In recent years, Africa and other developing markets have been a major focus for a significant number of small/mid cap E&P companies. However, with oil prices at their lowest for over five years, and indications that they may stay at this level for some time, E&P companies and the governments of the countries where they conduct their exploration and production activities are now assessing their options.

For small/mid cap players the prospects for raising substantial capital either through debt or equity financing are extremely tough or non-existent. At  the same time, E&P companies are bound by the work commitments agreed to in their contracts with host governments (in most cases production sharing contracts (PSCs)),  and perhaps budgets approved before the extent of the price fall was known. Unsurprisingly,  insolvency and consolidation in the sector is now occurring as companies face the possibility of  not meeting the PSC conditions and the prospect of their subsequent termination and forfeiture.

From the government’s perspective it could be the case that by causing the incumbent to forfeit its  PSC or licence, the government would find itself with a block which no new entrant is willing to  take on, or for which potential new entrants request reduced work commitments and extended exploration periods. In short, the government could be swapping delays on the part of the existing PSC holder for potentially longer delays and reduced  work commitments. Certainly for the duration of any gap, the government will not be paid any  applicable rental fees or contributions to their training and development budgets as required under  the PSC. These payments are often important sources of hard currency particularly in countries  where oil and gas production has yet to start. Also companies that are forced to exit will lay off  all locally hired staff and contractors and the resulting unemployment may not be short-lived with  the attendant political cost and implications.

As it is not necessarily straightforward for a government to enforce its rights and achieve a quick  and easy clean break, there may be an opportunity for the renegotiation of commitments.

Resulting legal issues:

  1. Limitations on, or consents required due to, a change of control, asset disposal or the creation  of security: This  is an issue applicable to both debt and equity financing depending on the  structure and the creation and/or enforcement of any security.
  2. Solvency: Is the company insolvent either under legislative definitions or as defined by any  contractual undertakings? Have any prior covenants been breached as a result? Do breaches cause  cross defaults under any other agreements and what are the implications?
  3. Employment issues: Are redundancies required? What is the process? How can terms of employment  be amended to minimise redundancies? Do employees automatically transfer to the buyer of an asset,  and if so, what are the consequences?
  4. Corporate and directorship issues: What are the duties of directors? What is their personal  liability? Will any personal liability of directors be covered by D&O insurance? What corporate authorisations are  required for transactions and/or commercial renegotiations?
  5. Contractual and commercial issues: How can you be sure that renegotiation of contractual terms  is binding and effective? What local approvals are required? Are there any regulatory issues, for  example, is competitive retendering required? Does a sustained drop in the oil price constitute, or  could it lead to, an event of force majeure, and if so, would any relief be available as a result?
  6. Litigation: Is any protection available through investment treaties? How can the chances of a  successful arbitration litigation be maximised? What is the best way of trying  to ensure that  enforcement of an award or judgement is achieved? Does litigation or the threat of it cause any agreement warranties to be breached and  if so what are the consequences and how are they most effectively mitigated?

Fundamentally, oil companies and investors will be assessing the ongoing viability of financing their investments. Whether the decision is made to  raise equity, debt, a combination of the two, manage the portfolio or renegotiate contracts or  commitments, the considerations highlighted above will be prominent in the thinking of all company  directors and senior managers. To make the best possible decisions, expert legal advice will be  required. Our lawyers are experts in their chosen practice areas who focus their practices in the  oil & gas sector. They have previously dealt with all the issues now faced by companies, shareholders and governments in the  oil & gas sector and are therefore uniquely placed to provide cost effective, focused and value-adding legal advice.