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Energy 2017: Trends & Conclusions

The energy sector remains a highly interesting and developing area. The oil industry continues its current downturn, with the price of oil just $48.78 per barrel in May 2017, despite a recent deal between OPEC and non-OPEC countries to maintain output curbs until March 2018 in an effort to boost flagging prices. This is causing significant problems for companies operating in the oil industry as the sector endures another year of low prices. Elsewhere however, emerging markets are opening up, with an increasing demand for energy, and specifically cleaner energy, and thus there are also significant opportunities for many companies operating in the energy space. The legal market continues to feel the pressures that are also affecting clients in the industry; yet while oil and gas prices remain low, this doesn’t necessarily mean the demand for legal services is correspondingly reduced.

Oil and gas

The oil and gas industry continues to operate at the depressed levels that have persisted for the past two to three years, due to overcapacity and production. Things have reportedly “improved a little but prices are increasing only very slowly”. This has resulted in “the bottom of the market being culled” and the continuing story of smaller oil and gas companies being unable to access the required capital to allow them to continue to operate. However the demand for legal services is by no means stagnant across the industry. Between 2016 and 2017 we have seen an increased interest from private equity companies, particularly in acquiring production and midstream assets. There is an element of “asset-swapping among the financial sector”, often with different parts of infrastructure in a project being bought and sold by different entities who “have the capital and are keener to take risks”, rather than energy companies “who are themselves dependent for their bottom line on the oil price”. As a result, “there is a reasonable amount going on” for lawyers servicing the oil and gas industry.

In addition, “the high level of disputes in the oil and gas sectors is continuing”, according to our sources. As industry prices are low “there is less money around and so people are looking to get out of contracts which are now no longer as economically viable as they were when the prices were high”. Thus there is continuing high demand for legal services from firms who offer particular expertise and experience in handling large-scale, cross-border energy disputes. Larger international firms with a global platform are particularly well placed to take advantage of such a demand, as they have the capacity to offer their services in multiple jurisdictions to larger international clients.

Brexit

Brexit remains a “hot topic” in the UK, which has led to a significant uptick in advisory work across all areas of law, due to the “large amount of uncertainty as to what the deal with Brussels will actually look like”. This uncertainty will no doubt continue in light of the UK general election result.  However, in the energy space, lawyers argue that they “don’t actually think it will impact business in the longer term”. Energy is “fundamentally a global market” and so Brexit “will not materially or negatively affect business being done out of London, since this work concerns a much wider area than just the UK”. As one practitioner pointed out, “None of the transactions here are solely UK-based, or solely involve significant UK assets.” As a result, lawyers operating at the bigger international firms, handling large cross-border matters, are reporting that “Brexit is not materially affecting the energy market at the moment”, nor indeed the legal market as a whole. One lawyer argued, “London and English law are currently a big export and indeed consequently a big part of how the world works; it will take a long time for that to change and will probably take more than Brexit to change that.”

Renewables

Nevertheless, the UK has a substantial domestic energy market, particularly in the renewables sector. This is likely to be influenced by Brexit, as the UK’s exit from the European Union “certainly will impact foreign investment into the UK”.  From an investor’s point of view “it is likely that they will see or perceive an increase in risk in the UK on their investment”, particularly “if sterling decreases in the long term”. Sources point out that “a number of projects did go on hold straight after Brexit, and are still on hold in some cases”. In addition it was recently announced that the UK now features 10th on EY’s attractiveness index of countries for new investment in renewables. Only four years ago the UK market was graded as fourth globally, but has progressively slipped down the scale after a succession of reductions to the levels of government subsidy available. Indeed, investors are reportedly deterred from the UK renewable energy market due to a lack of policy direction.Yet practitioners say they “don’t anticipate a dearth in demand for renewable energy legal advice”; offshore wind power is still “pretty active”. The government’s recent auctions for contracts for difference subsidies allocates £730 million of annual funding, £290 million of which is expected to go to offshore wind farm developers. Furthermore, recent High Court rulings require urgent action by the UK government to reduce air pollution in towns and cities, and bring levels down to those allowed by law. In the UK, 37 out of 43 zones have illegal levels of air pollution, and thus cleaner methods of producing energy are “certainly going to be in demand” in the near future, according to interviewees who conclude, “Overall it is an interesting time for lawyers who operate in this tussle between climate change and clean energy supplies.” As demand for renewables picks up, lawyers can expect an uptick in demand for legal advice to companies operating in the sector, particularly regarding compliance and regulatory matters.

