Research Trends and Conclusions: Oil & Gas 2009
Helen Lamb -
In times of economic uncertainty all eyes become fixed upon the price of oil. Consequently the past year has been an eventful one for the oil and gas industry, with crude oil prices reaching a record of $147 a barrel in July 2008 and dropping to below $50 just four months later.
Oil Rig
In comparison, the more stable and relatively low price of natural gas means that it remained out of the headlines, while experiencing a peak in consumption not seen since 2004. In general, the oil and gas industry, however, benefits from the fact that "energy and infrastructure is relatively downturn resistant", according to Ashurst's Geoffrey Picton-Turbervill. Alexander Msimang from Vinson & Elkins LLP concurs, noting "oil and gas is a long-term business with projects that are based on long-term projections of oil prices" and despite the collapse in prices "short-term variations are unlikely to mean very much in the long term". Although the oil price has experienced a sudden drop from its short-term peak, it is likely to bounce back; the International Energy Agency (IEA) foresees prices soaring as high as $200 a barrel by 2030.
This area is unique in commercial law as it is highly political, extremely international in scope and subject to an exceptionally volatile market. The research has identified 268 leading oil and gas lawyers from 62 countries, with these practitioners often working across political and geographical boundaries in a highly politicised and fast-moving legal market.
NORTH AMERICA
America consumes more natural gas than any other country and is second only to Russia in terms of the amount that it produces. It is also the second-largest producer of crude oil. Canada is the world's fifth-largest consumer and third-largest producer of natural gas and is the eighth-largest oil producer in the world. This region's stable political, financial and legal set-up has resulted in a sustained period of investment in the oil and gas area and, as a result, US and Canadian firms continue to be engaged in their domestic markets as well as abroad.
Texas boasts the largest fossil fuel reserves in the US and is home to the headquarters of big-name players such as Exxon Mobil, ConocoPhillips and Halliburton. This has resulted in a developed legal market with firms that are heavily specialised on oil and gas. These outfits have also developed their international capabilities so that they are able to assist North American oil companies in their overseas activities.
In Canada, the focus is on Alberta's oil sands with many of the Canadian firms heavily engaged in the reserve-rich province. The oil sands provide proven reserves that put Canada second only to Saudi Arabia in international oil reserve rankings and count for a high percentage of Canada's oil production. As a result they have been "attracting a great deal of foreign capital", according to lawyers at Blake Cassels & Graydon LLP.
With this increase in foreign capital has also come a rise in oil and gas M&A and Uisdean Vass from Maclay Murray & Spens LLP envisages the industry becoming more of a buyers' market again, at least while oil prices remain stuck in the doldrums". This is a trend evident internationally and highlighted here by two high-profile deals: Shell Canada's acquisition of Duvernay Oil Corp in August 2008 and Sinopec's September acquisition of Canadian company Tanganyika. Stikeman Elliott LLP and Vinson & Elkins served as legal counsel to Sinopec, which demonstrates the prominence of Canadian firms with their local knowledge and Texas-based oil and gas powerhouses in large deals.
There are also a number of ongoing projects between the US and Canada which aim to improve energy reliability in North America. For example, Enbridge's Southern Lights Project will supply diluents (light hydrocarbons) from US refineries to petroleum producers in the oil sands and heavy crude oil production regions in Canada. Access to a reliable supply of diluents from the US will facilitate the production of crude oil to be transported via pipeline to the US, which is experiencing a decline in production in areas such as Western Texas. Another important energy source for Canada and the US is coalbed methane. A development noted by both Fulbright & Jaworski LLP's Susan Farmer and David Asmus from Baker Botts is the recent reversal of the steady decline in US natural gas production due to the development of coalbed methane and shale gas. Farmer notes that this has "contributed to a softening of US gas prices and the diversion of LNG to other markets". Baker Botts provides counsel to one of the largest producers of coal seam gas in Australia, a country which has reserves that exceed national demand.
