SEIZING NEW

energy

OPPORTUNITIES

Technological innovation, political shocks and regulatory
reforms
are transforming global energy dynamics, threatening
some players’ business models while opening new doors for others,
and forcing countries to forge new export and import strategies.






Conflict in Ukraine alters global energy dynamics



The crisis in Ukraine may cause countries to rethink how energy resources flow within and across their borders, and this could result in an increase in development of energy infrastructure around the world.


In response to the crisis, the European Union and the United States issued sanctions targeting selected Russian energy companies and restricting the provision of technology, equipment and services to Russian entities that develop certain types of energy resources, including natural gas from shale.


Many countries in Eastern and Western Europe depend on Russian gas and oil, and they could face shortages if Russia curbs European exports. It could do so in response to sanctions or due to complications arising from relations with Ukraine, which is home to a major pipeline for distributing gas from Russia to Europe. That possibility has led many European countries to consider developing pipeline and liquefied natural gas (LNG) infrastructure to diversify their access to supplies, increase their storage capacity and speed development of their own fracking capabilities.


Indeed, geopolitics related to Ukraine may already be having an impact on the development of distribution infrastructure as evidenced by Russia’s cancellation of its South Stream pipeline project, which was intended to transport Russian gas across the Black Sea to Bulgaria and on to Serbia, Hungary, Slovenia and Austria.


The implications extend beyond Europe. The crisis has fueled arguments for the United States to help fill the supply gap by expanding its LNG capacity and increasing gas exports. To diversify its energy opportunities, Russia is looking to strengthen relationships with Asian countries—particularly China and India. And countries in the Middle East will adjust their export pathways to meet shifting demand.


Exogenous factors, such as changes in oil prices, could further complicate energy dynamics, adding to the uncertainty about how events in Ukraine will affect global investment. What is clear is that energy companies are keeping a close eye on the situation.






The US shale revolution: Capturing its full value


The US shale and gas revolution has radically changed the country’s energy outlook. But pipeline capacity is lacking and, for various reasons, investors have been slow to support additional pipeline development. The recent drop in oil prices has further complicated the situation.


“The United States has a golden opportunity to become a powerhouse in global energy markets, to truly achieve energy independence and to use natural gas to power our economy. But that path is far from assured without a major expansion of the long-distance pipeline network,” said White & Case partner Daniel Hagan.


To realize the potential of the US shale revolution, the Interstate Natural Gas Association of America estimates that US$641 billion of transport infrastructure investment in the United States and Canada is needed.





To achieve that level of investment, fresh ideas are needed, such as:


Investment incentives
Insufficient incentives currently exist. One way to make pipeline investment more attractive is to add revenue streams from pipeline systems. The proposed Master Limited Partnerships (MLP) Parity Act before the US Congress extends the benefits of MLPs to infrastructure firms and renewable energy concerns and would provide strong incentives for investing in pipeline expansion and boosting clean power generation development.


Innovative investment models have also brought together the pipeline builder, the gas producer and the gas purchaser and seller as equity owners in infrastructure projects—for example, the 177-mile greenfield Central Penn Line scheduled to go into service in 2017.


Improving gas-electric coordination
Lack of coordination between gas and electric power companies contributes to the unwillingness of power generators to commit to firm, long-term gas contracts. Federal Energy Regulatory Commission and industry participants are exploring possible solutions, and stakeholders are pursuing various regional initiatives. For example, the New England States Committee on Electricity proposal includes a request that regional grid operators develop tariff provisions enabling parties to recover the cost of pipeline construction or expansion investment in New England.


Pushing through the bottleneck in LNG export authorization
Tapping into world LNG demand is critical to spurring pipeline investment, but the US Department of Energy (DOE) has been cautious about issuing permits to countries without free trade agreements with the United States. Several bills in the US Congress promote LNG exports to US allies. In addition, treaty negotiations could affect the authorization process. For example, the Trans-Pacific Partnership Agreement, if executed by the United States and Japan, would cause the DOE to automatically approve LNG exports to Japan.


Forging a solid partnership between industry and regulators
The United States needs a national energy strategy to kick-start pipeline expansion. In January 2014, US President Barack Obama ordered a Quadrennial Energy Review that will focus, in part, on determining the country’s infrastructure needs for transmitting, storing and distributing oil, gas and electricity, as well as recommending necessary steps to promote infrastructure investment.


Solving North Dakota’s flaring problem
Much dry natural gas is lost through flaring at the wellhead, particularly in North Dakota. In January 2014, the Flaring Task Force made recommendations that, if implemented, could significantly increase natural gas capture. They include: requiring producers and relevant midstream companies to develop gas capture plans; establishing policies and legislation to facilitate acquisition of the necessary Right of Way for pipeline infrastructure development; and creating financial incentives for advanced capture technologies.




