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WHOLESALE ENERGY PRICES: OCTOBER 2018

In this article, Dominic Whittome covers recent changes to wholesale energy prices.

Oil

Despite the efforts of the US to almost brow-beat Saudi Arabia into increasing output, crude oil continued to march upwards and rose a further 9% amid open talk in trading circles of a possible three digit oil price at some point this winter, especially if crude or petroleum product inventories look like tightening further.

Paradoxically the latest intervention will have made the Saudis even less inclined to raise output, lest it reinforce the perception it is know-towing the US and working at odds with its cartel partners. There are other reasons why high prices (though below $100/bl) remain a policy goal for the kingdom, not least the delayed floatation of Aramco, for which a robust oil market remains essential.

There are also physical limits as to how much more oil it can produce. No OPEC oil producer should ever want its geo-politically priceless ‘swing capacity’ put to the test unless absolutely necessary. The same holds true for many North African and South American oil producers who may be strong on reserves but still have quite limited capacity to export more oil amid creaking infrastructure and worsening economic outlooks that will thwart foreign investment.

With the Russians and Iranians incentivised to rattle the cages of Western economies, this winter could see further stockpiling that alone will cause the market to tighten. The petro-dollar meanwhile has strengthened through the year, magnifying energy inflation effects in many oil importing countries. Indeed, inflation is a key factor to watch for general energy consumers, with rises in petroleum product prices evidently feeding to gas and liquid fuel markets with contract prices fixed against oil and escalation terms indexed to oil in a stronger petrodollar.

Gas

Natural gas prices increased another 12%, following on from their 15% climb over the May and June period amid expectations of continuingly high crude prices and a cold and protracted European winter that might extend into the shoulder months of March and April, when the Forward Market is generally at its most volatile and gas storage close to depletion in some regions.

In particular, the UK is now without a major gas storage facility following the closure of Centrica’s Rough platform. Whilst concerns over the security of supply from Russia and other Eastern countries may have been overstated in the past year, the forward market is probably now building, amid clearly rising East-West tensions, a higher risk-premium into prices out on the curve. Last month the UK’s annual gas contract hit a ten year high, breaking past 70 pence per therm at one stage.

However, today sees gas prices being influenced by an ever-expanding mixture of global supply & demand factors, with LNG playing a marginal supply role, including recent hurricanes in the USA which drove up crude and spot gas prices up in tandem. In fact, there has been no shortage of bullish news to keep the prompt market strong and this is now affecting gas prices further out on the curve, even if the actual justification for rising long-term gas prices is tenuous. Indeed from a resource perspective there is no actual or expected shortage of gas. The commodity enjoys an increasingly wide geographical spread as far as production is concerned and, according to the latest BP figures, the world has well over 300 years of forward supply at current rates of consumption. In reality however, short-term security of supply concerns, together with persisting long-term indexation to oil, have served to keep driving gas prices higher. The NBP traded over-the-counter price for gas has since risen by over 75% in the last eighteen months.            

Electricity

Although it had been hoped that most of Europe’s reactors would be back up after the summer hiatus, when a lack of cooling water supplies forced many to go offline, there have been reports of persisting outages. The age of nuclear fleets across the Continent is now a growing concern. In the UK too, all existing nuclear power stations, bar Sellafield, are due to close within five to ten years.

It is also becoming clear that renewable electricity and sub-sea interconnectors will not plug the gap, with new-build reactor projects arriving late, due to construction and safety problems, or not even getting off the ground at all amid concerns over technology, rising costs and funding.

In the backdrop, several European countries are quietly permitting the building of new fossil-fuelled power stations. Germany is currently installing coal-fired plants at a faster rate than the Chinese and last month it sanctioned the felling of an entire tree forest to produce the lignite dedicated to power generation.

The UK government itself has just given the go-ahead for a mammoth 2,500 MW gas-fired power station at Eggborough, the site of a former coal-fired plant that was closed only recently. This new power plant will produce some 80% of the output of Hinckley Point C; it will come on line sooner and it will not entail any meaningful subsidy, not from government or from the consumer by way of price-support under CFD tariffs added to bills.

Whether or not these examples mark a general policy shift towards fossil-fired generation remains to be seen. In the meantime, however, the market is tightening.                                                                                                                                 
About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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AN ANALYSIS OF THE CONSULTATION ON AN ENVIRONMENTAL PRINCIPLES AND GOVERNANCE BILL: PART II

Perhaps unnoticed, Defra’s consultation on ‘Environmental Principles and Governance after the United Kingdom leaves the European Union’, is probably the most important consultation affecting environmental laws to be introduced for at least the last ten years. It goes right to the heart of how environmental laws will, or should, or may not be, enforced, after the UK leaves the EU.

The second part of this series addresses losses the UK may suffer in terms of environmental law enforcement once it leaves the EU, as well as the likely aims of bodies set up under the Environmental Principles and Governance Bill  and environmental justice concepts  in operation in  the USA.

What the UK will lose in terms of environmental law enforcement on leaving the EU

On top of the existing failures to deliver effective enforcement of existing laws, the U.K. will now, after Brexit, lose:

  • Treaty obligations reinforcing environmental laws;
  • enforcement by the European Commission;
  • enforcement by the Court of Justice of the European Union;
  • the ultimate sanction of Member States risking fines for continuing
    breaches of EU law;
  • the legal requirement upon government to ensure that penalties for
    breaches are “effective, proportionate and dissuasive”; and
  • the right of individuals to activate enforcement of EU environmental laws, at no cost, by raising complaints with the European Commission.

Environmental governance                                                                                              

Any body, or set of bodies, set up, under the U.K. government’s proposed Environmental Principles and Governance Bill and/or parallel legislation in the devolved Parliaments will need to aim to deliver a consistent approach to environmental law enforcement across the UK; to be independently financed, established by statute and answerable to Parliament(s); to have the right to take up and investigate individual citizen complaints of breaches or non-enforcement of environmental laws without the prohibitive costs of judicial review; and to be able to hold government and public bodies to account.

Issues of Environmental Principles

With respect to the principles covered by section 16 of the European Union (Withdrawal) Act 2018 , as a minimum:

(a) government and public bodies at all levels should have regard to them  when discharging their functions; and

(b) where they are already embedded in retained EU law, there should be a commitment by government to reflect that, and not to dilute their application.

