When asked about the top ESG risks in oil and gas, a familiar list typically emerges.  Health and safety, environmental harm, climate change, activities in a particularly high risk jurisdiction…  From a legal perspective, we do not disagree, but our key concerns come from a different angle:

 

  1. Did you do what you say you did?  Many oil and gas companies make varied and wide-reaching claims about their ESG performance.  This can be by way of “formal” ESG / sustainability reports, or other publicly made statements.  Oil and gas companies “sign up” to voluntary initiatives (often ones without “hard law consequences”) all the time.  Our experience tells us that not all statements are fully audited before they are made, and that not all businesses live up to the letter (or spirit) of the initiatives that they sign up to.  This opens them up to liabilities down the line.

 

  1. When was your last ESG audit?  By which, we do not mean, “How many health and safety breaches were committed last year?”  What we are most concerned about is, when did you last take an in-depth look at whether the business lives up to (1) its internal policies and (2) any external initiatives, in all matters ESG-related?  This cuts across a very broad range of activities, and a meaningful audit should not be a tick box exercise.

 

  1. Who checked it?  Internal advisors and consultants not familiar with the broader legal regime surrounding ESG-related obligations are unlikely to be able, on their own, to make sure that you are genuinely in compliance.

 

  1. What did you say about your global approach?  In a global world, with far flung operations, it can be tempting to proudly announce that you take the same, rigorous approach to ESG compliance globally.  We understand that in practice, this is very difficult to achieve, and from a legal perspective can be an impossible goal to live up to.  Communications may need to be more nuanced.

 

  1. Have you thought about future scenarios? Many oil and gas businesses have now adopted alternative courses for their businesses, including in respect of an increasingly carbon-constrained world.   Targets, on their own, only go so far.  We think that what investors are most focused on is the extent to which you have really thought this through, modelled different scenarios, and are readying yourself for the future.  Without doing so, sources of both debt and equity are likely to become more scarce.

 

  1. Do you know what the “S” is?  Or that it too can be measured, reported on and verified?  The social side of ESG is often ignored, and sounds relatively innocuous.  But getting matters such as the use of child labour and worker low pay wrong can inflict just as much damage to a business as a serious environmental spill.  S, to our mind, also stands for “supply chain”, and is a matter that oil and gas companies need to be paying closer attention to.

 

  1. B is for (net)biodiversity gain.  At the risk of adding another letter, it is increasingly recognised that, hand in hand with a climate crisis, the world is confronting a biodiversity loss crisis.  Addressing this matter is far from the exclusive preserve of the oil and gas industry.  Equally, it will not be possible for the oil and gas industry to avoid making progress in this area in the coming years.

The UK has announced an ambitious target to achieve a net zero carbon economy by 2050. It is widely acknowledged both within the UK government and industry more broadly that hydrogen will play a key role in achieving this target. The potential role of hydrogen in the transport and heating sector is seen as particularly important.

In September 2020 the UK commenced trials of its first hydrogen powered train. A £750,000 grant from the Department of Transport has been made available to test the technology which, if successfully proven, will enable the retrofitting of existing rolling stock to operate on hydrogen.

£6.3 million has also been ear-marked for a hydrogen re-fuelling station to be constructed in Glasgow and used to support 19 hydrogen-powered refuse trucks.

In the context of domestic heating, National Grid is participating in a trial project to test the use of hydrogen to heat homes. Ofgem (the UK energy regulator) approved the project in November 2020 and construction is anticipated to commence in 2021 with testing scheduled for 2022. Various blends of hydrogen will be tested under varying pressures to assess how assets will perform.

Whilst these pilot projects are seen as real positives nevertheless there continues to be a lack of a clear hydrogen strategy in the UK. Recent government announcements have confirmed that a detailed hydrogen strategy is being developed. It may be that the UK’s hydrogen strategy will be included in the long awaited and highly anticipated Energy White Paper, currently scheduled to be published in Q1 2021.

So, whilst some may dream of a White Christmas the UK energy industry is hoping for an Energy White Paper.

 

 

Please join us on December 3, 2020 at 9:30 am Central to discuss oil and gas investments in Latin America.  Link to registration is here. There will be two panels focusing on the following topics.

Is the oil crisis in the midst of COVID 19 another opportunity for Latin America?

Leading experts will examine how the decrease in oil prices, coupled with COVID-19, has greatly reduced US shale oil advantages and could potentially free up capex for international oil and gas projects.  Given the reduction in capex for oil and gas projects as a result of the low oil prices, energy transition, climate change and other restrictions, countries will have to compete for investments.

