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Emerging trends in energy litigation and regulatory enforcement highlight the risks to companies that do not proactively assess their organizational goals, identify areas of exposure and ensure alignment across their businesses.
Emerging litigation
In the post-COVID world, plaintiffs, activists and regulatory agencies have felt emboldened to challenge the status quo in the energy industry, creating potential exposure for companies unwilling or unable to re-assess, adapt and take proactive steps to position themselves to withstand these challenges. While the trends may seem diffuse, many are driven by the energy transition and the social forces driving it. Companies that fail to adjust to these trends can be exposed to negative publicity, harmful regulatory decisions and to juries open to delivering major judgments.
ESG risks
While companies are setting admirable environmental, social and governance (ESG) goals, a failure to execute them in a conscientious way can create risks for those that do not successfully practice what they preach. Although setting ambitious ESG goals may generate positive public attention, especially for the oft-maligned energy industry, investigative press coverage can reveal misalignment with those goals and trigger disputes between investors, shareholders and regulators.
Moreover, while strategic management may set ambitious goals, these will inevitably fail if they lack an established procedure for implementation throughout the entire organization. Specifically, companies that embrace ESG goals may also unwittingly expose themselves to claims of greenwashing (making misleading environmental claims) or fairwashing (making misleading social responsibility claims). Therefore, it is critical that energy companies embracing ESG set transparent, well-defined goals; use precise language in the promotion of ESG efforts; and develop defensible and credible methods for tracking progress and data.
Energy transition risks
As the energy transition continues, many standard practices developed over years or decades may become obsolete and increase risks for forward-thinking energy companies. As consumers and governments press for production systems and products with lower carbon impacts, companies may need to make difficult and well-reasoned decisions on their standard practices. For instance, they may need to replace their previous vendors in order to meet ESG or emissions goals, and some boilerplate contractual provisions may no longer serve their purposes in new markets.
Energy companies embracing the transition should perform a holistic, proactive contractual review to identify areas of risk; draft potential new standard language that will serve the company’s new goals; and develop ways to maintain contractual flexibility in the rapidly evolving market. Some areas for particular focus include flexible termination clauses; provisions requiring compliance with applicable laws and regulations, including new or successor rules; and disclosures regarding supply-chain and ESG reporting.
Companies should also revisit their contracts’ standard force majeure provisions. Weather events such as Winter Storm Uri (which in February 2021 hit an unprepared Texas and other areas) highlight the importance of force majeure clauses and their application. Recent court decisions, in which gas suppliers were excused due to impracticability, show that standard clauses leave much open to interpretation. Energy companies should think about possible situations that may require an invocation of force majeure and consider drafting specific language on a contract-by-contract basis to ensure greater predictability.
Project siting considerations
Another area of increased attention is project siting, particularly for new renewables projects. While the industry has developed decades of experience in dealing with constituents and regulators when starting oil and gas projects and infrastructure, developing, constructing and maintaining the requisite infrastructure for renewable, low-carbon sources pose new challenges. First, many areas have grown accustomed to dealing with industry in major oil and gas producing regions and have come to understand the siting and logistical implications thereof. Some assume that renewable projects may not face some of the same development concerns that oil and gas operations have historically faced, but that expectation would be misplaced. While many look forward to more renewable energy in theory, “nimbyism” is still a practical concern. Second, coordination of potentially conflicting surface uses (e.g., well sites and solar arrays) present complicated considerations for projects, especially in regions where gas and coal estates may be highly severed and owners difficult to locate.
A further recent development that urges thoughtful and conscious development is the emerging concern with environmental justice. The Environmental Protection Agency defines environmental justice to mean “fair treatment and meaningful involvement of all people – regardless of race, color, national origin, or income level – in the development, implementation and enforcement of environmental laws, regulations and policies.” Thus, environmental justice may be raised by regulators, constituents, or the media if a project is perceived as having an outsized impact on low-income communities or communities of color. Although there is not currently direct liability for violations of environmental justice, the concerns may be raised through civil rights suits or procedural claims. Accordingly, energy companies should be sure to create a strong record detailing the basis for their siting and development decisions with thorough and transparent assessments.
Trial risks
A nationwide trend in litigation has been the increase in the number of trials and the size of verdicts. Many judges are hotly focused on moving their dockets after the stagnation caused by COVID-19 shutdowns. Aggressive members of the plaintiffs’ bar have taken the opportunity to set a new lodestar value for large cases, and juries have been obliging them. Because of these developments, companies should consider what dispute resolution provisions they include in their contracts. Careful thought should be given to whether a relationship is better suited for arbitration; what forums and venues would best handle a potential dispute; and whether a jury trial waiver is advisable. Additionally, companies should increase scrutiny and diligence with respect to counterparties and subcontractors. If a dispute should arise, it is critical to retain seasoned trial attorneys from the outset of litigation.
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