Research Trends & Conclusions: Oil & Gas 2011
With the benefit of over 14 years of research and tens of thousands of votes from clients and private practitioners, Who’s Who Legal takes a closer look at developing trends in the oil and gas legal marketplace worldwide.
"It is one thing after another”, is how one lawyer described the volatile economic and political oil and gas landscape this year. This description is not so different to the view expressed in previous editions: as we reported in our 2010 publication the industry underwent profound changes, from the BP oil spill to the emergence of unconventional resources. Oil and gas has always been a controversial and unstable industry: practitioners remark on the increase in demand for gas and rise in global gas production but fall in gas prices, off set by a rise in oil prices and fall in oil production owing to the disorder in the Middle East and North Africa.
OVERVIEW
We collected thousands of votes from industry professionals and private practice lawyers around the world, resulting in 419 leading oil and gas lawyers. This marks an increase in the number of lawyers listed from the previous edition. The research has also been enhanced by the inclusion of lawyers from seven new jurisdictions, Gabon, Hungary, Israel, Syria, Turkey, South Africa, Serbia and the US state of Virginia, bringing the total to 77 countries.
As can be seen in chart 2, we feature more countries in the research than ever before. What we notice is that more countries are being put forward for inclusion in the research which evidently filters down to inclusion in the published edition, as well as a widening in numbers from the traditional natural resource centres. The key characteristic identified in the seven new inclusions is their need for oil and gas as up-and-coming countries: we have drawn attention to the corporate and energy demands of Turkey and South Africa in previous editions of the oil and gas book, and other practice areas, such as M&A, which is leading to further development of legal expertise in these areas.
As can be seen in chart 3 below, there is still a high concentration of lawyers in the traditional energy financing centres, such as the USA, Canada, Australia and England, but the expansion reflects the desire for law firms to invest in expertise locally and overseas in developing economies, in order to attract more deals in this lucrative area. We feature 40 lawyers from Houston and 17 from the capital. This is very much the story of Vinson & Elkins LLP, the firm with the most lawyers in the edition overall. The firm’s listings are representative of the composition of the oil and gas edition this year. Out of 21 lawyers it lists six in Houston, three in DC, four in China, two in England and the UAE, and one in Hong Kong, Japan, New York and California.
INTERNAL CHALLENGES
Our research identifies trends in the legal marketplace, prompted by changes in government policy and regulation in the foremost oil producing centres. The major countries in our research from South America performed very well, but they are not without their problems. In Ecuador, lawyers reported an exodus of private oil and gas entities from the country, resulting in some law firms losing a number of their clients. The mass exit came about due to unsuccessful contract negotiations between the government and companies. Lawyers call for more regulation of government contracts in order to attract more foreign investment. The Ecuadorian energies legal market is lacking competition and choice for clients, such as Agip Oil, Petrobras and Andes Petroleum, and this is a problem that must be addressed in the next 12 months otherwise lawyers fear that projects will be filtered by the central government and not determined by the market, causing long-term harm to the country’s oil and gas ambitions and discourage capitalist enterprise.
Venezuelan lawyers also continue to express concern at the lack of competition in the energy market. The problem is that the barriers to entry are prohibitively high and complex to foreign agents, so there is a need for local expertise more than ever. Contrast this with Bolivia: the recent congressional approval of joint ventures between foreign and domestic entities has created a path for more substantial investment into the industry. Some of the BRIC economies have taken advantage of this development: lawyers expect to see strong export ties develop between themselves and Russia, China, Brazil and others, particularly in gas exports, in the next 12 months.
Colombia tells a similar story. Oil and gas procurement has been very active over the past year. Transactional work, such as drafting contracts and securing permits, has been the mainstay of local practice, according to our contributors. Practitioners expect this trend to continue as more PFI projects are won from US, UK and Swedish developers looking to benefit from the gains of Ecopetrol, Colombia’s state run oil producer. The big issues facing the country are typical of ongoing issues experienced in the global oil and gas industry: environmental affects on operations. NGOs have pushed the issue into the political and media arena with the aim of highlighting the inherent ecological dangers in laying pipeline and energy drilling. Lawyers foresee an increase in compliance and regulation on this front, as the need for better and more environmentally friendly pipeline techniques are demanded and, in time, a need for law firms to laterally hire environmental oil and gas experts.
A comparison between the oil and gas and other research areas, such as environment, mining and project finance reiterates the experiences of lawyers. For consistency we compared the oil and gas 2011 edition with the 2010 editions of related practices, such as project finance, commercial litigation and trade and customs in the graph below, demonstrating the kind of cross over work clients demand of counsel. The chart reflects the rising importance of environment expertise within the energy industry. Further, it illustrates the unsurprising overlap in mining and energy with project finance knowledge as lawyers advise clients on where to find and how to maximise investment opportunities. However, in countries where international investment is sparse, clients rely on oil and gas lawyers with trade experience to complete deals.
