UK: Impact of COVID-19 on AGMs: An update
In our briefing COVID-19: What does this mean for AGMs?, we considered a number of issues with which companies with December 31 year-ends have been grappling.
National governments across Africa, including Morocco, Nigeria and Angola, alongside energy companies active in the region are facing exposure to oil-related debt burdens that are feared to pose a systemic risk, especially to international energy traders already in financial trouble. A combination of declining oil prices, a lack of hedging against the volatility of oil price movements, and the lack of diversification in Africa’s oil industry, has resulted in trading houses lending and thus becoming exposed to large debts, often unclearly structured and linked to an oil company’s supply chain finance. The Nigerian federal government owes around US$2 billion for unpaid petrol subsidies, and the high court recently ordered it to pay US$165.8 million it owes to local oil company Capital Oil and Gas Industries. More such cases could have a severe impact on the public finances of African countries, many of which are already struggling to repay their debts during a time where commodity revenues have rapidly declined and had a similar effect on the local currencies. The President of the African Development Bank has called on African countries to diversify away from the export of raw commodities such as crude oil, and to instead focus on developing refined products that will add more value, and thereby help to create a natural buffer against the current oil market.
Maersk Oil & Gas has agreed to acquire respectively a 25% and 15% stake in Canadian oil firm Africa Oil’s concessions in the Rift basin and South Omo basin in Ethiopia, as well as half of the company’s shares in three onshore exploration licences in the Turkana region of northern Kenya. Covering an area of approximately 100,000 square kilometres, which include eight recent oil discoveries, the value of the deal is split between an upfront farm-in payment of US$365 million and future contingent payments of up to US$480 million, to be determined after final appraisal on the size of the resource and agreed timetable. The parties have signed a farm out agreement which includes the transfer of shares within the two blocks in Ethiopia, and will now request formal approval from the Ethiopian Ministry for endorsement, alongside the relevant government approvals in Kenya.
Lekoil’s wholly owned subsidiary Lekoil 310 Limited has agreed to acquire Afren’s entire 22.86% participating interest in OPL 310 for US$13 million. Another Lekoil wholly owned subsidiary company Mayfair Assets and Trust Limited (Nigeria) currently holds a 17.14% participating interest and a 30% economic interest in OPL 310 since signing a farm-in agreement in 2013. This will mean that following Nigerian ministerial consent, the company will hold a consolidated 40% participating interest and 70% economic interest in OPL 310, alongside becoming a technical and financial partner. The OPL 310 licence contains the Ogo oil and gas discovery, and situated close to the West African Gas Pipeline offers a ready outlet for developing gas discoveries.
Ownership of exploration blocks in Kenya is undergoing significant changes amidst the uncertainty in the upstream sector attributable to the global decline in oil prices. The National Oil Corporation of Kenya (NOCK) is to acquire shares worth US$1.2 billion in the South Lokichar basin (blocks 10BB and 13T), in the northwest of the country where 600 million barrels of crude oil has recently been discovered, on behalf of the government. The production sharing contract will allow the Kenyan government to participate as a paying partner upon the approval of the field’s development plan, with production expected to commence in 2020.]
Gazprom, the world’s largest gas producer, has agreed to buy all of the liquefied natural gas from the floating export Perenco project in Cameroon, and will reportedly be the sole off-taker of 1.2 million tonnes per annum. The project is owned and operated by Norwegian company Golar LNG and is the first offtake agreement from a third party floating LNG asset. The supply is due to start operating in 2017, and the contract is not destination-restricted, allowing Gazprom to ship the LNG anywhere in the world, although it is anticipated that it will sell to Atlantic markets, including Latin America and China.
Egypt’s Dolphinus Holdings, a gas trading company, has signed a letter of intent to agree to import up to 4 billion cubic metres of gas per year as part of a preliminary US$10 billion 15 year deal with Israel, despite its discovery of the large offshore Zohr gas field by Eni earlier this year. Still subject to negotiation of final terms and various approvals, the gas will come from Israel’s offshore Leviathan field, which is expected to commence production in 2019 or 2020, and will pass through the underwater pipeline built by East Mediterranean Gas a privately owned pipeline operator, nearly a decade ago. The development of the field is being led by Texas-based Noble Energy and Delek Group, and is estimated to hold 622 billion cubic metres of gas.
