How the law is changing in the oil and gas sector

Whether you have qualified or are thinking where to spend some of your training, the oil and gas sector can provide a varied diet of interesting work.

Why such a variety?

First, the value chain is long. It begins with bids to a host government for a licence or production sharing agreement; then, having won a licence, there is the exploration, development and production of oil and gas, transportation to a processing facility and sales. The distance between the points of production and consumption can be thousands of miles. All this introduces complexities.

Second, the range of work is vast: agreements to be negotiated with the host government; the joint venture among oil companies undertaking the project; construction and use of rigs and sub-sea infrastructure; service agreements with contractors; agreements for transportation and sale of crude, gas or LNG; and financing.

Third, there is an array of legal disciplines and skills and specialisations required: transactional; M&A; regulation – competition controls; regulation of third party access to infrastructure; tax; environmental; transportation by pipeline; advising on disputes. The list can go on. Issues can arise at all levels: between the host government and oil companies; among the participating oil companies themselves; between contractors and operators; among users of sub-sea infrastructure; issues with insurers and with buyers.

Fourth, it is not just a single system of law that is involved. Invariably, there are at least two: the upstream licence is likely to be governed by local law; but other agreements may be governed by English law or the law of another country; and additional systems of law can come into play depending on the markets where the parties are operating, the countries in which parties are incorporated and the countries to which oil and gas are being exported.

Is the landscape changing for lawyers?

Yes and no. If you look at documentation signed 25 years ago, it will be similar in form and content to what you see written today. But there are differences which require lawyers to adapt. Here are some examples.

When I started work, the terms of bilateral and multilateral investment treaties to which the host government was a party were given relatively little attention; but these will today form a serious part of the legal due diligence and structuring.

The traditional way of getting oil from the well-head to market was by pipeline to a refinery. Today, floating production, storage and offloading vessels (which look similar to oil tankers) are designed to remain at the field for years; oil is pumped onto the FPSO; shuttle tankers receive partially processed crude which can then be taken to any refinery. This has transformed the ability to produce in areas that were previously inaccessible. Floating liquefaction facilities for natural gas are coming on-stream. Projects for the construction, financing and leasing of FPSOs and FLNG vessels represent a new legal work-stream that is an integral part of many upstream projects.

The climate in which oil companies operate is changing. There is more emphasis today on responsible development and respect for the rights of groups who are affected by operations. Lawyers become involved in compliance programmes and bringing and defending claims.

The supply chain continues to be integrated but there are opportunities for it to widen. LNG is an example. Natural gas is chilled at a liquefaction facility to minus 160 degrees C and reduces to 1/600 of the gaseous volume. LNG is transported on carriers to a regasification terminal, fed into a transmission system and delivered to power stations and other industrial and domestic customers. LNG projects continue to be integrated with power projects because the viability of LNG projects is underpinned by long-term offtake contracts.

But the design of LNG carriers today is such that they do not need to be dedicated to a single regasification facility or to a single project. LNG carriers have much more flexibility as to where they go; they can be diverted from one discharge port to another; so a spot market in LNG has now developed and, with it, documentation for spot sale and purchase of spot LNG cargoes. Also, an LNG allows a power station to be constructed where locally sourced gas is less available. A team working on an LNG to power project will include lawyers with experience in upstream work, construction and financing of LNG carriers, LNG sales and transportation, the construction and financing of power plants and power purchase agreements.

There is some change in the legal issues. Risk allocation is always important but can be increasingly complex. In terms of basic contract law, it is essential to keep up to date with, for example, excluding or limiting liability for consequential loss and in connection with the law’s approach to indemnities (indemnities are a fundamental tool in many agreements in the sector). And there is a growing need to be aware of the developing use of good faith and the approach of English law to address issues that can only be sorted out at a later stage.

Should I get involved?

Why not? It is a world that is never dull.

David Moss is training partner at Hogan Lovells