ashurst_challenges and opportunities in the asian oil and gas sector

AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR　 INDONESIA (ASSOCIATED OFFICE)ITALY JAPAN PAPUA NEW GUINEA SAUDI ARABIA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA

Challenges and Opportunities in the Asia Oil and Gas Sector

February 2015

Restructuring and Special Situations Group

2

Background: Recent Drop in Oil Prices

• Sharp decline in Brent crude oil prices.

• 60% lower in Jan 2015 compared to 2014 high, followed by a slight rebound.

• However, concern over perceived weak fundamentals remain.

• Industry participants are also wary of the high volatility in the oil markets. Source: Nasdaq

3

Case Study: South East Asia

• “lower crude oil prices will be negative for exploration and production (E&P) companies in South and Southeast Asia producing a high proportion of liquids or exporting crude price-linked liquefied natural gas (LNG)” (Moody’s, Jan 2015).

• The region's main oil producers are:– Indonesia (928,000 barrels/day);– Malaysia (670,000 barrels/day); and – Vietnam (353,700 barrels/day).

• In particular, quite a large number of independent and mid-cap E&P companies currently operate in South East Asia.

• These companies are likely to be more exposed to the price of crude oil when compared to the oil majors.

• South East Asia is also a hub for many oil and gas services companies.

4

Key E&P Stakeholders

E&Pcompany

Drilling rig contractors

E&P service providers

Financiers

Government

Regulatory bodies

Transportation providers

Customers

Refinery & storage

5

Business Implications for E&P Companies (1)• Reduced revenues

– Crude oil and natural gas are typically sold on contracts with “floating” prices linked to specified crude oil benchmarks.

– Timing and level of revenue impact will depend on existing hedging arrangements.

• Capital expenditure cuts– E&P companies will reduce overall capital expenditure and utilise

committed capital more efficiently. – Maintenance of “producing” assets is likely to be prioritised over new

exploration ventures. – Several companies have already announced significant cuts to their

expenditure over the coming years. E.g.• Indonesian state energy giant Pertamina recently announced that it is cutting its

2015 spending plans by up to half.• Royal Dutch Shell has announced plans to cut spending by $15 billion over the

next three years.

• Decline in trading prices of many E&P companies’ securities.

6

Business Implications for E&P Companies (2)• However, existing commitments under signed concession

agreements will still need to be honoured– E.g. Minimum Work Commitments to shoot [x] km of seismic and/or to

drill [x] wells of [x] depth etc. – Consequences of failure to perform obligations may include termination of

concession and/or default under any joint venture arrangements.

• Streamlining of portfolio assets– E&P companies may rationalise their portfolios by divesting non-core and

capital intensive assets.– However, E&P companies looking to strategically dispose of certain

upstream assets are currently less likely to find buyers for such assets on a stand-alone basis, which could drive down asset prices.

– Merger and acquisition activity in the E&P sector may be muted in the short-term as buyers and sellers try to digest the large price shift and “un-bridgeable” price expectations may exist between sellers and potential buyers.

7

Implications for E&P Service Providers

• E&P service providers are likely to face reduced demand for their services and increased competition for work.

• Overall E&P costs are also expected to decline as a result. • A recent Moody’s report predicted that E&P service providers’

earnings could fall by 25%-30% if oil prices remain below $60/bbl.– COSCO Corporation (Singapore) Ltd recently issued a profit warning.– Keppel Corp and Sembcorp Marine, which together account for 70% of

global jackup rigs, have suffered share price falls of 25% and 27% respectively over the past six months.

• Smaller independent service providers may not be able to weather the storm.

• Decline in trading prices of many E&P service providers’ securities.

8

Debt Service Implications for E&P Companies and Service Providers (1)

• Financing and re-financing exposure– A sustained period of reduced revenues will likely see some E&P

companies and E&P service providers face difficulty in servicing their existing loans.

– Access to new debt or equity is likely to be reduced as lenders and investors scale back their exposure to the sector and sponsors balk at higher pricing.

