Company law -oil and gas

Introduction

Oil is a commodity, and as such, it tends to see larger

fluctuations in price than more stable investments such as

stocks and bonds.1 Oil shocks four decades ago transformed the

world economy and geopolitical landscape, and the latest oil

crisis threatens to do the same. The price of oil hovered near

$100 per barrel during the past three years, and the recent

vertiginous fall in price to near $50 per barrel has sent

markets reeling. Ali al-Naimi, oil minister of Saudi Arabia,

considered the industry’s most powerful decision maker, said

oil could fall to $20 a barrel as predicted by the Citigroup

analyst2 and the lower prices are expected to persist at least

in the medium term.3 This dramatic shift has global

consequences. Some governments welcome it with glee, others

1 Available in http://www.investopedia.com/ask/answers/012715/what-causes-oil-prices-fluctuate.aspaccessed on March 16,20152 Available in http://247wallst.com/energy-economy/2015/03/23/oil-starts-move-down-to-20/ accessed on March 16,2015

3 Available in http://oilprice.com/Energy/Oil-Prices/Global-Economy-At-Risk-From-Oil-Price-Dive.html accessed on March 16,2015

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with fear. There are winners and losers, risks and

opportunities in the continued decline in the price of oil.4

Possible Reason Of Oil Price Falling

The Organization of Petroleum Exporting Countries or OPEC, is

the main influencer of fluctuations in oil prices. OPEC is a

consortium made up of 13 countries: Algeria, Angola, Ecuador,

Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi

Arabia, the United Arab Emirates and Venezuela. OPEC controls

40% of the world's supply of oil. The consortium sets

production levels to meet global demand and can influence the

price of oil and gas by increasing or decreasing

production5.OPEC vowed to keep the price of oil above $100 a

barrel for the foreseeable future, but in mid-2014, the price

of oil began to tumble. OPEC failed to reach agreement on

4 Available in http://www.econ.upd.edu.ph/perse/?p=4268 accessed on March

16,2015

5 Available in http://www.investopedia.com/ask/answers/012715/what-causes-oil-prices-fluctuate.asp accessed on March 18,2015

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production curbs, sending the price tumbling,6 marks the

beginning of an incredibly important change7.  

Four things are now affecting the picture. Demand is low

because of weak economic activity, increased efficiency, and a

growing switch away from oil to other fuels. Second, turmoil

in Iraq and Libya—two big oil producers with nearly 4m barrels

a day combined—has not affected their output. The market is

more sanguine about geopolitical risk. Thirdly, America has

become the world’s largest oil producer. Though it does not

export crude oil, it now imports much less, creating a lot of

spare supply. Finally, the Saudis and their Gulf allies have

decided not to sacrifice their own market share to restore the

price. They could curb production sharply, but the main

benefits would go to countries they detest such as Iran and

Russia. Saudi Arabia can tolerate lower oil prices quite

easily. It has $900 billion in reserves. Its own oil costs

very little (around $5-6 per barrel) to get out of the ground.8

6 Available in http://www.economist.com/blogs/economist-explains/2014/12/economist-explains-4 accessed on March 16,20157Available in http://www.energytrendsinsider.com/2015/01/20/everything-has-changed-oil-and-the-end-of-opec/ accessed on March 18,20158 Available in http://www.economist.com/blogs/economist-explains/2014/12/economist-explains-4 accessed on March 18,2015

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In The Event of F alling O il P rices , It

Does Creates Some Opportunities and Risks

Along With The Declination.

Oppurtunities & Risks

Lower prices improve economic prospects by way of two main

mechanisms:

The first is through better public finances. In many

developing countries, governments heavily subsidize energy

usage by selling fuel for automobiles far below the market

price. These policies have been destructive on many levels. By

reducing fuel prices, such subsidies discourage fuel

efficiency, exacerbating global warming. And they impose a

dangerous burden on public finances because governments are on

the hook when oil prices increase. Though fuel subsidies are

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often rhetorically justified on the grounds that they help the

poor, research suggests that in most countries the middle

class receives the bulk of benefits. Some developing countries

have taken advantage of lower prices to cut or eliminate fuel

subsidies. When prices are high, scrapping subsidies shifts

costs to consumers and risks political backlash. Now, however,

extremely lower oil prices provide political cover to

undertake tough reforms. Indonesian President Joko Widodo, for

example, is developing a plan to sharply cut fuel subsidies

and redirect public spending to more productive uses, such as

infrastructure or education. If more countries follow

Indonesia, the policy changes facilitated by lower oil prices

will underwrite more economic growth for years to come.9

Second will be, oil consumers, benefit from lower prices is

straightforward – households have more money to spend on other

goods It will give consumers a break, reducing their cost of

transportation and as a result increasing their purchasing

power for other goods and services.10. In the United States,

for example, consumers spent $370 billion on gasoline in 2013,

9 Available in http://yaleglobal.yale.edu/content/plummeting-oil-prices-upend-global-economy accessed on March 16,201510 Available in http://slconcordtimes.com/the-falling-oil-prices-what-we-should-know/ accessed on March 15,2015

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according to analysis from Goldman Sachs. That constitutes

roughly 3 percent of total household spending. Lower prices

may save American consumers $125 billion over the coming year.

