An insight into the oil war and the legal sector by Saher Qarini
While oil and gas corporations have seen massive blows to their profits and share prices, there seems to have been quite a lot of calm about the crude oil price drop below zero dollars. It was the first time in history that oil prices dropped below 0 dollars, which essentially meant that oil producers would pay buyers to take barrels of oil off their hands. Although prices have risen back up, they are still relatively low.
Why did this happen?
Most news reports and media outlets have reported that the blame lies vastly on COVID-19, but then again, the media blamed COVID-19 for Venezuela’s deepening economic depression, USA’s high death rate, and El Salvador’s prison gangs’ organised murders. The reality is that COVID-19 only has knock-on effects, or in other circumstances a contributory one. The blame, however, is far-reaching in each of these cases.
Signs of trouble were already shown in the OPEC dynamics long before COVID-19, and in March 2020 Russia refused to continue to cut oil production, which essentially led to a price war with Saudi Arabia. This pushed the price of crude oil to plummet over 50% of its initial value last year. This was further exacerbated by the fall in demand of crude oil due to the COVID-19 pandemic, which led most countries into lockdown.
Where does this lead us into the future?
The short answer is that nobody really knows. Currently Russia and Saudi Arabia have reached an agreement. However, the significance of that isn’t great. Oil prices have been in hysterical swings since the Gulf War. With the current sensitive political situations in the Middle East, as well as future uncertainties, oil prices can go either up, down, or sideways (in a channel).
What does this mean for law firms?
The firms in question here are the large multinational firms with at least one of two characteristics:
1) Strong presence in the energy sector e.g. CMS, Akin Gump, Herbert Smith Freehills;
2) Strong presence in the Middle East e.g. Trowers & Hamlins, Eversheds Sutherland, Pinsent Masons
Law firms with a significant source of their revenues coming from the energy sector have already seen the knock-on effects of the plunging oil prices. Their challenges are directly impacted by oil corporations stopping their operations and limiting expansions into oil-rich locations. This in return leads to a fall in demand in advice on mergers and acquisitions, syndicated loans (used for expanding into new jurisdictions and research & development), debt securities, commercial contracts and the likes.
As to law firms with a strong presence in the Middle East, they are indirectly caught in the middle of an oil price war, which causes economic strains in the Gulf States. This has a direct impact on the respective states’ macro-economies, which essentially leads to less transactional dealing in general. An example of a firm that was unfortunate to be caught in the Arab Spring, and now in the price war, is Trowers & Hamlins, which have closed their offices in Egypt since the first signs of trouble in the country’s political sphere.
A bright future or a dark ending?
At this point in time, nobody knows where oil prices go next. The political situation in the Middle East is so fragile that anything can happen, from a state Coup to another high-profile state murder, which was evidenced at the beginning of 2020 with the conflict between Iran and USA.
For oil and gas corporations, the fall in oil prices are proving to be very challenging. However, for law firms with strong footing in the energy sector, this might be a suitable time for them to seek to acquire corporate clients in the renewable energy market: with the growing pressure from climate change activism, as well as changing consumer and collective societal perceptions, renewable energy has seen, and is likely to keep seeing, large increases in their demand.
The answer, therefore, lies with each firm’s approach: firms may either choose to persevere in retaining current O&G clients and show reluctance in exploring different energy markets, or they may re-assess their corporate strategies and shift their priorities on acquiring new clients in the renewable energy market, all the whilst diversifying their risk in both the renewable and O&G market.
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