News of these negotiations comes as Egypt is ordered to pay a fine of almost US$1.73 billion to Israel in an ICC arbitration ruling issued in early December arising out of disruption of supplies during 2011 and attacks by militants in the Sinai peninsula on the pipeline owned by Eastern Mediterranean Gas. The Egyptian government has ordered the state owned oil and gas companies to stop issuing approvals to companies seeking to import Israeli gas while the impact of the decision is reviewed, which Egyptian Prime Minister Sherif Ismail has said that his country will appeal. On the Israeli side, Prime Minister Benjamin Netanyahu is reported to be sending a special envoy to Egypt to seek to resolve the dispute, which comes at a time when both countries have been working to exploit Mediterranean gas reserves to mutual benefit.
During the two day oil and gas conference held in Tehran and attended by oil and gas company executives and government energy advisors from across Europe and Asia (not the USA), Iran revealed the framework for its new oil and gas contracts seeking to bring back foreign investment from international oil companies to the country following the expected lifting of the United States’ sanctions on Iran in early 2016.
The new and more flexible Iran Petroleum Contract (IPC) is a framework outlining the basic structure for all future petroleum contracts within Iran, and the terms by which foreign oil companies will be allowed to exploit Iran's vast natural gas and oil resources. The IPC framework will permit foreign companies to book reserves in certain circumstances, but they will still be prevented from owning oilfields, which will belong to the National Iranian Oil Company (NIOC) which has exclusive ownership rights over such resources. The new model is aimed at increasing foreign companies’ profits by basing the fee on the oil fields risks so that the Iranian and foreign contractors spread the investment and operational risks on a sliding scale, offering more collaborative flexibility and competitive terms, as well as allowing the service contracts to last for terms of up to 25 years, and not including capital expenditure ceilings.
The first party to the contract will always be the NIOC on behalf of Iran and the contracts will only be in relation to specific sites identified by NIOC and awarded through a tender process. Costs will be recovered from the production and subsequent sale of the oil / gas, subject to a cap of 50% of total production for oil, and profit is payable as a fixed fee earned per barrel of oil produced (and not a profit sharing agreement), which could result in foreign companies waiting a significant time for a return on their investment. Foreign contractors must also commit themselves under the IPC to improving technology and know-how in Iran, bringing construction tools and materials with them which will transfer to the NIOC alongside ownership of all installations and property on the contracted site, and employing Iranian nationals wherever possible. Two matters stated to not have been addressed in the IPC include what law is to govern the contract, and the process and forum for dispute resolution. Such clauses will therefore need to be carefully negotiated by foreign petroleum contractors according to established international legal practice.
However, the US treasury sanctions on the banking sector may make the flow of foreign investment into and out of Iran via banks more difficult. Investors may instead have to either invest into an oil and gas company, such as Shell or Gazprom, who is a partner to the IPC, or the Iranian Government may need to issue bonds against the energy sector as an incentive to outside investment.
The corruption scandal in Brazil’s oil and gas and construction sectors has spread with the arrest of financier André Esteves and Workers’ Party senator Delcídio Amaral in late November, on charges of interfering with the ongoing corruption investigation. The situation surrounding Petrobras is causing problems for Sete Brasil, the company set up to build offshore drilling rigs for Petrobras. Recent reports indicate that the attempts to restructure Sete Brasil’s debt to a number of Brazilian banks earlier this year have reached an impasse due to uncertainty of delivery and diminishing finances.
As elsewhere in Latin America, the difficult economic climate is affecting politics, with Congress now considering impeachment proceedings against President Dilma Rouseff.
Argentina’s newly-elected president, Mauricio Macri, took office on 10 December attended by high expectations for improvements to the country’s business environment. As well as promoting a more “business friendly” Argentina, one of his campaign messages, Macri’s key challenges will be to revitalise Argentina’s energy sector and restore investor confidence. Argentina has found it increasingly difficult if not impossible to raise money on the international capital markets following disputes with bondholders, and current estimates put the inflation rate as high as 38 per cent. Early comments from Macri’s party spokespersons suggest that he will seek to re-engage with the international community including the UK, with whom Argentina’s relations have deteriorated as the outgoing administration used the Falkland Islands (Las Malvinas) dispute to distract attention from domestic concerns. It is likely to take some time before any improved relations translate into cooperation over oil and gas exploration of that region.
