Energy boost

Other practice areas may be having a tough ride but energy lawyers are flying. LB maps the trends driving the sector

There are many sectors of the economy that governments can afford to scrimp on when times get hard, but luckily for power, oil and gas companies, energy is not one of them.

Power is as vital to economic function as oxygen is to breathing; fuelling transport, communication, defence programmes and health services. In addition, the political and economic instability attached to the supply of oil and gas ensures that energy security continues to dominate national agendas.

So it makes sense that while Europe slumps and many business sectors flail, energy continues to enjoy its spell in the spotlight. Indeed, energy has become a core driver of law firm strategy in recent years, particularly internationally. You could be forgiven for thinking everyone is an energy specialist now.

‘There has been a rush of players looking to recession-proof their firms by rebranding their corporate practices as energy practices but there are only a handful of firms that can do the corporate work and get involved in the nitty-gritty, specialist work,’ says Humphrey Douglas, energy partner in the London office of SNR Denton.

That isn’t deterring the flood of firms looking to get a foothold in the industry, because as other sectors nosedive, energy continues to drive deals.

Market power

There is no doubt that clients are busy. In 2011 the energy, mining and utilities sector accounted for the highest value of M&A deals announced globally according to mergermarket, totalling $557.7bn – or a quarter of all deals. Interestingly, the next best-performing sector was industrials and chemicals, strongly related to energy, which was worth $365bn in 2011.

The trend has continued into the first half of this year. The figures show that energy, mining and utilities accounted for 27.7% of global deal value in the first half of 2012. Although that value has fallen by 14.3% to $257.9bn on the first half of 2011, it still massively dominates global M&A receipts – the next biggest share is posted by the consumer sector, which represented 11.8% of deal value in the first six months of this year.

In the first half of 2012 alone, four out of ten of the most valuable announced deals involved Asian parties

The geographical trends behind the numbers are significant. In 2011, the top ten energy deals were dominated by US, European and Russian entities. Most notably, buyers were all UK or US listed companies with just three exceptions: Abu Dhabi sovereign fund International Petroleum Investment Company bought a 52.9% stake in Spain’s Compañía Española de Petroleos; Anglo-Australian mining giant BHP Billiton acquired Petrohawk Energy Corporation; and Japan-based ITOCHU Corporation was part of the consortium that acquired Samson Investment Company. Only two deals involved Asian buyers.

In the first half of 2012 alone, four out of ten of the most valuable announced deals involved Asian parties: state-owned China National Offshore Oil Corporation (CNOOC) bought Nexen for $17.65bn; Japan’s Nuclear Damage Compensation Facilitation Corporation bought a 75.7% stake in Tokyo Electric Power Company; Korea National Oil Corporation was part of the consortium that acquired EP Energy Corporation in February; and Malaysian-government-owned Petroliam Nasional Berhad bought Progress Energy Resources Corporation for $5bn.

It’s a sign of the times. Those headline figures don’t even take into account the smaller strategic deals that may not make the top ten but still involve big money and high-profile names. For example in April, China Petrochemical Corporation (Sinopec) invested $2.2bn in a minority stake in Devon Energy Corporation’s five shale gas assets in the US. A month later, the same buyer acquired around half of Talisman Energy’s UK North Sea business in a $1.5bn deal. A Herbert Smith team led by corporate partner David Clinch advised Sinopec on the North Sea deal, and then in July the firm was appointed to act for CNOOC on the UK and European aspects of its $17.65bn acquisition of Canadian oil and gas company Nexen. Competition head James Quinney and energy partner Simon Tysoe will be leading the team advising on what has become the second most valuable energy deal globally so far this year.

‘Asia continues to be very busy,’ says Mark Newbery, global head of energy at Herbert Smith. ‘In particular, Chinese investors are keen to do deals, while we’re seeing increasing interest from Japan, post-Fukushima.’

