ON THE HORIZON 2026 | An evolving world

The last few years have seen significant political turmoil and conflict across the globe and recent events indicate that shows no sign of slowing down. Whilst governments and international organisations battle with the immediate and obvious impact of conflict and political instability, the international nature of conducting business in modern times means that the impact of significant geopolitical events is wide ranging. In this article, we take a look from a contractual perspective at the impact that geopolitical instability can have on offshore energy projects.

Introduction

The offshore energy industry is particularly exposed to the volatile nature of international politics and emerging conflicts because the jurisdictions for offshore energy projects are dictated by the location and availability of natural resources (such as oil and gas fields under the seabed or areas of the ocean that are naturally suitable for building offshore windfarms). This means that in offshore energy projects the parties also have to consider the risk of operating out of a jurisdiction that, for example, may be less politically stable, and with less well-established laws, infrastructure and tax regimes. As a result, the contractors for offshore projects must adequately address these potential risks. Otherwise, the parties involved may be left in a difficult position if the jurisdiction they are operating in becomes the subject of significant political instability or conflict.

Risks posed by political instability or conflic

Not every jurisdiction is as developed or as politically stable as others. There is therefore a risk that the jurisdiction is sufficiently stable at the point of contract signing, but the political landscape could change dramatically over time. This is more so relevant where many offshore projects involve long-term contracts lasting years or tens of years.

An offshore energy project is a significant undertaking, whether in the oil and gas or renewable sectors, usually involving many different parties and significant amounts of personnel, equipment, assets and – crucially – money. Significant changes to a local government (including by way of collapse of the government or a coup) or civil unrest or commotion can impact offshore energy projects, including all manner of contractors involved in that project.

By way of example as to what impact this could have:

• Changes in law in the local jurisdiction could result in much higher operating costs for a contractor. An example of this could be that a local government changes the law such that anyone working on an offshore asset and/or project within territorial waters or in an onshore project office must be local and paid a minimum sum that ultimately increases the costs to a contractor or means it cannot adequately crew and/or staff its project.
• Significant political instability or unrest could prevent a contractor from performing the work required of it under a contract with its client. If it became clear that conflict or unrest meant that it was no longer safe for a contractor’s staff to operate in that particular jurisdiction, the contractor may be forced to withdraw all personnel, leaving it unable to fulfil its contractual obligations. This could apply to both crews working on offshore assets and projects, as well as staff in an onshore project office.
• Seizure or detention of a contractor’s assets or equipment working or operating in territorial waters of country in the midst of significant political instability or unrest. It is possible that for example, a military coup, could result in local military forcibly seizing assets, equipment and materials belonging to any of the parties involved in an offshore project. There would likely be little scope for a foreign company to resist such a seizure.

Mitigating these risks in the contractual framework

The risks described above are of course significant practical and safety issues that would have to be addressed as and when they arose. From a contractual perspective though, it is possible for parties to mitigate against these risks as between themselves at the time of contracting. This will not fix the practical and/or safety issues but will provide a certain level of commercial certainty and risk allocation.

In this respect, there are some key clauses to think about which are likely to be the most relevant if an incident of geopolitical instability does impact the project:

• Change in Law clause – a change in law clause is typically a clause that allocates responsibility for the costs associated with changes in the laws that are applicable to the contract, parties and project. The first question is - does the contract contain one at all? It would be prudent to ensure one is included as it may be engaged for all manner of reasons, including political instability and the potential for a change in government. If a change in law clause is included, which contractual party is responsible for the cost impact of a change in law? Allocating risk to one party or the other (or having a threshold, such that one party is responsible up to a certain cost, and the other is responsible if the cost impact is greater than that threshold) provides certainty such that if there is a sudden change in law, there is no dispute about which party has to absorb that cost.
• Force Majeure clause – this clause will likely be key if significant political instability or unrest could prevent a contractor from performing under the relevant contract. Under English law, force majeure is a creature of contract – in other words, the contract must expressly provide for force majeure and detail the precise impact and nature of force majeure events. The list of events that are stated to be force majeure events will need to capture all manner of potential events arising out of geopolitical instability. In this respect, the drafting should be as precise as possible whilst ensuring it adequately captures a wide range of eventualities. Any contractor concerned about whether its ability to perform would be impacted by such events such carefully consider precisely which events are expressly listed out in the force majeure clause.
• Actual or Constructive Total Loss clause – offshore contracts related to a particular asset often contain clauses regarding when an asset is deemed to be an actual or constructive total loss. A party with concerns about the jurisdiction the asset will be based in should consider carefully whether these provisions ensure that the seizure or requisition of an asset by a local government or military power constitute a constructive total loss of the asset. A party should also give careful thought to the consequences of the asset being a constructive total loss as a result of seizure or requisition of an asset by a local government or military power; does the contract automatically terminate? If so, what are the consequences of such a termination?

A final point to consider is the contractual counterparty itself – if a party is contracting with a local entity that would undoubtedly also be affected by political instability or conflict in the relevant jurisdiction, it may be sensible to obtain some form of security from a bank or parent company based in a more stable jurisdiction. Effective allocation of risk and cost in the contract will mean nothing if there is no way to obtain payment or reimbursement from a contractual counterparty.

Conclusion

It is always difficult to ensure that every possible risk is captured by a contract but the global landscape at the moment presents a clear risk to those operating in the offshore industry that can and should be considered when agreeing a contractual framework. It may not always be possible to predict the exact nature of the risk, but if parties ensure that geopolitical risk is one of the factors considered when preparing a contract, commercial and financial risk can be allocated and mitigated.