MIDDLE EAST
The Middle East is famous for its natural resource reserves, with markets such as Saudi Arabia and Iraq attracting considerable international attention. Iraq's emerging oil and gas industry is beginning to open up and in September 2008 an agreement was signed between the Ministry of Oil of the Republic of Iraq and Shell that sets the commercial principles to establish an incorporated joint venture between the South Gas Company and Shell for the processing and marketing of all associated natural gas produced in the governorate of Basra in southern Iraq. Another key development came in November with a breakthrough in the ongoing dispute between the Baghdad central government and the Kurdistan regional government. An initial agreement was announced on 27 November 2008 with Iraq's oil ministry and the largely autonomous northern Kurdish region agreeing to export oil from Kurdistan to Turkey. Jay Park from Macleod Dixon LLP is familiar with the market in Iraq and wrote one of the first post-war oil and gas contracts. He expects to see a "flood of foreign investors keen to enter the country when contracts begin to be awarded more freely". Baker Botts LLP has also been engaged in this market, working on projects under federal regulation and projects regulated by the regional governments. The firm has represented companies preparing for the upcoming federal licensing round and companies seeking to renegotiate existing services contracts. In addition, the firm represented a major US exploration and production company making its first upstream investment in Iraq's Kurdistan region. This advice included analysis of the regional and federal laws and preparation and negotiation of the first production sharing contract (PSC) under the new regional Oil and Gas Law in September 2007. The PSC that was negotiated helped form the basis for the regional government's model PSC.
The Arabian Gulf remains an active jurisdiction, although lawyers are seeing fewer matters emanating from countries such as Qatar, a "historical driver of deals". Sources think that this could be a result of Qatar reaching saturation point in terms of investment opportunity coupled with a need for more natural gas. Philip Weems from King & Spalding LLP talks in greater depth about the region's gas shortage and the effects of the credit crunch in the Middle East on page 15. As a result of a general shortage in this area, countries such as Saudi Arabia are consuming more oil for electricity generation, and Weems draws to our attention to the fact that: "Saudi Arabia, home of the fourth-largest gas reserves in the world, placed a moratorium on new gas-fired power plants and announced that any future demand will be met by oil-fired power plants instead."
Recent deals in the region reflect this trend with Tim Pick from Shearman & Sterling LLP leading a team to advise on the financing of a US$411 million Saudi Arabian national petrochemical project. It is clear that industry attention has shifted to Saudi Arabia with the kingdom touted as "the next big thing in terms of activity" by our sources.
Islamic financing in the oil and gas industry has become more commonplace over the last few years and as a result of the growing familiarity within the market these deals are growing in size. Shearman & Sterling advised Dolphin Energy on its US$2.45 billion conventional bridge financing and its US$1 billion Islamic (Istisna'a) financing, which is the largest Islamic oil and gas financing to date, highlights the compatibility of the sector with this type of financing and suggests bigger deals to come.
Liquefied natural gas (LNG) projects provide a steady stream of work for lawyers in the Middle East with Philip Dundas, the managing partner of the Abu Dhabi office of Shearman & Sterling, working with the Abu Dhabi National Oil Company in a $1.5 billion joint venture petrochemical project with Borealis A/S and in the $4 billion expansion of the ADGAS LNG project, as well as renegotiation of the joint venture with BP, Total and Mitsui, and structure and establishment of shipping arrangement for a $2 billion LNG fleet.
CENTRAL AND SOUTHERN AMERICA
LNG is "the only global market for gas" in the words of David Asmus. Asmus also notes that the market has "experienced growth in the last 10 years or so with a boom in export projects and import terminals, which are coming on stream now". This was a result of strong gas prices, technical developments that had initially lowered project costs and improved finance. When asked about the effects of the credit crunch on the market, he noted "a limited impact on projects in the construction phase".However, it and any fall in gas prices will no doubt "impact on plans to initiate new projects" and with very few new projects likely to emerge after 2015, there are concerns about long-term supply.
