For a time, energy lawyers had never had it so good. The sharp rise in the price of oil over the last few years made costly drilling projects deep in the ocean floor or amid gloopy tar sands commercially viable – creating a gush of lucrative legal work.
But over the last year the price of oil has plummeted as demand has shrunk because of the global recession. In early June the price of a barrel of oil stood at $68, less than half last summer’s peak of $147. Analysts anticipate further volatility in the coming months.
This year, leading international oil companies’ profits have taken a battering. BP’s first quarter profits fell to 62% to $2.4 billion. Royal Dutch Shell suffered a 58% drop in first quarter profits to $3.3 billion. “The margin oil companies receive from the refining process is allied to the oil price,” says Antonio Carbajal of Madrid’s Garrigues.
“The whole sector has been affected.” Spain’s Repsol, a client of Garrigues, saw first quarter profits this year down 57% from last year. This has had a knock-on affect on law firms that specialise in the area. “We have seen a drop-off in the amount of energy work because of the decline in oil prices,” says Roy Slettvold, a partner specialising in energy at Norwegian firm Selmer.
In addition, many of the major oil companies have imposed budget costs and put caps on expenses around the world, including legal spend. “Some oil companies are now approaching law firms to emphasise the problems they now have to confront,” says Elisabeth Eljuri, managing partner of Macleod Dixon's Caracas office. Energy lawyers across the world are feeling the pinch. “This shift has affected lawyers everywhere,” says Roy Slettvold. “Any firms that tell you otherwise are lying.”
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The slump in the price of oil has forced international oil companies to cancel or delay numerous large-scale oil and gas projects. Investment in oil and gas exploration and production has fallen 21% this year, or almost $100 billion, according to the International Energy Agency. More than 20 major oil and gas projects – collectively valued at more than $170 billion – were deferred indefinitely or cancelled between last October and the end of April, according to the IEA. A further 35 projects were delayed by at least 18 months.
The vast oil sands of south-west Canada – that had witnessed breakneck growth in the previous decade – make up many of the postponements. The bitumen-like deposits situated in Alberta and neighbouring Saskatchewan hold an estimated 173 billion barrels’ worth of oil. But the oil sands are among the world’s most costly places to extract oil. Two tonnes of raw materials must typically be extracted to yield a barrel of crude.
Huge quantities of steam have to be injected into the wells to extract deeper deposits. This means the price of oil must be close to $100 a barrel to make many new projects commercially viable. “Six to eight projects that were in various stages of construction or expansion have been scaled back dramatically,” says Don Greenfield, a partner at Bennett Jones in Calgary. “The deferrals could last a year or more.”
If oil prices continue to hover around the $60- a-barrel mark then energy lawyers in the region could see their workloads dry up. “There has been less activity. But, as yet, it hasn’t impacted law firms as much as you’d expect,” says Christopher Nixon at Stikeman Elliott. “There is still legal work in things like refinancing. But, ultimately, if projects continue to be mothballed and the train stopped we would have to consider our overall focus.” Norway is another country that has witnessed a sharp slump in project work.
“There is no doubt we are feeling the impact also in the Norwegian oil and gas industry,” says Peter Hiorth, head of the energy department at Schjødt. “But there is still a long lead time between investment decision and completion.” Nevertheless, “a number of new projects have been postponed. That will lead to less demand in future for legal services. I expect 2009 to be quieter than last year.” Adds Jarle Erik Sandvik, the head of Wikborg Rein’s Energy Natural Resources Group in Oslo: “Oil services companies in the exploration and production industry are having to adjust and this had led to substantial pressures on legal services.”
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The silver lining of the cloud hanging over energy lawyers has been a wave of consolidation, as bigger companies acquire vulnerable rivals that have struggled after the collapse in the price of crude. “The slowdown in projects work has been offset by M&A work,” says Wikborg Rein’s Sandvik. In March, for example, British oil exploration company Premier Oil acquired the North Sea unit of the bankrupt Canadian company Oilexco for £346 million, launching a rights issue for £171 million and securing bank loans to fund the acquisition.
In Canada, Suncor Energy, one of the biggest oil sands operators, bought rival Petro-Canada for $15.9 billion earlier this year. “In the last six months or so, businesses that were very highly geared or underfunded have started to run into difficulties because either they can’t get more funding or if income has dropped they can’t meet their finance obligations,” says Bob Ruddiman, a partner specialising in upstream oil and gas work, at McGrigors in Aberdeen.
