Unprecedented changes in the event of force majeure

COVID-19 Oil & Gas

Challenges posed on the industry under COVID-19

The COVID-19 pandemic and its broad-reaching economic impacts poses a significant challenge to the continuous operation of oil and gas projects in Australia. In a very short space of time, companies have been forced to grapple with an unprecedented disruption in demand, evolving State and Commonwealth Government restrictions and reworking existing operational practices in a manner that ensures the health and safety of their employees.

It may be that members of industry are forced to look at calling force majeure under their existing contractual arrangements. This requires a close review of the relevant force majeure provisions to determine whether COVID-19 related events would constitute force majeure events, and to identify which obligations are suspended in times of force majeure. We note that some contractual arrangements may also have change of law provisions that capture the regulatory changes introduced to combat COVID-19, and in limited circumstances you may be able to rely on the common law doctrine of frustration to bring a contract to an end.

If there is a right to suspend operations in a contractual arrangement, take note of any notice requirements and obligations to mitigate, as they will need to be built into any suspension planning. If an operator determines that it does need to suspend operations, a clear strategy and work plan will be important to manage and minimise impacts to the business and ensure that
the shift from care and maintenance back to operations can be as seamless as possible.

Key issues to consider in a suspension work plan:

  • (Employee arrangements) Suspension of operations will have a significant impact on the workforce. It will be necessary to review employment arrangements of those workers who will not be required in any suspension period and develop a strategy to address the consequences of any reduction / end of employment. Contractor
    arrangements will also need to be considered to determine if there is a risk of  claims to recover redeployment or redundancy costs. It is also worth considering whether suspension may require repatriation of employees subject to working visas.
  • (Environmental obligations) It will be important to understand the ongoing environmental obligations that will continue throughout any period of suspension (for example, monitoring / reporting obligations), and the relevant plans which need to be developed and submitted to the regulator in accordance with applicable statutory requirements.
  • (Health and safety issues) It will be necessary to conduct a hazard identification analysis and determine what is required to secure the site and ensure ongoing safety obligations are met. This analysis should also identify what will be required to ensure ongoing compliance with safety obligations under applicable legislation.
  • (Finance obligations) A review of financing and security arrangements will be important to determine the extent to which financiers' rights are enlivened by the proposed suspension.
  • (Insurance arrangements) A review of the terms and conditions of insurance arrangements (for example, business interruption insurance) should be undertaken to determine whether there will be any recovery for losses arising from the suspension. We note that losses caused by interruptions due to epidemics or pandemics are often excluded in these types of policies (although some extend the concept of damage to include notifiable disease).
  • (Disclosure obligations) Listed entities will need to consider their continuous disclosure obligations and any necessary announcements to be made to the
    market regarding the suspension.

What should be covered in a suspension plan will depend on the phase of operations leading into the suspension and the number of stakeholders affected. Specialist advice from legal advisors, financial advisors, independent experts and communications advisors may be required to prepare and implement a suspension work plan that ensures the project remains in compliance with all of its legal obligations, while placing itself in the best possible position to recommence operations.

For more insights and analysis regarding COVID-19 please see the dedicated COVID-19 insight hub on our website.

Emerging with strength

This insight is part of our latest oil and gas publication, find more on our hub page.