Energy & resources is something of a barometer for lawyers and firms in the region trying to gauge their success in overcoming the effects of the global downturn. And with plenty of investment still to come alongside strong government support, the readings are good.

Those who know their way around the energy and resources (E&R) sectors will be familiar with the saying “as energy goes, so goes the economy”. In many ways the E&R sector is as much a perfect microcosm of the broader economy as it is a bellwether for overall macroeconomic health. Yet how true is this conventional wisdom in an economic climate where even the most elementary of economic theories has been turned on their head? ALB investigates.

Resilient leanings

Asia’s E&R sectors have always enjoyed a special status. They have been talked of as possessing the potential to effect economic miracles and to deliver to regional economies that sometimes-elusive growth they thirst for. When things aren’t going to plan the E&R sector is considered the panacea – the ingredient most able to pull ailing economies out of recesssion and into the black.

Arguably, no other region in the world is blessed with such abundant reserves of power, minerals and resources as is Asia. In the past, dilapidated power infrastructure development in places like Indonesia, Vietnam, Thailand, India and China was cause for embarrassment. Now this is part and parcel of the growth occurring in the region, a story which continues largely unabated despite the current financial crisis. It is this growth story – and those investors, sponsors and governments who want to be part of it – throwing E&R practices into overdrive.

Even lawyers are somewhat surprised by the levels of activity in the sector. Brad Roach, a Singapore-based partner at Lovells Lee & Lee, says transactional activity in specialty areas like oil & gas remaining resilient (despite the financial crisis) has more to do with the types of deals coming to the market than prevailing economic conditions. “Our clients are investing in projects that have a 15- 25 year time horizon in many cases, such as LNG, geothermal and IPP projects. Their view of project economics is long-term and not driven by market volatility,” he says. “The fundamentals for energy demand in Asia are extremely strong, so time horizons are measured in decades rather than short-term business cycles.”

Government stimulus packages have also helped focus attention on the long-term outlook. Since the beginning of Q3 2008, nearly US$100tr has been sunk into developing economies across Asia – with nearly half this amount being set aside exclusively for either oil, gas and power projects or the industries that are supporting them. Hector de Leon Jr, a partner with SyCip Salazar Hernandez & Gatmaitan in Manila, singles out infrastructure as the most prominent industry, saying funds earmarked for this area will continue to push along E&R deal flow. “The huge stimulus packages being implemented around the world will result in the construction of more infrastructure, which will in turn result in increased demand for metals and drive up metal prices,” he explains.

In the Philippines, de Leon says, it is the mining sector which is most active for lawyers. Here, firms are spending a greater percentage of their time advising companies that mine, process and sell minerals. “We [are] providing legal assistance on all aspects of mining projects including project structuring, mergers and acquisitions, joint ventures, corporate financing and project financing, due diligence review and permitting.”

Over the past year de Leon and his team has been involved in the following big deals: closing the sale of Anglo American’s interest in the Silangan project (formerly the Boyongan Project) to Philex Mining; the acquisition by Gold Fields of the right to earn certain projects of Mindoro Resources, and project financing by a group of banks (led by BNP Paribas) of the Masbate gold project by Filminera Resources/CGM Mining.

For Lovells’ Roach, LNG activity in southeast Asia, particularly in Indonesia, remains a hot-spot for his practice. The firm is advising Indonesia’s largest independent exploration and production (E&P) company, PT Medco Energi, in connection with the Donggi-Senoro LNG project in Sulawesi, being developed in conjunction with PT Pertamina (Persero) and Mitsubishi.

Changed spaces

While E&R dealflow may not have been as adversely affected as that in the M&A or equity market space, it has nonetheless seen its fair share of change since the onset of the financial crisis. “During a period of depressed metal prices, low demand and a tight credit market, mining companies try to cut costs and operate more efficiently,” says SyCip’s de Leon. “They focus on core assets, and in certain cases they divest assets that are not on their priority list.”

Part of this positioning also involves seeking out alternative financing arrangements. “Since bank financing can be very difficult [to obtain] mining companies try to raise funds through joint venture arrangements and bringing in strategic investors,” de Leon says. He goes on to note that while “only the brave” would contemplate listing their shares on stock exchanges and conduct public offerings at this stage, it is more common for some companies to scale back their operations or place certain projects on hold.