Environmental Justice

In America, there are much better developed concepts of environmental justice in the way in which environmental laws and regulation are applied. As an example, the Presidential Executive Order for 1994 stated that:

…”to the greatest extent practicable and permitted by law…each Federal agency shall make achieving environmental justice part of its mission by identifying and addressing as appropriate disproportionately high and adverse human health or environmental effects of its programs, policies and activities on minority populations or low-income populations.

Another way that this was explained to the author of this article, by Professor Robert Kuehn of Tulane University Law School was as follows:

The observation that most community environmental struggles are not won solely through the hands of lawyers is profoundly accurate. If equal enforcement of environmental laws is to be achieved, then all aspects of the enforcement process need to be opened up to residents of affected communities – their participation in making enforcement decisions must be sought out, their opinions and desires respected and addressed, and their ability to protect their own communities and police the facilities in those communities enhanced.”

Concepts of environmental justice, and the approach to law making and enforcement recommended there by Professor Kuehn, might well have helped to avoid some of the worst aspects of the Grenfell fire disaster. It may be time to consider what lessons there are to learn from American approaches to environmental justice when considering environmental governance in the UK.

The fundamental structures of enforcement of environmental laws are being re-designed from scratch. At a time of some legislative and constitutional turmoil, environmental lawyer, and those interested in effective environmental laws, need to identify what really matters, and to speak up for it.

Prospect Law Ltd, September 2018

About the Author

William Wilson is a specialist environmental, regulatory and nuclear lawyer with over 25 years experience in government, private practice and consultancy. He worked as a senior lawyer at the UK Department of the Environment/DETR/Defra, and helped to build up the environmental and nuclear practices at another major law firm, as well as running his own environmental policy consultancies. William has experience of all aspects of environmental law, including water, waste, air quality and industrial emissions, REACH and chemicals regulation, environmental protection, environmental permitting, litigation, legislative drafting, managing primary legislation, negotiating EU Directives and drafting secondary legislation.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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CREATING SHARED VALUE IN COMPLEX ENVIRONMENTS: PART II

Part II of this series will focus on a company’s internal structures and external relations department, and the impact these can have on a company’s relations with its community stakeholders. There will also be discussion of the promotion and protection of human rights in the context of a social license to operate.

Internal Management Issues and the Acquisition of a Social License to Operate

Attempts to acquire a SLO will succeed to the extent that its core purpose is conducive to the acquisition of a SLO. Initiatives which create Shared Value among relevant stakeholders will succeed to the extent that they are fully integrated into core commercial decision-making policies, designed to deliver sustainable, long term success.

Commercial decisions that resolve societal problems are fundamental to the achievement of an effective SLO.

There is clear evidence that the manner in which the internal departments of a company are structured, and relate to each other, has a direct impact on the success of a company’s relations with its community stakeholders. The way a company conducts its day to day core activities is more important than its community relations programmes in determining how the company is perceived by local stakeholders.

Fundamentally, it is the behaviour of the Company as a whole, not just its external relations department, that drives people’s perceptions of the Company.

It is essential that policies conducive to the acquisition of a SLO are integrated into the decision-making cycles of all departments. For example, the HR Department determines who gets hired, the Contracts Department sets policies that can favour local contractors and suppliers, or make it difficult for local businesses to benefit from the corporate presence. The Accounting Department can facilitate administrative procedures and ensure speedy payment of compensation, or set complicated and delaying administrative requirements.

All the best efforts of an external affairs department can have little impact if the hiring procedures of a company are seen as unfair, security policies are seen to be oppressive or local contractors are not paid on time.

External Engagement – A Concern for All Departments

Safety issues are regarded as the responsibility of everyone on the workforce, regardless of their particular role. Similarly, external relations should be regarded as a responsibility of all, rather than just the External Affairs Department – which should coordinate rather than implement.

When an external relations department is the sole location for community relations experts, this often means that their expertise is required to resolve community problems only after they have already occurred.

It is essential to ensure that ways are found whereby external relations can be transformed from a fire-fighting role, to one of internal service provision. It is also important that ways are found to broaden the ownership for external relations within the organization:

Communities should be approached as partners, rather than as potential risks to be mitigated;

  • Every member of the company should receive training in community affairs skills;
  • Representatives from all departments should be invited to participate in community meetings;
  • The quality of the company’s relationship with local stakeholders should be incorporated into performance reviews for all staff – the number of community related incidents might be linked to the determination of bonuses, or to provide company wide awards for staff of departments that are judged to have made a positive contribution to company-community relations;
  • Ways should be identified to develop in-house capacity in conflict-resolution skills.

Guidelines for the building of a SLO in complex environments

Human Rights (VPSHR)

VPHSRs state that risk assessments are vital to the promotion and protection of human rights. These risk assessments must consider the available human rights records of public security forces, paramilitaries, local and national law enforcement as well as the reputation of private security. Awareness of past abuses and allegations will help companies avoid recurrences as well as promote accountability going forward.

Companies must take care to ensure that their partners are consistent with the protection and promotion of human rights. The following measures will help ensure this:

  • Regular consultation between stakeholders about the impact of security arrangements on those communities, and clear communication between all stakeholders about the need for ethical conduct and respect for human rights by public service providers;
  • The primary role of public security agencies should be to maintain the rule of law, including the safeguarding of human rights, and deterrence of acts which might threaten personnel and facilities;
  • Individuals credibly implicated in human rights abuses must not be allowed to provide security services, and force should only be used when strictly necessary and to an extent proportional to the threat, and the rights of the individual should not be violated while exercising the right to exercise freedom of association and peaceful assembly, the right to engage in collective bargaining or other related rights of employees– as recognised by the Universal Declaration of Human Rights and the ILO Declaration on Fundamental Principles and Rights at Work;
  • Companies should ensure the holding of structured meetings with public security on a regular basis to discuss security, human rights and related work-place safety issues. Support should be given to the host nation governments to provide human rights training and education for public security, as well as in their efforts to strengthen state institutions to ensure accountability and respect for human rights;
  • In respect of allegations of human rights abuses there should be active monitoring of the status of any on-going investigation, and pressure for proper resolution of these issues, in consultation with host nation government and relevant NGOs. The security and safety of sources must be protected and additional or more accurate information that may alter previous allegations must be made available as appropriate to concerned parties;
  • Companies must ensure that private security companies observe company policies in regard to ethical conduct and human rights, the law and professional standards of host nations, emerging best practice developed by the industry, civil society and governments and the promotion of the observance of international humanitarian law. In particular private security contractors must act in a lawful manner, exercising caution and restraint in a manner consistent with international guidelines on the use of force, including the UN Principles on the Use of Force and Firearms by law enforcement officials and the UN Coode of Conduct for Law Enforcement Officials as well as emerging best practice.
  • Furthermore, private security companies must have policies regarding appropriate conduct and the use of force, which are capable of being monitored. Such monitoring should encompass detailed investigations into allegations of abusive or unlawful acts, the availability of disciplinary measures sufficient to prevent and deter, and procedures for reporting allegations to relevant local law enforcement authorities when appropriate. All allegations of human rights abuses by private security must be recorded, and credible allegations investigated. Once those allegations have been forwarded to the relevant law enforcement authorities, companies should actively monitor the status of investigations and press for their proper resolution.

Part 3 of this series will cover corporate engagement with NGOs and the need for formal engagement, at the outset, between NGOs and corporates on various CSR initiatives. There will also be an overview of the indications of a positive NGO-Corporate relationship, as well as discussion of the need to integrate a grievance procedure when consulting local communities.

Prospect Law Ltd, 7th September 2018

About the Author:

Mark Jenkins advises clients on Corporate Social Responsibility (CSR), security and risk management issues affecting the viability of on and off-shore energy, mining and infrastructure sector projects in Europe, the Middle East and Africa. Mark’s experience has been focussed on creating reliable community support for projects through the development of a Social License to Operate (SLO) based on effective CSR initiatives. The success of these initiatives has been based on a thorough understanding of local environmental, commercial, and cultural dynamics, especially Islamic ones.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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CREATING SHARED VALUE IN COMPLEX ENVIRONMENTS: PART I

Part I of this series will focus on the three categories for understanding and analysing company-community relations – Benefits Distribution, Accountability for Impacts and Appropriate Behaviour. There will be analysis of how these categories combine in the building of the kind of relationships necessary for the building of an effective Social License to Operate (SLO).

I am often asked to share thoughts on how corporates can Create Shared Value in complex environments, thereby reducing the significant risk posed to their operations by loss of a Social License to Operate.

Company – Community Relations

A schematic representation of how the three relationships work is below:

 

 

 

 

 

 

Accountability for Impacts

An effective SLO plan will acknowledge the positive and the negative side effects of mining operations on local, and national communities. When a community sees that a company is concerned by, and accepts responsibility for the unintended and long term side effects of its operations, then they will interpret this as a sign that the company cares about them and their lives.

Acceptance of responsibility for any negative effects of commercial operations, such as the Curse of Resources/Dutch disease, is a good example of such acknowledgement. Crucial to the acceptance of accountability for impacts is the need to discuss a long term vision with communities, listen to their concerns about possible negative impacts and provide long term contracts and training plans.

Fair Benefit Distribution

The right approach to benefits distribution is based on the principle of fairness.

Fairness refers to how people in communities perceive the distribution of benefits and their share of these benefits. Unsurprisingly, the key is to ensure that deserving people get what they deserve, and those who do not deserve rewards do not get them. Furthermore, many communities assign value to immaterial and intangible things such as historical and traditional hierarchies, social relations and spiritual qualities. SLO strategies must ensure that people feel they receive non monetary benefits – as well as payments – as a result of a company’s presence. If communities believe the company is fair, it will be reassured. This will reduce needless competition and fear, as well as reinforcing the long term view over short term gains. Transparency is a key component of fairness. A divider and connector analysis will guide ways in which a SLO plan can emphasize and reinforce common and collective interests, among communities.

Appropriate Behaviour

How a company behaves towards communities sends messages about respect and disrespect, trust and mistrust and whether or not it cares, or does not care about them. The behaviour of a company, including its contracted agencies, has a direct impact on how communities view the company. More messages are communicated to local communities by company behaviour than by words or publications. Getting it right involves the showing of respect, trust and care for the communities affected by a company’s operations – respect, trust and care sets the tone for company community relationships, and mitigates risk.

There are many ways in which a company can display these qualities, including:

  • good social interaction;
  • identification and mapping of culturally important sites;
  • open engagement;
  • minimization of overt displays of security;
  • following through on commitments;
  • responsiveness to community inquiries;
  • acceptance of corporate accountability to local communities.

Creation of Shared Value (CSV)

John Browne, a former CEO of BP, has emphasized the risk posed to corporates by having the wrong relationship with society, of neglecting those aspects of their activity that go beyond narrowly legal requirements. For Browne, activities that make a social contribution should be construed as being part of a company’s central purpose.

Browne argues that companies should engage with society in a radical, rather than a grudging and episodic manner. He says that the “definition of purpose” is changing for many organisations, with an increasing acceptance that shareholder value should be seen as an outcome, rather than the goal of commercial activity. Browne says that the integration of Corporate Social Responsibility (CSR) and sustainability into core business activity is tough, but that there is a clear business imperative for the extractive industry to improve its relations with host communities. Across the world extractive communities lose billions of dollars each year as a result of community strife. In particular Browne advocates:

  • Building a portfolio of strategic programmes with long term economic development strategies, rather than making one-off, reactive investments;
  • Creating processes which integrate social investment staff into core business decision making;
  • For a switch from incentivizing on-time, low cost delivery to incorporating social performance into compensation packages;
  • Measuring investments in communities by dollars spent to measuring investments in communities by societal and business outcomes;
  • Building relationships with governments/NGOs and community leaders to help solve societal problems.

Part II of this series will focus on a company’s internal structures and external relations department, and the impact these can have on a company’s relations with its community stakeholders. There will also be discussion of the promotion and protection of human rights in the context of a social license to operate.