Chinese consumers are less avid drivers than Americans, but

they too will notice the economic effects as energy costs

influence the price of food – Chinese spend near 27 percent of

their income on food while Americans spend about 6.5 percent.

Indeed, across the world, consumers will experience similar

windfalls if oil prices stay low. In economic terms, this will

function as a medium-size tax cut and boost consumption as

people can afford to buy more goods or save.11

Non -Oil and gas companies:

China

“Falling global oil prices present a golden opportunity for

importers like Indonesia and India to reform their costly fuel

subsidy programs,” said Asian Development Bank, Chief

Economist Shang-Jin Wei12.as it contribute to strong growth,

11 Available in http://oilprice.com/Energy/Oil-Prices/Global-Economy-At-Risk-From-Oil-Price-Dive.html accessed on March 15,201512 Available in http://www.adb.org/news/features/falling-oil-prices-asia-and-pacific-potential-gains-importers-opportunities-exporters accessed on

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reduce inflationary, fiscal and external pressures. For

developing countries in particularly, the current drop in oil

prices presents a window of opportunity for them to formulate

policies and undertake structural reforms which will alleviate

poverty and promote sustainable livelihoods.13 Depressed oil

prices could help China make up for some lost ground in its

economy due to slowing industrial growth, falling exports,

rising bad-debt levels and struggles in shifting to a

consumption-led, rather than investment-led, growth model. If

oil prices remain low, China could follow up its November

interest-rate cut with another one this year, analysts say.

India and Indonesia

India and Indonesia, both facing high current-account

deficits, Mr. Chehab said. Both countries will be able to

reduce relatively high interest rates without worrying about

the impact on inflation, he said. India’s Modi administration

and Indonesia’s Jokowi government have, since recently taking

power, slashed most of the large fuel subsidies that have

crippled policy making in the past. For the 12 months leading

March 15,201513Available in http://slconcordtimes.com/the-falling-oil-prices-what-we-should-know/ accessed on March 15,2015

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up to March, two months before Narendra Modi was elected prime

minister, India had fuel subsidies of almost $22 billion for

consumers, though much of that has gradually been cut, and the

country is planning to deregulate fuel prices completely if

oil continues its fall.14

According to officials at India’s oil ministry, every dollar

drop in oil prices helps reduce the government’s burden of

subsidy payments by $1 billion. Mr. Chehab said the cost of

oil is one factor that will help India’s GDP growth increase

to around 6.3% next fiscal year from an estimated 5.6% for the

year ended in March.15

Indonesia, scrapped gasoline subsidies completely on the last

day of 2014, a month after raising subsidized fuel prices by

about one-third. It has promised more reforms in fuel pricing,

and a range of economic and administrative policies that could

help lift GDP growth to 5.5% this year from an estimated 5.1%

last year.16

14 Available in http://www.wsj.com/articles/falling-oil-spells-boon-for-most-of-asias-economies-1420398456 accessed in 25th March 201515Available in http://ep-bd.com/online/details.php?cid=11&id=18132 accessedon March 16,201516 Available in http://www.wsj.com/articles/falling-oil-spells-boon-for-most-of-asias-economies-1420398456 accessed on March 16,2015

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On the whole, cost savings especially for heavy energy users,

higher margins and profits can be witnessed at the same time

uncertainty against future costs may arise

Oil and gas companies:

A dramatic downfall can be seen, through price decline and

wage stagnation, redundancies, cancelled projects loss of

confidence from investors in share price decline

Russia

The main effect of this is on the riskiest and most vulnerable

bits of the oil industry. These include American frackers who

have borrowed heavily on the expectation of continuing high

prices. They also include Western oil companies with high-cost

projects involving drilling in deep water or in the Arctic, or

dealing with maturing and increasingly expensive fields such

as the North Sea. But the greatest pain is in countries where

the regimes are dependent on a high oil price to pay for

costly foreign adventures and expensive social programmes.

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These include Russia. Russia’s economic problems are forcing

the country’s elite to reconsider its geopolitical position.

