20 February 2006
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11 March 2013
International projects in the power, water and oil and gas sectors have been pumping out multibillion-dollar deals with startling regularity. But with Allen & Overy (A&O) becoming the last of the magic circle to take the sword to its projects practice, it is arguable which firms are best positioned to make the most of these emerging markets.
From the Nigerian oilfields to the gas reserves of the Caspian Sea and the massive water and power plants in the Middle East, the battle lines have been drawn. Casualties have been seen from both the UK and US. Cadwalader Wickersham & Taft recently cut loose its projects team. It was neither receiving any work from the mega-deals, nor competitive in domestic PPP/PFI work. A&O partners have had their equity points cut, signalling the death knell for pure lockstep, but that will be a slow and bloody battle played out on a different field. Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters have all made recent cuts to their projects practices.
In this market, the magic circle firms not only have to battle with each other, they are also facing increasing competition from the London offices of US firms, which have a few aces up their sleeves.
The competition is fierce and the competitive edges few and far between. Fee capping has to be balanced with profitability and budgets and the strain is showing. So where are the players positioned?
Latham partner Joseph Blum says: "From London we do more sponsor and bond underwriters work - it's really varied. We try to stay at the high end, where we have a traditional focus on oil and gas in the Middle East, Kazakhstan and West Africa."
Milbank partner Phillip Fletcher says the firm handles both oil and gas, and increasingly power and water. "I don't see things changing too much. You'll continue to see us on the lender side," he says.
Sullivan partner Jamie Logie comments: "Our focus is on energy, natural resources and oil and gas in all its shapes and forms. We're usually on the sponsor side of deals, reflecting our corporate client base."
Philip Stopford, partner at White & Case, says: "We're more than just a US firm, with offices and expertise in the emerging markets. Historically, we were almost exclusively lenders, but now we do more with the sponsors and have substantial work for both."
Several US firms argue that their key strength, and the one the magic circle has struggled with most, is the lack of baggage they bring to the table. US firms often have only a handful of lawyers in the practice group, all of whom are willing and able to divert their attention to other areas of work when the projects are a bit slow. As one US partner explains: "A UK firm brings a separate team for the joint venture arrangement, another for the commercial contract, another for the construction, another for the financing and another for the competition. You end up dealing with half-a-dozen teams, with a slightly disjointed approach."
Another says: "Flexibility is the key. If we're not doing projects, we're doing M&A or other corporate work. Likewise, if a big deal lands on the table, we can drag in up to 15 associates just in London to pitch in. You don't get that in the UK firms."
Is the price right?
The difficulties facing projects teams need to be put into context. More companies are looking to realise their oil assets, and demand for liquid natural gas (LNG) is at its highest point. Oil prices continue to reach record highs at a time when the US dollar is weak against the pound. Making a profit when you are billing in sterling has become a whole lot harder.
US firms do have certain advantages, however. Fewer staff, smaller offices and tighter overheads: combine these with a narrow focus on top-end deals, plus extensive US-based resources at your fingertips, and all of a sudden you have a tightly controlled and effective project finance machine.
The massive amounts of money involved are forcing the companies behind these projects to demand better price competitions from their legal advisers. Indeed, fixed rates or price-capping is becoming increasingly common for the second or third stages of deals.
The place to be
The push is on to tap the newest emerging markets, with Africa shaping up as the next frontier. It is the political uncertainty and scarcity, or sometimes complete absence, of pre-existing infrastructure that is creating plenty of billable hours on complex documents for lawyers on both sides of the table.
"The more political uncertainty you've got, the more of an emerging and untapped market it is with inherent risks; and the more complex your contract is, the more carriage of documents you've got and the more money you can make out of the deal," says one projects partner. "Once a project or a region sees a few deals, it becomes less novel and there are lower fees in it."
Fees from acting for the lenders can vary wildly, which is why the prize every practice wants is regular work from the sponsors.
"It's dangerous to get too close to the banks because they drive hard bargains and there's fierce competition among them to finance these deals. If your bank doesn't get the work, then you've got no work," explains one partner.
Which is probably why A&O projects head Graham Vinter is so keen to dispel the myths about his firm. "There's a natural perception we do just lenders because of the financial strength of the firm, but that's not the case," he says. "If they think that, we just roll out the stats and figures and prove otherwise."
And impressive statistics they are, with A&O topping deal tables for 2005. So why, then, did the firm need to cut partner equity points? "It's always been profitable, but it's a question of relativity," argues Vinter bravely.
Another ace up the sleeve of the US firms is their client base. Most of the sponsors are US companies, and the US is the world's biggest energy consumer. Indeed, most of the big oil majors are US-based. Linklaters gets a look in with BP ("It's hard to get much more British," laments a US partner) and the magic circle has made some inroads with Shell. But Sullivan is one firm that has capitalised the best. It has a loyal client base through its corporate team, a situation even US rivals describe as "really quite frustrating". Every firm will tell you it acts for both sponsors and lenders, but the truth is that the US firms have the sponsor market sewn up pretty tightly.
Even Vinter is forced to admit that it is only through acting for lenders that they can get close to the sponsors, but in the next breath he says the firm has a balanced portfolio of both.
Milbank, through practice head Phillip Fletcher, is known primarily as a lender's adviser, but according to rivals it is equally well known for riding the wave of US-completed work and spending considerable time dabbling in other areas to keep its lawyers busy.
The small teams and narrow focus mean that, with the exception of White & Case, the US firms have turned their backs on domestic PPP/PFI work both in the UK and in Europe.
One US partner comments: "We've never been in it for the simple reason you have to add infrastructure to do it. You need planning, property, employment and tax expertise. And now, with the increasing competition from the regional firms, it doesn't make sense."
