As the financial pressure on oil & gas companies continues, the risk of insolvency in the industry is becoming increasingly acute. It is vital to be alive to the possible insolvency of co-venturers, suppliers and contractors in order to ensure your interests are protected. Insolvency Partner, Stewart Perry, provides his top 'legal tips' for managing your relationships with counterparties in this environment.

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Global oil price volatility survey - insolvency findings

Industry drivers

A fifth (21%) of industry respondents expect consolidation of both E&P and service companies to have a major effect on their business in the coming year. Supply chain consolidation of oil & gas majors was highlighted by 15%. This compares to just 4% who foresee any perceptible impact from the divergence of oil & gas companies into other forms of energy, from shale to renewables.

This has significant implications for contract arrangements, increasing the risk of disputes and insolvencies as businesses change and they re-evaluate not only their internal structures, but also their requirements from, and relationships with, suppliers.

Impact on business

How confident can businesses be that they can rely on counterparties staying afloat and performing their obligations? Given that the oil & gas supply chain is built on an intricate network of inter-related supply agreements, JV partnerships and contractor relationships, this is a critical question for every segment of the industry.

Growing demand for storage adds another link to the supply chain, increasing its complexity. With demand for storage surging as producers and buyers wait out the price rout, offshore tanker capacity is at a premium. Contango may gain further momentum if freight costs ease, making floating storage not just a necessity for excess oil stocks, but also an attractive trading position. Therefore, despite the inherent risks (operational, environmental, territorial, contractual) and spiralling charter costs, on- or offshore storage remains an attractive option for many oil companies as they look for ways to protect profit margins. In addition, the drive towards cost-cutting in transportation and distribution is also causing pain in the downstream supply chain, with almost one in ten saying this issue is the most pressing trend for their business.

Business response

Managing these supplier/contractor relationships positively and pro-actively in a challenging and fast-changing environment is vital. Our research found that many businesses are taking a “wait and see” approach, with 42% saying they are closely monitoring supply chain activities to ensure they are aware of stress points. However, a third (32%) are renegotiating contracts and one fifth (21%) appear to be positioning themselves for such a move by running a careful eye over contractual performance and obligations. Identifying ways to protect yourself against default or collapse of a counterparty, while simultaneously ensuring that any actions taken do not jeopardise either their viability or your business, is essential.