Elon Musk and Vladimir Putin’s state-run gas giant both cited ‘force majeure’ this week. Here’s what that means
Elon Musk and Russia’s state-run gas giant Gazprom seemingly have little in common. But this week both cited “force majeure” to explain business interruptions.
Force majeure is a provision in a contract that frees parties from meeting their obligations if “extraordinary events” directly prevent their ability to perform. It’s often called an “act of God” clause because these extraordinary events can include anything from wildfires, floods, and pandemics to war and riots.
Musk repeatedly referenced force majeure in Tesla’s second-quarter earnings call with investors on Wednesday, saying that the past year has seen “quite a few force majeures” for the carmaker amid an ongoing “supply-chain hell,” the war in Ukraine, and COVID-19 lockdowns.
The Tesla CEO used “force majeure” as a synonym for so-called “black swan events,” rather than as a reference to a specific contractual provision.
Black swan events are exceedingly rare occurrences that can’t be foreseen by companies and lead to devastating economic impacts, like the Great Financial Crisis or the war in Ukraine. The term was popularized by former New York University finance professor and derivatives trader Nassim Nicholas Taleb in his 2007 book The Black Swan.
“We have the potential for a record-breaking second half of the year,” Musk said on Wednesday. “I do want to emphasize this is obviously subject to force majeure, things outside of our control.”
In letters to European energy companies that were revealed this week, Gazprom used the term “force majeure” in a way that’s more in line with its technical definition. The company said in a July 14 letter seen by Reuters that it can’t guarantee the natural gas supplies it promised in contracts with European utilities because of “extraordinary” circumstances, and retroactively declared force majeure on gas meant for Europe going back to June 14.
Gazprom’s management blamed Western sanctions that caused a delay in the return of a key gas turbine from its scheduled maintenance in Canada as the reason for invoking the force majeure provision. Two German utilities, Uniper and RWE, were among the companies that received Gazprom’s force majeure letter.
“We consider this as unjustified and have formally rejected the force majeure claim,” Uniper responded this week, per Bloomberg.
Klaus-Dieter Maubach, Uniper’s CEO, added in a Monday statement that the company is “paying the price” for Russia’s curtailed natural gas deliveries and is taking “emergency measures” to ensure it can maintain production.
Russia has been delivering less gas than European customers have ordered for months, forcing E.U. officials to call for a voluntary 15% cut in natural gas use by March in its member states. In a Wednesday report, the IMF said there’s been a 60% drop in Russian gas deliveries since June of last year.
In a Tuesday research note, Deutsche Bank strategist Jim Reid called Russia’s force majeure move “a concerning sign” that gas flows from Russia could continue to slow beyond the scheduled maintenance period for the Nord Stream pipeline.
But on Thursday, Russia restarted natural gas deliveries through the Nord Stream 1 pipeline, which delivered 35% of Europe’s gas imports in 2021. Still, Germany’s economy minister Robert Habeck has said that the reduced gas flows from Russia are the country’s attempt to bully the E.U., and they may continue.
“It’s obviously Putin’s strategy to unsettle us, drive up prices, and divide us. We won’t allow that. We defend ourselves resolutely, precisely, and thoughtfully,” he said in a statement.
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