RPME speaks to the experts from the region’s legal market about the latest developments in the refining and petrochemical’s market
If you are reading this magazine, you’ve probably noticed that the Middle East’s downstream hydrocarbon industry is growing. Last year alone, the GCC’s petrochemicals capacity reached 127.8 million tonnes(mt), a 5.5 per cent increase from 2011.
This spending has gone towards upgrades on existing facilities; such as in Iran, where plans to spend $8 billion on revamping refineries throughout the country are already in motion; and to the building of new capacity, such as the Jubail and Yanbu refineries. Naturally, as the size and scale of these projects increases, so does the need for legal expertise.
“There will be good opportunities in the future, refining from an investment and ROI perspective is something that a lot of governments and state owned companies are looking at very seriously,” says Leroy Levy, partner at King and Spalding in Dubai.
“There are refineries around the region, but there are certainly projects that are being planned and where the projects are, the legal work will ultimately follow.”
The scope of work that lawyers are finding in the downstream industry is wide and all-
encompassing.
“The majority of our work involves advising our clients in relation to the development of new downstream projects in the region, and the investment in or development of such projects by state owned entities elsewhere in the world,” says Adrian Nizzola, partner at Simmons & Simmons in Abu Dhabi.
In fact, the downstream projects in the region are among the largest, most complex in the world. For an idea of the size of these projects, one need only look at the $20 billion, Sadara project in Saudi Arabia that is set to be one of the world’s largest integrated chemical facility, as well as the largest facility ever built in a single phase.
Surprisingly, this boom in downstream project work comes in the face of a general slowdown in the development of new projects in the European and North American markets, where the work tends to be concentrated on dispute resolution or the sale and purchase of aging downstream assets, according to Nizzola.
The Middle East on the other hand, has become an attractive region for downstream investors, with its access to capital, feedstock… and lawyers.
So exactly what type of advice is this legal counsel providing?
“Petrochemicals covers a wide range of agreements, which cover a wider range of legal fields such as; construction law, EPC contracts, specialized technology used in the petrochemical plants, technology licensing, supply of catalysts needed to produce products, everything that requires specialist types of legal support,” says Levy.
Depending on the precise nature of the transaction at hand, lawyers are typically first engaged to assist in the establishment and structuring of a project vehicle, typically using a joint venture agreement.
Once the corporate structure has been determined, they are involved in the drafting and negotiation of the key project agreements including the feedstock supply agreement, EPC contract, technology agreement(s) and the offtake/marketing agreements.
If the project is seeking advice on financing clients are usually advised on the full suite of financing agreements and the security package.
But the work does not stop there, after a project reaches financial close, the nature of required legal support will change to reflect the status of the project. “In general, our clients require continued advice in areas such as compliance with local laws, interpretation of key project agreements, branding and trade mark protection,” says Nizzola.
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“In the event of a dispute in relation to the project, we also advise clients on the most effective means of dispute resolution, including negotiation and arbitration.”
One would assume that with all the paperwork in front of them, a lawyer’s fees would be sky high. But Nizzola is under the impression that with the exception of specialist advice such as tax and Islamic finance, legal costs are not rising alongside the work.
“There has been a recent drive across the energy sector to keep legal work in house as far as possible, this trend has intensified as a result of the cost pressures placed on our clients during the financial crisis,” he explains. “Government owned companies, whilst perhaps less sensitive to cost pressures are also cutting back on their external legal spend.”
At the same time, legal costs have been kept down by the prevalence of international law firms, particularly in the United Arab Emirates and Qatar.
“Increased competition has placed a downward pressure on fees and also led to a general move away from invoicing clients by reference to hourly rates,” says Philip Stevens, associate at Simmons & Simmons. “Many believe that the market for legal services in the region is close to saturation point and that some international firms may be forced to scale back their regional operations.”
But Christopher Pederson, VP UAE of Hill International Claims Group, believes that the legal market might not actually be so crowded. “There are plenty of opportunities for all. The difficulty is not in winning work, but agreeing a fair final account,” he explains.
Rather, he believes that the bigger challenge is that the big governmental and quasi governmental organizations are still learning to use the modern standard forms of contract and as a result there are a growing number of disputes in the region. Fortunately, he sees this as part of the region’s learning phase.
Eventually, “the selection and appointment of impartial contract administrators and moving away from ‘lowest price wins’ policy will improve the situation and reduce disputes.”
Of course the government’s involvement in downstream projects is not all bad; in fact, state involvement is actually proving to be a catalyst for the major projects.
“Generally financing is relatively easy to secure, and is governmental in nature,” says Purser. “It may sound counter intuitive, but the largest projects are often easier to finance than the smaller ones. Large and strategic projects often come with governmental support, in the form of off-take agreements, sovereign wealth fund investment and support from state controlled or owned financial institutions.”
All-in-all, it’s apparent that as the region’s downstream market continues to mature, the legal industry can expect to see more contentious work. It seems that these lawyers can also expect to see an increase in M&A activity as industry participants begin to adjust their downstream portfolios, and ultimately, that means there’s going to be a lot of work ahead for the lawyers.
“We expect to see continued fierce competition between international law firms […], over time, the price pressures on international firms may force many out,” concludes Nizzola.
In Numbers
– 127.8 million tonnes of petrochemicals capacity was reached by GCC in 2012.
– 5.5% of increase in the GCC’s petrochemicals capacity from 2012 to 2013.
