Global Overview: The global energy industry is never boring!

Stephen D Davis
Vinson & Elkins LLP
Houston

The global energy industry continues to bring new challenges and opportunities to all of its participants. While markets are still recovering from the global downturn of 2008-2009, and the rate of growth in global energy consumption may have slowed, the long-term demands on the industry remain high and only likely to grow. And occasionally, as industry participants strive to meet those demands in increasingly hostile environments, setbacks occur. The reverberations from the Gulf of Mexico Macondo explosion and resultant tragic loss of life, oil spill and cleanup, deepwater drilling moratorium, new laws and regulations, high-stakes litigation and changed attitudes will continue being felt for many years, and not just in the US. Other countries are reviewing their rules, as well, and a number are the beneficiaries of drilling rigs departing for work off other shores.

The past year has seen a storm of activity in US shale gas plays, often joint ventures and joint development agreements involving international players, including those from India, Japan and Europe, with the Chinese not far behind. All this despite the relatively low price of natural gas and not without some who question the long-term viability of the trend. Internationally, interest in shale gas and other unconventional gas plays is peaking as the technology for developing those resources becomes better understood. In Europe, Polish and German shale resources, among others, attract interest, as parties look to lessen dependence on pipeline gas from points east and north. In Eastern Australia, LNG export projects seeking to monetise another unconventional gas resource, coal bed methane or coal seam gas, actively proceed, as do other projects in Northwestern Australia utilising conventional gas production. Australia generally is an attractive location for FDI, with large projects in the oil and gas and mining sectors underway, as well as related M&A activity. Even North America is seeing LNG export activity in part resulting from shale gas, as various Gulf of Mexico LNG receiving terminals pursue export and re-export licences and the Kitimat LNG export project in Western Canada makes progress, even as across the continent Canaport LNG, Canada's first LNG import terminal, completes its first year of operation. Meanwhile, midstream infrastructure buildout, primarily processing and gathering facilities, continues apace, including for shale oil developments, even as challenges exist in the US around the frac water issue. The US has also seen renewed interest in development of greenfield and brownfield petrochemical projects, in large part due to the continued expansion of shale gas plays, the liquids associated with them and a belief among some project sponsors that natural gas prices will remain relatively stable for a number of years.

An attractive destination for many players today is Brazil, with its highly touted pre-salt prospects and attractive M&A environment. While Brazil has not yet finalised its proposed move toward production sharing contracts with Petrobras the mandated operator, international players, not least the highly-acquisitive Chinese NOCs and oilfield service companies, nonetheless are pouring resources into the country. Colombia, which recently liberalised its upstream sector, fares well. More broadly, South America seems to have fared the economic down-turn reason-ably well, due in part to lack of involvement by its financial institutions in US subprime mortgage structures, and continues to attract foreign direct investment, although challenges remain, particularly in Venezuela and Ecuador. Across the Atlantic, Africa shows signs of development. For example, LNG projects in Nigeria and Angola proceed, as do geothermal projects in Kenya. Libya is less in the news than it was when it first reopened for business a few years ago, while oil and gas discoveries continue to be made in Egypt. Additional stability across the African continent undoubtedly would bring still more FDI and consequent improvements in living standards.

In the Middle East, Iraq perseveres in its attempts to revive its oil industry. The past year has seen a number of positive developments but political stalemate limits the Iraqis' ability to consolidate gains. Still, many of the world's largest players and a number of service providers have staked out positions in the country. Investment in Iran is stalled, as industry players await the outcome of diplomatic initiatives surrounding Iran's nuclear ambitions. Sovereign wealth funds from the region (and from elsewhere in the world) continue expanding their investments, both within the energy industry and outside it. Saudi Arabia, in its efforts to create jobs for its growing numbers of youths, continues to build independent power and water projects as well as other infrastructure, at the same time that it attracts investments in the refining and petrochemical sectors. A number of petrochemical projects there and in Qatar, under construction for several years, will increasingly direct large volumes of products primarily to East Asian markets.

While post-Copenhagen, the urgency to address climate change issues in a rapid way seems to have lessened, the renewables and clean energy sector continues to see significant investment. New wind, solar and geothermal projects proliferate around the world, in places as far-flung as China, Denmark, Ecuador, Germany, Indonesia, Kenya and the US, as do biomass and biofuel projects, particularly those that do not compete with food or consumer crops or that otherwise meet sustainability goals. In the US, these projects often are supported by the federal government through tax credits and financing, even grants, and have a jobs-creation focus, or are mandated by state-level renewable portfolio standards. Clean-tech start-ups backed by Silicon Valley venture capital investors increasingly seek liaisons with traditional energy companies that have capital and expertise in project management and industrial-scale operations. Chinese companies also continue rapid buildout of renewable energy projects and develop greater capacity to play internationally in that space, including as cost-competitive suppliers of equipment and services, even as the Chinese NOCs and Indian companies compete globally with international oil companies for more traditional oil and gas and mineral assets. Nuclear power projects, while slower to develop in the US, attract substantial investment in other countries, particularly China and the Middle East. And, of course, development of power projects fuelled by natural gas and by one of the planet's most abundant resources, coal, remains active, despite greenhouse gas concerns and environmental challenges to coal projects in some jurisdictions, including at the state level in the US, while a variety of carbon capture and sequestration, coal-to-gas-to-liquids and other clean-coal projects attract attention.

All in all, the energy industry remains a vital destination for global capital and center for economic growth and shows every indication that it will continue to generate exciting and interesting challenges and opportunities for its participants.

This article is intended for educational and informational purposes only and does not constitute legal advice or services. If legal advice is required, the services of a competent professional should be sought. These materials represent the views of and summaries by the author. They do not necessarily reflect the opinions or views of Vinson & Elkins LLP or of any of its other attorneys or clients. They are not guaranteed to be correct, complete, or current, and they are not intended to imply or establish standards of care applicable to any attorney in any particular circumstance.