How are different countries in the region positioning themselves to attract foreign investments in oil and gas? Practitioners from Brazil, Colombia, Ecuador and Mexico will consider investment operations in the current climate.

Moderator: 
Vera de Gyarfas, Mayer Brown, Houston

Panel:
Hernando Becerra de Cima, Gonzalez Calvillo, Mexico City, Mexico

Marianna Boza Morán, Brigard Urrutia, Bogotá, Colombia

Giovani Loss, Mattos Filho, Rio de Janeiro, Brazil

Javier Robalino, Ferrere, Quito, Ecuador

Is it feasible to finance oil and gas investments in Latin America in the era of energy transition?

As a result of limitations on traditional financing to oil and gas companies, lenders will have to structure creative financing arrangements to fund these international projects.  What types of lenders are willing to fund oil and gas projects which are necessary for the development of Latin American countries?

Representatives of financial institutions, local firms and government agencies will analyze what is required to finance oil and gas projects in Latin America.

Moderator:
Vera de Gyarfas, Mayer Brown, Houston

Panel:

Fernando Brunelli, Bomchil, Buenos Aires

Linda Fitts, Director of Energy and Infrastructure, U.S. Treasury, Washington D.C.

Rolf Schmitz, Managing Director & Head Latin America, Corporate Banking – Energy, Scotiabank, Houston

Miriam Signor, Stocche Forbes, São Paulo

On 11 November 2020, the UK government published draft legislation, the National Security and Investment Bill (the “Bill”), which will significantly change the treatment of mergers and acquisitions in the United Kingdom and will introduce a new security screening regime separate from competition law. 

Once in force, it will require prior notification and approval of the acquisition of certain shareholdings or voting rights in “qualifying entities” active in a wide range of sensitive sectors, including acquisitions of minority interests as low as 15%. The Bill also provides for a “call-in” power (i.e. the power to review transactions retrospectively) and a voluntary notification procedure in respect of other acquisitions, including in relation to a wide range of assets, such as intellectual property, as well as acquisitions of material influence, in any sectors in which national security issue might arise.

In view of the scope and broad-ranging nature of the proposed new powers, they will be of interest to energy companies. Transactions taking place from today until the commencement of the new regime will become subject to the call-in power once the new legislation enters into force, creating risks for companies with immediate effect.

To read our recent article please click here. 

 

 

According with the current oil & gas regulatory framework, the Mexican Government must have a marketer that carries out the commercialization of hydrocarbons that correspond to it under the contracts for the exploration and extraction of hydrocarbons executed through the National Hydrocarbons Commission (CNH). For this purpose, CNH, at the request of the Mexican Petroleum Fund for Stabilization and Development (Petroleum Fund), must contract a marketer through a public tender process. The Petroleum Fund must provide the minimum terms it requires for the correct provision of such marketing services, including the maximum acceptable price.

Considering that the contract for the commercialization of liquid hydrocarbons executed between the Mexican Government and Trafigura México, S.A. de C.V. was terminated on October 22, 2020 (before its expiration), and the contract for the commercialization of gaseous hydrocarbons with the same company concluded on October 23, 2020, it was imperative for the Mexican Government to have a new hydrocarbons marketer.

Accordingly, through official writs dated January 30, April 30 and August 17 of 2020, the Petroleum Fund requested CNH to carry out the required tender process. Some of the most relevant features determined by the Petroleum Fund were the following:

  1. Maximum price: $0.25/b liquid hydrocarbon sales and USD $2.92/b with logistics (USD $4.95/b for the cost of the freight of the oil tanker if sold on the Gulf of Mexico US side);
  2. Term of 5 years; and
  3. Reception at the “Point of Delivery” and assumption of material and legal responsibility of the marketer up to the “Point of Sale”.

CNH began the tender process by carrying out a market investigation in which it considered the following 12 industry players, although only 2 submitted a tentative proposal to perform the services in the required terms:

COMPANY SUBMITTED PROPOSAL
CFENERGÍA, S.A. DE C.V No
ENI TRANSPORTE Y SUMINISTRO MÉXICO, S. DE R.L. DE C.V. No
GLENCORE ENERGY MX S.A. DE C.V. No
GUNVOR GROUP LTD- 19 Yes
INDUSTRIAS ENERGETICAS S.A. DE C.V. No
IPSA HIDROCARBUROS DE MEXICO S. DE R.L. DE C.V. No
MERCURIA ENERGY GROUP LTD No
NOBLE GROUP HOLDINGS LIMITED No
PMI COMERCIO INTERNACIONAL, S.A. DE C.V. Yes
SHELL TRADING MÉXICO, S. DE R.L. DE C.V. No
TRAFIGURA MÉXICO, S.A. DE C.V. No
VITOL MARKETING MEXICO S. DE R.L. DE C.V. No

