Who’s Who Legal brings together Caroline Kehoe at Herbert Smith Freehills LLP and Sean Korney at Burnet Duckworth & Palmer LLP to discuss issues facing energy lawyers and their clients in the industry today, including increasing investment in renewables projects and sector-related M&A activity.
Caroline Kehoe: We have certainly noticed this trend. In the Gulf Cooperation Council (GCC), there is fierce competition to develop solar power projects, resulting in world-record-low tariffs being set first by the Sweihan project, and then the Sakaka project, for photovoltaic power, and the DEWA 4 IPP for concentrated solar power. Waste-to-energy is beginning to establish itself; the Sharjah Waste-to-Energy project developed by Masdar and Bee’ah is the first project to use that technology in the region. Further afield, Jordan continues to develop both solar and wind power projects, and Egypt was successful in closing Round 2 of its Feed-in Tariff programme with the support of (among other financial institutions) the International Finance Corporation and the European Bank for Restructuring and Development.
We believe this trend has been driven by a combination of authorities (such as ADWEA and DEWA) with an excellent track record of procuring IPPs and creditworthiness, favourable climatic conditions and plentiful liquidity.
Sean Korney: There has been increased investor interest in renewable energy projects in Canada from both Canadian and international investors and in international projects from Canadian investors. There are two main drivers of this trend: first, decreasing costs of delivering renewable energy solutions, and second, a change in legislation (and public attitude) in favour of renewable energy. The current federal government and most of the current provincial governments have embraced an effort to reduce the carbon intensity of everyday life in Canada. This has resulted in additional taxes on carbon and incentives for renewable energy projects. Investors have responded with a very successful first bid round in Alberta’s renewable electricity programme. However, not every such programme has been a success – Ontario, for example, is enduring high energy prices because of missteps in the changes made in that market.
Caroline Kehoe: Positively – technological advances in solar in particular have helped to contribute towards a higher uptake of solar projects in the UAE. The fact that the technology is now available at a world-record low cost is encouraging an uptake in smaller-scale projects such as rooftop solar as well as more ambitious larger solar parks. An expansion of the market for supply of photovoltaic panels (particularly from China) has pushed down capital costs considerably, but some concerns linger as to the maturity of the industry and its ability to service power projects over their long-term life.
Additionally, technologies such as bifacial solar modules and cleaning mechanisms requiring less water may lead to improved efficiency, and ultimately lower costs.
Sean Korney: I think the proof is in the outcome. In December 2017, Bid Round 1 of Alberta’s renewable electricity programme resulted in the award of four projects totalling approximately 600MW of wind power for a weighted price of $37/MWh. This was a new record in Canada for the lowest renewable electricity pricing. The winning sponsors were a mix of Canadian and international investors.
Caroline Kehoe: We are seeing M&A in the renewables sector grow year on year globally, and that is no different in the Middle East. The energy sector is often the best performing sector for M&A deals in the Middle East, and low oil prices are also causing an impact by pushing companies towards M&A to gain a market share.
The GCC is fast becoming a regional hub for investors who are looking at Africa with a renewed interest due to jurisdictions such as Dubai offering a well-regulated business environment.
Sean Korney: The recent recovery of oil prices (but not gas prices) has had a positive impact on M&A activity as the price expectation gap between buyers and sellers has narrowed. M&A activity in Canada is expected to be more robust in the coming year in terms of the number of deals, but the aggregate value of the deals may be lower. Since 2014, there have been a number of large consolidations and sell-offs with significant prices, but this activity may be mostly behind us. Companies continue to focus on “core areas” (which may be intentionally narrowed since the slump in oil prices), monetise their midstream assets, create royalty interests as finance tools and combine with other companies to rationalise costs. Those players that are here are stronger for having come through the downturn. But, there are few new market entrants and fewer players in the market overall.
Caroline Kehoe: It is clear that oil and gas entities are preparing for a transition towards a less carbon-intensive energy mix, and as a result of this, both gas and renewable energy investments are likely to increase steadily.
We have certainly seen a number of the large oil and gas entities looking towards diversifying their portfolios – BP will reportedly invest $200 million into its renewable energy arm, Lightsource, over the next three years for a 43 per cent stake in the business. More recently, we have seen Shell selling off a 17 per cent stake in an oil field in Oman, and we expect to see further similar moves from the large oil and gas entities.
Sean Korney: Lower oil and gas commodity prices have actually had the opposite effect in Canada – companies are concentrating on what they do best and what gives them the best margin and opportunity for success within their core areas. There remains some diversification between oil (both light and heavy) and gas, both conventional and non-conventional. From a capital markets standpoint, investors do seem to favour the companies who are more focused or even “pure-play”.
Caroline Kehoe: With growing interest in renewable and other alternatives to oil and gas, energy lawyers will be faced with changes in government policy, and consequently changes in the legal and regulatory framework within which they work. The continuing development of renewable energy sources and the shift towards them will have a continued impact on lawyers, their clients, consumers and society.
It is also likely that with the pace of change in technology, the legal and regulatory framework will simply not be able to keep up and lawyers will have to navigate the problems that come with new technological innovations on an outdated legal and regulatory system.
An increasingly competitive legal market, and greater focus on costs control by clients operating in potentially challenging economic times, will also require lawyers to provide innovative solutions to clients, and differentiate themselves from competitors in terms of sector knowledge, cost and added-value services.
Sean Korney: There are a wide range of macro issues that will continue to challenge energy lawyers. First, the tension between economic development and “not in my backyard” attitudes. This includes pressures from aboriginal peoples looking for fair economic rent or seeking environmental stewardship of their lands, and from environmental activists who do not acknowledge the role energy plays in providing benefits in our daily life and for whom no project can ever be clean enough to secure their “social licence”. Second, legislative and policy changes that affect the timelines and economics of new and existing energy projects. Third, the impact of international sanctions on companies with operations connected to sanctioned countries. Fourth, the new challenges ahead as regulators look for better ways of ensuring that the public is not left footing the bill for the abandonment and reclamation obligations of failed energy companies. An important bankruptcy priority case (Redwater) is currently before the Supreme Court of Canada. Finally, access to capital. Equity markets continue to be difficult; some debt providers have left the market and those that remain are providing less leverage given the market’s recent experiences with bankruptcies and the focus on abandonment and reclamation obligations.