The International Who’s Who of Oil & Gas Lawyers has brought together three of the world’s leading practitioners to discuss key issues facing oil & gas lawyers today
Our research suggests that transactional work remained an active area for lawyers in the past 12 months. Has this been the case in your jurisdiction? What kinds of transactions are clients pursuing?
Giovani Loss: Transactional work has been very active during the past 12 months. We have seen both transactions involving exploration assets, as well as producing assets. Considering the size of discoveries in Brazil and visibility of the Brazilian oil and gas sector, the average value of transactions is increasing as are their complexity. The types of transactions included IPOs, bond issuance, structured financing, share sales and asset sales. Some examples are: QGEP IPO, Pifco bond issuance, OGX Maranhão financing, Sinopec-Galp acquisition and Statoil-Gran Tierra farm-outs. The type of transaction relies on the commercial and tax issues involved and this can affect whether they are done locally or abroad. We have closed a record of 14 oil and gas deals in Brazil during the past 12 months, which is much higher than in previous years.
Sean Korney: There is a demand for legal services for oil and gas transactions in the Middle East, Central Asia and Africa. There is significant competition from firms in the region, new entrants and firms outside the region who are looking for opportunities here. It seems, more and more, that energy industry work is the flavour of the month, probably because the industry has remained robust while others have declined. As a result, some firms and lawyers are trying to rebrand themselves as energy experts. Our industry clients are pursuing a wide variety of projects, including LNG import and regasification; midstream gas infrastructure operation and development; petrochemical facilities and refineries; sour gas; upstream investments through new production sharing contracts; power projects; and acquisitions of oil and gas assets and companies.
Boyd Carano: Latin America is seeing an upsurge in oil and gas transactions. Much of this is due to significant discoveries of new oil and gas reserves. The pre-salt discoveries in Brazil are some of the most well-known, but other Latin American countries have also realised new successes. Argentina, for example, has been the site of recent large discoveries by Repsol YPF, though Argentina’s decision to renationalise YPF has required IOCs to re-examine their development plans. Colombia is attracting increased investment, thanks to an improving security situation and highly competitive royalty regime. Uruguay is also a country where recent and potentially large discoveries of gas, both offshore and onshore, could lead to the emergence of another hub of upstream activity. Focusing on Brazil for a moment, we see a continued focus on upstream M&A and joint ventures by IOCs from Asia, Europe and the United States, and increasingly by Brazilian independents. This is not surprising, given Brazil’s relatively favourable fiscal regime, good economic and political climate, and strong prospectivity. Although companies like OGX and BG (which had previously been marketing a portion of their Brazilian upstream assets) have now reportedly shelved those plans, upstream activity isn’t over. Other companies continue to consider sell-down opportunities to take advantage of high valuations, and many others await the resumption of Brazil’s auction process, both under the old concession regime (for non-strategic blocks) and the new production sharing model (for pre-salt and other strategic blocks). Only 4 per cent of Brazil’s sedentary basins have been concessioned thus far, and there are still over 100,000 square kilometres of pre-salt areas that have not been auctioned (reserve estimates for the pre-salt range between 50 to 125 billion barrels).
NEW FRONTIERS OF EXPLORATION
As much of the world’s “easy” oil and gas has been found, exploration and development is moving into new frontiers. Which regions and unconventional resources do you expect to see rising in levels of activity in the coming year?
Giovani Loss: Unconventional resources encompass tight oil and gas formations, oil sands, shale gas, coalbed methane, heavy oil, oil shale, deep and ultra deep water plays, and gas hydrates. Most of the largest oil and gas transactions in the world that have recently been negotiated are either directly or indirectly related to unconventional resources. In the short term, shale gas in the US will keep its leading position as a changing factor to the oil and gas sector as it increasingly affects particularly the global LNG market. We expect deep and ultra deep water plays in Brazil and Africa to be also a changing factor to the oil and gas sector in the mid-term as new leading countries could rise in the geopolitics of the oil industry.
Sean Korney: We have seen interest in new regions, new technologies, natural gas and unconventional resources. Our clients are very interested in areas that have recently opened or have recently proved themselves as petroleum provinces. These regions include Iraq, East Africa and the Eastern Mediterranean, among others. There is also interest in investing or resuming operations in the Arab Spring countries.
We are seeing the traditional petroleum provinces refine their strategies for getting more out of their existing reserves. This has included commercialising associated gas, and applying enhanced oil recovery techniques to mature fields. Many companies are positioning themselves for anticipated future bid rounds.
Growing demand for electricity and economic diversification has meant a greater emphasis on natural gas. This emphasis extends to nearly all aspects of the market – buying and selling gas by pipeline or as LNG, incentivising gas exploration and non-associated gas production, conserving associated gas, and developing sour gas. These efforts also extend to electricity and water demand management, as an effort to encourage conservation and reduce consumption.
Technology has helped to make frontier regions which were once unreachable accessible. Similarly technology and commodity prices have encouraged the regional governments to consider their own unconventional reserves potential and have encouraged investors who have successfully developed unconventional reserves elsewhere to assess opportunities in the region.
Boyd Carano: Giovani and Sean have described why and how unconventional resources will be an increasingly important focus of investment and development activities. In Latin America, Brazilian pre-salt and Argentine shale are two of the most well-known opportunities. We’ve already discussed the former. As for examples of the latter, Repsol YPF announced discoveries of an estimated 927 million barrels equivalent of shale oil at the Loma La Lata field in northern Patagonia in November 2011, and an estimated 4.5 trillion cubic feet of shale gas in Neuquen province in December 2010. Successful development is likely to require foreign technological support and equipment, as well as a considerable amount of foreign capital.