Since Gunvor S.A. did not comply with the required technical specifications and did not include the commercialization of gaseous hydrocarbons in its proposal, CNH concluded in late October that the only company in a position to effectively provide the services under the required terms was PMI Comercio Internacional, S.A. de C.V. As a result, CNH issued an opinion justifying the exception to the public tender process in order to contract PMI through a direct award.

The above becomes relevant and matches the latest resolution of the Board of Directors of Petróleos Mexicanos (Pemex), the Mexican national oil company, which on October 28, 2020 approved that Pemex serve as guarantor under a USD 2 billion revolving credit facility granted by a group of banks to P.M.I. Trading Designated Activity Company (PMI Ireland), an affiliate of PMI. The purpose of the credit facility is to refinance debt from previous years, as well as to finance current and future operations (predictably including the commercialization services to be provided to the Mexican State through PMI). The guarantee is unconditional, irrevocable and obliges Pemex to jointly respond with PMI Ireland for the principal and accessories under the credit.

The Policy of Reliability, Safety, Continuity, and Quality in the National Electricity System (the “Policy”) published on May 15, 2020 in the Federal Official Gazette (Diario Oficial de la Federación) was subject to several judicial proceedings due to its controversial content.

The Policy, based on the current health emergency, slowed the dispatch of renewable electric energy to the National Electricity System indefinitely due to its supposed lack of reliability, granting priority to CFE’s electricity generation despite the fact that it implies greater pollution and a higher cost to the end user.

The Federal Commission of Economic Competition (Comisión Federal de Competencia Económica) filed constitutional controversy docket 89/2020, which resulted in the Court’s decision to suspend, with general effects, the application of the Policy since June 2020.

The President –through the Executive Power Legal Counsel- filed an appeal against such decision.

Notwithstanding the foregoing, the Court determined unanimously that the complaint filed by the Executive Power was unfounded and on October 21, 2020, the Supreme Court of Justice confirmed the decision to suspend the Policy. We estimate that the definitive resolution of this procedure could take up to one year.

On the other hand, in November 2020 the final judgement of the amparo trial filed by EGP Magdalena Solar –one of several renewable energy companies that challenged the Policy-was published and it was the first judgment that analyzed the merits of the case. The judge considered that the Policy affects free competition and violates regulatory requirements; therefore, the Policy was suspended with general effects.

As a consequence of the foregoing, the Policy will not be part of the legal framework of the power industry and the relevant players of the sector may continue operations as if the Policy had never been issued. This may be further altered if SENER appeals such decision.

In Spanish below

Continue Reading Mexico – SENER’s Electricity Policy is Overruled

On November 10th, 2020, the Brazilian Economy Minister, Mr. Paulo Guedes, affirmed that Centrais Elétricas Brasileiras S.A. – Eletrobras will be privatized by December 2021. Eletrobras, a mixed-capital company controlled by the Federal Government, is the largest power company in Latin America and, in Brazil, is responsible for 30% of the power generation capacity and 45% of the power transmission capacity.[1] Currently, the Federal Government holds 42.57% of Eletrobras’ common shares with voting rights.[2]

The privatization process is proposed pursuant to the Bill of Law No. 5,877/2019,[3] and is flagged as high priority in the government’s agenda. It will be implemented by a follow-on public offering that will dilute the Federal Government’s equity stake to less than 10%. If such goal is not reached in the follow-on public offering, then there will be a secondary public offering of the common shares owned by the Federal Government or by another shareholder directly or indirectly controlled by the Federal Government.

Prior to the transactions described above, Eletrobras will carry out a corporate restructuring to spin-off Eletrobras Termonuclear S.A. – Eletronuclear and Itaipu Binacional, Eletrobras’ subsidiaries that may not be privatized pursuant to applicable laws, which will thus remain under the Federal Government’s direct or indirect control, as indicated in the attached Eletrobras.Structure

Also, the Bill of Law No. 5,877/2019 provides that the company’s by-laws will be amended to prevent any shareholder of holding more than 10% of the common shares and also any block voting agreements among shareholders representing more than 10% of the voting shares of the company. The objective is that Eletrobras becomes a corporation with pulverized control. Such Bill of Law does not create any golden shares for the Federal Government, but it is still subject to further amendments in the Brazilian Congress.

