Opinion: High oil prices are fuelling the flames of energy disputes
21 July 2008
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Disputes lawyers sit with sharpened pencils waiting impatiently for the full force of the fallout from the credit crunch. As thumbs are twiddled, a torrent of disputes has already started in the energy sector. Across the world disputes are being fuelled by the unsettling effects of the high price of oil.
The nature of these disputes and the tensions giving rise to them reveal trends, and their importance to the wider economy cannot be overstated.
The energy sector has always been a high-risk, high-value sector: high risk because the margin between success and failure is narrow – $50m (£25m) can be blown drilling a ‘dry’, unproductive oil well; high value largely due to the huge market for energy – the present consumption of power globally is around 15,000 gigawatts (GW). To put this in context, the largest power station in Europe, Drax in North Yorkshire, has an output of just 4GW, and this is almost twice that of any other power station in the UK.
With years of stable oil prices, all has been relatively quiet in the energy sector since the supply shocks of the 1970s. Cheap oil brought about limited investment in new exploration and a cowardly approach by governments to the increasing gap between domestic supply and demand – the easy route being taken every time through increased coal, oil and natural gas consumption. There has been a 20-year silence on new nuclear plants and no meaningful investment in alternative technologies.
But now the surge of oil prices is giving rise to a very different landscape. Oil services companies and their specialist drilling rigs and personnel are in a tight market. The same applies to wind turbine and solar panel manufacturers. Disputes are arising where scarce resources are committed to uneconomic projects, or where the heightened returns now expected by oil companies appear ripe for rebalance.
Increased commodities prices – for example, the price of sophisticated steels – are triggering disputes over the allocation of risk for cost and schedule overruns. Oil refineries – the key to increasing supplies of automotive fuels – take centre stage and are also assessing their pricing structures. Natural gas prices are racing away due to the price link to oil, despite gas being a more abundant commodity.
Long-term pricing commitments in power and natural gas contracts based on $20 oil are coming under strain in this new market and price reviews are widely reported. The high oil price makes more technically complicated hydrocarbon reserves economical.
But deep, high-pressure, high-temperature oil and gas fields give rise to disputes when technologies fail or investment decisions turn sour. Fierce competition is now arising for access to energy reserves. Governments in producing nations, seeing a rise in the value of indigenous resources, tend towards expropriation. Governments not yet intervening overtly may begin to do so indirectly, through tax and visa authorities and through the local courts.
New regulations and initiatives introducing clean technologies bring their own frictions. The EU target to have 15 per cent of the UK’s electricity produced from renewables will keep lawyers busy in planning disputes, construction disputes and disputes over protection of cutting-edge technologies. Regulatory lawyers pick away at a sector often riddled with subsidies, while project financing all of this will keep the banks and their advisers busy.
These disputes are global in nature and are as inevitable as the basic forces
of supply and demand. Because most of them are determined in private arbitrations their outcomes are seldom known, and while many consider that high bank lending and mortgage rates will fall, the consensus is that high oil prices are here to stay.