Senior Energy Lawyers London Networking Luncheon

Transcription

1 Senior Energy Lawyers London Networking Luncheon Thursday 1 st May 2008 Cripps Sears & Partners 11th bi-annual Networking Luncheon for senior lawyers with an interest in the Energy sector was held on Thursday 1st May 2008 at the Baltic Exchange. Nineteen senior lawyers attended from a mixture of UK and US law firms and energy companies. Note: The Chatham House Rule applies at our lunches. Accordingly this note seeks to summarise briefly the points made during our conversation without attributing them to individual attendees. The note is not exhaustive and does not necessarily reflect the views of Cripps Sears & Partners. Apologies for any omissions or unintentional inaccuracies. 1. Can HMG allow a bid for, or JV with, British Energy to proceed without requiring BE to divest some of its sites in order to ensure that there is a possibility of competition for nuclear new build? British Energy in whatever form - is of course expected to play a key role in the drive for new generation nuclear plants in the UK. HMG has conflicting interests on the one hand, to encourage a Dutch auction (which is looking less likely) in order to secure the best possible price, and, on the other, to resolve the ownership issue as early as possible in order to kick-start the new build programme. There are concerns that a drawn out

2 auction could jeopardise new build particularly if the credibility of the government continues to be undermined. A number of potential suitors have been mentioned, and any investment in BE will most likely entail the purchase of the UK government's 35.2% stake in the utility; which could then lead to an outright offer for the entire company. The most likely purchaser is EdF. The fact that nuclear power accounts for the majority of that company's business would enable it to bring to the UK power sector significant nuclear expertise, much of which does not exist currently in the UK. Indeed, considering the stable nuclear environment in France, the company's expertise in the field and its expansive business strategy, as well as the possible economies of scale that would be derived from the acquisition, EdF must be considered the forerunner and any acquisition by them would undoubtedly be advantageous for the advancement of nuclear technology in the UK. It was agreed that the government is wary of enabling any one buyer to have a controlling stake. This was seen as particularly relevant in the current economic climate where the largest players are getting bigger and the barriers to entry for smaller companies are getting higher and higher. Conversely, as nuclear is the most competitive segment of the power market, the consolidation arising from the acquisition of BE would not necessarily adversely affect competition. It would, however, signal that the acquirer has set its sights on playing a role in building nuclear capacity in the UK, which would have a positive effect on prices and security of supply. All of the sites selected for new build power stations are on or near those of existing nuclear plants. Bringing such an experience party as EdF to the programme would ensure that the programme is implemented as

3 quickly as possible and reassure contractors and other third parties with regard to risk. Their involvement would enable the actual policy and political agenda to be clearer and although there would still be a degree of risk associated here it would give much more certainty to potentially investors. In conclusion, commercially there is no reason why British Energy s assets should not be acquired by one party although politically this is unlikely to happen, particularly if the potential acquirer is foreign. 2. What is the impact of the shortage of LNG on global energy markets? Is there a need for further importation capacity in the UK? What role can OFGEM and NGG play? The significance of LNG has grown rapidly in the UK over the last few years due to its relative flexibility and, in the face of declining supplies of gas from the North Sea, has been actively encouraged by the Government. However restrictions on capacity in the NTS as a result of historic gas sources being used to set capacity limits are causing disquiet internationally. OFGEM and NGG appear reluctant to tackle the problem head on with a new booking system designed to take account of new and flexible gas supplies. Gas storage and gas, including LNG, importation facilities need a secure and stable NTS capacity regime in order for developers to take forward their projects. The reduction in NTS entry capacity at some entry points has severely damaged confidence in the UK onshore regulatory regime and will act in a way to discourage new developments in the UK market. Furthermore, there is a potential conflict between restricted access to NTS and the requirement to participate in price sensitive global market for

