Scotsman Legal Review: Energy

The impact of the Energy Act on North Sea drilling will take time to emerge.

Supply continues to outweigh demand in the oil and gas industry, leading commentators to predict little change in the price of a barrel in the foreseeable future.

“The talk in the industry is around getting used to the oil price being ‘lower for longer’ or indeed ‘lower for ever’,” says Norman Wisely, partner at CMS’s Aberdeen office.

“Oil companies and service companies alike are therefore having to adapt from being used to a high oil price environment to how they do business now with what may be a low price in the longer term, and it has been very difficult for most.”

The volume of companies going through redundancies in the North-east has generated work for law firms, which are brought in to handle distress and insolvency-related issues.

“We acted on the two North Sea oil company insolvencies which have happened to date as advisers to the companies, and then laterally, as the administrators of those companies,” says Wisely.

“First Oil and Iona Energy entered administration and there is a significant amount of legal – and other – work dealing with the contracts, insolvency and regulatory position while facilitating a sale of the assets to ingather monies for the secured creditors.

“I don’t think we have seen the last of insolvencies in the sector, as many oil companies continue to experience capital and cashflow issues, and breaches of banking loan terms and the terms of their various oil licence-related contracts as a result.”

Doom and gloom aside, there has been talk of “green shoots of recovery” with pockets of mergers and acquisitions activity keeping law firms busy.

BP increased its interests in the Culzean field while other oil majors are looking to both rationalise elements of their North Sea portfolios and invest in the future of the North Sea.

The Energy Act 2016 was passed on 12 May, formally establishing the oil and gas regulator – the Oil & Gas Authority (OGA) – as recommended in the Wood Review.

The act gave new powers to the OGA including access to external meetings, data acquisition and retention, dispute resolution and sanctions.

“One key element of the Energy Act is to introduce a principle of maximising economic recovery (MER), put simply, aimed at requiring oil companies involved in the North Sea not just to consider their own interests but to work to achieve hydrocarbon recovery for the benefit of the basin as a whole and the other oil companies involved,” explains Wisely.

The powers under the Energy Act came into effect on 1 October and it has yet to be seen how the OGA will exercise them with regard to requiring companies to work collaboratively.

The renewables industry has suffered with the end of the subsidy regime. Developers have slowed down activity as they regroup and plan the next move.

Ongoing developments are occupying lawyers’ time, as well as community renewables schemes which, according to Nick Jones, partner and head of the energy group at MacRoberts, are generating some interesting work.

“It’s generally single or perhaps two-turbine sites,” says Jones. “There’s a lot of interest from the general public – people seem keen to support community schemes.

“We are starting to see some entrepreneurial activity from people who realise the landscape is different now and are trying to approach these things in a different way.

“They are speaking to developers who have had to shut up shop with some new ideas going forward.”

On the corporate side, MacRoberts has been involved in big buyouts and corporate finance deals, with some inward investors coming into the UK.

The firm acted for global wind tower manufacturer CS Wind Corporation of South Korea in relation to the acquisition of Wind Towers Scotland, based in Campbeltown, Argyll.

The effects of the recent subsidy cuts have been felt across the board in what Patricia Hawthorn, partner at Shepherd & Wedderburn, describes as a “prolonged period of ‘tough love’ on the part of the Westminster government”.

Hawthorn optimistically predicts recovery in the market, if not to 2014 levels. “It will recover and our strategy has been to stay close to those we know are committed to renewables long term, to help them restructure and refocus their businesses and investigate new areas of opportunity – like storage and heat and re-powering existing sites to drive cost reduction and improve efficiency,” she says.

Regardless of the sudden cuts, announced at the beginning of the year, there are longer term projects which are keeping Hawthorn’s team busy.

“The last year has been very busy for those supporting delivery of onshore renewables projects going for ROCs [renewables obligation certificates] before that regime comes to an end,” says Hawthorn.

“In the wider Shepherd & Wedderburn team, this means property and construction, some consenting and of course corporate and financing work.

“And we have continued our consenting work for offshore wind projects with another significant consent granted in August and major litigations still running on another.”

Aside from the rush in the last year to meet deadlines for the support mechanisms, Derek McCulloch, partner at Gillespie Macandrew, says he has witnessed a sense of confidence from clients – both developers and landowners – that non-subsidised larger wind, particularly onshore, will have a future.

“We are reasonably confident in that and in fact we are still entering into option agreements although timing of investment will still rely on electricity prices and government policies,” says McCulloch.

“We see a future for mainly larger wind onshore and offshore; smaller onshore projects are much more difficult unless the risk of cap ex is supported by policies.”

The market for buying portfolios of existing supported renewables has carried on regardless, with interest focused on wind and hydro as well as biomass.

“You can see why because there are a number of projects that still have a period to run under the support mechanisms, therefore those portfolios have a particular value in the market to private equity and other investors.”

The outlook among lawyers in terms of acquiring new projects is not as optimistic as recent years.

“Last year was a very busy year,” says Jones, of MacRoberts. “I’m less confident that this year will be quite so busy but so far it’s holding up.

“We shall need to be quite innovative in where we look for work perhaps in the second half of this year.”

Briefing: Oil & gas, by Clare Munro

Two significant developments this year have been the Energy Act becoming law and the Oil & Gas Authority (OGA) being created.

The OGA’s first year as a regulator will be critical in terms of how it establishes itself and engages with the industry.

This year has seen the continued rise of entrepreneurial businesses and private equity investors, who are primed and waiting to capitalise on lower oil prices by acquiring upstream and midstream assets.

After a slow start, mergers and acquisitions activity is beginning to ramp up with a number of North Sea players appraising assets that are up for sale.

We are seeing signs of recovery with the oil price recently tipping over $50 a barrel for the second time this year and an increase in activity across the board, including a promising rise in the amount of drilling work being tendered.

Drilling activity has included a number of contract awards for well decommissioning, as plugging and abandonment is estimated to account for 45 per cent or more of total decommissioning costs.

Decommissioning of topsides and subsea infrastructure is a rapidly emerging market, with challenges and opportunities for the supply chain and operators – the former attempting to develop necessary skills and resources, and the latter attempting to identify opportunities for continued use of existing infrastructure to extend field life and support opportunities for satellite developments.

Clare Munro is head of infrastructure and energy at Brodies.

Briefing: Onshore wind assets, by Colin Innes

A range of options are available to operators of onshore wind farms, nearing the end of their design life.

These range from seeking to extend the life of the existing turbines to 30 years – “life extension” – or redevelopment on the existing site, but with new generating assets, usually described as “repowering”.

Both approaches will undoubtedly play a critical role in the further development of the onshore wind sector in the UK, and at the same time afford an opportunity to start again and deploy the latest technologies with the resultant cost benefits at existing sites.

We have been helping clients understand and evaluate the existing land rights and the changes that may be required to facilitate life extension of these ageing wind turbines.

Most planning permissions/consents granted in the UK have a time limit of 25 years.

If the time restrictions are only contained in conditions then an application to vary the condition may be appropriate, but in other circumstances a more substantive application to vary the permission may be required.

Furthermore, in the event that the original application was subject to environmental impact assessment, it is very likely that an environmental statement may be required.

Colin Innes is a partner at Shepherd and Wedderburn.

The Scotsman’s annual legal review looks at some of the most active areas of legal practice in Scotland. Informed by comprehensive data published by Chambers and Partners and Legal 500, the articles give exclusive insight into the work of more than 11,000 practising solicitors and over 460 practising advocates.