Law firms interviewed: A&O Shearman; Reed Smith

 

In recent years, the combination of trade conflicts, the pandemic, and regional tensions have resulted in increased volatility for businesses in the energy, transportation, and commodities sectors. In Southeast Asia, where the transition to green energy is one of the primary focuses for governments, lawyers examine critical areas susceptible to disputes and identify best practices to avoid them.

 

Southeast Asia is determined to go green, but its ongoing endeavour to transition towards clean energy has been fraught with challenges from supply chain disruptions, energy security, to compliance hurdles.  

The clean energy transition in Southeast Asia has led to a shift in the types of projects that market participants are investing in, and the types of products that they are selling and purchasing. This has partly changed the nature of disputes arising from these sectors.

Nick Moon, partner at Reed Smith in Singapore, notes that the last few years—with COVID snarling supply chains—has marked a period of price volatility in the energy, transport and commodities sectors. Then Russia invaded Ukraine and conflicts broke out in the Middle East, pushing the prospects of price stability even further down the road.

“As lockdowns began to ease, increased demand, combined with Western sanctions on certain Russian energy companies and Russian origin goods, caused substantial price rises on commodities ranging from natural gas and coal to metals and wheat,” says Moon.

 

BREAKING CONTRACTS

The combined impact of the pandemic’s repercussions, far-off wars constricting fuel supplies, and sanctions against major oil producers has caused market dislocation. Consequently, some market participants have met difficulties in fulfilling their contractual obligations.

“We have seen a sharp increase in the number of disputes arising between parties in these sectors,” says Moon. “According to their annual reports, in 2018, 27 percent of new claims filed at the Singapore International Arbitration Centre (SIAC) were in the trade sector, whereas in 2023, 47 percent of new claims were in the trade sector.”

It’s not just a volume game either as there was a significant increase in the value of the disputes too. Lawyers believe this upward trend largely reflects the volatility in commodity prices seen during this period.

In accordance with English law and other common law jurisdictions, the initial principle is that damages resulting from the non-delivery of goods are determined by the disparity between the contract price and the market price at the designated time and location of delivery.

“Therefore, the greater the difference between the price of a commodity when the contract was agreed and when it was due to be delivered, the higher the value of the claim,” explains Moon.

During this period, one area where disputes stemming from contractual obligations proliferated is over liquefied natural gas (LNG) between oil majors and exporters. This has also led to a surge in contract arbitration.

Specifically, companies in Asia are not immune to the trend in rising LNG-related disputes, as LNG is regarded as an important transition fuel in many Southeast Asian countries, including the Philippines, Thailand and Vietnam.

“Until the late 2010s, disputes concerning the sale and purchase of LNG cargoes were relatively rare, as fewer cargoes were produced, and the majority were sold by the seller directly to the end-buyer,” says Moon.

“Since then, a surge in the price of LNG and an increase in the volume of cargoes traded in the third-party market, combined with the use of long-form agreements that often were not intended for trading arrangements, has led to us seeing an increase in performance-related disputes under LNG sale and purchase agreements, for example, failures to deliver or take cargoes, and force majeure issues,” he adds.

Edward Taylor, partner at A&O Shearman in Hong Kong, notes a significant level of volatility in energy markets in 2022 as European buyers sought to replace Russian pipeline gas with LNG cargoes that would otherwise have been delivered to Asian buyers.

“Long-term LNG supply contracts were tested by these extreme market conditions. Many of these LNG-related disputes are still being resolved through international arbitration,” adds Taylor.   

Against the backdrop of escalating geopolitical conflicts and trade tensions, market participants in the energy, transport and commodities sectors will need to consider how best to future-proof their contracts, to minimise the risk of disputes arising, cautions Moon.

 

REGULATORY PITFALLS

As Southeast Asia spearheads the transition towards sustainable energy, two trends have emerged. First, there's been a wider adoption of renewable energy technologies such as solar and wind power. Second, there's an increased reliance on technologies to mitigate carbon emissions.

And with the development of emerging sectors and technologies first come regulations, especially those with a focus on environment, sustainability and governance (ESG) across Southeast Asia, including ASEAN’s Taxonomy for Sustainable Finance.

Moon says it is too early to know whether these regulatory changes will give rise to disputes, but it is not uncommon for disputes under long-term supply contracts to arise because of such regulatory changes.

“These can occur when the contract does not state clearly, or does not state at all, which party is responsible for compliance. If ensuring compliance involves a significant financial outlay, or, as is usually the case, the penalties for non-compliance are substantial, a party may seek to get out of a contract rather than incur the financial cost of compliance or risk of penalties,” he explains.

To prevent this situation, it is recommended that producers, traders, and end users explicitly outline in their contracts which party holds the responsibility for adhering to any relevant regulatory requirements as they become effective, according to Moon.

Moreover, many market participants have also invested in the construction and repurposing of facilities used in the production of renewables, including biomass, sustainable aviation fuel and circular pyrolysis oil.

Moon cautions that in these projects also lie risks for disputes. “These projects often include a prepayment by an offtaker in return for the right to purchase the product produced at the facility over a five to ten-year term,” says Moon.

 

“Many of these projects are still early in the construction phase, but as they commence production it is likely that disputes involving these types of renewable products will become increasingly common in the energy, commodities and transport sectors.”

- Nick Moon, Reed Smith

 

“Many of these projects are still early in the construction phase, but as they commence production it is likely that disputes involving these types of renewable products will become increasingly common in the energy, commodities and transport sectors,” he adds.

Renewable energy projects are also susceptible to disputes due to defective technologies and changes in government policies and regulations.

 

“In situations where renewables projects benefit from government subsidies or incentives, investment treaty and commercial arbitration disputes can arise if such subsidies or incentives are unexpectedly phased out.”

- Edward Taylor, A&O Shearman

 

For instance, “In situations where renewables projects benefit from government subsidies or incentives, investment treaty and commercial arbitration disputes can arise if such subsidies or incentives are unexpectedly phased out,” explains Taylor.

Also, “decommissioning disputes, including between companies and state-owned companies or local regulators, often arise in relation to how decommissioning costs and future liabilities are allocated under contracts and statutory regimes,” he adds.