This year natural gas prices in the US and Canada reached a decade low and drilling in many fields has become no longer viable. As companies in the mid-market space struggle to make a profit, it is expected that consolidation in the near term will ensue. Do you expect to see a rise in M&A activity in your jurisdiction? Have you seen an increasing number of joint venture agreements between parties looking to share their finances and resources?
Sean Korney: Whenever there are significant changes in the market, there are buying and profit-taking opportunities. However, change can also cause nervousness and a tendency to stand still. There could well be an increase in M&A activity this year, but much depends on the world economy as we are increasingly interdependent. There are too many variables at work to predict where the economy will go in the next 12 months. I am, however, an optimist by nature.
Joint venture activity in the region has been increasing. Companies see the benefits of both combining their strengths, and sharing the risks on the larger projects. Often a joint venture between two or more competitors ends in a win-win situation – subject of course to the competition law issues!
Boyd Carano: In Latin America, it’s not just the mid-market sector that seeks to share the enormous cost and risk of hydrocarbons exploration, development and production, or finds value in combining its talents and technical expertise with those of other experienced players. For example, in Brazil, almost all the M&A deals we’ve seen result in joint ventures of some kind or another, typically as separately owned concession interests that are jointly operated, or as joint equity ownership of the Brazilian entity holding the interests. In addition, former state-owned companies are now attracting capital and knowledge for exploration and production activities through joint activities with major independent and other state-owned oil companies. Examples of this trend include Petrobras’ joint ventures in the Brazilian pre-salt concessions, and Ecopetrol recently joining with Statoil to announce its first find in the Gulf of Mexico. More controversially, the Argentine government is reportedly seeking to attract an IOC to invest $10 billion in a partnership with the renationalised YPF to develop that country’s oil sector. Indeed, the law enacted in May to expropriate Repsol’s shares in YPF expressly authorises YPF to enter into joint ventures with domestic and international companies.
We may also see more joint ventures to monetise natural gas, especially in Brazil, given the huge capital requirements and technological know-how that will be required to develop the associated infrastructure. Many of the onshore and offshore fields actively under development (including pre-salt) are either gas prone or have significant volumes of associated gas. Brazil is severely restricting flaring, and at the same time is liberalising its laws and regulations to encourage private investment in gas transportation. Thus, companies like OGX have announced plans to build gas-fired power plants to utilise gas produced from its prolific onshore blocks, and BG and Petrobras have launched feasibility studies for floating liquefaction facilities. Large-scale petrochemical investments (and perhaps even new generation, low carbon GTL technologies) are also possible as other ways to address the future problem of stranded gas.
Giovani Loss: In addition to what Boyd already mentioned, in Brazil – as we haven’t had a bid round since 2008 – M&A activity has been growing in the oil and gas sector. The data we were able to collect from ANP shows that farm-ins approved by the agency went from 20 in 2010 to 43 in 2011 and reached 21 during the four months of 2012. Most of these farm-ins are in fact of joint venture agreements between parties looking to share their finances and resources.
On the natural gas side, the first Brazilian shale gas discovery was confirmed at the Sao Francisco Basin, in the state of Minas Gerais. Since shale gas requires specialised technical knowledge, we expect M&A activity involving this basin.
Regulatory requirements across the world are becoming evermore stringent, with environmental concerns top of the agenda for many clients. Have there been any regulatory developments in your jurisdiction, environmental or otherwise? How does the differing level of regulation across jurisdictions affect your clients’ business plans and activities?
Sean Korney: Regulatory requirements remain a key concern in every project. Environmental laws in the region are becoming more stringent and enforcement is becoming more prevalent. However, the best operators already strive for best international practice on HSE. Anti-bribery, money laundering and corruption laws, with their far-reaching jurisdiction, remain a key concern for companies in the industry. Our clients always have these matters in mind when entering a new project or a new phase of an existing project. Due diligence, proper structuring and ongoing monitoring are key steps for mitigating this counterparty risk.
Boyd Carano: Increasing environmental regulations and enforcement, local content requirements, complicated local tax regimes and governmental intervention are some of the key regulatory concerns arising in upstream investments in Latin America. For example, the local content issue may be framed by noting that a few Latin American countries, particularly Brazil, have required grantees of new exploration and production blocks to commit to the use of an ever increasing percentage of goods and services from local sources. The problem arises when the local goods and services sectors are not sufficiently developed to meet the needs of large upstream investments. Historical recordkeeping has also been problematic.
Concerns about governmental intervention in Latin America’s upstream sector are not new, but were highlighted rather dramatically recently when Argentina moved to expropriate Repsol’s shares in YPF. Governmental intervention can also take more insidious forms, however: compulsory relationships with state-owned entities, changing royalty regimes, and mandates that investors direct their activities towards certain political or other objectives. As an example of the first type of risk, the Brazilian government has placed increasing responsibilities on Petrobras, notwithstanding that it is already subject to considerable budgetary and work commitments to existing partners. These responsibilities are likely to increase further as Brazil requires Petrobras to be the operator and a 30 per cent investor in all new pre-salt contracts.
Giovani Loss: The ANP has focused on stricter and more rigorous enforcement of regulations rather than implementing any major regulatory changes as a direct result of the Macondo and Frade spills.
In addition, IBAMA, together with the Brazilian Navy’s department of ports and coasts (Diretoria de Portos e Costas), the government of the state of Rio de Janeiro, Petrobras, the ANP and others, have organised working groups to define and prescribe improved strategies to prevent accidents, identify risks, and respond to spills. Among other activities, the working groups are preparing a national contingency plan for oil spills (the Plano Nacional de Contingência para Derrames de Petróleo or PNC) and recommending regulations on the use of new drilling and production technology.