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JUNE 2013 ENERGY For the first time since its inception in 2005, The International Who’s Who of Oil and Gas Lawyers has expanded its remit beyond oil and gas to include lawyers in the nuclear energy, renewables and power sectors. Having conducted hundreds of hours of interviews with private practitioners and in-house counsel, in April we whittled the list down to just over 600 individuals in 74 countries, from Algeria to Vietnam. Compiling the observations from all the people we spoke to, Who’s Who Legal takes a look at the key developments across the energy legal market over the past year. Shale, shale, shale “The US is all about shale, shale, shale, shale.” Those were the opening words of one Houston-based interviewee when asked to describe his focus at the moment. Although the flurry of multibillion-dollar foreign investments in US shale assets seen in 2011 has slowed down, in 2012 and early 2013 the impact of the shale revolution began to be felt in the US midstream and downstream sectors. Lawyers are busy advising on the huge amount of storage and transport infrastructure that needs to be built in regions that have not had a tradition of oil and gas development. There has also been a surge in LNG work as the US prepares to convert and expand its existing terminals and enter a new dawn as a gas exporting country. “I had a phone call about three weeks ago from a hairdresser in Florida, wanting to get in the shale industry,” one lawyer in the London office of a large US firm told us. “Everybody at street level – from hairdressers to estate agents and banks to private equity investors – is looking for a slice of the pie.” The abundance of US oil and gas work has had a phenomenal impact on the Houston legal market, where firms appear to be moving in droves. Over the past three years alone, Houston has seen the arrival of Latham & Watkins, Cadwalader Wickersham & Taft, Paul Hastings, Sidley Austin, Reed Smith and K&L Gates – all established with lateral hires from local firms – while many lawyers have put Norton Rose’s merger with Fulbright & Jaworksi down to getting a presence in Texas. The word on the street is that some British-headquartered firms are also sniffing out the market. Energy work is so hot in Texas that people are finding it difficult to hold on to the lawyers they have, one partner confessed. On the other hand, the increased supply of natural gas in the US has driven down gas prices and left a disparity of nearly $100 between gas prices on the New York spot market and the price of Brent crude. This has lead many energy companies to look towards liquid-rich shale plays or invest in gas-to-liquid projects. Though it will be a couple of years before the US can export its gas to Europe and Asia, the price drop has already had an impact abroad on non-US companies with long-term oil-indexed gas supply contracts, who are locked into purchasing set amounts of gas at a rate far above spot prices. The result has been a surge in gas price review arbitrations. Italy’s Edison and Eni, Poland’s PGNiG and the Czech arm of Germany’s RWE all successfully renegotiated the terms of their contracts with suppliers in Algeria, Libya, Qatar and Russia through arbitration in 2012. Other European buyers in Austria, Germany, France and Slovakia are also known to have redrafted the price mechanisms in their contracts with Russia’s Gazprom. New frontiers (and the resurgence of old ones) Across the rest of the world in the oil and gas sphere, law firms reported enormous activity focused in three key areas: Brazil, Africa and the North Sea. Brazil’s May concession round – its first in five years – was hailed as a resounding success as 142 exploration blocks were sold for a total of $1.4 billion. Commenting on the results, lawyers said they expected the bid round to provide long-term work, even though preparations for the round itself were mainly completed in-house. They were less positive, however, about the first pre-salt auctions that the state recently announced will be held in October 2013. The model contracts for the production-sharing agreements with Petrobras are yet to be published, so assuming the first auction will take place later this year is “optimistic”, said one commentator. Meanwhile, the federal government is still in debate with Brazil’s oil-producing states over the distribution of royalties. One interviewee noted that it will probably be disputes counsel that benefit most from the pre-salt as litigation kicks off with the government over permits and tariffs. London continues to be a hub for oil and gas work in Africa, and the east of the continent is the word on everyone’s lips. Lawyers have reported a big buzz in this hitherto untapped part of the continent, encompassing in particular Mozambique, Tanzania and Kenya. They have also seen a greater willingness from energy companies and private equity funds to take on the risks of investing in sub-Saharan Africa in general. But the cost of bringing the resources in this region to market is likely to be very high, and some fear that East Africa’s chances may be scuppered on a cost-per-molecule basis by the shale gale. Eni, which made its biggest ever gas discovery off the coast of Mozambique, has estimated that it will cost around $30 to $40 billion to monetise gas supplies in the country – and it doesn’t even have a modern gas law yet. From new ventures to old ones, the North Sea is having something of a rebirth, according to lawyers in Norway and Scotland. If proof were needed, the billion-dollar investments by China’s CNOOC and Sinopec, who both entered the UK North Sea by buying assets belonging to Canadian companies last July, are a good sign. Decommissioning has been pushed back and is not expected to overtake upstream work until around 2030 now, as companies find ways of squeezing more out of their existing assets. Speaking of Canada, the big news in that part of the world is the internationalisation of the country’s oil sands: projects are getting so large and expensive that local companies are no longer able to finance them alone, paving the way for an uptick in investments by foreign companies (and creating work on very high-value deals for the legal industry). In December 2012, the Canadian government approved two huge takeovers by SOEs, the $15.1 billion acquisition of Nexen by China’s CNOOC, and the US$6 billion takeover of Progress Energy by Malaysia’s Petronas. These takeovers gave rise to new foreign investment rules by the end of 2012, introducing rigorous scrutiny for SOEs wishing to take a controlling stake in oil sands projects. “Obviously these state-owned companies are being controlled by their governments and Canada is concerned about this influence,” said one Calgary lawyer. The new rules are expected to lead to more joint venture investments and an exodus of M&A lawyers from the energy market – though notably, the rules are still relaxed for the Canadian shale sector. Some lawyers predict that the rise of international companies in Canada could