ANNUAL REVIEW

Energy & Utilities 2016

February 2016  |  SECTOR ANALYSIS

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The drastic decline in oil prices over the last two years has had a dramatic impact on the global energy market. It is difficult to predict how the sector will be affected by current volatility in the space; however, moving forward it is clear that we are entering a significant period for the industry. Economic and geopolitical challenges are weighing heavily on the wider commodities sector. With job losses becoming more common and many jurisdictions beginning to shift away from coal powered stations, the global energy & utilities market seems to be approaching a point of no return. The use of coal powered stations, in the long term, is becoming untenable.

 

UNITED STATES

Rhett Van Syoc

Kirkland & Ellis

“Obviously, the drastic decline in oil prices has caused tremendous disruption in the energy markets, particularly with relatively small-scale, independent producers in the US. Liquidity is of paramount concern and many firms have been forced to pursue creative means of raising capital as traditional debt or equity raises have become much more challenging, if not impossible in many instances. With significant volatility introduced in just the first few weeks of 2016 – above and beyond what we witnessed last year – it has become that much more difficult to predict how long prices will remain at these depressed levels, and this heightened uncertainty may finally unlock a lot of potential deals that didn’t get done last year because of the large gaps over value between buyers and sellers.”

 

CANADA

Vivek Bakshi

Dentons Canada LLP

“Oil price volatility, continued low natural gas prices and their respective impact on oil & gas exploration and production activity have had a significant effect on the energy industry this past year. Cash flow from production has been negatively impacted and drilling activity has slowed down significantly through 2015. Compounding the challenges faced by the Canadian oil & gas sector due to price, transportation of oil & gas production to both existing and new markets has proven challenging. Environmental and regulatory challenges have stalled construction of new capacity, leaving Canada reliant on domestic demand and a seemingly declining US appetite for Canadian petroleum.”

 

MEXICO

Edmond Frederic Grieger Escudero

Von Wobeser y Sierra, S.C.

“Throughout the past 18 months we have seen remarkable developments in the oil & gas as well as the power sector. Fundamental reforms have turned around the Mexican energy market 180 degrees, allowing private investors to actively participate in most stages of energy sourcing. In the oil & gas sector, we have witnessed mixed results on auctions for exploration and production contracts, whereas in the power sector we are noting a significant increase, mainly within renewables. Both in the midterm are surely going to have positive implications for Mexico’s neighbouring markets too. Potential challenges are mainly of a legal nature, as relevant laws and multiple regulations and administrative guidelines, mainly for the power sector, have just been passed and are in the process of being implemented.”

 

ARGENTINA

Juan Pablo Palladino

Pistrelli, Henry Martin y Asociados s.r.l. – EY Argentina

“Argentina’s current production capacity has not been able to cover its domestic energy needs and consequently Argentina has been importing energy for a number of years. In that context, macroeconomic conditions have affected the level of investment returns – including high inflation rates, foreign exchange controls to limit the exchange of foreign currency and the outflow of capital to other countries, limited access to credit markets, and import restrictions, among others. In addition, the energy sector is highly regulated by the federal government, which has established fixed prices to end consumers in recent years; in other words, increasing costs driven by domestic inflation were not passed through to prices.”

 

UNITED KINGDOM

Clare Munro

Brodies

“The sharp reduction in oil price remains the main challenge for companies active in the North Sea, alongside exploration being at its lowest level since the 1970s. Companies are committing to improving efficiency and reducing costs – including job losses across the industry. UK energy policy has seen the UK commit to closing all coal-fired power stations by 2025 and continue the move toward natural gas and nuclear energy – with the first new nuclear power station being constructed at Hinkley Point in Somerset. In addition, to tackle a projected over-allocation of renewable subsidies, the UK government has made substantial reductions to subsidies. For utilities, the focus is on the end price for consumers and last year the UK’s Competition and Markets Authority investigated the UK’s ‘big six’ energy suppliers’ prices to encourage more competition.”

 

GERMANY

Antje Becker-Boley

CMS

“The Fukushima disaster of 2011 marks the beginning of the most fundamental change and challenge for the German energy market to date – the ‘energiewende’, or energy turnaround. A government decision to phase out nuclear power by 2022 and replace conventional power production has boosted renewable energies and turned the market upside down. The traditional business model of utilities, backed by conventional generation and energy supply, is no longer sustainable. Photovoltaics are playing an ever increasing role in residential energy management. Wholesale prices are too low for profitable conventional production, such as from gas-fired power plants.”

 

PORTUGAL

Ricardo Andrade Amaro

Morais Leitão, Galvão Teles, Soares Da Silva & Associados

“Although the energy sector is on the way to becoming fully liberalised, and despite the fact that competition is slowly rising between market players, the country’s energy consumption has decreased in recent years. Accordingly, the current installed capacity for electricity generation is considered adequate for the coming years. This requires energy and utilities companies to do more with less, by focusing on what they do best and cutting existing fat and inefficiencies in their corporate structures, while ensuring that the quality standards of their services are maintained and improving their offers and marketing strategies.”

 

CHINA

John Yeap

Pinsent Masons LLP

“A significant aspect of China’s energy sector is the oil & gas sector, and the sector has not been immune from the global fall in oil prices. However, apart from oil & gas, the biggest challenge for China’s energy sector has undoubtedly been the country’s historical reliance on coal. China has been the world’s largest emitter of greenhouse gases since 2007, when its emissions overtook the US. However, in the past 12 to 18 months, with the continuing slowdown in the economy, coal consumption in China has in fact been falling with reports indicating a fall of around 3 percent in consumption over the past year. Concern for the environment and reducing carbon emission has been a priority on the national agenda since the eleventh plan, covering 2006-2010, and the proactive role that China played in COP21 is likely to see implementation of further policies in this direction.”

 

SOUTH AFRICA

David Walker

Werksmans Attorneys

“The South African Government’s Renewable Energy Independent Power Producer Procurement Programme (REIPPP) continues to be instrumental in mobilising investment in the South African energy sector. The South African Department of Energy (DoE) has, over the last 12-18 months, continued its focus on independent power producers (IPP) and it released a Coal Baseload Independent Power Producer Procurement Programme towards the end of December 2014. The first Baseload bids were submitted for evaluation on 2 November 2015. The minister of energy, in consultation with the National Energy Regulator of South Africa, has issued new ministerial determinations for additional capacity allocation for South Africa’s renewable energy, gas and co-generation procurement programmes.”

 

NIGERIA

Oghogho Makinde

Aluko & Oyebode

“The Nigerian Electricity Regulatory Commission (NERC) recently published the draft Feed-In-Tariff Regulations for Renewable Energy Sourced Electricity in Nigeria, the purpose of which is to introduce the Renewable Energy Feed-in Tariff (REFIT) programme. The REFIT programme is aimed at attracting investment into the Nigerian power sector by offering long term contracts and guaranteed pricing to investors. It establishes a tariff that covers the cost of generation plus a ‘reasonable profit’ to incentivise developers to invest in renewable energy. The federal government announced plans to gradually remove subsidy on PMS in 2016 to cut government expenditure and introduce transparency to the PMS pricing structure; this has now been implemented and so far the impact has not been as catastrophic as imagined, although supplies are sporadic.”


CONTRIBUTORS

Aluko & Oyebode

Brodies

CMS

Dentons Canada LLP

Kirkland & Ellis

Morais Leitão, Galvão Teles, Soares Da Silva & Associados

Pinsent Masons LLP

Pistrelli, Henry Martin y Asociados s.r.l. – EY Argentina

Von Wobeser y Sierra, S.C.

Werksmans Attorneys


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