Opportunities

Further afield, the future looks set to bring significant opportunities to energy companies across the globe. The continuing international trend towards the increasing use of technology in consumers’ everyday lives as well as in business and sectors such as healthcare will necessarily create an uptick in demand for energy to power such devices. “Energy is currently vital to the way our global society is constructed,” one lawyer told us. Equally, emerging markets in particular are predicted to initiate a stark appetite for energy over the next decade, especially in countries that are rapidly developing and whose residents expect access to the same technology as developed countries.

In particular, India is forecast to become a lucrative opportunity for energy investment. With a current population of 1.3 billion, the country is calculated to become the most populous globally in the next 10 years. This will result in an additional 800 gigawatts (GW) to be added to the country’s network in order to satisfy the ensuing demand for energy. The Modi government is committed to implementing a renewables programme, with plans to have 175 GW generated from renewables by 2022 as part of a target of having renewable energy comprising 40 per cent of capacity as soon as 2040. Thus India is currently an attractive investment prospect for renewable energy companies looking to expand their portfolios. Yet each of India’s 29 states and seven union territories has substantial autonomy over their own energy policy, and as such the Modi government faces a significant challenge when executing a stable renewables programme throughout the country. Law firms with a presence in the Indian market could see themselves especially well situated to take advantage of the expected uptick in demand for advisory and compliance services, as energy companies look to invest in this expanding market over the next 10 years. Equally, firms looking to expand their global energy footprint would do well to consider India as the next a profitable location. 

In addition, sources point to countries such as Iran – which, now the international sanctions are lifted, is becoming a new market for energy providers and consequently energy legal services. As one source put it, “We have spent a lot of time understanding what this now means for clients and how they might get involved in the Iranian market.” Similarly, it is further expected that the energy market will experience a general boom across jurisdictions such as Libya, Iraq and Kurdistan where there has been significant recent instability. This will not only lead to an uptick in disputes work “as parties have necessarily been forced to break contracts,” but will also necessitate “a rebuilding of infrastructure and the provision of energy to those communities who return and are still there”. As such, advisory and contractual legal work in the energy space may well experience an uptick in these jurisdictions in the future. 

The legal market

In the light of the reasons above, sources paint a mixed picture of the energy legal market. Practitioners describe it as “particularly competitive” at the moment, as there are probably too many lawyers chasing too few deals”. Many of the larger firms who have “traditionally enjoyed the big-ticket work, have had to move down the chain a bit, as there is currently less of such work around, and so they need to get their hands on other work”. As a result there is “fierce competition in terms of pricing”. Firms are “very keenly pricing their services to potentially undercut the next-tier firms and make themselves available for the next wave of work”. Some practitioners point towards the “necessity of looking at future work flow, when thinking of prices today” and “moving towards a more sensible fee arrangement once clients trust you and know you do a great job”.

However, firms that “have a genuine energy team are probably going to be OK”, report market sources. These firms have the capacity to switch between different forms of energy work, including oil and gas, conventional and unconventional power generation and project development, as well as M&A and joint ventures, and can therefore “follow the market if one channel of work dries up”. On the other hand, smaller firms and practitioners “who only have one string to their bow are suffering” in the current climate.

Despite the problems affecting the industry, as one lawyer put it, “One of the things society is always going to need is heat, light and power; it is just not an option not to have it.” Sources are quick to point out that for law firms “a proven track record and high-quality advice and service still counts for a lot in the current climate”. In addition, the market hasn’t seen many new entrants recently, as “energy law requires specialised expertise and experience and, if a firm doesn’t have this, it is very difficult to break into the market”. Thus firms that currently enjoy a good position in the market expect to hold on to their market share for the near future, and so many practitioners are positive about the future months for the legal market. As one lawyer put it, “For good work, clients will pay good money, as there's always such a large amount at stake in energy transactions and disputes.” As a result, although there is some uncertainty, practitioners, particularly at the top of the market, are upbeat about the future.

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W11 1QQ, UK