further exacerbate the trend for mergers between international and Canadian firms that has already taken off over the past few years. In March 2013 Canada’s Fraser Milner Casgrain partnered up with SNR Denton and Salans to form Dentons, after Norton Rose Group gobbled up Ogilvy Renault in 2011 and Macleod Dixon in 2012. Other hydrocarbons regions that are reportedly hot right now are offshore Australia and Colombia. In Australia, Asian investments abound in the blooming LNG industry, with countries such as China, Japan and Korea fighting to secure long-term gas supply from the country. Colombia – where oil production has grown 72 per cent since 2007 – held its latest bidding round in November, which included some onshore blocks with shale acreage. Atomic New to Who’s Who Legal for 2013, the small specialised group of counsel working in the atomic energy sector were keen to share their optimism about the future of the industry. Many new build projects were pushed back slightly in the wake of the 2011 Japanese earthquake and tsunami at the Fukushima Daiichi plant, as the world concentrated on nuclear safety, but with the exception of Germany and Japan, where nuclear energy has been abandoned for now, the industry is healthy and is becoming more globalised than ever before. TEPCO, the operator of the Fukushima plant, has been very active in talking to international players about what can be learned from the narrowly averted disaster, lawyers around the world said. “Those looking to build are now seeking to make sure that the technology meets international safety requirements. They went back and looked at the design, made changes to make the technology safer. The industry as a whole has seen that Fukushima was dealt with well and radiation has been contained, so there have been lots of positives,” noted one interviewee. While some testified that the majority of nuclear legal work is done in-house, the globalisation of the industry is making it more attractive to hire external advisers. Counsel in the UK and US said that they were working on new nuclear projects in the UAE, Jordan, Saudi Arabia and the Philippines. None of these countries have had nuclear programmes before and they are going from “zero to 60 mph”, requiring the drafting of nuclear law and regulations, liability frameworks project contracts and financing, lawyers said. Meanwhile, as Tokyo re-examines its long-term energy policies and all but two of Japan’s nuclear plants remain offline, companies such as Toshiba, Mitsubishi and Hitachi have been reportedly looking to export their technology elsewhere in the world. In October 2012, Hitachi signed a deal worth more than $1 billion to buy a series of new nuclear projects in the UK from European sellers. Clean, but there’s not enough green Another new category for 2013 is renewables, an industry that has had a hard time in the global financial crisis. Lawyers in Europe reported that they are still doing renewables work (Europe aims for 20 per cent of its energy to come from renewable sources by 2020) though new investment has slowed since state subsidies were cut “massively” owing to financial pressures. Solar work is down in particular: one interviewee in Italy said that where solar accounted for 90 per cent of his work two years ago, it was now much less. European wind and hydro power have fared a little better. In the US, lawyers were grateful that a tax credit on wind power production survived the fiscal cliff legislation in January 2013. “If that hadn’t got extended, [the industry would] be dead,” one admitted. Solar tax credits were also extended through 2014, with lawyers expecting project finance to pick up in this field. Most agreed that without these advantages, renewables projects in the US would be uneconomic. As a result of uncertainty over the past year, renewables investors from the EU and US seem to have moved to acquire portfolios of assets in other countries, with lawyers in Canada and Chile particularly reporting a spike. In Ontario, there has been a “gold rush” for wind and solar investment since 2009 as a result of an incentive programme. In Chile, wind and solar projects are profitable without subsidies, counsel reported. The Middle East also now appears to be spearheading renewables development. One lawyer predicted that solar energy could see success in years to come as the cost of production is coming down all the time. Common trends There were some recurring themes that emerged during our research: lawyers in the US and Canada reported a general reduction in M&A work due to leverage problems, particularly amid small and mid-level companies whose valuations are down at the moment. Most M&A work that has gone ahead has consisted of oil majors taking over smaller companies who are finding it difficult to finance new activities. There was also a drive towards consolidation of projects. China and India’s appetite for investments still remained high, but lawyers have been less likely to talk to about it because it’s not surprising anymore (although it is a good indicator of the health of a particular industry or asset). Equity finance remained depressed, but practitioners the world over have reported seeing novel financing structures for energy projects, particularly through debt financiers. These usually come in the form of export credit agencies, especially from Asian countries, as well as development banks and pensions funds. Banks are still rather reluctant to lend on a project finance basis. As with last year, private practitioners confirmed that more and more energy work is moving in-house (Shell reportedly has more than 800 in-house lawyers). This has created a problem for firms when it comes to educating trainees, since a smaller amount of the simpler work now gets outsourced. It also makes it harder to retain trainees, who move straight in-house when they qualify. European lawyers also reported that there is still a lot of regulatory work arising from the Third Energy Package – a series of measures intending to bring the creation of a single, competitive European energy market – as the 2014 deadline for domestic adoption looms. Some lawyers said that clients were more likely to seek counsel with European or international experience rather than local boutiques as a result of the third package. Moving forward, everyone agreed that the really big game changer will be if the US starts to export gas as expected in 2016. “The big policy question pending before US Congress and the Federal Energy Regulatory Commission is whether to permit the export of natural gas and what would be the impact on consumers,” one senior lawyer said, explaining that US federal law requires approval of gas exports to countries that have a free trade agreement with the US – and for those that do not, the Department of Energy decides whether to grant an export authorisation on the grounds of whether it would be “consistent with the public interest”. The outcome of the debate could have an enormous impact – not just in the US, but all over the world. Continue reading →