Article

Avoiding disputes in projects aimed at reducing emissions

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Published Date
Nov 23, 2023
The Middle East's ambitions for achieving Net Zero mean there is a wealth of opportunity for projects aimed at reducing carbon emissions. However, these projects will require careful navigation of the growing labyrinth of risks. Proactive engagement will be essential to success, according to Kirsten O'Connell, Daniel Garton and Rachel Green.

The UAE’s strategic initiative to achieve Net Zero for carbon emissions by 2050, and its commitment to reduce emissions in all economic sectors by 2030, align with the objectives of the Paris Agreement. Across the Middle East, countries in the region have declared their own national strategies to achieve Net Zero by 2050 or 2060, and implemented national climate strategies. However, to achieve these goals it will be necessary to substantially increase the availability of clean energy and also significantly reduce carbon emissions. The pathway to Net Zero will require the successful completion of projects aimed at providing clean energy and reducing emissions.

The types of projects envisaged, some of which are discussed in this publication such as green hydrogen and carbon capture and storage, will require the successful completion of complex construction to achieve the planned outcomes. However, in any construction project there will be claims arising out of different issues such as delays, disputed variations, ground conditions, force majeure, issues with suppliers, and other issues that require careful consideration throughout the life cycle of the project, ranging from negotiating the contract to avoiding and resolving disputes.

When it comes to implementing projects aimed at supporting the achievement of Net Zero, in addition to the usual grounds for claims in complex projects, they will also face additional risk factors that are unique to the huge opportunities of the green revolution. The backdrop to this is that, as governments around the world face increasing pressure to address the challenges of decarbonization and move towards a more sustainable future, we can expect to see a global increase in the number of disputes concerning climate change and energy transition.

Global shift towards decarbonization raises challenges for the Middle East

While the region has previously focused on traditional energy projects, it is rapidly emerging as a significant player in investment and activity in clean energy projects. Ambitious plans for renewable energy are largely based on solar and wind, but green hydrogen and sustainable aviation fuels also have significant potential, thanks to the region’s potential for scalable production as well as export capacity. Yet the complexity of these large projects and the rapid growth in the construction industry in the UAE, host of the upcoming COP28 climate talks, adds to the challenges faced by the region in reducing its carbon footprint.

These challenges will involve, among other things, managing the various risks inherent in the construction and operation of clean energy projects, including the types of disputes that are likely to arise along the way. It is vital that these risks are considered from the outset of projects and managed carefully throughout the project life cycle.

Challenges faced

Supply chain volatility

One of the key challenges the region faces is resource availability. As with a number of other Middle Eastern countries, the UAE relies heavily on imported materials for construction. The rapid growth of clean energy has led to a significant increase in the number of commercial projects as well as to supply chain squeezes on some key raw materials.

For example, a study by McKinsey has estimated that the rare earth metals used in wind turbine generators and electric vehicles will face a significant shortage by 2030.

Add in price volatility and supply-demand imbalances in some of those materials, and the risks arising from a less than resilient supply chain become clear.

New entrants

The opportunities presented by energy transition have led to a number of new players entering the market, as well as the Middle East region, for the first time. Some are already well established in the construction sector while others are not. The latter will sometimes assume risks unknowingly or may not understand what the required risk allocation has been in an agreement.

Disputes happen when a party encounters a particular risk, which in reality turns out to be too much for that party to bear. The reliance on contractual risk allocation is not always possible if the risk was not anticipated or clearly defined in the contract.

Other new entrants to the market may have difficulties navigating factors specific to the region, such as local regulatory requirements or the relevant ground conditions, which can cause significant delays and result in unexpected costs. At times, parties have too little margin for error to handle the demands that can accumulate when issues arise.

New technologies

Clean energy projects rely on new technologies that are continually evolving. In the UAE, a lot of capital is flowing towards renewable projects and business cycles are being influenced by a race to implement new technology, while aiming at ambitious targets.

While the new technologies involved in solar energy projects are now relatively well-tested, including hydrogen and ammonia and other types of clean energy products where new technologies are in scope, there will be an evolving understanding of the potential risks that can arise.

For example, potential risks include delays to regulatory and planning approvals, a lack of developed industry standards and an increased design uncertainty associated with “first-of-a-kind” projects. In addition, for projects that are reliant on new or fast-evolving technologies, where those projects experience significant delays, the parties may find the technology that had been incorporated into the project has quickly become outdated, leading to further delays in procurement and overall progress, and increasing costs.

Delayed approvals

Claims regarding delays due to obtaining approvals from the relevant authorities are a common feature of projects in the Middle East. This is commonly addressed in the contractual risk allocation, often with the contractor responsible for obtaining the relevant approvals not having any entitlement to additional time or cost for any resulting delay. However, the risk of delayed approvals is heightened whenever there is a “first-of-a-kind” type of project, where the requirements for obtaining approvals may be unknown or evolving, and can increase the likelihood of claims.

Changing contracting structures

One feature of the energy transition has been a move away from traditional contracting structures of certain industries. These new procurement structures involve different allocations of risk and responsibilities. Owners and contractors need to ensure their internal team structures and resources are adequate to address their new roles and responsibilities in projects and a failure to adjust to new procurement structures can result in mismanagement of the project and major disputes between the parties.

Well-established risks

Clean energy projects are not immune to the risks that are already well established in more traditional projects. Claims such as delay, unforeseen ground conditions, changes in scope and disputed variations will be just as likely to appear in clean energy projects as in more traditional energy and infrastructure projects. The consequences, however, may be more pronounced depending on the complexity and magnitude of the project at hand.

Proactive engagement and claim management

Parties must stay on top of risks as they emerge in their project, armed with the knowledge of how risks have been allocated, and ensure that this allocation is implemented to avoid unintentionally “modifying the bargain”. Successful and proactive management of risks, and the resulting claims, as they arise will be the key to achieving completion while minimizing unnecessary delays and increased costs, allowing progress to be made on the pathway to energy transition.

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Perspectives on the energy transition in emerging markets

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This content was originally published by Allen & Overy before the A&O Shearman merger