– New loans are expected to be subject to tighter borrowing caps, shorter tenures and increased interest rates to reflect sector risk.

– Significant impact on E&P companies that have reserves based or borrowing based financing where borrowing capacity is linked to oil prices.

– Such companies may be required to provide additional collateral or pay down the outstanding loans.

9

Debt Service Implications for E&P Companies and Service Providers (2)

• High-yield debt– Globally, E&P company high yield debt has begun to trade below par.

• Honghua Group, a Chinese equipment manufacturer and drilling service provider, has seen its bond price drop close to 60% since the end of October 2014.

• Anton, a leading Chinese oil field service company, has seen its bond price drop 40% over the last three months.

– A recent S&P Capital IQ article predicts a 6% default rate for energy companies over the next 12 months.

• Limited liquidity– The industry is capital-intensive and requires continued investment.– E&P companies generally have limited liquidity on their books.– In the past, E&P companies raised liquidity through borrowing or through

the sale of assets. – Access to liquidity may become increasingly difficult as E&P business

partners and lenders withdraw from the sector.

10

Immediate Contract/Legal Implications for Upstream E&P Companies• Pressure on existing contracts

– The sharp fall in oil prices will put pressure on contractual performance by E&P companies.

– Renegotiations and/or selective performance of contracts?• But certain commitments are likely to be difficult to renegotiate. E.g. Minimum

Work Commitments under concession agreements and fixed term contracts etc.– May result in breach, litigation, arbitration or negotiated settlements.

• Legal issues to consider:– What is your dispute resolution forum?– Can litigation be pursued effectively in local courts?– Challenges of enforcing foreign court judgments locally.– Does arbitration provide more certainty?– What about a local arbitration forum versus an international arbitration?– Is mediation a possibility?

11

Immediate Contract/Legal Implications for Upstream E&P Companies• Possible debt restructuring and the relevance of local

bankruptcy/restructuring court processes– Singapore – Schemes of Arrangement and Judicial Management.– Hong Kong – Schemes of Arrangement under the Companies Ordinance

and possible provisional liquidation.– Indonesia – PKPU process.– China – Reorganisation of corporation under the Enterprise Bankruptcy

Law.– Thailand – Voluntary reorganisation under the Bankruptcy Act.– India – Schemes of Arrangement and processes under SICA, BIFR and

CDR.– The Philippines – Suspension of payments/corporate rehabilitation

under the Insolvency Law.– Korea – Corporate rehabilitation under the Corporate Restructuring

Promotion Act.

12

Immediate Contract/Legal Implications for Upstream E&P Companies• Possible debt restructuring and the relevance of local

bankruptcy/restructuring court processes– Depending on the jurisdiction of the debt-issuing entity, consider the

possibility of a Scheme of Arrangement? Possible jurisdictions include: Singapore, Hong Kong, England, Cayman Islands, Bermuda, British Virgin Islands.

– A scheme may be effective in achieving (a) a stay against litigation, and (b) a cram-down of dissenting creditors.

– A Chapter 11 bankruptcy filing may also be relevant – note the relative ease of establishing jurisdiction.

– Recent developments in England make the English courts a possible restructuring destination (see recent cases – Vinashin and Apcoa Parking)

13

Other Issues to Consider: Exit or Sell-down

• Investment funds could benefit from reduced asset valuations and fewer competing buyers in the E&P sector.

• Energy sector-focused private equity funds would appear well-placed to invest in upstream E&P companies or service providers.

• Investment funds may also choose to buy all or part of an interest in upstream assets (e.g. the participating interest in a production sharing contract) or strategic assets owned by the relevant service providers (e.g. vessels, rigs etc.).– KKR & Co recently announced that it is targeting US$3 billion to provide

financing to troubled energy companies.– Blackstone is raising its first energy focused credit fund.– Apollo Global Management is also raising a new fund to buy the debt of

distressed energy companies.

14

Other Issues to Consider: Alternative Financing

• Investment funds may provide alternative sources of senior debt (e.g. term loan financing) or mezzanine debt (e.g. through subscription for convertible bonds which give investors the right to convert such bonds into the shares of the issuer) to such companies.

