In recent years, oil and gas has been at the heart of a slowly recovering global economy. It has driven worldwide projects, fired up high-value M&A and spawned a private equity industry dedicated to the sector. For lawyers and law firms, the oil and gas sector has represented big money. Now prices have plummeted and the impact is likely to be felt widely.
With oil prices some way below the break-even point for many upstream and mid-stream businesses, the market is moving into a stasis. As oil prices hit a low of $46 a barrel in mid-January, Shell announced that it was scrapping its $6.4bn al-Karaana petrochemical project in Qatar. It claimed the project was 'commercially unfeasible' thanks to the 'current economic climate prevailing in the energy industry'.
In the 1980s oil prices plunged in a similar way. Prices had been on the rise and expectations were that they would continue their persistent ascent. In 1986, prices per barrel dropped from $27 to only $10 thanks to an oil glut. Oil businesses were ruined and previously successful tycoons were bankrupted. It was a brutal period.
'As a young lawyer I saw people and businesses having to cope with very difficult times over a number of years,' recalls Rick Burdick, Chair of the global energy and transaction group at Akin Gump Strauss Hauer & Feld. Burdick says that oil and gas lawyers were forced to switch their attentions away from projects and boom time M&A, to restructuring and litigation.
'It has all created tremendous uncertainty. There will be significant cutbacks on capital expenditure programmes and a focus on projects that have to go forward. Other projects that are discretionary will fall by the wayside.'
Rick Burdick Chair, Global Energy and Transaction Group, Akin Gump Strauss Hauer & Feld |
This time around, the impact is being felt particularly strongly in Russia, where the rouble has collapsed and the nation is coming to terms with its over-reliance on its primary industry - oil and gas. Brian Zimbler, the head of Morgan Lewis's Moscow office says that the firm is already being affected by Russia's maladies with some arctic and deep-water projects being pulled. 'Obviously some energy projects are no longer attractive at these prices,' he says. 'The biggest impact is on projects involving more complex technologies and higher risk operations that involve more cost. We do see a change in the market with fewer deals in the pipeline, and some large projects having been suspended.'
Burdick sums up the current sentiments in the industry: 'When the oil price takes a dive, capital expenditure budgets are cut,' he says. 'It has all created tremendous uncertainty. There will be significant cutbacks on capital expenditure programmes and a focus on projects that have to go forward. Other projects that are discretionary will fall by the wayside.'
Testing Russian resilienceFor law firms, acclimatisation to this icy environment poses a big challenge. For those in Russia, where a combination of sanctions and depressed oil prices has taken its toll on the local currency, firms are waking up to a new era. For years there have been questions over Russia's over-dependence on the oil and gas industry, but the shocks appear to have spurred a long overdue diversification. Russian president Vladimir Putin announced in December that the country would seek to broaden its economic output away from the historic concentration on oil and gas, to other sectors such as agriculture, technology and services.
Nevertheless, the value of the rouble poses a challenge to law firms operating in Russia. Russian-based companies may struggle to pay off loans denominated in foreign currencies and demand that they pay their legal fees in roubles. Zimbler says this is all about sharing the foreign exchange risk with their suppliers. 'It is unclear how this will affect international law firms,' he remarks.
Though oil and gas capital expenditure is clearly going to suffer with oil prices at the current levels, energy lawyers are not completely despondent about the overall picture. Many oil majors still have healthy balance sheets and may look to use surplus cash to acquire assets at attractive valuations.
Others may be forced to sell assets to generate cash in the hope of sailing through the stormy seas. Restructurings and litigation are also an inevitable consequence of these testing times. 'We're still likely to be busy,' comments Herbert Smith Freehills energy partner Anna Howell. 'My personal preference would be to be in an upward cycle, but it doesn't mean that the work isn't there. There are also companies with cash that are in a good position to buy assets at a cheaper price. There may be distressed M&A activity as well. Restructuring work in particular is fantastic for our practice and we have already been instructed on several matters in this area.'
Zimbler believes it is hard to be bullish in the current environment, particularly in Russia, but neither is there a valid reason to despair. 'There are,' he says, 'still sectors that are quite active: for example, the Russian consumer market is the world's sixth largest, and still attracts investor interest. Many Russian online businesses are growing.'
Like the oil and gas industry, Russia appears to have great powers of recovery as illustrated by its recuperation from its financial crisis in 1998 and its recession in 2008/2009. Zimbler explains: 'Having worked in Russia for more than 25 years, my experience is that the Russian market always comes back from a crisis. The fundamentals of the market are strong and the Russian people are resilient. For lawyers, it is important to plan for the long term.'
Chris Crowe is a freelance journalist and can be contacted at chris@crowemedia.co.uk
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