Prospect Law Ltd, 21st August 2018

For a PDF of this blog click here

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AN ANALYSIS OF THE CONSULTATION ON AN ENVIRONMENTAL PRINCIPLES AND GOVERNANCE BILL: PART I

Perhaps unnoticed, as people head to the beach in August, Defra’s consultation on ‘Environmental Principles and Governance after the United Kingdom leaves the European Union, which closed on 2 August 2018, is probably the most important consultation affecting environmental laws to be introduced for at least the last ten years. It goes right to the heart of how environmental laws will, or should, or may not be, enforced, after the UK leaves the EU.

It proposes a new Bill, to set up a new body with the essential task of holding government and public bodies to account for environmental law enforcement, in place of enforcement of EU law by the European Commission and Court of Justice of the European Union.

The Bill will also address how the key environmental principles which underpin EU environmental laws should be reflected in UK laws after Brexit. The new Bill will only apply to England, as responsibility for the environment is a devolved matter, but similar issues will arise for each devolved administration. Debates continue over the workability of having four separate enforcement bodies, or a single body for the UK applying consistent standards but (and this is now a pressing need) taking real and full account of the concerns in each of the UK’s constituent parts.

In this article, the author argues that given the current failures of enforcement under existing legal structures, there now needs to be a legal duty upon all levels of government“ to secure the effective enforcement of environmental laws” for which they are responsible. He also argues that government and public bodies must, as a minimum, have regard to environmental principles when discharging their functions, and must commit not to dilute the existing application of those environmental principles where already reflected in EU law; and that it is time to introduce the principle of environmental justice to UK law.

Issues of non enforcement of existing EU environmental laws

The consultation does not address the really serious issue of non-enforcement of existing EU laws under existing structures. Examples of this are as follows.

Volkswagen and ‘defeat devices’

Volkswagen placed 590,000 vehicles containing defeat devices to mislead emissions tests on the US market. After investigations by Congress, State Attorneys General, the FBI, the Department of Justice, the State of California, Volkswagen in 2017 agreed to plead guilty and to pay $4.3 billion in criminal and civil penalties, ($2.8 billion criminal and $1.5 billion civil penalties). Six executives and employees were named and indicted.

Volkswagen placed 1.2 million cars fitted with similar devices on the UK market. Initially, the then Transport Secretary wrote to the European Commission saying that he hoped they would “investigate this matter thoroughly and take appropriate action to avoid a recurrence”. On 8 December 2016, the European Commission opened infringement proceedings against 7 states, including the UK and Germany “for failing to set up penalties systems to deter car manufacturers from violating car emissions legislation, or not applying such sanctions where a breach of law has occurred.” Since that time, it does not appear that any UK enforcement authority has taken any enforcement action of any description against Volkswagen for this matter.

Air quality and the ClientEarth cases

The UK’s non- compliance with EU air quality legislation, and the ClientEarth series of cases in different jurisdictions to try to enforce it, are a matter of record. Successive UK governments must know quite well what EU laws require on air quality; but ClientEarth has been obliged to go back and back to court to obtain one ruling after another that the UK government is in breach.

Illegal waste sites

It is becoming clear that in parts of the UK there may be hundreds of illegal waste sites that are not yet being tackled by the environmental regulators, who are somewhat given to complaining that they simply lack the resources to do more to enforce existing laws in the area. This gives rise to two questions. First, is there the will to enforce existing law? Secondly, if the issue is really about resources, what can and should be done, for example, to share more of the proceeds of crime recovered in waste cases with the regulatory agencies, instead of with the Treasury?

Enforcement of river pollution incidents

The current referral to the European Commission by Afonydd Cymru of the inactions by the NRW in enforcing existing river and nitrate legislation underlines both the availability at present of a European remedy to breaches of EU environmental law, and the importance of oversight of environmental regulators as a practical issue for environmental law enforcement.

Failure to enforce existing environmental laws, at a time when the UK is, on Brexit, removing many of the most effective powers and means for their enforcement, risks sending a signal that pollution pays, that compliance with environmental laws is for the little people, not large companies, and that regardless of public concern, there isn’t the political will to make enforcement effective. Again, if environmental laws are not going to be effectively enforced, it doesn’t greatly matter what they say.

What is needed to make enforcement of environmental laws effective is –

(i)        clearly drafted laws;

(ii)       a strong political message, from the top, that environmental laws are there to do an important job, and will be enforced, against individuals, and companies of all sizes;

(iii)      a proper statement of enforcement policy by regulators;

(iv)      properly resourced, adequately informed and skilled, independent and robust regulators; and

(v)        a legal duty on all levels of government “to secure the effective enforcement of environmental laws” – something which the new environmental regulator can focus on, and support.

The follow-up to this article will address losses the UK may suffer in terms of environmental law enforcement once it leaves the EU, as well as the likely aims of bodies set up under the Environmental Principles and Governance Bill and environmental justice concepts  in operation in  the USA.

About the Author

William Wilson is a specialist environmental, regulatory and nuclear lawyer with over 25 years experience in government, private practice and consultancy. He worked as a senior lawyer at the UK Department of the Environment/DETR/Defra, and helped to build up the environmental and nuclear practices at another major law firm, as well as running his own environmental policy consultancies. William has experience of all aspects of environmental law, including water, waste, air quality and industrial emissions, REACH and chemicals regulation, environmental protection, environmental permitting, litigation, legislative drafting, managing primary legislation, negotiating EU Directives and drafting secondary legislation.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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BIGGER BILLS WILL DRIVE BATTERY INVESTMENTS BEHIND THE METER

Rising non-commodity costs and resilience concerns make batteries more attractive for big users.

Increased Charges

Energy is pure expenditure. There is no investment or “hidden benefit” to be had, and even for companies that can damp down usage, there are bill increases to come. Prometheus Energy, a demand side response and reserve battery provider, reported in 2017 that more than one UK business in 20 incurred financial losses due to at least one brown or black-out last year.

The wholesale market aside, business prices will rise because of increases in network capacity charges and higher levies. As of this April there are seven separate taxes, on top of commodity and capacity costs. My research suggests that capacity and tax rises will have increased a typical commercial user’s bill by 35% between October 2017 and September 2020, even with no increase in wholesale prices.