In the CNOOC deal, Herbert Smith is acting alongside Davis Polk & Wardwell (which is leading advice to CNOOC) and Stikeman Elliott (which is acting as Canadian counsel). On the other side, Blake, Cassels & Graydon is leading advice to Nexen, with Paul, Weiss, Rifkind, Wharton & Garrison advising the Canadian company on the US aspects of the deal. As the calibre of the players involved shows, energy produces meaty mandates, not least because it is a heavily regulated and political market that does not traditionally lend itself to low-balling.

So it’s no surprise that firms are pulling out all the stops to follow the money, with new office launches increasingly being driven by energy practices.

Branching out

‘Energy is a growth area, when other areas are shrinking,’ says Douglas Glass, transactional energy partner in the Houston office of oil and gas giant Akin Gump Strauss Hauer & Feld. ‘So energy has become the key driver of expansion – particularly for UK firms into China and Australia. That is simply because clients drive them there – I can’t think of any other business sector where it is as prevalent.’

‘Energy is a growth area when other areas are shrinking’

Among the most high-profile gold rush areas, Australia and Africa have been the markets that expansionist firms have been most keen to court. Norton Rose encapsulates that trend perfectly, merging with Deacons Australia in 2010 and then following that up with its acquisition of South Africa’s Deneys Reitz in 2011; it also added Canadian firms Ogilvy Renault in 2011 and Macleod Dixon in 2012 – Canada is a particularly useful platform for the firm’s top-tier mining group.

‘Our sector focus has been key to developing clients across borders and has played a key role in our growth internationally,’ says Matthew Ash, energy and infrastructure specialist in Norton Rose South Africa’s Cape Town office. ‘The African energy market is very diverse and we’re advising on a wide range of projects across a number of energy sectors. In South Africa the focus has been on renewables, nuclear, and unconventional gas. In Namibia, Tanzania and Uganda the focus is oil and gas, while in Senegal and Morocco it’s renewables. In Nigeria we’re advising on regulatory restructuring.’

Linklaters has become the latest in a long line of firms looking to get a foothold in the African market, with news leaked in August that the Magic Circle player is in talks with South African firm Webber Wentzel regarding an exclusive alliance. Baker & McKenzie also recently launched in Johannesburg with the hire of a 31-strong team from Dewey & LeBoeuf.

South Africa is not the only country on the continent that is attracting energy players though. In 2011, Allen & Overy, Clifford Chance and Norton Rose all launched platforms in Morocco to take advantage of the region’s ambitious energy and infrastructure programmes.

‘There is a lot of activity around power projects in North Africa, especially renewables projects in Morocco,’ says Yves Baratte, energy and infrastructure partner in the Paris office of Simmons & Simmons. ‘They are also trying to open the investment framework in Algeria.’

Lawyers who would have traditionally had a strong practice in advising on European renewables projects are particularly keen to utilise their international networks.

Lisbon-headquartered Raposo Bernardo has one of the broadest international networks of any Portuguese firm, with international platforms in Angola, Cape Verde, Guinea Bissau, Mozambique, Poland, Romania, São Tomé and Príncipe and Spain, as well as dedicated Brazil and East Africa desks.

‘Following the financial crisis in Europe, from 2010 to 2011 the renewable energy market suffered an incredible setback, virtually stagnating,’ says Joana Andrade Correia,
co-head of the firm’s global energy practice. ‘Only great players, belonging to global business groups, with their own financial capacity, can develop their projects.’

Luckily, Andrade Correia says that demand for renewable energy projects remains robust in other jurisdictions.

‘We are seeing appetite for renewables projects in Canada, India, Brazil, Australia, Chile, Uruguay, Angola and Mozambique, among others,’ she says, also pointing to some European markets that are more robust, such as Poland. ‘In these countries the energy projects continue to grow at a good pace.’

In a case in point, the firm recently advised Self Energy on the implementation of a new solar photovoltaic project in Poland – the largest of its kind in the country.

Regulation stations

Although transactional energy work may be dwindling across many European countries outside Central and Eastern Europe (the CEE), firms are still seeing a strong flow of energy-related instructions, but with the emphasis switching to regulation and litigation matters.

Vienna-based Fiebinger Polak Leon Rechtsanwälte (FPLP) is a full-service firm known for advising companies within the regulated industries sectors. That regulatory experience, coupled with its strong reputation for dispute resolution, ensures that it is well placed to take advantage of the current domestic trends.

