Coronavirus Force Majeure Explainer from Reuters (for Oil & Gas Contracts)

[Tom Kirkman + 8,860]

We are soon going to enter a period where oil and gas companies with clearly delineated force majeure clauses in their contractual terms & conditions will have a leg up over companies that just have cookie cutter, vague, force majeure clauses.

●  Force Majeure was already invoked repeatedly by China's CNOOC (China National Offshore Oil Company), and

●  French oil company Total has rejected a force majeure claim by an unnamed China LNG buyer.

The country specified in the contract where court hearings / third party binding arbitration will take place will be one key aspect.  If the country specified is China, then the international oil company has already lost, and would be better off seeking to mimimize losses and negotiate, rather than pursue binding third party arbitrarion in China.

Rather than me blathering on endlessly about the commercial importance of having clearly written, specific, detailed contracts written, I'll just refer you to this Reuters explainer:

 

https://af.reuters.com/article/energyOilNews/idAFL1N2AB01T

RPT-EXPLAINER-As coronavirus fails to ease, interest in 'force majeure'

(Reuters) - With the coronavirus outbreak that originated in Hubei province, China, showing no signs of abating any time soon, some companies that buy and sell goods in the Chinese market are taking interest in the legal defense of “force majeure.”

The death toll in China from the epidemic continues to climb and now stands above 1,000, more than the SARS epidemic two decades ago, with more than 42,000 confirmed cases in China and 319 cases in 24 other countries.

WHAT IS FORCE MAJEURE?

Force majeure refers to unexpected external circumstances that prevent a party to a contract from meeting their obligations.

The underlying event must be unforeseeable and not the result of actions undertaken by the party invoking force majeure. Natural disasters, strikes, and terrorist attacks can all be force majeure events.

Declaring force majeure may allow a party to a contract to avoid liability for nonperformance.

IS THE CORONAVIRUS OUTBREAK A FORCE MAJEURE EVENT?

Legal experts said that the coronavirus likely qualifies, but any company invoking force majeure would need to show that it is effectively impossible to perform their contractual duties as a result of the outbreak.

In other words, a company is not excused from an obligation just because it has become more costly or time-consuming, said John Scannapieco, a Nashville, Tennessee-based lawyer who advises U.S. companies on Chinese transactions.

The coronavirus is “not carte blanche to say force majeure,” said Scannapieco, a shareholder at law firm Baker Donelson. “You have look at the facts and circumstances.”

HOW IS FORCE MAJEURE INVOKED?

Cross-border deals typically include clauses that allow for non-performance during force majeure events, said Vanessa Miller, a U.S. lawyer at Foley & Lardner. These clauses are sometimes “cut and paste” and “not reviewed as carefully as they ought to be,” Miller said.

Force majeure clauses rarely mention diseases, but more frequently provide relief in the event of unforeseen “acts of government,” Miller said. Chinese authorities have ordered lockdowns and closed factories in the wake of the coronavirus, so the “act of government” language could allow some firms to invoke force majeure, she said.

WHO DECIDES WHAT HAPPENS NEXT IF FORCE MAJEURE IS DECLARED?

Cross-border deals often stipulate that disputes arising out of the contract will be decided by a particular court or arbitration body.

In practice, foreign firms doing business in China may be better off avoiding litigation and negotiating a compromise, Scannapieco said.

HAVE ANY COMPANIES INVOKED FORCE MAJEURE OVER CORONAVIRUS?

China’s biggest importer of liquefied natural gas (LNG), China National Offshore Oil Corp (CNOOC), has invoked force majeure to suspend contracts with at least three suppliers, two sources told Reuters on Feb. 6, without specifying whether the coronavirus is what triggered the action.

French oil major Total said a day later it had rejected a force majeure notice from an unnamed Chinese LNG buyer, the first global energy supplier to push back publicly against such an effort.  ...

 

More in the link:

https://af.reuters.com/article/energyOilNews/idAFL1N2AB01T

 

An earlier force majeure / contractual terms & conditions discussion in another thread started here:

https://community.oilprice.com/topic/9618-coronovairus-phase-one-agreement-lower-for-longer/?tab=comments#comment-89692

 

[BLA + 1,666]

In reality the sellers to China have no choice but to work with them.

Many of the major producers that sell to China have let them cancel or defer shipments to the future.  In other words they caved.   The customer is always right. 

The Chinese will remember those whom deny Force Majeure.

For example Saudi Aramco let Sinopec and some others cancel some deliveries.  China is their largest client.  Saudis can't piss them off. That would be stupid.  

Result is a lot of shifting supply and deliveries, volatile market price (especially spot mkt) and nervous producers.  

Houthi's supposedly shoot down KSA jet this weekend, right on que.

Edited February 17, 2020 by BLA

[footeab@yahoo.com + 2,132]

1 hour ago, BLA said:

In reality the sellers to China have no choice but to work with them.....

For example Saudi Aramco let Simple and some others cancel some deliveries.  China is their largest client.  Saudis can't piss them off. That would be stupid.  

Result is a lot of shifting supply and deliveries, volatile market price (especially spot mkt) and nervous producers.  

Houthi's supposedly shoot down KSA jet this weekend, right on que.

From Saudi perspective: ~10Mbb/d and if price goes up say $1 for a couple days over shooting down an old jet worth ~$10Million, they just made 50% on their lost "investment"...

PS: No, I do not think they would do such a thing as a new jet is still ~$100M so, unless they have a large number of old used jets to purchase cheaply somewhere or willing to throw away their own jets without replacing... yea....