Stewart Perry talks to Diane Hughes about the rise of arbitration and insolvencies in the oil & gas sector and the risks of international trade.
Downsizing, M&A and international disputes: A forensic accountant's view of the oil & gas market
STEWART: I know you’ve a large team of advisers focussed on the oil & gas sector at the moment. What are they mostly engaged on?
DIANE: My colleagues are engaged in a wide range of activities in this sector. Whilst the oil price hit a seven month high this month, there is little optimism for the rest of 2016 and, therefore, much continued uncertainty across the value chain. Company side, we are advising on cost structure improvements, whether through operating and overhead cost reduction or procurement and outsourcing strategies. We are also seeing transaction activity, in particular selling out of non-core businesses.
Another busy area is disputes. It is hard to discern trends, but certainly parties appear in general to be seeking to avoid obligations, resulting in claims through both litigation and arbitration.
STEWART: We’re busy in those areas too, especially the disputes work. Have you noticed a significant increase in requests for forensic accountants from clients in the sector?
DIANE: We are seeing a rise in companies prepared to contemplate litigation with an early focus on the potential economic benefits. These potential disputes are varied in origin but definitely have been driven by the fact that the sector is stressed. One noticeable feature in the oil & gas sector is that the quantum of damages tends to be a big number.
Recently, we’ve been engaged in several investment treaty arbitrations. These have been related to situations in countries in Eastern Europe, Asia and Africa. I’m sure that you are fully aware that businesses in the oil & gas sector are based in, or trade through and with, countries with unstable regimes. Where you have contracts being awarded by governments in these regimes, those contracts are more prone to getting cancelled, simply not honoured or unilaterally re-negotiated, particularly if the government suddenly changes. Big sums of money are involved, often because of the large up-front investment required prior to generating returns and these investors end up as claimants.
I think the uptick in arbitration is largely because so many transactions in the oil & gas market are based on cross-border contracts. This is increasingly so because of saturation in national markets. The USA is a good example of this; refineries which traditionally might have just sold in-country, have been forced to start trading internationally by virtue of the increase in alternative fuels and the fracking boom in the USA. The refineries may not have deep experience in international trade. If contracts with new non-local partners are not properly honoured, in performance or payment terms, then for the first time, they’ve got international issues.
STEWART: In your experience, are the people that are investing in these foreign countries, and the people having to go internationally for the first time, all looking at contracts with arbitration provisions?
DIANE: I believe so, yes. Lately, the disputes in which AlixPartners has been engaged in have been arbitrated. My partners are currently, or have been most recently, involved in arbitrations in London, Paris, Switzerland and Singapore.