LNG is a key market in Central and Southern America, a real "up and coming" jurisdiction according to a number of sources. In Brazil, Baker Botts LLP has represented Petrobras on its LNG interests in the time chartering of the world's first converted floating LNG storage and regasification unit to enter service. This first regasification vessel has recently been delivered and the second is scheduled for delivery in May 2009. Both vessels will have the capacity to supply up to 21 million cubic metres of natural gas per day to the domestic Brazilian gas system. The firm is also actively advising Petrobras in relation to the tender for a third regasification vessel. Projects such as this demonstrate the increasing popularity of floating LNG. Asmus noted that the above deal highlights the advantages of floating terminals, which are "easier to move to and from their locations and can even be reused" after the extraction is complete. It also seems as if the cost of these projects could be lower than conventional export projects where "construction and other related costs have risen sharply in the last three to four years, putting a squeeze on profitability". As a result many companies, including Shell, are reportedly looking to floating liquefaction.
National oil companies (NOCs) such as Petrobras have been aggressively pursuing strategic acquisitions both inside and outside their own countries. This is an international trend that is evident in Central and Southern America. Despacho de Abogados miembros de Macleod Dixon SC's Elisabeth Eljuri confirms that this is the case in Venezuela, where the "continuing nationalisation of the energy sector is reducing the amount of high-end true oil and gas work" landing on lawyers' desks (being replaced with corporate and public law work in many instances). However, Eljuri notes a consequential increase in residual arbitration against the state brought by major companies. One such example is the high-profile arbitrations in motion between Exxon and Venezuela. Eljuri and Carlos Maduro examine the "re-nationalisation" of the oil industry in Venezuela in greater depth on page 12. Chinese and Indian NOCs are also playing a major part, with their countries' phenomenal economic growth, with both parties driving deals for a number of international and national firms.
AFRICA
In a similar fashion, NOCs from the aforementioned countries are also showing a great deal of interest in Africa and Sola Adepetun from Adepetun Caxton-Martins Agbor & Segun is one of a number of lawyers on the ground in Nigeria who is seeing "more foreign companies entering the market", with a great deal of work coming from China, Korea and India. With so much foreign investment there was concern over domestic gas supply addressed by Nigeria's recently introduced national gas pricing policy and regulations, which stipulate that "all oil and gas developers in the country are to allocate a specified amount of gas from their reserves and annual production to the domestic market".
What is causing this influx of international activity in West Africa? Vinson & Elkins's Alexander Msimang partly credits the "Nigeria effect". Nigeria became socially, economically and governmentally stable enough by Western standards to conduct business effectively. Even though some of the excitement about Nigeria has recently waned, companies who have prospered there (or who have tried to do so) have become willing to try to do deals in nearby countries with a similar political climate. Msimang, who has handled many deals in the region and recently advised a major European energy company on the proposed acquisition of offshore oil and gas assets in Nigeria with a value in excess of $2 billion, expects to see more work coming in from across West Africa. Angola, Equatorial Guinea and Ghana are becoming a great deal busier with the Mahogany-2 Well and the Jubilee field in Ghana the subject of international attention. V&E also is active in Côte d'Ivoire, representing Devon Energy in the successful sale of assets in Côte d'Ivoire in September 2008.
Msimang also draws attention to the increase in the involvement of private equity funds - most notably in the upstream field. This is typified by recent private equity involvement in exploration and production in West Africa. For example, Texas-based exploration and production company Cobalt added private equity investor First Reserve as financial backer, helping to drive its exploration and development in the Gulf of Mexico and West Africa, while Kosmos Energy (which is heavily focused on West Africa) announced the establishment of a $500 million equity-funding programme led by Warburg Pincus and Blackstone Capital Partners in June 2008. These examples from Africa exemplify a trend, which has been evident internationally for some time.
EUROPE AND CENTRAL ASIA
While new markets like West Africa are opening up and becoming increasingly attractive to investors, activity in parts of Europe seems to be slowing down amid political and economic uncertainty.