In the Asia region, lawyers are seeing increased demands for LNG and upstream projects, largely due to greater supply options and interest from other regions. In Japan, oil and LNG are central to the recovery: after the Fukushima disaster, earthquake and tsunami Japan’s demand will likely and rapidly increase as reconstruction gets underway. Abu Dhabi is also experiencing a shortage of liquid gas; however, the region runs a closed industry consisting of BP, Shell, Total, Exxon and a handful of other major oil and gas conglomerates. Competition is essential to improve the conditions of the market, according to lawyers there.
Nigeria has benefited from a small upswing in M&A activity, much like the rest of the corporate world. Shell’s disposal of over US$1.5 billion dollars of assets has generated large levels of work for both big and small entities. However, lawyers describe how the short term boost will have long term negative implications. Small entities are picking up the pieces of the asset disposition leading to a shift in market players but Shell’s reduced presence in the market in the future will diminish Nigeria’s energy competitiveness on the world stage. Even as domestic interest moves in to take over supply, the recent Nigerian presidential elections divided the country among ethnic lines, prompted violence in the central-north states and the president’s home state, Niger Delta, which is likely to lead to further oil disruptions. This demonstrates the complex sovereign risks inherent in operating in Nigeria’s oil fields, and local companies are likely to lack the resources and political power to tackle uprisings. However, lawyers we spoke to have cautious hope in the form of the Petroleum Industry Bill. The recent presidential elections delayed enactment of the Bill but lawyers expect to see the Bill achieve more added-value by ensuring local workers and raw materials are favoured above foreign manpower on projects.
Canadian oil and gas experts look forward to a fairly busy year but draw attention to the high but stable oil prices and crowded market, particularly in Calgary. Our sources noted that companies are trying to diversify into unconventional projects, such as hydrocarbons, and are focusing on pipeline constructions – which, they noted, would have not been financially viable two years previously. A major internal issue is the change in the royalties’ scheme in Alberta, a major resources hub. The changes are complex and affect all aspects of oil and gas production, but until the legislation is finally enacted the Alberta oil patch will be a much more uncertain place and next year will be a period of adjustment in the province. Lawyers expect to see a significant departures and movements as companies determine what position (if any) they wish to take going forward. On a more optimistic note, smaller energy companies are investing in Canada’s stable and proven revenue stream. China and India are looking to benefit from the re-emergence of oil sands projects that were previously curtailed by the global recession. Lawyers are already seeing large deals, such as the PetroChina’s US$2 billion deal with a Canadian pipeline producer to provide crude oil from Canada’s oil sands, and they hope to see many more projects like this in the next year.
The US energy sector has been relatively quiet, according to contributors. Texas is the heart of the US oil and gas markets and continues to enjoy steady international interest. Once again, Shell operations have created work in that region, specifically relating to gas production and technology. Meanwhile in the UK, lawyers are enjoying an uptick in LNG project financing work at the moment; they expect this trend to continue and even improve as interest from Japan intensifies, following the devastation of part of their energy infrastructure, and demand from Nigeria, Bahrain and Australia remain strong.
In addition to the internal developments of a country’s energy sector, lawyers also expressed serious concern about the interplay between the global politics and the oil and gas economy, particularly in the some of the most volatile, and oil-abundant regions. We explore how the geopolitical issues of oil and gas are affecting the legal marketplace, and what practitioners hope to see in the future.
THE GEOPOLITICS OF OIL & GAS
The impact of the disputes in the Middle East, Africa, and partially South Asia have created unprecedented rises in the oil price and further question the accessibility of foreign investment into these regions. Global oil prices have risen by over 30 per cent since the start of the year and are likely to continue rising. Contributors to the research provided interesting insights into what this means for the legal oil and gas market.
Libya poses the biggest problem, according to our contributors. As the 17th largest oil producer the conflict has effectively ended production and exports. Economic sanctions have choked the country’s oil and gas exports and since the start of the revolution in February 2011 there has been uncertainty about when oil production can resume and how the country will recover lost export revenue. Consequently, access is a problem and the longer the conflict continues the more impact it will have on the world’s oil supplies and prices. From the client’s perspective, the recent call by the Libyan government for foreign oil workers to return to Libya puts oil and gas companies in a difficult position. Apart from the safety implications of sending employees back into a conflict zone, companies must consider whether international sanctions permit a return to business in Libya. Consequently, oil and gas work for firms now includes providing advice on local politics, safety of workers and visa implications. Firms who counted Libya as a trading partner have had to sever ties due to untenable projects and the political situation.
