Susan Talley, Stone Pigman Walther Wittmann
Susan Talley at Stone Pigman Walther Wittmann explores the impact of the growth in petrochemical infrastructure spending across the US Gulf Coast on real estate practices.
In March of this year, ExxonMobil announced a US $20 billion investment to expand its chemical manufacturing capacity along the US Gulf Coast (news.exxonmobil.com, “ExxonMobil Plans Investments of $20 Billion to Expand Manufacturing in US Gulf Region”, 6 March 2017). According to the press release, the planned investment includes 11 projects over a 10-year period between 2013 and 2022, which are projected to create over 45,000 jobs. Two months later, Dow Chemical followed with its own announcement of a five-year $4 billion spending programme in the Gulf South, including the capacity expansion of an ethylene cracker and the construction of a polyethylene production unit (Oil & Gas Journal Online, “Dow Chemical Unveils $4-billion US Investment Plan”, 12 May 2017).
The investments by ExxonMobil and Dow Chemical are part of a petrochemical manufacturing renaissance in the United States. According to the American Chemistry Council, 294 projects representing nearly $180 billion in capital investment have been announced since 2010 (americanchemistry.com, News and Resources, “US Chemical Investment Linked to Shale Gas: $179 Billion and Counting”, March 2017). Cheap and plentiful natural gas has been the primary driver of this growth. By far the largest concentration of investment has taken place along the Gulf Coast, where considerable shale gas deposits, access to deep water coastal ports and significant petrochemicals infrastructure make states such as Texas and Louisiana particularly well suited for these projects (americanchemistry.com, News and Resources, “Shale Gas in Louisiana”, October 2016).
Other recent examples of petrochemical expansion include large capital investments in Lake Charles, Louisiana by Sasol and by a joint venture between Lotte Chemical and a division of Westlake Chemical. Sasol is scheduled to complete an $11 billion ethane cracker in 2018 (Bloomberg Online, “Sasol Says $11 Billion US Project on Track for 2018 Start”, 27 February 2017). Lotte and Westlake are not far behind with a $1.9 billion ethane cracker and a $1.1 billion monoethylene gycol plant scheduled to open in 2019 (opportunitylouisiana.com, “Lotte Chemical, Axiall Break Ground on $3 Billion Complex in Louisiana”, 14 June 2016).
What does this mean for real estate lawyers? It has meant, and will continue to mean, a lot.
In many ways, these transactions are just as much real estate as project finance deals. The megaprojects occupy significant footprints. In addition, whether by requirement of applicable law or regulation, or as a defensive measure to mitigate potential environmental and toxic tort claims, there is often a surrounding buffer of undeveloped land. Further, they tend to need many rights of way for utilities, feedstock and product delivery. Accordingly, much time is devoted to land and property rights assemblage. By way of example, one project in southwest Louisiana necessitated the acquisition of entire residential subdivisions, in some instances one home at a time.
Because of the nature of their operations, these projects often involve multiple parties. A provider of feedstock materials that go into the process may have piping, meters, tanks and other equipment situated onsite by way of a ground lease, easement or other property interest. The same may be true of off-takers who have made long-term commitments to purchase the end product of a facility. There might be one or more co-locators – a company taking one byproduct of the operations and using it in that company’s own processes. A co-locator may hold a ground lease or other property interest for the pad on which it is situated, coupled with access, pipeline and similar easement rights leading to and from its pad. There might be rail or docking facilities. Water access will frequently involve not only private parties, but governmental bodies. In other words, there are numerous property rights that have to be negotiated and documented. They need to be financeable; and, most important, all of the pieces and parts must work together. Think of these projects as a unique form of mixed-use development.
As one might expect, petrochemical projects often pose land use and permitting hurdles. Although state and local economic development officials might welcome them with open arms due to the job-creation effects they have, the projects may confront opposition from local residents. Even where there is no opposition, conditional use or other special zoning permits may be necessary. Furthermore, these projects can present unique questions of zoning interpretation. For example, even in locales that are home to existing projects, zoning codes may speak in terms of “buildings” (where the vast bulk of the improvements may not be buildings at all), lot sizes, floor area ratios for buildings, setbacks and other terms and requirements that do not fit these developments. Real estate lawyers with land use expertise are often needed to undertake a zoning review and work with local regulators to make sure the project is permitted under applicable zoning and land use laws. Satisfying land use requirements is a long-lead item. Besides the company developing the project, equity investors and financiers will be looking for opinions, title insurance endorsements or other assurances that the project is properly zoned.
Speaking of title insurance, nothing is simple about the title insurance for these projects. Real estate counsel with considerable title insurance experience has to be engaged early on. First, because of the amounts involved, no single underwriter can insure these projects. It takes a consortium of title insurers. Also, some of the substantial cost items in one of these projects may not constitute real property interests. Counsel for all of the parties dealing with title insurance must work with their respective clients to make sure that appropriate coverages are obtained and premiums are not being paid for expenditures that do not relate to the value of the insured estate. Further, with a consortium of title insurers, most underwriting decisions, including the endorsements to be delivered, must be made by multiple underwriting counsel.
Because these projects are often located in areas that were formerly agricultural or areas with limited prior development, there can be coverage questions running the gamut from missing heirs to former burial sites to riparian rights. Each one of these title questions must then be analysed and blessed by the underwriters. In addition, because these projects are often developed in phases, where the timing of construction overlaps, mechanics’ lien coverage may be an issue. Depending on the state, the various ALTA endorsements that are available may be limited or very costly. Finally, where they are critical to the project operations, it may be necessary to insure easement rights benefitting the project. That can entail examining title to the properties underlying miles of pipeline.
The same complexities of these projects implicate what land surveys are required, to what standard will they be prepared and the manner in which title insurance exceptions will be shown. Key to all of this is assembling a real estate title and due diligence team from the outset.
Anytime there is a complex real estate project, financing is never easy. That is certainly the case here. Real estate lawyers detailed to the mortgage or deed of trust collateral must be prepared to draft carefully and “herd cats”. The collateral may include fee, ground lease and easement rights. There may be a number of third parties from whom non-disturbance agreements are required. Similarly, there may be leasehold mortgagee cure rights and “new lease” provisions to negotiate with a variety of parties having different requirements. And, while the collateral documents may be granted for the benefit of a single collateral agent, the terms of all of these documents must be satisfactory to a range of financing participants.
As one can tell from the introduction, the investors in these projects and the companies operating them span the globe. Any entity acquiring real property interests needs to be structured in a way so as to address the Foreign Investment and Real Property Tax Act and similar legislation.
The boom in petrochemical infrastructure spending in the Gulf Coast region of the United States has resulted in the kinds of economic growth that one might expect – jobs, construction spending and an improved tax base. This has also provided opportunities for the real estate practice groups of law firms that are prepared to tackle these sometimes daunting but also interesting and exciting projects.