The investor community will also be watching how the new government approaches Argentina’s shale resources. Development of the Neuquen Basin could have a transformative effect on Argentina’s economy even in straightened times for the oil and gas sector globally. However, as YPF has recently warned, a further US$200 billion of investment is needed to achieve its development potential. That can only occur following a stabilisation of the legal and economic framework. The new hydrocarbon law passed at the end of outgoing President Kirchner’s term provides some capex incentives to large investors – a right to export 20 per cent of production abroad tax-free, and equipment import licences – but it is unclear whether this will be enough. Macri’s energy and mining minister will be Juan Jose Aranguren, a former CEO of Shell Argentina, who has already announced that the new government will end subsidies for electricity bills in the Buenos Aires metropolitan area.
Leaders of the opposition coalition in Venezuela, the United Democratic Roundtable, are claiming a victory in the 6 December leglislative election of two thirds of the seats in Congress, giving the bloc a super-majority which would enable them to make sweeping changes to the country’s legal and economic framework and to oust the current president. Venezuela’s shrinking economy and international isolation are said to have driven voters away from Hugo Chavez’s populist left wing government, producing a rally in Venezuela’s sovereign bonds as well as debt issued by PDVSA, the national oil company. It remains unclear whether the coalition of left and right wing parties which make up the opposition can turn their election result into economic stability and growth while oil prices remain below US$50.
Mexico’s next auction of onshore blocks will take place on 15 December. While most of the pre-qualified participants are small Mexican companies hoping to gain experience in the newly liberalised market, there are expected to be a number of international participants as well, including Statoil and ExxonMobil. 52 companies are reported to be bidding for 25 areas on offer. Winning companies will be expected to bid between 1 and 10 per cent of pre-tax profits as part of their offer to the government, the Finance Ministry announced on 30 November.
Meanwhile, national company Pemex has entered the US fuel market by launching its first gasoline petrol stations outside Mexico, with four more expected to open around Houston in the coming months, all expected to sell petrol from the US wholesale market.
ExxonMobil has applied for an environmental permit to explore for shale oil and natural gas in Colombia in a move to become the first company to drill in the country using the controversial hydraulic fracturing technology. The company submitted its environmental impact assessment for fracking in the VMM-37 block to ANLA, Colombia's environmental agency, for approval. Last year Colombia published rules governing the methods companies could employ when exploring for oil and natural gas using hydraulic fracturing, and production regulations are expected to be published in the first quarter of 2016.
However, whether Exxon actually goes ahead with fracking will be dependent on a significant upturn in global oil prices, with some commentators stating that prices will need to rise to at least US$70 per barrel before it would make economic sense for Exxon to embark upon the expensive process of fracking in a new industry in Colombia, despite the vast geological potential offered by the region.
The Competition Markets Authority, the UK’s competition regulator, has written to the Department for Energy and Climate Change alleging that the establishment of an independent regulator for UK North Sea oil & gas to facilitate information exchange between industry participants may have a negative impact on competition in the sector. The Oil and Gas Authority (OGA) is intended to be an independent regulator whose responsibilities include asset stewardship. The OGA’s powers include fines and revoking licences, as well as attending meetings and having access to data to allow it to step in and resolve disputes between industry participants which might otherwise interfere with oil production.
North Sea explorer EnQuest has approved the development of the Scolty / Crathes oil field in the North Sea, which is expected to commence delivering oil in the beginning of 2017. The company specialises in maximising oil output from old oil fields by using its new technology, which alongside the low upfront costs of the existing infrastructure in this site, convinced EnQuest to authorise the project’s development, despite the current global trend of oil companies scaling back their investments in order to reduce their overall costs, prompted by weak oil prices and oil industry revenue. Due to adjusting its maintenance schedules, cutting its rates for contractors, and linking the payment of service providers to their performance, EnQuest has been able to lower its operating expenditure to US$31 per barrel from US$38, and this figure is expected to fall further to US$26 in 2016. Alongside this, by bringing forward some 2016 investments into 2015 and hedging 10 million barrels of its 2016 production in a strategy to protect itself from any further oil price decline, it now expects to be able to increase its oil production to between 44,000 – 48,000 barrels per day in the new year.
A rise in North Sea oil production has helped increase the industrial production statistics during the latter months of the year, despite the downturn in global crude oil prices. Annual growth of the industrial production rate rose 1.7% on the previous month. However, in contrast to the production increase, profits in the North Sea have fallen and the government predicts to collect only £100 million in tax revenues from oil production this tax year. Economists claim that such figures were unlikely to have a noticeable impact on the UK's moderate economic recovery because industrial production only accounts for 15% of the UK economy. Instead, the rise in North Sea output may simply be a result of companies bringing existing production facilities back on stream following long-term maintenance works.
