is payment by non-defaulting parties required? Similar arguments to forfeiture of interest? If after forfeiture party is still liable for underlying debt and forfeited interest is worth more than debt, would courts apply an equitable solution? Not penal simply because damages are recoverable in addition (Cavendish v Makdessi) Economic Date around forfeiture? Reviewable transaction? Transaction at an undervalue/unfair preference? Transaction likely to be entry into JOA and administrator protection in many cases? 18

19 Joint Operating Agreements - forfeiture problems Bottom line Where there is value it s likely attempted forfeiture will be challenged valuable assets vs liabilities General industry reluctance to go down the contested forfeiture route never been done as far as we re aware Consensual negotiated exit for ease? Consider Decommissioning Relief Deed (DRD) / Imposition issues 19

20 Insolvency Law Position 20

21 Companies in Distress: key legal issues Directors duties same duties owed by all directors (executive; non-executive; de facto; or shadow) duties are owed primarily, perhaps exclusively, to creditors potential for personal liability and disqualification: not to be overstated but care needed wrongful trading: if a company continues to trade when a director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation beware transactions at an undervalue/preferences (esp. intra group) practical steps include: advice; frequent board meetings; up-to-date financial and other information; more detailed minutes; review D&O policies 21

22 Administration the industry s process of choice to date where a consensual solution not possible e.g. Oilexco, Iona Energy, First Oil collective procedure, can be initiated by company or its creditors administrator (an insolvency practitioner) takes over control and management of company from directors, with broad powers primary purpose = survival of company as a going concern but rarely practicable and so purpose tends to be to achieve a better result for creditors would be likely in liquidation statutory moratorium: helpful but has its limits e.g. does not prevent forfeiture or termination of contracts expenses of administration n.b. IPs will have certain requirements in order to take office 22

23 Regulatory Position 23

24 The role of OGA/DECC In insolvency, OGA can revoke licence at any time OGA consent needed to assets transfers under the Licence(s) Letter of comfort typically sought from OGA for disposals giving rise to change of control 24

25 The role of OGA/DECC OGA will seek to use its powers to ensure that: o No liabilities fall to tax payers as a result of valuable assets being sold for value and liabilities which would otherwise fall to the taxpayer being disclaimed o There is an orderly process which takes into account the interests of all stakeholders OGA will need to approve any potential transferee (asset or share deal) Interests of creditors (including JV partners) are not paramount due to OGA s role Early engagement is key 25

26 Impact on Co-venturers Contractual rights defeat moratorium Value recovery production rights and timing of entitlement, liens, set-off (contractual/equitable) Role of OGA engagement, domino effect? What if don t take / don t want to take forfeited interest (liability)? administrative burden of having entity in administration in asset? what if more than one non-defaulting party? In the event of liquidation/disclaimer, bona vacantia / lack of clarity as to ownership? decommission? 26

27 Impact on Contractors Moratorium on any litigation/arbitration Likely minimal recovery of sums due Cash flow Retention of title/possession of equipment Option of termination? Option of guarantees or security? Step in rights? Preservation of supply chain Reduction of workscope Impact on delivery schedule 27

28 Norman Wisely Partner CMS Cameron McKenna LLP +44 (0) Sian Aitken Partner CMS Cameron McKenna LLP +44 (0) Frank Fowlie Partner CMS Cameron McKenna LLP +44 (0) CMS Legal Services EEIG (CMS EEIG) is a European Economic Interest Grouping that coordinates an organisation of independent law firms. CMS EEIG provides no client services. Such services are solely provided by CMS EEIG s member firms in their respective jurisdictions. CMS EEIG and each of its member firms are separate and legally distinct entities, and no such entity has any authority to bind any other. CMS EEIG and each member firm are liable only for their own acts or omissions and not those of each other. The brand name CMS and the term firm are used to refer to some or all of the member firms or their offices. CMS locations: Aberdeen, Algiers, Amsterdam, Antwerp, Barcelona, Beijing, Belgrade, Berlin, Bratislava, Bristol, Brussels, Bucharest, Budapest, Casablanca, Cologne, Dubai, Duesseldorf, Edinburgh, Frankfurt, Geneva, Glasgow, Hamburg, Istanbul, Kyiv, Leipzig, Lisbon, Ljubljana, London, Luxembourg, Lyon, Madrid, Mexico City, Milan, Moscow, Munich, Muscat, Paris, Prague, Rio de Janeiro, Rome, Sarajevo, Seville, Shanghai, Sofia, Strasbourg, Stuttgart, Tirana, Utrecht, Vienna, Warsaw, Zagreb and Zurich.