Energy and Projects

In a nutshell

Energy and projects are two distinct but overlapping areas of law. When combined, they focus on the development, construction and financing of major natural resource (oil/gas, mining), power and infrastructure projects. The construction of pipelines, refineries, mines, power plants and petrochemical plants is a massive business, with high stakes and massive dollar values. Emerging economies are frequently the most hungry for infrastructural improvements, meaning a lawyer's work increasingly takes on an international flavor.

In addition, the projects component of an energy practice consists of both transactional and regulatory work (with regulatory work more prevalent in US domestic projects). There is a clear demarcation between transactional and regulatory work, and lawyers usually specialize in one of the two.

Non-energy projects are all about infrastructure. Typical examples might be road, airports, rail, shipping, telecoms and, most glamorously, sewage and water systems. The work would also include the construction of major multi-investor public buildings such as jails and stadiums. 

"It's always in flux. But never in my long practice has it been in such rapid flux as it is currently. So it's never boring, never static.” — Thomas Eastment, Baker Botts.

What lawyers do

Energy – transactional & regulatory

  • Transactional work can cover anything across M&A, joint ventures, capital markets, private equity, venture capital and project development and finance work.
  • Energy lawyers deal with three types of clients: upstream, midstream and downstream. Upstream businesses deal with getting energy out of the ground – oil, gas, coal, sometimes geothermal. This includes mining and minerals companies. Midstream clients are in the refining, treating and transportation of resources industry and its offshoots. Downstream clients are energy distributors: gas stations, electricity providers, gas companies.
  • Lawyers advise clients on negotiating and drafting agreements related to things like energy projects, the sale of power companies, investment in and development of upstream resources and the financing of various energy investments.
  • Many firms’ energy work focuses either on infrastructure and construction projects or on representations in front of the Federal Energy Regulatory Commission (FERC). FERC is a US government regulatory agency. It regulates electricity sales, electric rates, hydropower projects, natural gas pricing and oil pipeline rates. Its decisions can be reviewed by federal courts.
  • “Practicing in energy regulation and litigation is exciting because you're dealing with ever-changing government policies. It's always in flux. But never in my long practice has it been in such rapid flux as it is currently. So it's never boring, never static,” says Thomas Eastment, partner and head of the energy regulatory section, Baker Botts.

“Project finance transactions are complicated exercises in risk allocation that take a lot of time and generate lots of paper." — Keith Martin, Chadbourne & Parke

 

Projects 

  • Projects lawyers have three or four types of clients: sponsors/developers who put together the project; financiers (banks, international development agencies, foreign export credit agencies); the provider or contractor (who supplies raw materials or undertakes construction); and sometimes the ‘offtaker’ who purchases the products produced by the project. The most significant roles for lawyers are representing either the sponsors/developers or the financiers.
  • Keith Martin, partner and co-head of the project finance group at Chadbourne & Parke, says: “Project finance transactions are complicated exercises in risk allocation that take a lot of time and generate lots of paper. The complexity is increased by the involvement of different countries and the number of people in different roles – sponsors, senior and subordinated lenders, tax and true equity investors, landowners, offtakers. These are interesting puzzles to put together – they take an ability to listen carefully, spot common ground and solve problems.”

Realities of the job

  • Texas is “the land of opportunity” for energy lawyers focused on US-based projects. Its law schools – most notably the University of Texas – are some of the only ones in the country to provide energy classes. In Texas the energy industry is regulated by the Railroad Commission of Texas. Alaska is the country’s second oil state. With the recent explosion of natural gas (and oil) shale development, many other states have seen increases in energy activity.
  • The overwhelming majority of international work for projects lawyers is handled in New York – which remains the ‘money center’ for transactions in Latin America. The Energy Policy Act of 2005 created a host of new regulations by which companies in the industry are required to abide. These include loan guarantees for technologies that avoid greenhouse gases, subsidies for alternative energy producers and incentives to drill for oil in the Gulf of Mexico.
  • Work is often international or related to projects overseas, as there is hyperactive development of infrastructure and the energy sector in many economies. “Just look at where development is roaring to find out where we work: China, India, Brazil, Mexico, Indonesia, Peru, the Gulf states. There are giant infrastructure developments there – things are moving much faster than in the developed world.”