Earlier this year, many in Moscow speculated that Russia had

the resources to survive a serious deterioration in ties with

the West, and to sell gas to China instead. With plummeting

oil prices, however, many in Russia’s elite now realize that

their country’s main export – energy – is far less scarce than

it used to be. Oil is a much less influential geopolitical

tool. As a result, some Kremlin advisors have urged Putin to

improve relations with the West.Indeed, as oil prices slide,

the Kremlin adopted a more conciliatory policy toward Ukraine

in order to regain confidence of financial markets and

stabilize its economic position. Russia appears to have

abandoned efforts to set up independent states in Eastern

Ukraine, and fighting in the region has fallen sharply since

early December.17It is has to be noted that Russia, which is

one of the world’s largest oil producers, has been hard hit,

and the World Bank has cautioned that the country’s economy

17Available in http://oilprice.com/Energy/Oil-Prices/Global-Economy-At-Risk-From-Oil-Price-Dive.html accessed on March 14,2015

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would contract by at least 0.7% in 2015 if oil prices do not

pick up.18

Malaysia

In view of the decline in oil prices, Asia's biggest oil

producer now expects its economy grow by 4.5-5.5% this year,

down from a previous estimate of 5-6%.The fiscal deficit will

also be larger at 3.2% of gross domestic product.19 Malaysia’s

revenues have been hit hard by the collapse in crude prices,

which have halved as a result of a supply glut and the weak

global economy. The currency, ringgit, has lost about 10% of

its value against the US dollar in recent months as dwindling

investor confidence has led to capital outflows. The country

is also struggling with one of the highest levels of household

debt in Asia, rising prices and a large current account

deficit.20 According to data revealed by the Finance Ministry,

between January and November last year, the country’s net

exports of crude oil totalled RM7.7bil, while net imports of

18Available in http://slconcordtimes.com/the-falling-oil-prices-what-we-should-know/ accessed on March 16,201519Public Mutual Berhad, Calibre, March Edition 2015, 1420 Available in http://www.bbc.com/news/business-30892591 accessed on March 16,2015

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petroleum products stood at RM8.9bil with a deficit of

RM1.2bil.Treasury secretary-general Tan Sri Dr Mohd Irwan

Serigar Abdullah said Malaysia had turned into a net importer

of crude oil and petroleum products since 2014 Hence, lower

oil prices will not adversely impact net export receipts.

Based on the revised oil price assumption of US$55 per barrel

for Budget 2015, Malaysia’s current account surplus this year

was expected to be around 2% to 3% of gross national income

(GNI), down from the estimated 5.1% of GNI last year. 21

Venezuela

Venezuela is one of the world's largest oil exporters, but

thanks to economic mismanagement it was already finding it

difficult to pay its way even before the oil price started

falling. Inflation is running at about 60% and the economy is

teetering on the brink of recession. The need for spending

cuts is clear, but the government faces difficult choices. The

country already has some of the world's cheapest petrol prices

21 Available in http://www.thestar.com.my/Business/Business-News/2015/01/21/Clearing-the-air-Treasury-sec-gen-Malaysia-net-importer-of-crude-oil-petroleum-products-since-2014/?style=biz accessed on March 14,2015

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- fuel subsidies cost Caracas about $12.5bn a year but

President Maduro has ruled out subsidy cuts and higher petrol

prices. "I've considered as head of state, that the moment has

not arrived," he said. "There's no rush, we're not going to

throw more gasoline on the fire that already exists with

speculation and induced inflation."The government's caution is

understandable. A petrol price rise in 1989 saw widespread

riots that left hundreds dead.22

Australia

The drop in oil prices is having big impacts on international

liquefied natural gas (LNG) prices and may cause a slowdown

in the development of LNG export plants globally, due to that

a number of proposed projects in Australia have been

shelved as to high costs.23 Wage stagnation at stake as

Austarlia’s Oil and gas company Woodside Petroleum has begun

cutting hundreds of jobs and has imposed a freeze on pay rises

22 Available in http://www.bbc.com/news/business-29643612 accessed on March 14,201523Available in http://breakingenergy.com/2015/01/21/impact-of-falling-oil-prices-on-lng/ accessed on March 16,2015

