All players in the oil and gas industry are facing tougher times as weakening demand and production from overseas drives prices downward. On top of low prices comes the COVID-19 (coronavirus) crisis. Employers in the industry are faced with a myriad of new issues to confront as the situation evolves daily.
Well operators, midstream companies and oil field service providers may find it difficult to meet various contractual obligations with the absence of office staff and field employees due to illness, child care issues, quarantine or government mandates.
Relief for non-performance of many of these contractual obligations may be found in the force majeure provision of the contract document.
What about coronavirus and force majeure clauses?
Force majeure provisions typically excuse performance of certain contractual obligations in circumstances which were unforeseeable when the contract parties entered into the agreement.
The unforeseen circumstance must effectively prevent the performance of a contractual obligation by the party seeking the protection of the clause. The non-performing party will also need to attempt to take steps to mitigate any non-performance.
In any future dispute, the burden of proof will be on the party citing the force majeure provision for its non-performance, so documentation will be key.
Standard oil and gas leases, joint operating agreements (JOA), master service agreements, and gathering or sales contracts usually contain a force majeure provision. Force majeure clauses which expressly include “epidemics” or “pandemics” as enumerated definitions of the term will make it easier to invoke the provision.
If not, parties seeking the protections of a force majeure clause will need to determine if the impacts from coronavirus fit into common force majeure clause phrases like “Act of God,” “industrial disturbance,” or “governmental action.”
Additionally, certain form lease and JOA provisions may contain force majeure clauses that require written notice within a certain time frame in order to seek the protections of the force majeure clause.
Also, certain oil and gas lease forms may require payment of shut-in royalties if a force majeure event could cause the cessation of production.
What if my contract doesn’t contain such a provision?
Your contract document (be it a lease, JOA, master service agreement, gathering, sales contract or other) may not contain a force majeure provision. In that instance, other legal arguments may aid in assisting a claim for non-performance, such as the impossibility doctrine or frustration of purpose.
Parties should promptly review their contracts for specific force majeure provisions, including whether they list epidemics or pandemics and if prior written notice is required.
Parties may want to begin a dialogue with the counterparty to the contract to discuss prospective invocation of the force majeure provision. In any ongoing lease or contract negotiations, parties may want to specifically address coronavirus to avoid any uncertainty with regard to what types of performance and under what circumstances it may be excused.
Under all circumstances for oil and gas operations, invoking the applicable force majeure clause due to coronavirus issues will be a fact-specific question, so documentation of all issues preventing the performance of an obligation and steps taken to mitigate the impact will be key in any dispute.
Our team will continue to share the latest developments and provide insights on the spread of coronavirus and its impact across sectors.