The U.S. oil industry is facing the dual shockwaves of falling demand and increased supply as a result of global efforts to slow the spread of the novel coronavirus (COVID-19) combined with an oil price war driven by Russia and Saudi Arabia. Major airlines are canceling thousands of flights due to international travel bans, demand from China has dropped dramatically, domestic fuel sales have fallen due in part to widespread “shelter in place” orders in California and other states, and many businesses have had to curtail operations or close entirely due to the outbreak. As a result, the International Energy Agency has predicted that global oil demand will decline for the first time since 2009.
At the same time, Russia and Saudi Arabia have cut costs and increased supply as part of an oil price war that escalated in early March 2020. The price war, in combination with the global reduction in demand, has pushed prices to as low as $20 per barrel for the first time in eighteen years. U.S. oil producers and midstream companies have responded by cutting their capital budgets and ceasing drilling activities, and are considering supply reductions to help end the price war.
In this turbulent environment, it is more critical than ever for businesses in the oil industry to assess their contractual rights and liabilities. As we discussed in detail in a prior memorandum addressing the coronavirus outbreak,4 businesses must consider the applicability of various escape hatches recognized in contract law, including force majeure and the common law doctrines of frustration of purpose and impossibility. As parties in the U.S. oil industry seek to invoke force majeure provisions based on circumstances related to the COVID-19 pandemic, questions will arise not only as to whether the pandemic qualifies as a force majeure event, but whether the pandemic is being used as a pretext to avoid contracts made uneconomical by the oil price war. This memorandum provides a summary of certain key legal considerations facing the U.S. oil industry in these uncertain
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Sage Vanden Heuvel