Even if wholesale prices stay fixed for three years, many bills will rise 32% because of network capacity and government surcharges. By 2020, the commodity cost will make up just a quarter of the bill.

Seeking a favourable energy quote will still help. However, competitive tendering alone will not protect businesses from the changes ahead. However, there are measures users can take, some quite easy, to reduce these charges or avoid them altogether.

Mitigating Increased Charges                                                                                                                                                                                                   

Top of the list is responding to Triad warnings. High usage during a Triad period (declared by National Grid months after the event) can increase transmission charges substantially, with the user effectively “recategorised” and positioned in a higher pricing charging band that may apply to all future consumption.

Second is responding to distribution charges, which are influenced by consumption in Red Zone periods. Unlike Triads, Red Zones occur at known times. These have generally been weekdays from     4pm to 7pm, but it varies between networks and by location, and the timing of those zones may change.

Over-the-Counter Trade Registration

Larger consumers may consider a managed OTR service (over-the-counter trade registration). This offers a combined trade sleeve and clearing service, and can streamline trading through one channel.

It can also cut energy costs, firstly because it gives a company direct access to the OTC (over-the-counter) market, which removes various visible commissions, transaction costs and hidden commissions, premiums and bid-offer spreads. Secondly, it means access to the entire wholesale market, because an OTR vehicle can simultaneously access every player in the power market, access all bid-offer pairs that have been posted and thus buy or sell at the most favourable price available.

Finally, a managed OTR service can spare the expense of signing up to the Balancing and Settlements Code (BSC) or other legal-intensive agreements, with every BSC-accredited player that the client wishes to trade with. The managed OTR service can be a low-cost way to start trading on the wholesale market directly, and can mitigate many operational costs and risks associated with trading with Elexon (National Grid) as principal and also with GTMA players directly.

Battery Hosting

With those bases covered, energy buyers will be looking at a combination of competitive tendering and more active demand-side management, including the possible application of demand-side response (DSR) hardware and DSR-related battery storage. It may be cost-effective to install on-site generation and a battery in unison. As with energy service contracts, battery hosting contracts are likely to become more familiar. Hosting a battery would mean a battery service specialist will supply, operate and maintain the battery system in exchange for a share of the annual saving from the “host” company.

A battery has side benefits as well. It offers some emergency power, automatic brown-out protection and limited blackout protection. It will also automatically improve power quality – valuable for businesses that can be disrupted by voltage surges, harmonic distortions and other network issues. Broader benefits and lower energy bills are likely to combine to ensure battery installation remains the flavour of the month for many months to come.

About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory. 

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

 Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues. 

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: MAY – JUNE 2018

In this article, Dominic Whittome covers recent changes to wholesale energy prices.

Oil

Despite reports of US influence, and of OPEC agreeing a relaxation in quota to offset supply problems from Venezuela and sanctions on Iran, crude prices extended their gains to end the period 11% higher.

This output increase is essentially a token gesture anyway, given that most OPEC and non-OPEC countries are already producing at or close to capacity whilst the global supply cushion stands below 4%, the lowest it’s been for 30 years. Consequently, Vienna’s meeting of minsters has done little to reverse the price trend. However, the recent levels also raise questions about the authenticity of the ‘shale oil’ argument.

It was barely two years ago when investment banks were issuing research papers declaring ‘$30 – $40 /bbl – the new norm’ amid expectations of fracked oil and gas keeping the world over supplied. As things turned out, oil prices doubled and many forecasts were promptly re-written. Perhaps a reasonable question to ask is that if there is (or ever was) close to this amount of surplus shale, then why are prices this high now, despite the actions or inactions of OPEC producers?

Prices might soften over the coming months but they are very unlikely indeed to return to anywhere close to the levels discussed in the market barely two years ago. Meanwhile, rising world inflation, which will add to transport, production costs and enhanced recovery budgets, could also drive oil prices higher, whilst the talk of US fiscal tightening and the strong petro-dollar have taken some of the sting out of oil price rises in nominal/dollar terms. Any relapse though, or renewed money printing that sees the dollar fall, could repeat the surge in oil prices last seen in the aftermath of the First Financial Crisis, which witnessed a flight into safe assets, hard commodities, including oil, that then dragged the market above $80/bl when demand was actually weaker than now. The forward outlook therefore appears stable and the current ‘high prices’ environment may be with us for a while.

Gas

Forward gas prices climbed a further 15% amid an unreasonably strong prompt market, with even spot prices trading over 50 p /th and sharply rising petroleum product prices. Oil prices themselves last fell below $40/bbl in April 2016, although their main assent (from $ 45 to $ 75) took place within the past 15 months. This timing may be significant and it may partly explain why wholesale gas prices are rising as fast as they are now.  The ‘low’ gas prices in 2016/17 are due to fall completely out of most long-term contract price escalation formulae soon, if not already. There will therefore be a contractual readjustment for gas via key take-or-pay Russian, Norwegian and LNG gas contracts, most of which account for marginal supply and will dictate forward prices as we move into the next buying round or into the next Gas Year on 1st October.

The OTC market has also seen carbon prices soaring. Today the EUA is trading above € 15/ tonne CO2 versus € 5/tonne CO2 exactly a year ago. While a sharply higher carbon price might be expected to depress gas demand, its overall (and certainly more immediate) effect will be to increase the principal feedstock price for gas generators. Events in the EU ETS will therefore be doing nothing to support any renaissance in new-build gas-fired generators, which may well be needed before long as the national generation margin shrinks further.

Electricity

Forward power prices surged 13% over the period. However, with the medium-term outlook for gas and most other indigenous power generation looking fairly soft, the grid will be relying increasingly on new interconnector imports from the Continent, Norway and potentially Iceland further down the line.

As previous articles have commented, this energy strategy may be unsound, not so much for ‘import/export’ reasons per se but basic reliability. Leaving to one side the question of plant reliability and ability or willingness of European suppliers to offer peak power when needed, the reliability of sub-sea cables needs to be considered as such systems are themselves prone to outages, even the newest cables with the latest electrical technology.

