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.