 

 

"The work tends to be extremely varied for many years, even for partners, and that keeps the learning curve very steep for a good part of your career. The challenge is that you don't have the opportunity to repeat transactions and hone your expertise early on, as you might in other areas. It takes longer to become an expert.” — Jonathan GreenMilbank

 

  • The international nature of work means lawyers often have to deal with “shaky jurisdictions. Structuring a deal to take into account political risk is very much a part of being an international projects lawyer. And that’s not just in less developed countries – there could be similar issues surrounding a mining deal in California.”
  • Thomas Eastment tells us: “With so much evolution in the market and government, flexibility is required to solve problems. You can't just look at the last deal or memo for answers to new questions that a client poses. Energy law isn't for someone who wants to feel like, 'I've got all this mastered, now I can use my cookie cutter'.”
  • Eastment continues: “A nice broad understanding of the key areas of law is crucial. This would include classic energy law but also environmental, finance and general commercial law. The issues we grapple with span all these, so you need to be nimble. The answer is not simply taking an energy course.”
  • Jonathan Green, partner and cochair of the project finance group at Milbank, says: “Projects lawyers get the opportunity to do many different transactions without a whole lot of repetition. For young lawyers I think that presents benefits and challenges. The work tends to be extremely varied for many years, even for partners, and that keeps the learning curve very steep for a good part of your career. The challenge is that you don't have the opportunity to repeat transactions and hone your expertise early on, as you might in other areas. It takes longer to become an expert.”

"The work tends to be extremely varied for many years, even for partners, and that keeps the learning curve very steep for a good part of your career. The challenge is that you don't have the opportunity to repeat transactions and hone your expertise early on, as you might in other areas. It takes longer to become an expert.” — Jonathan GreenMilbank

Current issues

  • The oil price drop is one of the most talked-about news stories of the past twelve months. Although at the time of writing, prices had begun to increase, they plummeted to below $30 per barrel around December 2015. This has had drastic ripple effects across the sector.
  • In the wake of the slump, oil and gas-dependent states across the USA like Texas, Oklahoma, Wyoming, Louisiana, North Dakota, Alaska, New Mexico and West Virginia, have taken an economic downturn after mass layoffs and oil rig shut-downs. For example, projections in North Dakota indicate that between 2015 and 2017, there will be a 32.6% drop in extraction jobs in the state.
  • On the (slightly) brighter side, attorneys with bankruptcy specialisms will likely find more work in this sector than ever before. Around 48 oil and gas companies in North America had filed for bankruptcy since the beginning of 2015, compared to only eight filed in 2014. According to energy consultancy Graves & Co. energy companies have announced that at least a further 319,000 jobs will be cut since late 2014.
  • The knock-on effect is that there will be a surge in M&A. After a disappointing 2015, with Wood Mackenzie placing last year's deal quota at only 14 M&As over $1 billion, There is a surplus in private funding that still remains after deals were canceled. This means that small to medium-sized independent companies are likely to merge more in 2016, to ride the slump. For everyone else, assets-targeted acquisitions appear to be key.

“An incredible sea-change has arisen in the USA from shale oil and gas development. It has transformed the debates about so many issues. There are serious environmental questions posed over the fracking techniques used to develop oil and gas. There's also a concern that by exporting these commodities domestic prices will go up."  Thomas Eastment, Baker Botts.

  • Scott Barshay, global head of M&A at Paul, Weiss tells us that “there is normally a lag before we see an increase in M&A in that space. It's a function of psychology. Directors need to get used to the fact that their stock prices aren't going to be back to the same level as their 52 week high. It takes time for people to accept that oil won't be back at $75 or $80 per barrel. Once this happens, then there will be a come-back for M&A. But in the meantime, I think now deals will be mostly dominated by stock transactions. If prices don't rise again, then I think we're likely to see a phenomenon in 2016 where there will be more cash deals taking place.”
  • The Federal Reserve Bank of Dallas observes that a sustained 50% lower crude oil price is likely to raise US growth by 0.5 of a percentage point for around a year. For the next year or so, it's likely that growth in the USA will be on the up if things stay the way they are.
  • Shale oil exploitation has been a big thing since the 2000s, with a nearly 80% increase from the 2006 levels being reported by the US Energy Information Administration. But in the aftermath of the oil price plummet, smaller companies who got rich quick from the earlier shale boom are now going out of business.
  • The emerging trend of US shale gas exportation has already begun to have an impact on other oil-producing countries. Many foreign companies tied into deals requiring them to purchase set amounts of oil at prices far above spot-price have gone to arbitration in order to renegotiate the terms of their contracts. The first export took place on March 15, 2016, when a tanker transported 3 billion cubic feet of natural gas to Brazil. The USA is now set to become the third largest exporter of liquefied natural gas (LNG), which is poised to raise sustainable job creation.
  • Internationally, Brazil, East Africa, Australia and the North Sea are attracting increasing attention. Chinese and Indian companies especially are investing heavily in infrastructure and exploration in these new areas, as well as existing markets. South Africa looks ripe to become a key player in shale gas exploration come 2017.
  • Thomas Eastment says: “An incredible sea-change has arisen in the USA from shale oil and gas development. It has transformed the debates about so many issues. There are serious environmental questions posed over the fracking techniques used to develop oil and gas. There's also a concern that by exporting these commodities domestic prices will go up."
  •  Jonathan Green says: “Cross-border work continues to be very strong, particularly related to developing nations and in energy and natural resources. This allows you to work in different legal systems and cultures. We're seeing very large international projects often supported by governmental lenders and multilateral institutions.”