However, with the Hinkley Point power station (which when ready will barely supply 5% of the market) unlikely to produce at capacity before 2025, and other nuclear plants also delayed and unlikely to come online until ca. 2030, the short-term and medium-term generation outlooks are tight. However, rather than higher wholesale prices, the impact will be expressed in sharp rises in premiums and the cost of shape in end-users’ commodity prices, i.e. on top of capacity price increases and increasing eco levies and taxes (now seven in total).

The recent changes discussed above suggest that, if anything, the average businesses will now see power bills rising by 40 – 45% (the top end of the range estimate) within just three years. This prospect should spur end-users to look at energy reduction, demand-side management, on-site generation and profile-correcting batteries.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts. 

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues. 

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: MARCH – MAY 2018

In this article, Dominic Whittome covers recent changes to wholesale energy prices.

Oil

Crude prices crept up a further 4% up amid renewed concern over OPEC exports, the possibility of new US oil sanctions on Iran and reports Houthi rebels starting to target Saudi exports of crude – a possible long-term campaign with the insurgency in Yemen showing no sign of abating.  Exports from OPEC’s second largest producer, Venezuela, were hit by a wave of national strikes and the market was buoyed further by the prospect that OPEC and non-OPEC countries agreeing to prolong their Accord and roll forward their production cuts well into next year. There are perhaps sound, if nefarious, incentives for Russia to take a lead in oil production sacrifices, possibly to ‘rattle the inflation cage’ of certain Western economies. Saudi Arabia will also be keen to keep oil prices as high as possible, in preparation for the partial sale of Aramco, whose stock market float is still believed to be on the cards. All in all, there have been few reasons to short crude over the past two months and oil prices could well strengthen further as we move into summer.

Gas

With oil prices re-visiting highs not seen in four years and heading for $70/bl, the effect of lagged oil price indexation in Trans-European take-or-pay gas contracts will be growing as the new gas year approaches on 1st October. Significantly, there are several major long-term contracts coming up for renewal. The starting Base Price in such deals will also be up rated and a ‘ratchet effect’ may be reflected to some degree in the Forward Market itself. Annual NBP gas prices rose a further 5% during the two month period. Despite the relative abundance of physical gas and the prospect of spot LNG cargoes being released by South East Asian buyers, gas prices could rise further if petroleum markets continue to climb as they have been.

Electricity

Prices rose 13% following the oil and gas higher (both more liquid and actively traded) although the market was spooked by the shutdown of the Hunterston B reactor. Although the plant was soon back online, the episode served as a reminder of the state of Britain’s aging fleet of Advanced Gas-cooled Reactors. All AGRs are set to operate well beyond their original design lives and this design accounts for all still-functioning reactors bar Sellafield. EDF was confirmed in one report to have said “the findings [at Hunterston] will probably limit the lifetime for the current generation of AGRs” so some nuclear output may come off line sooner than expected and before new-build reactors can replenish it. This long-term outlook was dimmed further by reports of defects identified in rivets forged for the EDF’s two European Pressurised-water Reactors (EFRs) under construction in France and Finland. The concern being that such design faults may extend delays at its third EPR under construction at Hinkley Point.

Wholesale market aside, business prices are set to rise anyway due to legislated increases in network capacity charges and higher tax levies. As of this April there are now seven separate taxes, on top of commodity and capacity costs. My research suggests that capacity and tax rises will have increased a typical commercial user’s bill by 35% over the period Oct 2017 to Sept 2020, i.e. assuming as a baseline we see no rise in the wholesale prices (in Oct 2017 £45/MWh or 4½p/kWh, so already up 14% since) . Energy buyers will possibly be looking at a combination of competitive tendering and more active demand-side management, including the possible application of Demand Side Response hardware and DSR-related Battery Storage, a topic to feature in Energy Focus soon.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues. 

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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IRAN NUCLEAR DEAL – HAS TRUMP GOT IT RIGHT?

Is President Donald Trump alone in his criticism of the “Iran nuclear deal”? And was his decision to withdraw from it a wise one, based on facts rather than conjecture? This “deal”, officially known as the Joint Comprehensive Plan of Action (JCPOA) was signed in July 2015 by Iran, the five permanent members of the Security Council (China, France, Russia, UK and US), Germany and the European Union. Of course, the US signed it under the Obama administration and President Trump made no secret of his opposition to it during his election campaign; as with “Obamacare”, was his main reason for withdrawing from the deal because it was implemented under the previous administration?

HISTORY

What do people say is wrong with the deal? Ironically, Iran’s civil nuclear development programme started in the 1970’s with assistance from the US under the Atoms for Peace programme. Under this, the US deployed many nuclear research reactors around the world and supplied the associated nuclear fuel.

Since those early days, Iran’s nuclear programme has gone through many changes, but to many, in recent years, it was pursuing what appeared to be its own nuclear weapons development programme. Like any country signed up to the Non-Proliferation Treaty (NPT), which Iran became party to in 1970, it has a right to undertake research into the production of nuclear energy for peaceful purposes. Iran protests that its research was purely related to power generation was not helped when the existence of previously unknown uranium conversion and enrichment facilities, which could be related to nuclear weapons research, were revealed in the early 2000’s. For a chronology of key events in Iran’s nuclear history see here.

Attempts to curb Iran’s nuclear research through diplomatic means, various international agreements and the imposition of sanctions through UN resolutions seemed to be having some effect, but there were indications that weapons research had not stopped – In 2006, Iran was found to have a heavy water production plant but had not notified the International Atomic Energy Agency (IAEA). Heavy water can have a “dual use” purpose in either nuclear weapons production or for power production. To make matters worse, Iran did not permit full inspection of its facilities by the IAEA, something which all countries signed up to the NPT must allow.

Iran’s stance towards the international community changed somewhat in 2013 with the election of president Rouhani, thought to be more moderate than his predecessor Ahmadinejad. He requested the start of new negotiations with the international community, and even had direct talks with President Obama.

THE JCPOA

These new negotiations laid the foundation for the JCPOA and an interim agreement came into effect at the start of 2014 which allowed for increased inspections by the IAEA and the suspension of certain parts of its programme in return for relief from some sanctions. The IAEA issued a statement that Iran had complied with terms of the interim agreement which was reinforced by a statement on 5 March 2018 from the IAEA’s Director General, Yukio Amana, to the IAEA’s Board of Governors: “As of today, I can state that Iran is implementing its nuclear-related commitments …”; a conclusion supported by the Agency’s inspectors who spend some 3000 calendar days per year on the ground in Iran.

