Oil price slump and cuts in renewables’ subsidies impact on sector – changes flow as pressure builds
A combination of the oil price slump and the Conservative government’s cuts to renewables subsidies has resulted in challenges across the board for lawyers working in Scotland’s energy sector.
In oil and gas law, while law firms remain busy, the type of work that is occupying their time has changed in the last 12 months as some of the smaller players in the sector struggle to respond to the low price of crude oil.
While renewables teams have maintained a steady work flow, the recent reductions to subsidies by Westminster shocked the market and induced a certain amount of political tension.
“It’s come together at one time,” says Ian McCarlie, partner at Pinsent Masons specialising in the renewables and alternative energy sectors.
“The energy sector has got two challenges – the oil prices and these subsidy changes as well.
“It’s been a fairly challenging market I would say but there’s still an appetite for doing transactions there.
“The summer has been quite a body shock to the sector. The Conservative government came in on a manifesto pledge to reduce subsidies for renewables. That in itself has proved a bit of a shock to the market.
“There’s some political tension between Westminster and Holyrood. The Scottish market has had its challenges there. The market will have to adjust a little bit.”
Nonetheless, McCarlie says business has been good this year and he maintains that there are still opportunities in the renewable energy sector. One example he cites is the continued opportunities around biomass.
“I think Scotland is still seen as a good place,” says McCarlie. “The renewables sector for one gets all the natural resources. It’s just people are now having to make decisions with one eye over their shoulder.
“For us it’s certainly not decreased the deal flow and the work flow that we have. We have been continuing working on on-shore wind and off-shore wind as well. There are one or two solar developments coming through in the Scottish market that we have been involved in as well.”
McCarlie says any significant regulator changes in any market will result in a “ripple effect”.
“It is going to leave some projects challenged at times just to get them built,” he says. “That in itself is creating a lot of transactional work just to get stuff done quickly.”
The challenges faced by the renewables sector are reflected in the EY Renewables Indices for 2015, in which the UK is no longer in the top five, having dropped to number 11.
“Investors require certainty and if there’s a stable political environment and strong regulatory regime that helps,” says McCarlie.
“It’s just making the conditions a bit more challenging. There’s still plenty of activity there provided the government provides some clarity and certainty.”
Looking ahead to the coming year, McCarlie predicts that the market will simply have to readjust.
“I think we will still see renewable development but probably there will be some developers who stick with it whereas others will struggle,” he says.
Oil and gas lawyers in the north-east are also reporting a harsher climate as a result of the drop in oil price. While some firms have seen a decrease in the number of transactions completed, others are embracing a novel work flow.
“Certainly in oil and gas terms, in previous years a lot of lawyers would have dealt with things like contracts involved in new field developments and day to-day-operational activity,” says Norman Wisely, partner at the Aberdeen office of CMS, specialising in oil and gas law.
“That work, I think, has completely changed in the last 12 months in that oil companies are less willing to spend money on private practice law firms.
“We have seen an increase in the amount of mergers and acquisitions (M&A) work as a result of the low oil price, so we are quite busy on that and we are busy on the restructuring side.
“Thirdly, we are very busy on the disputes side. Money is important and companies are a lot more ready to sue each other.”
Wisely continues: “A lot of the work this year is quite novel. It involves a lot more thinking than doing things the old way.”
Clare Munro is partner and head of the oil and gas team at Brodies. She says that although negotiations have been keeping her team busy, they have only completed one deal this year, which was the acquisition by Ineos of the LetterOne DEA assets.
One of two major changes this year which will affect lawyers working in oil and gas was the advent of the Oil & Gas Authority (OGA) which was set up as a result of the Wood Review.
“There’s been really big changes in the regulatory part of the sector,” explains Munro.
“The whole implementation of the Wood Review, the OGA being introduced, the Energy Bill that’s currently going through parliament. That will formally establish the OGA and give it those extra powers.”
As those working in the sector await the implementation of the Energy Act in early 2016, Wisely says there is a feeling of uncertainty over what the changes will mean.
“At the moment while everyone is outwardly embracing this I think people are inwardly feeling nervous about what will change with a new regulator coming in,” says Wisely.
“The other main change in oil and gas law certainly is there’s a new European directive on the safety of offshore oil and gas.”
The new regulator is the Offshore Safety Directive Regulator (OSDR) which was brought in as a result of the offshore safety directive which is EU legislation and is aimed at major incidents offshore.
“This time last year we just had DECC and HSE and this year we have DECC and OGA and then we have got HSE and the OSDR so we have got twice as many regulators as we did last year,” says Munro.
“The OGA is definitely being more proactive. They want to demonstrate that they are making a difference and they really are making a difference. They are generally trying to facilitate some of the difficult commercial decisions.”
In spite of the continuing uncertainty in the sector, Wisely says this is still an exciting time to be a lawyer in oil and gas.
“The reason for that is that because of the oil price you have to be pretty innovative at the moment and doing things the way they have always been done in the North Sea isn’t an option,” he explains.
“I think next year will be a bit more of the same. We will begin to see assets changing hands more regularly. We will see further restructuring. We will see some of the small players being bought up by the larger players.
“Overall I think the OGA will be effective and we will see a lot more collaboration on industry projects.”
Munro agrees that this is an interesting time to be working in oil and gas law.
“It’s always interesting and it’s always challenging. There’s always new things to learn,” says Munro.
“There will probably be more movement of assets in the next 12 to 18 months than there has been.
“Obviously it’s a challenging time for the industry but the industry has tended to be pretty good at rising to the challenge.
“It’s not all doom and gloom although there is a sombre atmosphere. People are working hard and trying to get on with it and make the most of it.”
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