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in response to falling oil prices24 despite Australia is oil producer

but it is a net importer.25

Recommendations for investor, oil and gas

companies, and government of nations to

minimize the impacts of falling oil price

First recommendation, Information gathering. Good information

enhances strategic and other decision making. As part of the

overall risk review a business should gather data on its

customers, suppliers, sub-contractors and other business

connections. Information on the financial condition of these

counterparties will be highly valuable in assessing where

risks may exist, where defaults or delays may be expected,

whether there are bankruptcy risks, and how to mitigate these

risks. Equally, this data may influence relative bargaining

positions, creating opportunities to enhance contractual terms

or obtain better pricing in new contracts.26

24 Available in http://www.abc.net.au/news/2015-03-24/woodside-cuts-300-jobs-falling-oil-prices/6343210 accessed on March 15,201525 Available in http://www.smh.com.au/business/the-economy/falling-oil-price-a-free-kick-for-australian-economy-20141114-11lyrs.html accessed on March 16,201526 Available in http://www.hfw.com/Oil-price-shock-March-2015 accessed on March 25th, 2015

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Next, Through Articles of Association (AOA)27, companies able

to refer and determine any uncover area or any defect whenever

any crisis arises. In the course whether the company got a

balanced and effective board decision making and are there

enough non executives with the right sort of expertise.

Following, are the decisions being taken in the right way .The

Cadbury report and reports of Hampel and Higgs can be taken

into account in sorting out the crisis. Alternatively, In

order to adapt the changing circumstances, the company may

amend the companies’ AOA through special resolution under

Section 21 of Company Act 2006 (CA 2006)28. In the State where

an area need to be given more attention, a special committee

could be form through the main board to monitor the situation

i.e. by acquire the skilled non-executive directors in

company, well-knit reporting of risks and analysis of options

for dealing with them.29

27 Section 18(1) of Company Act 200628 Section 21 of Company Act 2006 (CA 2006)29 Available at http://www.ogfj.com/articles/print/volume-7/issue-9/features-/re-examining-corporate.html accessed 25th March 2015

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Besides, assessing acquisition opportunities; It is widely

expected that asset sales, mergers and acquisitions and

consolidation activity will increase significantly. This is

creating valuable buy side opportunities. Many oil and

oilfield services companies are planning non-core, or even

core, asset divestments. A business seeking such opportunities

will be well advised to engage with the investment banks,

private equity firms, and other professional advisers with

access to these. Businesses will also speak to each other, and

gather information on potential opportunities in this way.30

In further, Restructuring and winding up will be another well

known recommendation, it may be necessary for companies to

make redundancies, cancel projects , especially expensive oil

extraction such as deep drilling and fracking or even wind up

some businesses. As the company no longer able to cope the

crisis. One of the most severe cost cutting has been to reduce

staffing levels. It is essential that local employment

protection laws are understood and the correct procedures

30 Available in http://www.hfw.com/Oil-price-shock-March-2015 accessed on 20th March 2015

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followed.31 . Among other things, a business may need to call

upon ex-employees as witnesses in disputes or litigation going

forward, activities which are highly likely to increase due to

the stresses caused by the fall in the oil price. However, if

in the event of serious errors or fraudulent conduct by the

director or shareholder of the company which cause the company

suffer in debt or detriment, although the separate legal

personality is guarantee in Salomon32, however, the veil of

incorporation would be lifted to make the wrongdoer

(shareholder or director) responsible for the debts of the

company.33

It also can be recommended through separate legal

personality, it is possible to restructure in order to limit

litigation risks as in Adams v Cape34 such as, risks flowing

from cancelled projects. Yet it should be noted that separate

legal personality cannot be used to transfer legal liabilities

which have already arisen.

31 Available in http://www.hfw.com/Oil-price-shock-March-2015 accessed on 20th March 201532 Salomon v Salomon & Co Ltd [1896] UKHL 133 Helen Anderson, Piercing The Veil On Corporate Groups in Australia: The Case For Reform,33334 Adams v. Cape Industries plc [1990] Ch 433 (CA)

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 In addition, default management and risk mitigation; where

defaults occur or are expected, careful advance planning and

management of defaults will be critical. A default may set in

train unexpected and unwelcome consequences and significant

advantages are likely to be available to those able to plan

for and deal with such circumstances effectively. Once a

default occurs, it will be important to carefully adhere to

the terms of the contract or financing document concerned, to

ensure that rights are preserved. Where asset seizure or

arrest is a possibility, early advice should be obtained on

matters such as jurisdiction, competing claims and other

factors. Product or equipment location, title to goods and,

where relevant, local bankruptcy and other laws will be

important in many cases.

