Reorg Quotes Akin Gump Lawyers on Mitigating Risk in a Tumultuous Energy Market

In its article “Experts Say Production Shut-Ins, Contentious Bankruptcies and Force Majeure Claims Loom Ahead for E&P Companies, Midstream Operators Amid Storage Constraints,” Reorg has quoted several Akin Gump partners who spoke at the firm’s recent webinar “Mitigating Risk in a Tumultuous Energy Market.” The speakers offered their insights into some of the most pressing issues facing oil and gas companies and investors amid the COVID-19 pandemic.

According to the article, with surging crude oil stockpiles in the United States poised to overwhelm available storage, producers and midstream participants might consider production shut-ins as they look to ride out the storm. Other midstream companies, however, the article says, are asking producers to show that their crude oil has a destination.

“Some pipeline and storage operators have been sending letters to producers asking them to confirm that they have firm commitments to move products downstream of their terminals,” said partner Gabriel Procaccini.

Partner Michael Byrd added that for any decisions being made regarding where to cut production or shut in wells, a company “has to balance lease termination risks with economic and engineering risks. These truly require input and collaboration between several departments within the company.”

The article notes that some producers and midstream companies are considering the use of force majeure notices as a means of permitting a temporary suspension of performance under a contract.

Procaccini said he is frequently asked whether force majeure “can provide an escape hatch from burdensome midstream obligations as companies consider potential force majeure claims due to storage constraints.” Midstream entities and producers, he said, should continue their efforts to find reasonable solutions to the crisis, which might include future discounts in exchange for honoring current commitments, in lieu of litigation.

Partner Jim Wetwiska echoed those remarks, saying, “We really stress that parties should consider certain factors that will impact litigation, looking at alternative performance methods and doing a thorough analysis of the contract and the force majeure provisions. … The decision to claim force majeure should be taken seriously. If you’re going to claim a force majeure, it’s your burden to establish it.”

Speaking of the fallout from any potential contract renegotiation requests, Procaccini said midstream participants need to be focused “on finding practical solutions to mitigate the risks which have emerged as a result of this crisis. This is not necessarily the time to stand firm and risk upsetting long-term relationships over what could be a relatively brief period of dislocation.”

Procaccini added that operators in the space should “mindfully” address counterparty relationships with their business development colleagues to make sure they have a strong understanding of the classes of midstream contracts that their companies possess as well as any potential exposure so they are well positioned to respond quickly to accommodation requests, while also minimizing the risk of breach. In addition, he suggested that midstream companies remain on top of any provisions, such as hardship clauses, that might create a renegotiation obligation.