The American Lawyer: Energy Levels

11.03.2013

American Lawyer Focus Europe Russia Report

Energy is a significant sector for the leading Russian and CIS law firms, and with a thrust in oil prices and new opportunities for companies here, this is only set to continue.

Russia has seen an increase in activity in the energy sector recently, not least thanks to the advantageous oil prices which have attracted domestic and international players to the market. Despite a drop in M&A across leading markets internationally last year, Russia saw an encouraging increase in deals in the energy sector, which is now a dominant force in the market. Transactions totalled USD 4 bn, and included highlights such as Gasprom Neft’s acquisition of 50% of Beltransgas shares and OJSC Lucoil acquisitions of shares in ConocoPhilips.

Not only has this signalled a new appetite for Russian assets, but it has also spelled good news for the leading law firms with strong energy capability. Firms here haven’t always been in a position to leverage off a healthy energy market, however. This, despite Russia’s long standing status as a major oil producer and exporter. Kyle Davis of Goltsblat BLP explains this had a lot to do with a stalling deal pipeline. ‘Even though Russia has been a major oil producer and exporter fordecades, during a period between the early 2000s and about four years ago many law firms with Moscow offices, even those with a strong international energy practice, didn’t maintain an on-the-ground capability because there was not a lot of deal activity’.

However, despite ongoing economic ricochets across Europe, the energy sector has been, for many firms, one of the most important practice areas. ‘In the past few years you’ve seen a big increase in activity and Moscow is again teeming with oil & gas lawyers who are beingkept busy representing Rosneft, Gazprom Neft and other Russian oil companies both private and state-controlled, as well as the foreign majors that are partnering up with them. The deal flow has been outbound and inbound, upstream and downstream’ adds Davis.

This thrust in oil prices has not only got deals off the ground, but is also a good indication of the popularity of Russian assets and investment levels. The activity has not, however, been astronomical, despite having a considerable effect on the market. ‘Although there has been no repetition of the big sovereign wealth fund, IOC or big trading house cooperative ventures as were much hyped prior to the crisis, an oil price up towards and past USD 90-100 is hugely significant in terms of appetite for Russian assets and the willingness of the government to take measures to stimulate investment in production and other infrastructure’ explains Robin Wittering, partner at Egorov Puginsky Afanasiev & Partners.

Nonetheless, there is a question mark over how far oil prices are actually attracting investors. As Vladislav Zabrodin, managing partner at Capital Legal Services points out, while high oil prices do prompt heightened activity levels in investments into oil production and refining, ‘these investments are considered to be investments in strategic industries and require special government approval’. This increase does lead inevitably to a drop in investors’ interest in risk assets, ‘such as shares and bonds of companies involved in the oil sector, as their prices may drop after some time. It has to be mentioned that there is redistribution of oil and natural resources money in the country and investors are very interested in other fields that are significantly growing last years, like retail, pharmaceuticals automotive, and so on’ Zabrodin adds.

However, with a climate of uncertainty across Europe, how far are investors – even in a sector as strong as energy – affected by the Eurozone downturn? While Russia has increasingly set its stand out globally off the back of its roaring energy sector, it is impossible to ignore the fluctuating levels of M&A and investment across Europe. Nonetheless, there has been little noticeably impact on the sector thus far, partly thanks to the growing strength of domestic investors. The Eurozone crisis had little impact on the deal flow in the oil and gas sector, which never dried up during the crisis’ says Moscowbased Alexey Frolov, head of Russia’s energy and natural resources practice group at Baker & McKenzie. ‘We are now seeing increasing activity of clients in the oil and gas and oil field services sectors.  The deal flow in other sectors has been negatively affected’.

‘It would be surprising if it dropped off significantly’ says Davis, who notes that this prediction has a lot to do with the increasingly international nature of the sector. ‘Now that Russian state-controlled oil companies are going global in an increasingly big way, it seems there’s also an acknowledgment that if Russia is seen as an oilproducing country that has opportunities to offer for foreign majors, it will open doors for Russian companies. It seems unlikely that this approach will change if oil prices fall and make some projects less economical – it’s possible that the Russian policy response will be to open up foreign investment to some of the lower-hanging fruit’. It is certainly true that major Russian financial institutions and leading corporates are increasingly playing lead roles in the biggest deals. This is linked with the growing profile of Russian state banks as the hike in deals involving domestic investors is more and more evident. Russian business is increasingly geared towards outbound investment and operation on a global scale, with leading firms moving much more towards advising domestic clients as the investors on cross-border M&A and joint ventures. As Akin Gump corporate and energy partner Natalia Baratiants explains, the firm ‘continues to have a strong deal flow from energy companies that are currently focusing more on joint ventures with local partners for their greenfield projects in the frontier regions of Russia capitalizing on the synergies of their combined efforts’. Partner Alexey Kondratchik agrees; ‘This also brings the firm a flow of M&A transactions as Russian oil majors acquire domestic smaller oil and gas companies to expand their asset base’.

The dominance of the energy sector in Russia continues to provide a strong deal pipeline for the leading firms, and competition is fierce for the biggest deals. ‘Law firms are pack animals, and competitive. When they see their peers working on exciting deals in the Russian oil business it doesn’t take long for others to take the leap. So the market is getting more crowded with practitioners looking to get a piece of the energy business’ notes Davis.

And given that the strength of the oil and energy sector does prompt activity from international companies involved this industry, an growing need for broader legal service is the inevitable result. There are without doubt ‘grounds for optimism’ agrees Wittering. ‘And, certainly, in considering a move back into the market I take the view that investment themes featuring a Russian element will be back on the agenda’.

By Anastasia Hancock

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