Extract from a January press release from Schlumberger, the

world’s leading supplier of technology, integrated project

management and information solutions to customers working in

the oil and gas industry worldwide: “In this uncertain

environment, we continue to focus on what we can control. We

have already taken a number of actions to restructure and

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resize our organization that has led us to record a number of

charges in the fourth quarter. We are convinced that

performance must now be driven by an accelerated change in the

way we work through our transformation program. The delivery

of new technology that improves the performance of our

customers’ reservoirs; the increases in efficiency and

reliability that reduce overall finding, development and

production costs; and the opportunities for growth from more

integration—are all significant drivers of our own and our

customers’ performance. Tangible results have already been

recorded and, as we accelerate the benefits of the

transformation program across both Technologies and GeoMarkets

in 2015, we believe we are well-placed to outperform.”35

Conclusion

The decline in oil price does contribute risk and opportunity

which results in gain and loss. The government must face the

crisis through managing its budget via adjustments in both

35 Available in http://www.slb.com/news/press_releases/2015/2015_0115_q4_earnings.aspx accessed on 25th March 2015

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non-oil revenues and spending accordingly.36 For country like

Malaysia, they can form an independent committee to control

the price of commodity in the market so that the oil price

drop will not affect the people so much. Government could try

to safeguard against the falling oil price by optimizing

operation expenses to save costs, like, optimize outlays on

events and functions; travel expenses; embassies or high

commissions; exercise ‘zero tolerance’ on avoidable over-

spending, like, by tighten up project and spending monitoring

and take the necessary remedial and disciplinary actions to

prevent costly incidents of wastages, leakages, poor financial

management, and non-completion or late deliveries of

projects.37Thailand had gone through a political crisis in

2014; it affected tourism of the country which largely depends

on it. Since the oil price does not affect the people so much,

they should now decrease or cancel the oil subsidies system to

gain back their competitive strength, same goes to Indonesia.

The production of oil must be in accordance with the demand as

well as the supply, so that the precise range can be achieved

36 Available at https://www.imoney.my/articles/budget-2015-a-breakdown accessed 23 March 201537 Available at http://www.thestar.com.my/Business/Business-News/2014/12/13/Impact-of-low-oil-prices/?style=biz accessed 25 March 2015

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and can avoid surplus in order to prevent inflation,

unemployment, lower GDP and an economy downfalls. Note that

the recommendation stated earlier will be the relevant tools

in handling such situations.

(3180 Words)

Bibliography

Electronic Resources

1. http://www.investopedia.com/ask/answers/012715/what-causes-oil-prices-fluctuate.asp

2. http://247wallst.com/energy-economy/2015/03/23/oil-starts-move-down-to-20/

3. http://oilprice.com/Energy/Oil-Prices/Global-Economy-At-Risk-From-Oil-Price- Dive.html

4. http://www.econ.upd.edu.ph/perse/?p=4268

5. http://www.economist.com/blogs/economist-explains/2014/12/economist-explains-4

6. http://www.energytrendsinsider.com/2015/01/20/everything-has-changed-oil-and-the-end-of-opec/

7.http://yaleglobal.yale.edu/content/plummeting-oil-prices-upend-global-economy

8. http://slconcordtimes.com/the-falling-oil-prices-what-we-should-know/

21

9. http://www.adb.org/news/features/falling-oil-prices-asia-and-pacific-potential-gains-importers-opportunities-exporters

10. http://ep-bd.com/online/details.php?cid=11&id=18132

11. http://www.wsj.com/articles/falling-oil-spells-boon-for-most-of-asias-economies-1420398456

12. http://www.bbc.com/news/business-30892591

13. http://www.thestar.com.my/Business/Business-News/2015/01/21/Clearing-the-air-Treasury-sec-gen-Malaysia-net-importer-of-crude-oil-petroleum-products-since-2014/?style=biz

14. http://www.bbc.com/news/business-29643612

15. http://breakingenergy.com/2015/01/21/impact-of-falling-oil-prices-on-lng/

16. http://www.abc.net.au/news/2015-03-24/woodside-cuts-300-jobs-falling-oil-prices/6343210

17. http://www.smh.com.au/business/the-economy/falling-oil-price-a-free-kick-for-australian-economy-20141114-11lyrs.html

18. http://www.ogfj.com/articles/print/volume-7/issue-9/features-/re-examining-corporate.html

19. http://www.slb.com/news/press_releases/2015/2015_0115_q4_earnings.aspx

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Articles

1. Public Mutual Berhad, Calibre, March Edition 2015, 14

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2. Helen Anderson, Piercing The Veil On Corporate Groups in Australia: The Case For Reform,333

Statutes

1. Section 18(1) of Company Act 2006

2. Section 21 of Company Act 2006 (CA 2006)

Cases

1. Salomon v Salomon & Co Ltd [1896] UKHL 1

2. Adams v. Cape Industries plc [1990] Ch 433 (CA)

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