The JCPOA is quite a complex agreement, under which Iran has to reduce its stockpile of enriched uranium, limit any future enrichment to values not capable of producing nuclear weapons, limit uranium enrichment to one site, not build any new heavy water reactors, and adapt its existing one for peaceful purposes. Iran will also sign up to the Additional Protocol and submit to a comprehensive inspections regime by the IAEA which will involve some 150 inspectors. So long as Iran complies with the terms of the JCPOA, then various sanctions will be eased or lifted altogether.

The signing of the JCPOA was welcomed by virtually every country and international institution, although Israel remained critical. Iran’s fellow Middle East states saw it as bringing stability to the region. So what does President Trump have to be concerned about?

PRESIDENT TRUMP’S VIEW

Under US law the JCPOA is a non-binding agreement and has to have the approval of Congress following certification by the President. In his statement of 8th May 2018, President Trump said “It is clear to me that we cannot prevent an Iranian nuclear bomb under the decaying and rotten structure of the current agreement” and the deal is “defective at its core”. He further believes that Iran is a “sponsor of terror” and that there is a “very real threat of Iran’s nuclear breakout”; moreover, he linked Iran’s missile and other defence activities to the deal, something it was not designed to do. He is particularly concerned that much of the agreement is time-limited – around a decade or so for many of its provisions, but he wants it to be permanent.

INTERNATIONAL REACTION

Ahead of the 8th May statement, the position of the JCPOA’s counter signatories was that they remained committed to the deal, but their powers of persuasion were obviously non-existent. The UK Foreign Secretary, Boris Johnson said President Trump would be “throwing the baby out with the bathwater” if he went ahead with his decision; French President Macron Tweeted after the statement “France, Germany and the United Kingdom regret the US decision to get out of the Iranian nuclear deal …the international regime against nuclear proliferation is at stake.” UN Secretary General Antonio Guterres says he is “deeply concerned by the US decision to withdraw from Iran nuclear deal”, and calls on all other parties to fully abide by deal’s commitments.

THE US SCIENTISTS’ VIEWS

More criticism of the President’s position came from 90 American scientists in a letter published in October 2017 asking Congress to remain party to the agreement. They noted also that non-nuclear activities, not covered by the JCPOA, could be addressed separately and acknowledged Iran’s willingness to hold separate talks on its ballistic missile program. They point out that the IAEA’s system of safeguards under the Additional Protocol is the “strongest set … implemented by the IAEA”. They go on to say that additional “real-time” verification measures would be beneficial, not only in Iran, but in all non-nuclear weapon states where there is doubt about product use and that multinational control of enrichment plants would provide an extra level of security, citing the arrangements that URENCO, the European enrichment company.

FORMER GOVERNMENT OFFICIALS AND EXPERTS’ COUNTER VIEWS

A counter statement by the Foundation for Defense of Democracies (FDD) was also given in October 2017 which supported President Trump’s stance. It was signed by some 20 “former Government officials and experts” and included former IAEA Deputy Director General Olli Heinonen. It described the JCPOA “as one of the most highly deficient arms control accords in the history of American arms control diplomacy”. It went on to say that “We hope that the White House and Congress can come together to fix a fundamentally flawed agreement, curb Iran’s illicit activities, and end the nuclear blackmail imposed by the current JCPOA”.

WHAT NEXT?

Some observers believe that the US withdrawing from the JCPOA will mean Iran will continue to develop a nuclear weapons’ programme, however, technically, the JCPOA remains in force. Will it trigger a nuclear arms race in the Middle East? Although not officially recognised, it is well believed that Israel possesses over 40 nuclear warheads, on a par with India and Pakistan. Netanyahu fully supports President Trump’s decision, of course, giving his own assessment of Iran’s nuclear programme, saying “Iran lied”.

In March 2018 on a visit to the US Saudi Arabia’s Crown Prince Mohammed bin Salman said “… if Iran developed a nuclear bomb, we will follow suit as soon as possible”.

There will be plenty of commentary over the coming days and month. Decisions such as this have a tendency to implement the “law of unintended consequences”. We will monitor the situation and post further blogs on the issue.

For a PDF of this blog click here

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.
This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.
This article is not intended to constitute legal or other professional advice and it should not be relied on in any way. For more information or assistance with a particular query please in the first instance contact the department paralegal Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk

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OIL & GAS: VOLATILITY – ATTENTION TO DETAIL – THE KEY TO SUSTAINABILITY, PART II

In the following series of articles Alex Bakhshov will examine the challenges that come with negotiating key legal and contractual terms and managing legal risks across infrastructure operations comprising major oil and gas projects (Projects) in developing oil and gas markets and in turn a means through which to mitigate the impact of inflated barrel production costs (Barrel Price) by Independent Oil Companies (IOC), Oil Field Service Providers (OFP) and other market participants seeking to make strategic decisions relating to foreign direct investment (FDI).

Introduction:

In the first part of this series Alex Bakhshov considered the common determinants and barriers for Independent Oil Companies (IOC), Oil Field Service Providers (OFP) and other market participants seeking to make strategic decisions relating to Foreign Direct Investment (FDI) in developing markets. In this second article Alex will focus on the barriers faced by IOC’s in sub – Saharan Africa (SSA), which presents its own unique set of challenges amongst developing markets. Alex will hope to demonstrate that by collaborating with domestic policy makers (Regulators), barriers to FDI can be overcome and sustainable business can be built through periods of oil price volatility.

Unfavourable Fiscal Terms

A frequent source of frustration for oil executives seeking to invest in developing markets and in particular in SSA are the unfavorable fiscal terms frequently encountered during periods of low oil prices; this coupled with inflated barrel production costs (Barrel Price) is often the primary barrier to FDI. Paul McDade, chief executive of Africa focused Tullow oil told the Africa Oil Week Conference in Cape Town (2017) that exploration license terms must be competitive to attract new investors to the region’s upstream.