23 workers on the Guneshli platform in the Caspian Sea, offshore Azerbaijan, are missing and presumed dead following a fire which broke out on Friday 4 December after a gas line was damaged in a storm. Eight fatalities have been confirmed by SOCAR, Azerbaijan’s national company, with 33 workers having been rescued. The platform is a transit point for approximately 60 per cent of SOCAR’s oil production, mostly from other fields. BP, which operates several Caspian fields, has said its operations have not been affected by the outage.
Ukraine has stopped ordering Russian gas as of 25 November and closed its airspace to Russian airlines as relations between the two countries deteriorate further over the US$3 billion bond which Russia bought in early 2014, shortly before President Yanukovych of Ukraine was ousted. Russia’s demand for repayment and refusal to include the bond in the restructuring which Ukraine has negotiated with IMF, insisting that it be treated as sovereign debt and therefore outside the restructuring, threatens to put Ukraine in default of its IMF obligations. The Ukrainian government has said that it has sufficient gas to see it through the 2015-2016 winter and to maintain stable transit to western Europe. An agreement was reached in September between Ukraine, Gazprom and the European Commission following a pricing dispute during the summer, under which supplies were to resume in October, and Ukraine was subsequently buying gas from Gazprom until the current stoppage.
Naftohaz, the Ukrainian state gas company, has also signed an agreement in late October with the European Bank for Reconstruction and Development for a revolving loan of US$300 million to purchase gas from European suppliers. However, if the Ukrainian economy improves in the new year, additional supplies may be needed and Ukraine may have to resort to purchasing gas from Gazprom again. Naftohaz remains confident in Ukraine’s becoming independent of gas imports by 2020, according to recent statements from its CEO Andriy Kobolev.
The planned TurkStream gas pipeline project, launched with much fanfare in December 2014 but subsequently reduced in capacity by half and beset by pricing disagreements and delays, may not survive the deterioration in relations between Russia and Turkey following the latter shooting down a Russian bomber near the Turkish-Syrian border on 24 November. Russia has taken measures in response affecting Turkish companies working in Russia and Turkish imports, as well as Russian tourism to Turkey. Talks on the TurkStream project have been formally suspended, although it is unclear by which side. The Turkish Economy Minister, Mustata Elitas, has been quoted recently as saying that Turkey is seeking to reduce its dependence on imported gas. At the same time, Prime Minister Ahmet Dourutoglu has announced, jointly withAzerbaijan President Ilham Aliyev, that development of TANAP, the Trans-Anatolian Pipeline, will be completed earlier than the planned 2018 date.
Russia’s attention has increasingly been focused on Nord Stream II, the possible alternative route for Russian gas to western Europe which, like TurkStream, bypasses Ukraine. The consortium to develop Nord Stream II so far consists of Gazprom, E.ON, BASF/Wintershall, OMV, ENGIE and Royal Dutch Shell. The project is opposed by at least ten EU member states, including Poland, the Baltics and Romania, which have written to the European Commission indicating that Nord Stream II is contrary to the EU’s energy policy and interests. Nord Stream II is expected to begin transporting gas by the end of 2019. Russia may therefore engineer a delay of several years, or give up TurkStream altogether.
Samruk-Kazyna, Kazakhstan’s sovereign wealth fund, has announced that it plans to sell off stakes in several state owned companies including national company KazMunaiGas (KMG). The announcement comes against the background of a severe devaluation of the tenge and shrinking government revenues in 2015. Previous partial privatisations of state owned firms have taken place by way of IPOs on the Kazakhstan stock exchange (KASE) and Samruk-Kazyna has indicated it will follow the same route this time around, with an IPO planned for KMG in the next three to four years. Subsidiary KazMunaiGas EP’s GDRs are listed on the London Stock Exchange and shares on the KASE, with 30.9 per cent of the company being in free float. The capital planned to be floated as part of Kazakhstan’s privatisation programme totals approximately KZT2.5 trillion (US$8.1 billion).
KMG has also agreed an up to US$3 billion prepayment deal with oil trader Vitol for oil from its 20 per cent stake in the Tengiz oilfield, operated by a Chevron-led consortium, with the first payment expected in February. Production from the Tengiz field represents about one third of Kazakhstan’s total oil output.
In our briefing COVID-19: What does this mean for AGMs?, we considered a number of issues with which companies with December 31 year-ends have been grappling.
This legal update expands on and should be read in conjunction with the basic insolvency principles outlined in Part 2 (Insolvency fact sheet) of this series of legal updates. This update focusses on assisting company directors to understand their obligations under the new temporary relief measures in place during the COVID-19 crisis.