Finally, we also highlight that the Bill of Law No. 5,877/2019 allows the Federal Government to grant 30-year renewals for the hydro power generation concession contracts of Eletrobras, extinguishing the “quota regime” of these contracts created by Law No. 12,783/2013, where these generators had to sell energy at a regulated price, and implementing an independent power production regime, where these generators will be allowed to freely sell the energy in both regulated and free markets. On the other hand, the Federal Government will calculate the additional value added to these concessions as a result of these proposed changes and Eletrobras or their subsidiaries will have to pay 1/3 of such value to the Energy Development Account (Conta de Desenvolvimento Energético, or CDE) to be reverted to the final customers’ tariffs and 2/3 to the Federal Government as bonus for the concession renewal.

[1] Available on https://eletrobras.com/en/SobreaEletrobras/Annual-Report-2019.pdf.

[2] Available on https://eletrobras.com/pt/ri/Documents/Capital%20Social%20-%20Setembro%202020.pdf.

[3] Available on https://www.camara.leg.br/proposicoesWeb/prop_mostrarintegra?codteor=1830817&filename=PL+5877/2019.

On November 16, 2020 Staatsolie Hydrocarbon Institute announced the launch of a new bid round in Suriname covering 8 shallow water offshore blocks (~13,534 km).  The virtual data rooms will open on November 30, 2020 and bids are due by April 30, 2021.

After the recent successful oil discoveries in Suriname and the establishment of a new coalition government in July 2020, a new bid round could prove transformative for the South American country.

It will be interesting to see the results of this bid round but Guyana’s success next door may be a good indication of renewed interest in underexplored prolific reserves.

More information on the process and the bidding terms are available at the links below.

surinam – round – executive summary

instruction-to-bidders-16-11-20

 

Since March 2018 the Mexican Energy Regulatory Commission (Comisión Reguladora de Energía, “CRE“), by means of Acuerdo A/010/2018 appointed the Chief of the Electricity Department (Jefe de la Unidad de Electricidad) as the person responsible for the review and authorization of the requests filed by generation permit holders in connection with changes to the milestone dates set forth in the relevant permits.[1]

Generation permits include as milestone dates, the start and completion date for construction works, as well as the date for commencement of commercial operation. If a certain project intends to change such dates, a request for the amendment of the corresponding permit needs to be filed.

By appointing the Chief of the Electricity Department in 2018, the Government Board (Órgano de Gobierno) assured permit holders a more expedite review and authorization of the amendment requests.

Nevertheless, in November 2020, by means of Acuerdo A/039/2020,[2] the CRE decided to abruptly repeal Acuerdo A/010/2018.  As a result, the Government Board of the CRE shall be the only authority with the power to approve or deny the amendment requests filed in connection with milestone dates. It is expected that as a result of the increased workload of the Government Board, and the fact that its members meet less frequently, the consideration and approval of new amendments of generation permits may result in delays.

[1] Acuerdo por el que la Comisión Reguladora de Energía delega al Jefe de la Unidad de Electricidad, la facultad de autorizar o negar las modificaciones de fechas estimadas de los programas de inicio y terminación de obras, así como de inicio de operación de la central de generación de energía eléctrica de los permisos de generación; y de las autorizaciones de importación o exportación de energía eléctrica.

[2] Acuerdo de la Comisión Reguladora de Energía por el que se abrogan los diversos A/074/2017 y A/010/2018.

International Petroleum Law and Transactions (Rocky Mountain Mineral Law Foundation, 2020)

Norman Nadorff was invited by Professor Owen Anderson, the book’s General Editor, to write the official review of this seminal work.

The book is an exquisitely organized and richly detailed summary of the petroleum industry and its technology, laws, economics, and agreements. As such, it serves as both a one-stop textbook for international petroleum transaction (“IPT”) courses as well as an authoritative desk guide for practitioners and policy makers. The book covers the gamut of petroleum-related technology, laws, contracts, and social issues in a logical sequence. The text is peppered with numerous graphs, excerpts, tables and useful internet links.

The authors, all well-known petroleum academics and practitioners, are to be commended for producing this remarkably well organized and meticulously researched book. It will surely enable scores of professors to teach thousands of students about our intriguing industry and allow countless professionals to self-enhance their knowledge and careers.

Nadorff’s full review may be viewed, and the book purchased, at the Rocky Mountain Mineral Law Foundation book store.