This means governments and regulators being bold and flexible and allowing companies to make final investment decisions more quickly by improving fiscal terms that were in many cases initially agreed at greater than $100 per barrel,” he said. “At the end of the day capital goes where it’s welcome and that’s especially the case at $50 oil. If we like the play and we like the basin, but the terms don’t work, then we won’t be investing.

The reality is that resource rich dependent and developing economies are impacted negatively during low oil prices, triggering aggressive fiscal terms for investors; however this should serve as an impetus and incentive for collaboration for diversification of the economy and liberalization of the legal framework to allow full ownership of enterprises by foreigners and the proper protection of their property rights – which would have the added benefit of encouraging expatriates to save and invest locally. SSA remains behind the GCC states in diversification of economic initiatives (see further “Could low oil prices be an opportunity for the Middle East?”, World Economic Forum). So even where fiscal terms are unfavourable, there are opportunities for IOC’s to include the meaningful transfer of knowledge and technology as part of FDI by, amongst other initiatives, engaging with Local Content Requirements (LCR’s).

As was shown in Part 1 of this series, in considering FDI, frequently overlooked by the investment community and oil executives are the inherent legal risks in the misalignment between international contracts and those mandated under LCR’s; especially where the initial fiscal terms look attractive. Often these risks do not materialize until a contractual dispute, political upheaval including policy and legislative change or environmental crisis arises, which will often be long after significant capital has already been committed, further inflating Barrel Prices. Whilst developing markets are prone to these risks, these factors are rarely factored into the Barrel Price and therefore proactive procurement, contracting, governance and project management strategies must be implemented early on and revisited throughout the lifetime of the oil and gas project (Project), to minimize the impact on business disruption, health and safety or financial loss.

Varying Production Costs:

Investment in high oil and gas dependent developing countries, as has been indicated in relation to SSA, does not consistently attract FDI, as the components of Barrel Price can be inflated through higher capital costs, taxes, transportation costs, infrastructure unreliability and security costs. Risks of expropriation during periods of political instability and the imposition by some countries of a requirement of majority domestic ownership can be a significant deterrent to FDI (see further ‘On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?’ World Development Vol. 30, No. 1, pp. 107 to 119, 2002).

Oil and gas barrel production Cost, March 2016
Country Gross
taxes
Capital
spending
Production
costs
Admin
transport
Total
UK $0 $22.67 $17.36 $4.30 $44.33
Brazil $6.66 $16.09 $9.45 $2.80 $34.99
Nigeria $4.11 $13.10 $8.81 $2.97 $28.99
Venezuela $10.48 $6.66 $7.94 $2.54 $27.62
Canada $2.48 $9.69 $11.56 $2.92 $26.64
U.S. Shale $6.42 $7.56 $5.85 $3.52 $23.35
Norway $0.19 $13.76 $4.24 $3.12 $21.31
U.S. non-shale $5.03 $7.70 $5.15 $3.11 $20.99
Indonesia $1.55 $7.65 $6.87 $3.63 $19.71
Russia $8.44 $5.10 $2.98 $2.69 $19.21
Iraq $0.91 $5.03 $2.16 $2.47 $10.57
Iran $0 $4.48 $1.94 $2.67 $9.08
Saudi Arabia $0 $3.50 $3.00 $2.49 $8.98

Source: “Barrel Breakdown” Wall Street Journal, April 15, 2016.

Increased Costs: Nigeria & Angola

It is evident that in Nigeria, the total Barrel Price is significantly higher than most of the emerging markets largely due to higher capital and production costs. In times of low oil prices, Nigeria therefore does not attract FDI. These increased costs are due in part to lack of confidence in infrastructure and security concerns – most of the exploration activities now occur offshore, which attracts significant capital spending. Indeed, as indicated above the trend is that SSA countries attract less FDI than MENA or indeed other developing regions. This is troubling not only because of the significant oil reserves (Nigeria and Angola have amongst the highest proven reserves in the world) but because FDI is crucial to the region to help accelerate growth through technology, knowledge transfers, employment and infrastructure.

Pade Durotoye, chief executive of Nigerian independent Oando Energy Resources, has expressed frustration at the delay the company faced in exploration and production on its acreage because of unattractive terms.

One of the things we are trying to make the government understand and appreciate is that a higher government take of nothing is nothing,” he said at the Africa Oil Week conference in Cape Town (2017).

Future Reform:

These messages come at a critical time for the industry in the region, as governments rethink their hydrocarbons strategies at $50-60 oil. The continent’s two largest oil producers, Nigeria and Angola, are revamping their investment and legal frameworks for the oil and gas sector, and a plethora of other African states are keen to emulate the recent success of Senegal, Mauritania and Mozambique in kick-starting exploration and converting successful finds into concrete development plans.

Cote d’Ivoire, having just settled a protracted maritime border dispute with Ghana, has re-launched its efforts to encourage new exploration, offering redrawn blocks through direct negotiation with oil companies. Elsewhere on the continent, Namibia, Sierra Leone, Liberia and the Gambia are also promoting frontier offshore acreage. Onshore, Mali is also offering up blocks, hoping that investors will overlook the security risks posed by Islamist terrorism.

They will be keen to emulate countries such as Ghana, Mozambique and Senegal, which have managed to maintain exploration momentum during the industry downturn since Brent crude futures began to tumble in mid-2014.

In Part 3 of this series Alex Bakhshov will take a closer look at Mozambique, which has consistently attracted FDI, thus bucking the trend amongst SSA countries. Alex will take a close look at Mozambican Regulators’ approach to working in collaboration with IOC’s to develop its infrastructure and implement legal and social reform by working towards an innovative legal framework and diversification of its markets.

Alex Bakhshov is a commercial lawyer specialising in project and infrastructure work, having attained experience of major projects in Africa, Asia, the North Sea, South America and Australia. Alex has advised on mergers and acquisitions, joint ventures, construction, regulatory, contracting and procurement strategies, and possesses significant experience in construction, the marine sector, shipyard disputes, shipping (both wet and dry) and offshore Oil & Gas projects in the North Sea, West Africa and Brazil.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

For more information or assistance with a particular query please in the first instance contact the department paralegal Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here