• However, this would have to be priced attractively compared to other potential financing options, including:– Structured trade loans, e.g. through various commodity advance

payment arrangements etc.– Multilateral/export credit agency loans.– Loans which may be tied to certain equipment providers.

15

Case Study: Upstream Interest Legal Due Diligence – Concession Agreements

Issue Indicative ChecklistStatus of E&P interest • Nature of E&P interest: Production Sharing Contract or petroleum licence?

To what extent can the terms of the interest be varied?• Phase of E&P: exploration; appraisal and development; production?• Minimum work commitments? • Remaining Term: need for renewal or extension? Process, timing and

likelihood of extensions?Chain of title • Is the seller the legal and beneficial owner of the E&P interest?

• Common encumbrances on title to E&P interests include:o carried interest arrangements; o open waivers; ando sole risk.

Restrictions on transfer • What government consents/approvals are required? • Are there any restrictions on transfers under the applicable legislation?• Is approval required prior to a change in control or does it just apply to

direct interest transfers (i.e., asset deals)?Regulatory restrictions applicable to holders of E&P interests

• Are there restrictions on the type of project vehicle which may hold the E&P interest? E.g. Is there a local ownership requirement?

• Are there general restrictions on the transfers of shares in such vehicles?

16

Issue Indicative ChecklistOperator • Who is designated as the Operator? Technical and financial capability?

• What is the procedure for removal of the Operator and appointment of a new Operator?

Restrictions on Transfer and Pre-emption

• Is consent required, and on what grounds can it be withheld (e.g. technical or financial capacity etc.)?

• Any restrictions on assignment or transfer to Affiliates?• Any restrictions on transfer by a defaulting party?• Pre-emptive rights: Right of First Refusal, Right of First Offer, Right of First

Negotiation etc.• Is a “Change in Control” caught (e.g. corporate deals)? • Waiver: is time to complete third party deal sufficient?

Operating Committee and Voting

• Right to attend and vote at Operations Committee meetings.• Voting pass marks: control and negative control. Are there any matters

which require unanimity or which allow minority interest holders to block key decisions?

• Non-consent and consequences.Other issues • Sole risk / exclusive operations: what kind of sole risk projects (if any) are

permitted? Rights and obligations of non-participating parties?• Default and forfeiture.• Withdrawal: Buyer to proceed with caution if Seller is already in default.

Case Study: Upstream Interest Legal Due Diligence – Joint Operating Agreements (JOAs)

17

Issue Indicative ChecklistCrude Oil Marketing Arrangements

• Are there joint marketing arrangements in place?• Are each party's crude oil entitlements to be separately lifted? Is there a

nomination and lifting agreement in place to regulate the lifting arrangements?

• Term and termination.• When does ownership of oil and gas pass to holder of the E&P interest? • Liability regime under any joint marketing arrangement or nomination and

lifting agreement.

Gas Sales Agreements (GSAs)

• Term and termination.• Take-or-Pay and Seller shortfall.• Gas price and price review.• Force majeure.• Back-to-back with other contracts (e.g., LNG SPAs).

Case Study: Upstream Interest Legal Due Diligence – Offtake Agreements

18

Team Members

Joel HogarthPartner, Singapore

T: +65 6602 9176E: [email protected]

Carl DuntonPartner, Singapore


Daniel ReinbottPartner, Singapore

T: +65 6416 9529 E: [email protected]

Bertie MehiganPartner, Hong Kong and Singapore


Matthew BubbAsia Managing Partner


Sean PriorPartner, Singapore


Restructuring and Special Situations Group Energy and Resources Group

AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR　 INDONESIA (ASSOCIATED OFFICE)ITALY JAPAN PAPUA NEW GUINEA SAUDI ARABIA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA

These materials are for briefing purposes only and are not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Please take legal advice before applying anything contained in these materials to specific issues or transactions. For more information please contact the presenters or your usual contact.

ashurst_challenges and opportunities in the asian oil and gas sector

Documents