‘At the moment there are three main trends driving the energy market in Austria,’ says Peter Polak, name partner at FPLP and head of the firm’s corporate and M&A departments. ‘Firstly, the decoupling of oil and gas prices has meant that long-term gas delivery contracts that are oil indexed are too expensive and there has been an increase in litigation, especially arbitration, disputing those prices.’

Notably Polak, alongside energy head Thomas Starlinger, has advised a string of clients on price revision matters arising from long-term gas supply agreements.

‘You are also seeing gas-fired power plants becoming difficult to operate as electricity prices drop against the rise in gas costs. That has led to the restructuring or selling-off of power plants,’ says Polak.

Starlinger highlights the third trend. ‘There are always regulatory requirements being passed on by the EU, and other bodies, that need to be applied,’ he says. ‘It is a constant source of change and reform. The industry is in an ongoing position of restructuring.’

‘The industry tends to have vast in-house legal teams and they don’t readily farm out work. You need to be entrenched in the regime.’

Starlinger’s in-house experience gives him an insider’s perspective on energy issues – he was formerly head of legal at Austrian oil and gas giant OMV Erdgas (now OMV Gas) and did a stint as head of the legal committee of the Association of Gas and District Heating Supply Companies.

‘You need that in-depth energy knowledge and experience,’ says Starlinger. ‘The industry tends to have vast in-house legal teams and they don’t readily farm out work. You need to be entrenched in the regime.’

FPLP has advised several multinationals on competition issues over the past year, and that is a common theme throughout Europe. The EU has maintained its commitment to energy liberalisation, especially the separation of the production of electricity or gas from its distribution. In 2012 it sent out a warning to eight countries that had not yet complied with EU rules, including Spain, the Netherlands and Romania.

Although Switzerland falls outside the jurisdiction of the EU, it has been proactively stepping up the pace of its market liberalisation in recent years. The EU is its most important trading partner – Germany alone accounts for 26.5% ($103bn) of the country’s international trade – and in 2011 the EU Energy Commissioner Günther Oettinger announced that he wanted Switzerland to harmonise its energy policy with the EU in line with its close relationship. He outlined his vision that Switzerland could be a potential hub for electricity storage in Europe. In addition, the country’s strongly open market ethos ensures that liberalisation in all sectors is a priority. In 2009, Switzerland’s new Electricity Supply Act came into force, encouraging that process.

Vischer is a full-service Swiss firm with offices in Zürich and Basel, and it is seeing a steady stream of work relating to regulatory changes.

‘So far we have seen the partial liberalisation of the country’s gas market,’ says Stefan Rechsteiner, partner in the energy, public and administrative law groups at Vischer. ‘It also liberalised its commercial electricity market in 2009 and is anticipating doing the same for private customers in 2014.’

The firm has one of the market’s leading competition practices and has experience in advising energy companies on compliance matters and an excellent track record in regulatory matters across the piece. Among its trophy clients, the firm advises Swiss-based electric utility company Industrielle Werke Basel on issues related to the liberalisation and regulation of the electricity and gas markets.

‘The new electricity supply act, which came into force in 2009, is also set to be amended and we expect that to also lead to a rise in regulatory work,’ says Rechsteiner.

Switzerland is not the only mature Western economy experiencing dramatic change in its energy market. US-based energy lawyers are also enjoying a revolution, but it is product rather than regulation-led.

The holy shale

Washington DC-based Akin Gump’s energy practice is one of its signature strengths, indeed energy accounts for about half of its global business and it particularly shines on the oil and gas side – especially in the US and Russia.

‘The shale gas revolution is one of the most important trends shaping energy markets today,’ says Glass. ‘In the US, it has attracted companies from around the world, with players from China, Korea and India.’

In 2000, shale gas provided 1% of US natural gas production; by 2010 it accounted for over a fifth of the country’s natural gas production. Even more significantly, that is expected to grow to 46% by 2035, according to the government’s Energy Information Administration.

However, induced hydraulic fracturing, or fracking, which is the technique used to release shale gas and other oil and gas products from source rocks, is drawing increasing global scrutiny.