While the focus of mining clients may have changed, the way deals are structured – at least in the Philippines – remains largely the same. “I have not seen major changes in how deals are done and structured insofar as Philippines transactions I handle are concerned,” de Leon says. “There are tried and tested means of structuring deals and while we are always on the lookout to innovate, the structures used prior to the financial crisis are still adequate for this purpose. There may be a tightening in the way some provisions are drafted, in order to address the issues and concerns brought about by the GFC.”
As novel forms of financing are becoming popular in other Asian jurisdictions (mechanisms like forward sales of revenue streams or ‘flow-through shares’) these have not yet reached the Philippines – although de Leon does not rule out the possibility that they may arrive soon.

NEXT: Liquid sectors

Liquid sectors

The focus of companies in the oil & gas segments of the industry is decidedly different. In this regard, the buzzword is very much ‘invest’ rather than ‘divest’. Here, Roach notes that a number of E&P companies are “aggressively pursuing new acreage opportunities in Asia-Pacific, – particularly in Indonesia, Australia, Thailand and Vietnam.” Similarly, the recent coal-bed methane (CBM) gas developments are also attracting a lot of interest. “There has been a lot of attention lately on CBM opportunities given the developments in Queensland (Australia) where a number of international E&P companies have spent billions of dollars to acquire CBM acreage and are planning large-scale LNG projects, in conjunction with Australian industry players such as Santos, Arrow Energy and Origin Energy,” he says.

There are similarities with mining companies de Leon speaks of above, insofar as some E&P companies are also looking to effect acquisitions. “Many companies are also seeking to add production through acquisition rather than the drill-bit. We are working with a number of clients who are actively on the hunt for production,” Roach says.

National resources

Resource nationalism and protectionism in the E&R sectors is nothing new, as those familiar with the industries in Mexico, Iran, Libya and Venezuela will attest. One of the outcomes of the global financial crisis, however, will no doubt be paying closer attention on what impact – if any – foreign involvement will have on local companies and domestic E&R reserves. Roach believes that irrespective of what course the financial crisis takes in the short to medium-term, regulators across the Asia-Pacific region will realise that foreign involvement in domestic E&R sectors is necessary, while potentially being politically undesirable. “While regulators and national governments will always prefer companies and national oil companies to develop their reserves, there are major technological and financial issues that need to be overcome in many cases,” he says. “Partnering with experienced and well-capitalised multinational oil and gas companies is a necessary evil when viewed from this perspective.”

This is also a reflection of the fact that some domestic and national oil companies have not reached the same level of sophistication as their international counterparts, although, says Roach, this is quickly changing. “Multinational oil and gas companies have access to technology, and in many cases downstream marketing networks, that most national oil companies do not possess. While this is changing, if you are faced with a deep-water drilling campaign, or a multi-billion-barrel oil or multi-trillion-cubit-feet gas field, it is generally a given that some degree of foreign participation will be required.”
Prohibiting foreign involvement in some sectors within the E&R industry, as some regulators across the region have sought to do, may in the long run actuahlly be harmful to national interests. “Enhanced and secondary oil recovery is another area where international oil companies have technological know-how and experience from foreign operations that can be brought to bear. To preclude foreign participation in those areas will not be optimal from a production and recovery perspective,” Roach says.

Flexible outlook

Regardless of whether the discussion is about mining and minerals or oil and gas, lawyers will be required to adapt their approach to practicing in the E&R sector. Whether this adaptability takes the form of making sure they are as well-equipped to deal with effecting multi-billion dollar deals as they are with covering off the legal aspects arising from putting projects on ‘care and maintenance’, there are a number of emerging issues that practitioners must confront head-on, if they want their E&R practices to continue to fire up. Being flexible on fee and obilling arrangements is always a good place to start. The need to establish clear and open dialogue with clients about how practitioners can deliver higher-value, more cost-effective service is cited by in-house lawyers as one of the most important areas in this regard. As is the need to develop ‘client-specific’ fee arrangements, as Roach points out, that are in some cases fixed or “result in both [lawyers and their clients] sharing the pain.” ALB