Energy matters


FINANCING ONE OF THE WORLD’S LARGEST NATURAL GAS LIQUEFACTION AND LNG EXPORT FACILITIES

The rapid development of horizontal shale drilling and hydraulic fracturing technology resulted in a momentous shift in the US natural gas market. To take advantage of this market shift, our client Freeport LNG pivoted 180 degrees to develop one of the world’s largest natural gas liquefaction and LNG export facilities alongside its existing LNG import and regasification facility on the Gulf Coast of Texas.

We represented Freeport LNG and its subsidiaries in equity and debt financing of the first two liquefaction trains of the liquefaction project. This landmark transaction brought together a wide range of equity and debt investors with aggregate commitments of approximately US$11 billion, making it the largest financing of any project on any basis in 2014. Moreover, with each of the debt facilities for Train 1 and Train 2 of the facility structured without completion support from the sponsors, the combined debt financing was the largest fully nonrecourse construction project financing in history. We are also representing Freeport LNG in the third liquefaction train, which is expected to close in 2015.



INDEPENDENT PETROLEUM COMPANY AND ALLIANCE GROUP CREATE US$6 BILLION ENERGY JOINT VENTURE

We represented the Independent Petroleum Company (IPC) in the establishment of a joint venture with Alliance Group (Alliance), a leading independent oil and gas player with vertically integrated operations in Russia, Kazakhstan and Ukraine, and the subsequent buyout by IPC of the counterparty’s interest in the joint venture. The aggregate value of all of the assets contributed to the joint venture was estimated to be US$6 billion. The transaction also involved the US$3.9 billion financing of Alliance and the joint venture provided by VTB Bank.



EXPANDING THE PRESENCE OF CANADA’S FORTIS INC. IN THE US ELECTRICITY MARKET

We represented Fortis Inc., Canada’s largest investor-owned gas and electric distribution utility, in its US$4.3 billion acquisition of UNS Energy Corporation, an energy holding company headquartered in Tucson, Arizona.









Sweeping energy reforms open up Mexico to foreign investment


Mexico’s sweeping energy reforms implemented in 2014 make it “among the best opportunities for investment in the world,” said White & Case partner Vicente Corta Fernández.


In August 2014, Mexico’s President Enrique Peña Nieto signed reform bills allowing private companies—foreign and domestic—to participate in Mexico’s oil, gas and electricity sectors. Previously, Mexico’s government had maintained state ownership of these sectors, declaring them off-limits to foreigners and effectively monopolizing much of the country’s economy. Former US Ambassador to Mexico and White & Case Counsel Antonio Garza has characterized the change as “profound and potentially transformational” but cautions that the hard work of “implementing the legislation, putting projects together and then having Mexico truly compete for investment” now begins.


Mexico’s state-owned oil company Pemex, which controls 83 percent of the country’s proven and possible reserves and 21 percent of Mexico’s prospective reserves, will be restructured and intends to seek joint-venture partnerships with private firms. In 2015, private investors will be able to bid on 109 exploration blocks, covering more than 14 billion barrels of prospective reserves, and 60 production blocks. President Peña Nieto has estimated that reforms will attract US$50.5 billion of investment to explore, produce and refine oil by 2018. Although investment is expected to be impacted by the decline of oil prices in the second half of 2014, significant opportunities remain for long-term investors in the sector and in Mexico.







Equally important is the reform of the electricity sector. Similar to Pemex, Mexico’s Federal Electricity Commission (CFE) had nearly exclusive control over generating, transmitting, distributing and marketing electricity. CFE will now be one of many competitors in the new generation market, which is welcome news for manufacturers dependent on lower electricity costs and those looking at opportunities for further North American energy integration.


Additionally, the reforms allow suppliers to render services and products throughout the supply chain, with a premium being placed on a combination of local knowledge and access to both technology and capital from foreign partners. Given tumultuous oil markets and Mexico’s urgency in moving forward, these are likely to be exciting times, Garza noted. “I think you’ll first see some shaking out in the US energy sector, and then those with liquidity and know-how will consolidate, look south, and find in Mexico a country ready to do business.”


In February 2014, Mexico became only the second country in Latin America to earn a single A rating for its sovereign debt, as credit agency Moody’s upgraded it from Baaa1 with a stable outlook to A3, based on the reform process. That, combined with President Peña Nieto’s plan to spend US$316 billion on infrastructure by 2018 and additional reform to Mexico’s public-private partnership framework, makes it clear, Corta Fernández said, that investors see Mexico “as doing the right things and making some very bold moves.”




Quote
The United States has a golden opportunity to become a powerhouse in global energy markets, to truly achieve energy independence and to use natural gas to power our economy. But that path is far from assured without a major expansion of the long-distance pipeline network.
Daniel Hagan
Partner, Project Finance