The security of gas supplies to Europe is a key concern for European Commission and EU governments who are actively seeking alternative gas supplies. The trans-Saharan gas pipeline (TSGP), which would carry gas from Nigeria to Europe via Algeria, seems to be back on the table but its viability remains uncertain. There is speculation in the press of competition between Europe and Russia to play a leading role in the TSGP, with European interest in this project rejuvenated by the recent conflict with Georgia and concern over its dependence on Russian-controlled resources. September 2008 saw Gazprom sign a memorandum of understanding with the Nigerian National Petroleum Corp (NNPC) to cooperate on oil and gas projects in Nigeria and EU energy commissioner, Andris Piebalgs, visited Nigeria the same month to offer the Nigerian government a declaration of EU support with regards to the TSGP.
Russian interest in pipelines is well documented and in November 2008 the country became the biggest state shareholder in the Chevron-led Caspian oil pipeline by purchasing Oman's 7 per cent stake. This raised Russia's share in the export route for Kazakhstan's crude oil to 31 per cent in total. As Russian NOCs such as Gazprom's domestic market work within Russia has decreased, however, continued expansion of their geographical portfolios means more work internationally for these major players. Kazakhstan on the other hand looks as if it will become a more popular destination for foreign investors. It has large natural resource reserves and current efforts to clarify and improve the fiscal regime will surely lead to an increase of foreign capital coming into the country.
Lawyers acting on matters in central European continue to be busy as oil and gas deals internationally get bigger and share deals in upstream assets increase. Utilities are interested in securing upstream assets and in July 2008 we saw Centrica acquire its first Norwegian gas-producing interests. Meanwhile there are fluctuations of activity in the mature province of the North Sea. A handful of majors, including Shell, have recently sold off some of their ageing North Sea assets to focus their capital expenditure in other high-risk but high-reward areas. As smaller players struggle as a result of decreased bank liquidity and the closing off of the capital markets, large and middle-market players can thrive and firms are seeing a rush among some majors not currently active in this market to snap up assets. There are rumours of new players entering the North Sea, capitalising on existing platforms and pipelines. Recent deals include the Abu Dhabi National Energy Company PJSC (TAQA) purchasing the equity pertaining to operating licences for six offshore fields and two non-operated subsea tie-backs situated in the northern North Sea in July 2008. Vincent Aarts from De Brauw Blackstone Westbroek NV notes TAQA's activity in the Netherlands, where they acquired BP oil and gas assets and are "currently working on redevelopment of the depleted Bergermeer gas field for gas storage purposes". It became public in early December that Gazprom has entered into an agreement with TAQA to co-develop the Bergermeer facility, which is expected to be the largest gas storage facility in Europe when completed. Aarts sees this transaction as "a reflection of the fact that small gas fields onshore and offshore are nearing the end of their (economic) lifetime". He acknowledges that "this is good for innovative projects such as gas and carbon storage" however, on the other hand, the national high-pressure gas transmission network operator Gas Transport Services "expects to see volumes and income plummet over the next few years".
Aarts also highlights the importance of LNG in the Dutch market with "several large LNG projects under way in the Netherlands". De Brauw is advising 4Gas in the 9 billion cubic metre Lion Gas terminal in the Rotterdam port area, "which has recently seen its permits become irrevocable, which means this major LNG project is on schedule to start operations in 2012". Another notable matter is the GATE LNG regasification project in the Netherlands. Ashurst and NautaDutilh advised the lenders on the €745 million limited recourse financing, which closed in July 2008. Upon closure of this deal NautaDutilh's Harm Kerstholt commented that "this project is a prime example of the many energy projects currently being undertaken in the Rotterdam port area".
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The oil and gas market is by its very nature volatile with trends occurring and shifting at unprecedented speed. This market volatility is compounded by an uncertain economic climate and makes for interesting times ahead for all engaged in the industry. This is also an indication of how challenging the oil and gas legal market can be and highlights the need for experienced and specialist counsel. As players in this area increase their global reach, law firms are developing their skills and international capabilities to respond to their needs.