“This has led to a number of acquisitions.” State-controlled companies meanwhile have continued to buy oil and gas assets. Acquisitions by national oil companies and sovereign wealth funds reached a record high last year as a proportion of total deals, according to a survey by IHS Herold and Standard Chartered bank. India and China have become big players in the sector. Last year, ONGC Videsh of India acquired Imperial Energy, the London-listed Russian oil company, for £1.4 billion.
A recent study by Ernst & Young found that national oil companies had kept investment largely steady compared with last year, unlike the major international oil companies. This year, the largest national oil companies reportedly plan to invest more than $275 billion in total. In contrast, big international oil companies have cut their combined expenditures from $122 billion last year to $100 billion.
State-run Brazilian energy giant Petrobras, for example, is set to develop its huge offshore reserves over the coming years. “In Brazil most exploration projects are in deep water, which are also capital-intensive. Petrobras has announced significant investments for new projects notwithstanding the drop in current prices, perhaps as a result of its belief that prices will escalate again in the medium to long term,” says Roberto Lima, a partner at Souza, Cescon Avedissian, Barrieu e Flesch Advogados.
Brazil looks set to boom over the next decade and overtake Venezuela as the continent’s preeminent oil exporter. The Brazilian government will invite international oil companies to bid for concessions in the country’s enormous offshore fields next year, according to a report. In contrast, international oil companies have been more wary of investing in Venezuela in recent years. The policies of Venezuelan president Hugo Chávez, which have led to fields being seized from international oil companies, are the source of a lot of the tensions.
The country’s output has dropped from 3.4 million barrels a day when Chávez came to power in 1999 to 2.4 million today. Brazil meanwhile has doubled its daily oil production in the last ten years to 2.3 million barrels. But Macleod Dixon’s Elisabeth Eljuri gives short shrift to the idea that investment in Venezuela will tail off significantly anytime soon. “The oil is still here and companies are still looking. There is a major round of bidding going on as we speak.”
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Another knock-on effect of the slump in the value of crude has been a sharp drop off in investment in renewable energy sources, which look far less economically viable in the current climate.Many projects have been delayed or terminated as the credit crisis has dried up the supply of capital. The recession has also led to sluggish sales of clean technology.
“Alternative energy sources such as ethanol and biofuels were severely hurt by the drop in oil prices. Greenfield projects were cancelled and companies which operate exclusively in this field are undergoing financial distress given the fall in their prospects,” says Roberto Lima. “Its much more difficult to justify investment in renewables with the low price of oil,” says Garrigues’ Antonio Carbajal.
“The sector has contracted.” The nascent biofuels market has been hardest hit. Ethanol producers in particular have been under pressure as a result of volatile corn prices. VeraSun, Greater Ohio Ethanol and Gateway Ethanol are among the companies that applied for Chapter 11 bankruptcy protection in the USA last October.
This year saw Renew Energy and Northeast Bio-fuels also file. “All the work we had in biofuels has stopped,” says Garrigues’ Antonio Carbajal. “This has affected lawyers. The industry is not currently viable.” Oslo-based Selmer have close ties to the solar industry in Norway, but this sector has also been hit. “There has been a real decline in the solar business,” says Selmer’s Roy Slettvold.
“Many companies expected heavy growth worldwide and had been planning new plants all over the world. But there have been a lot of postponements.” Despite the downturn, Wikborg Rein’s Sandvik says energy lawyers in Norway should keep an eye on the country’s hydroelectricity sector. “The last two years have seen a change of law in the hydroelectricity sector that means only publicly owned companies can hold significant assets. We have worked with clients to see what this means and what are the possibilities.
The sector is ripe for consolidation. There are a couple of big transactions on the way,” he says. One country, however, that has seen its renewables market hold up is Ireland. “The renewables sectors in many countries are struggling because of the downturn, but not Ireland,” says Alex McLean, head of projects and energy at Arthur Cox in Dublin. “The country has to meet quite tough EU targets.” Ireland has further to go than many other countries, so the government has put in generous support mechanisms. “As a result, there are lots of renewable projects coming to market. It’s one area where banks are lending.”
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In a keynote speech to oil executives in Houston at the start of the year, BP chief executive Tony Hayward called on the global energy industry to look past the recent plunge in energy prices. He recalled that four years ago when oil prices were at $40 a barrel, the industry “worked just fine” and urged energy companies to “invest through this downturn, knowing that in the long term the fundamentals for energy demand have not changed.”
Energy lawyers maintain that, despite the seismic changes to the world economy in the last eight months, that observation rings true. “At the start of the slowdown people got nervous because they couldn’t predict where prices were going to go. A lot of projects were put on hold until there was a bit more clarity around the commodity price,” says Arthur Cox’s Alex McLean. “But the nature of big projects and utilities is that they take a longer-term view of the world.”