4 LNG. Without flexible access to the NTS for imported or stored LNG and gas, the UK will find it increasingly difficult to compete in the global market. The current system of requiring long term NTS booking is a disincentive to bringing LNG to the UK when higher prices with lower distribution costs are available elsewhere. A long-term contract for LNG has historically been the vehicle for underpinning the large up-front investment risks that characterise LNG projects. The short-term LNG market, while growing, still remains at less than 9% of total trade. The world market for LNG is extremely price sensitive and an active arbitrage market has developed whereby shipments from Trinidad or Nigeria have been diverted away from their intended destination to,say, Korea or Turkey depending on price. So far, because the volumes of LNG in short-term trading are not that large and because of the current shortage of supply, price arbitrage will have its limits in actually establishing long-term price equilibrium among different gas markets. Generally speaking long term contracts will remain an important element in any LNG related project, although the current world shortage of LNG is making sourcing of LNG for new contracts very difficult. For the time being, and as it still has a diverse gas supply, the UK is likely to remain a relatively small player in the global LNG market. OFGEM and NGG however have a role to play in ensuring NTS capacity is available when required to meet UK gas demand, to satisfy the Governmental objectives of flexible and market -driven gas supplies as well as convincing the global market that the UK has a stable regulatory regime.

5 3. There s nothing unsustainable about the way we do things now. Nigel Lawson: appealing to reason or lost all sense of reason? In summary, according to The Times, Nigel Lawson has joined the ranks of the climate change sceptics. He believes David Cameron s green agenda is overblown, biofuels are useless and carbon trading resembles nothing so much as the sale of indulgences by the medieval church. The main crux of Nigel Lawson s argument is apparently that global warming is more likely to be the result of cyclical global trends rather than the intervention of human beings. On that basis he suggests that any investment in renewable energy would be investment wasted. Most attendees agreed that whilst Lawson s arguments do not hold water - he fails, for example, to address the issue of carbon emissions from fossil fuels that he has done a good job of adding further impetus to the debate. At the very least we agreed that even if there is only the slightest chance that the global warming alarmists are right, then this is sufficient reason to consider adapting our sources of energy and our habits when it comes to energy consumption. The demand side issue has not been given enough attention to date. The conversation turned to sustainable energy and the reality of the sustainability of some fuels. The example of palm oil was given and the impact some, supposedly locally sustainable processes, actually have on a larger global scale. An interesting point was also raised that we now live in a disposable society. The amount of waste that we now produce due to a proliferation of packaged goods, over production of foodstuffs, consumerism, etc, has significantly increased from even twenty years ago. Accordingly, it was suggested this is a factor that might have more of an impact than some sustainable technologies.

6 4. Are the good times over: what s the likely impact of the credit crunch on the legal services sector? Stop press: Energy lawyers remain busy! The main impact has been a slight decline in corporate (particularly IPOs), banking and real estate work. However, counter cyclically contentious work has increased. Many expect litigation work to become more prevalent and other work associated with a downturn might include insolvency, corporate recovery and the like. The conversation then moved on to look at the general legal sector and it was suggested that another major effect of the credit crunch might be consolidation within the legal sector particularly in the mid-tier we expect there to be a number of mergers within the next two to three years and, more broadly, across the professional services sector. The impact of the Legal Services Act might allow the multi-disciplinary professional services corporation to evolve. Some expect management consultancies to seek to recruit individuals with legal backgrounds as issues such as risk and regulatory matters become more prevalent in certain sectors. The issues around the administration of companies have become more complex since the new(ish) Companies Act and this may result in a continuing trend of lawyers moving in-house to seek refuge from the storm. It was agreed that the critical factor impacting the pipeline of instructions to energy lawyers remains the potential impact of the credit crunch on interest rates. Twelve months ago banks were falling over themselves to provide financing - more recently debt at the right price is harder to come by - particularly for projects with a substantial value. On the other hand, with the inflated oil price the majors are enjoying bumper profits and have cash reserves they do not necessarily need external financing to fund many projects. We must hope the high oil

7 prices do not tip us over the edge into recession. Sovereign wealth funds are also entering the project finance market more significantly. Finally, it was suggested that the biggest impact of the credit crunch had been in corporate banking, particularly within capital markets and securitisation markets. This lead on to a final discussion about triple AAA rated banks and what reassurance credit ratings can give. It was agreed that the credit rating agencies had lost credibility and their ratings no longer provide the confidence investors or borrowers require. 5. Boris or Ken? On the day of the London mayoral elections our straw pole suggested a significant win for Boris Johnson who attracted 61% of the vote around the table. Many thanks to all those who attended. The next London-based luncheon will be held on Thursday13th November Additional lunches will be held in Moscow and Dubai in February and March 2009 (dates to be confirmed) respectively. Established in 1973 Cripps Sears is an international executive search company with integrated specialist practice groups in the Energy, Construction and Legal sectors. Andrew Somerville asomerville@crippssears.com