One of the big issues identified by lawyers in the English energy market is the UK government’s tax increase on North Sea production from 2 per cent to 32 per cent to help fund a 1p a litre cut in fuel duty. The UK tax rise, which is part of the government’s deficient reduction strategy, will cost £12 billion according to the industry. A number of major energy companies and general counsel spoke out against the tax rises and warned that many other companies will follow in the footsteps of Centrica, who has refused to restart gas production in its Morecombe South gas field, the largest in the UK, if the policy is not reviewed. Further, lawyers continue to mention the UK Bribery Act 2011 as a regulatory concern for clients, as UK-based firms outsource to foreign third parties for advice during international deals.
While the operational and political cost of production and investment remains high in these regions, clients will be reluctant to venture there and in the next 12 to 24 months, practitioners expect to see a gradual shift away from the so-called ‘supermajors’ towards localised suppliers and smaller, emerging energy players.
As repeated by a number of our contributors, although the production of shale gas is cheaper than any renewable alternative, it has always been a contentious energy product. The issues affecting this area centre on the environmental concerns surrounding the extraction process, called hydraulic fracturing, and the ongoing difficulties for major companies to obtain permission.
Lawyers we spoke to question whether shale gas is really the better long-term alternative to established fossil fuels. In May, France voted to ban the use of hydraulic fracturing because it is believed to contaminate drinking water supplies near drill sites, with failure to report the illicit use of the technique incurring a €75,000 fine and possible imprisonment. Admittedly, US lawyers describe the industry as poorly regulated: Pittsburgh is considering a ban on the drilling and New York has stopped drilling while it reviews the process. Equally, the UK’s Environmental Protection Agency is undertaking a large study of the industry to determine the effects but the outcome will not be known until 2014.
China takes a less cautious approach: the country’s largest energy company, CNPC aims to increase its production of shale gas by 2015 and has attracted business from Shell and Chevron who are looking to expand their operations in the country. Lawyers look forward to the consequential investor work this will spawn and expect to see more cross-border contract deals between the US, which produces 25 per cent of its gas from shale, and China, to develop shale reserves. Ultimately, lawyers believe that the future of shale will be determined by environmental considerations, geological preserves and technological advances, not political conflicts.
FIRM ANALYSIS
A look back at the previous four editions sees the traditional, large firms retain their dominating presence in the legal marketplace.
Vinson & Elkins LLP and Baker Botts LLP are the leaders in the research over the past four editions. The practitioners we feature are highly recommended for their specialist knowledge of the energy sector, and their international cross-border work. Vinson & Elkins LLP posts 22 lawyers this year, which emphasises the strength of its energy and natural resources practice groups, particularly in the USA, and the buoyancy of the energy market over that period.
Baker Botts LLP demonstrates a very consistent, 20 per cent yearly increase in lawyers included in the edition. Over the past five years, the growing appeal of unconventional energy sources and the recognition of America’s vast reserves has forced firms to concentrate efforts on improving and expanding oil and gas practices and fortifying expertise in environmental and mining-related issues.
In the UK, the research tells a story different to that of the US. With a few exceptions, last year was the strongest year for England’s oil and gas practitioners in our research: the fallout from BP’s Gulf of Mexico oil spill spawned a host of ensuing multinational law suits, policy changes and reforms that continue to keep lawyers busy in litigation and compliance today.
The difference in performance between the UK and the US legal marketplace is the increased focus on renewable and unconventional energy sources in the US that has not yet translated as clearly into the UK market. London based lawyers maintain that although they are involved in some big LNG projects, particularly in the Middle East, the main subsistence work is on the M&A side, advising on financing, consolidations and joint ventures, and less so on extraction or development. Further, the geopolitical factors mentioned above, specifically in the Gulf, North Africa and the UK’s changes to the tax and bribery regime have affected the confidence felt in the UK market, and consequently the strategies clients are pursuing. Despite this, lawyers are hopeful that confidence will return and that work from Australia and the Tiger economies will be the jump-start needed to bring about a wholesale shift towards unconventional projects in the UK market.
As the industry shifts towards more unconventional sources and technological advancements reduce the cost and environmental inconvenience of extraction, lawyers will be called on to demonstrate multi-jurisdictional experience and cross-practice area knowledge. Much like mining, the oil and gas industry is vulnerable to the political and economic fluctuations in some of the most unstable regions in the world. Recent events in the Middle East and Africa remind us how politically valuable oil and gas commodities are, and how their disruption directly and detrimentally impacts global prices and market behaviour. BRIC economies are taking advantage of the reluctance of traditional investors in the market and filling the gap: China is aiming to be the largest shale gas developer but our research identifies that the best legal expertise still resides in the US. Consequently, lawyers expect to see a large rise in the cross-border transactions between the traditional energy-rich countries and Asia, and work between and within Asian producers. The result is that the union between western expertise and Asian money will continue to dictate the pace and course of oil and gas development.
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