‘There is a serious debate over the use of fracking,’ says Glass. ‘Third parties have expressed concerns that it can cause groundwater contamination and even small earthquakes.’ The potential pitfalls have led to a ban on its usage in many jurisdictions. In the US, Vermont became the first state to ban it earlier this year. In Europe, it has been temporarily suspended in the UK following a series of earthquakes, while Bulgaria and France have forbidden it completely.

Of course the lack of enthusiasm for fracking in other parts of the world just creates a bigger market for US exports and it is a growth area that US lawyers are keen to exploit.

‘Even companies from the Middle East and Russia have been piling in to get some of the oil and gas action,’ says Glass. The Russian transactional energy market is a sweet spot for Akin Gump. Most recently, it advised longstanding client Lukoil, Russia’s second-largest oil company, on the biggest ever financing to a private company in the energy sector in Uzbekistan – a $500m project financing for the Kandym-Khauzak-Shady-Kungrad gas field development. ‘In short, there is no doubt that interest has exploded – shale gas is a big game-changer for the industry,’ says Glass.

Importantly, it is not just a game changer for the oil and gas industry. It is also set to shake up the global legal market.

‘For the first time in recent history, the US is becoming a net energy exporter’

US project finance powerhouse Latham & Watkins has tremendous experience in advising on global liquefied natural gas (LNG) projects, and now the firm is witnessing unprecedented demand for its skills at home.

‘For the first time in recent history, the US is becoming a net energy exporter,’ says Christopher Langdon, a finance partner based in Latham & Watkins’ London and Riyadh offices. ‘We’ve already seen the financial closing of the first LNG export facility in the US. Sponsored by Cheniere Energy, the facility will be built in Louisiana and is expected to push the company to exports of around 1.1 billion cubic feet a day by 2015.’

Latham is in a great position to utilise its international reputation for major oil projects, although it only launched a platform in Houston, the US energy capital, in 2010. Originally opening on the back of three partner hires from leading domestic oil and gas players Akin Gump and Baker Botts, the office has already grown to 54 lawyers, including 16 partners.

But the firm is taking nothing for granted just yet. ‘We’re still watching the global response to the treatment of shale gas and how that plays out,’ says Langdon. ‘In Europe, the perception is that shale gas may not be something that people are prepared to accept.’

So what are the alternatives for Europe? If renewables are not commercially viable and shale gas and fossil fuels have been ruled out for environmental reasons, options are limited.

Going nuclear

As one of the most controversial sources of alternative energy, nuclear has experienced its fair share of ups and downs over recent years. In the UK, for example, the government was set to roll out a new generation of nuclear plants, until Japan’s Fukushima disaster made politicians jittery. In Germany, nervousness translated into solid policy and in May 2011 the environment minister Norbert Röttgen announced that it would phase out all of the country’s nuclear power plants by 2022.

Austrian firm Schönherr is one of the top corporate law firms in the CEE and keeps a close eye on energy law across the EU.

‘Germany has decided to phase out its nuclear programme and rely more on renewable sources,’ says Bernd Rajal, regulation and environment partner at Schönherr. ‘German investors are looking for value in other markets – particularly Romania and Bulgaria.’

‘You can’t invent an energy practice in a day; not even in two years.’ 

There is no doubt that nuclear has some part to play in Europe’s energy mix. But with Germany’s dramatic U-turn and the UK facing mounting dissent from investors, it is difficult to envisage how long the much-heralded nuclear renaissance will take to get back on track.

Despite the uncertainty, one fact remains clear: as nations scramble to secure their energy needs, the sector will continue to drive corporate deals and energy will continue to dominate the legal market agenda.

Herbert Smith’s Newbery has a few words of caution for those firms that are getting ready to rush out and reinvent themselves as energy specialists.

‘There are many more law firms looking to position themselves as energy specialists and competition among the smaller firms is increasing,’ he says. ‘However, the ability of those smaller firms is limited and they will eventually learn that you can’t invent an energy practice in a day; not even in two years.’ 

maria.jackson@legalease.co.uk