Oil prices have plunged in the last few months.  For example, Brent futures traded at over $110 per barrel in June, and fell below $85 last week.  This is a fall of over 20%, and the market price for crude oil is now at its lowest level since 2010.

Oil prices impact activities in the sector and, in particular, the investments that upstream operators choose to make.  Some means of producing oil cost more than others, and producers continually seek to reduce the marginal cost of production.  For example, as recently reported by the Financial Times, studies estimate that the median North American tight oil development needs a crude oil price of $57 per barrel to break even.  This threshold price compares to $70 per barrel one year ago.  The situation is similar for production from Canadian oil sands, for which the average break-even cost is reportedly between $63 and $65 per barrel.  A sustained drop in oil prices may provide a renewed focus on reducing costs and keeping these unconventional projects economically viable.

The implications for long-term projects with costs that cannot be scaled are potentially more worrying.  Certain projects — for example, oil field developments, pipeline transportation, or other investments tied to the price of oil, such as LNG liquefaction trains or re-gasification terminals — can be dependent on expected oil and gas prices.  When the oil price deviates outside of an anticipated range for an extended period of time, the economics of a project can change and it can create legal disputes (e.g., between co-venturers or between the investment company and supporting service providers).  A fluctuating oil price can also encourage a government to change the rules of the game, which can also lead to litigation.

There are ways of mitigating these risks.  When circumstances permit, some operators may try to include legal provisions in their contracts that anticipate potential changes in the energy markets, such as hardship clauses that shift some of risk of price changes to others.  Frequently, legal disputes center on how these provisions should be applied.  Depending on the law of the contract, there may also be legal doctrines that can be of assistance (e.g., bouleversement and imprévision, civil law concepts that can sometimes provide relief in the case of a supervening change in circumstances).  Stabilisation clauses and investment treaty protections can sometimes be relied on to remedy actions taken by the government.

In short, a falling oil price may be helpful for the global economy, but it can create unwanted headaches for participants in the oil and gas sector and, potentially, give rise to litigation.