So the US firms are aiming for, and winning, the cream of the crop of mega-deals. Magic circle firms are forced to look for the second tier of deals, dipping into European infrastructure and second-tier oil and gas companies. Here they start to clash with the likes of Norton Rose, as well as Herbert Smith, Lovells and Slaughter and May.
At the top, the White & Case model is slightly different, with an expanded network of offices that leaves it somewhere in between the typical US London model and the big monoliths of the magic circle. It, too, is increasingly looking towards infrastructure projects born out of Eastern Europe's accession to the EU. But will all the current players survive? And is there any room for another in the market with at least one (Berwin Leighton Paisner having set out its stall to compete with the global project giants recently? The current crop thinks not.
Vinter at A&O says: "You've got all these firms nipping at the edge, and I think a time will come when one or two will say, 'this is not for me'. It's equally likely to be a US or magic circle firm, and I'm convinced we'll see one from each side take that decision."
But who? Nobody would be drawn on that topic, but the suggestion is that it is already happening.
Blum at Latham is one who seems to have set his stall out for where he will take his firm. "I wouldn't expect us to be hired for Eastern European work, and it's not our focus," he says. "We see a lot more opportunities in Western Africa, and that's where we're going."
A clear sign of a change of direction in 2006 from a firm that has ridden Qatar LNG projects to the top in the past.
With such scope for continued gas exploration, and the emergence of massive power and water desalination plants in countries such as Saudi Arabia, it is a bold move to look away from that to a market in its infancy. But with the first Nigerian oil field deal closing late last year, and a couple of whoppers looming on the horizon, it may yet prove to be the smartest move Blum has ever made.
White & Case is taking a broader view, according to partner Philip Stopford. "We've made strategic investments and diversification in what we can do. Geographically, we've got the offices and we marry those into where we think the business is going," he explains. Even Stopford's job title - head of energy, infrastructure, project and asset finance - gives some clue to the broad net the firm is trying to cast.
There is no doubt project finance is in for the long haul and, while the economic conditions remain right, the multibillion-dollar mega-deals will keep pumping along. But it remains to be seen which firms will be right there with them. There have been spectacular years and there have been bad years, but the industry demands project finance practices trundle on.
Project finance practices will never make the returns seen in M&A, where four times the fees can be made in a third of the time, but perhaps Vinter sums up the future the best when he says: "We'll always be there, always looked upon as being slightly boring, but we'll always be there.
RasGas 2 & RasGas 3 LNG expansion
Details: 2005's largest project by value, the combined $8.1bn (£4.65bn) LNG project in Qatar was financed through a combination of debt bond offerings and commercial bank lenders.
Advisers: Latham & Watkins advised the sponsors ExxonMobil and Qatar Petroleum. Skadden Arps Slate Meagher & Flom advised the bond underwriters Lehman Brothers and Goldman Sachs, as well as the commercial bank lenders.
Details: $5.8bn (£3.33bn) project for the production of natural gas offshore from Qatar's North Field and transport by sub-sea pipeline onshore to Ras Laffan Industrial City in Qatar, where it is processed into 7.8 million tonnes of LNG per year for export to the US.
Advisers: White & Case advised the sponsors Qatar Petroleum, ConocoPhillips and Mitsui. Allen & Overy (A&O) advised the lenders, US Export-Import Bank (US EXIM) and Japan Bank for International Cooperation. Skadden advised the commercial lenders.
Details: $3bn (£1.72bn) independent power and desalination plant in Abu Dhabi.
Advisers: Norton Rose advised the sponsor consortium, which included Marubeni, Japan Gas, BTU Power and Powertek. White & Case advised the Abu Dhabi Water and Electricity Authority. Simmons & Simmons provided local law advice. A&O advised the commercial bank lenders.
Details: $2.5bn (£1.44bn) power and water deal, the largest single greenfield international water and power project to date globally and the first of its kind in Saudi Arabia.
Advisers: Milbank Tweed Hadley & McCloy advised lenders Riyad Bank, Saudi Hollandi Bank, ABN Amro and Arab Bank. Al Rajhi advised on Islamic finance, Kexim and Hermes on export credit agencies, while Clifford Chance advised the Saudi government-owned Water and Electricity Company. A&O advised on finance aspects and Trowers & Hamlins, on project documents, advised Shuaibah Water and Electric Company. The consortium consisted of Khazanna Nasional, Tenaga Nasional, Malakoff, ACWA Power and Mada.
Details: Coinciding with Qatofin, this $2.1bn (£1.21bn) project, the larger of the two, saw similar issues, with the addition of an export credit agreement. It was complex for all parties involved because of the simultaneous closing of three projects and two financings. Both Qatofin and Q-Chem 2 project financed the Ras Laffan ethane cracker, which serves both projects.
Advisers: Latham & Watkins advised sponsor Qatar Petroleum and Chevron Phillips. Skadden advised the commercial lenders. White & Case advised US EXIM.
Details: This $1.1bn (£630m) project used a different set of advisers to the Q-Chem 2 project. It was complex for all the parties involved because of the simultaneous closing of three projects and two financings.
Advisers: Milbank advised sponsor Qatofin Company, while Linklaters advised the commercial bank lenders.
Nigerian Satellite Oil Field Programme
Details: $600m (£344.6m) Nigerian upstream oil field programme for three of the 22 undeveloped satellite oil fields in the area. Many more deals in this region loom on the horizon.
Advisers: Latham advised the sponsors ExxonMobil and Nigerian National Petroleum Corporation. Milbank advised the commercial bank lenders.
Hamma Water Desalination Project
Details: The largest desalination plant in Africa and the first PPP in Algeria, with a capital value of $250m (£143.7m).
Advisers: Milbank advised the sponsor Hamma Water Desalination Company. Clifford Chance advised the Overseas Private Investment Corporation.