Big Oil Money

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Today's newsletter is a 7 min read:

• 🛢️ Big Oil Money: Oil companies are making billions, but where are they spending it?
• ➕ Plus: Tragedy in Turkey, Biden's appeal, Microsoft's AI chatbot and Danish wind farm troubles.

📰 News Briefing

1. 🎮 The Competition and Markets Authority said Microsoft’s $75bn acquisition of video game maker Activision Blizzard could “result in higher prices, fewer choices, or less innovation for UK gamers” in provisional findings that jeopardise the landmark deal. The findings are a blow to Microsoft, which is also battling regulatory probes in Brussels and the US
2. 🇺🇸 In his state-of-the-union address, President Biden appealed to Republicans to support his policies to reduce debt, aid families and deal with China. Despite low approval ratings, he is expected to run for re-election in 2024.
3. 🤖️ Microsoft has unveiled an AI-enhanced version of Bing, powered by the same technology behind OpenAI's chatbot ChatGPT. This move is part of Microsoft's attempt to compete with Alphabet's AI-powered chat.
4. 💨️ The CEO of WindEurope has called the Danish government's sudden decision to halt approvals for all offshore wind farms "absurd." The move was based on concerns over violating EU state aid rules.

🤿 Deep Dive

Big Oil Money

In brief:

• Oil companies are using their huge profits to diversify their portfolios in less risky locations and greener projects.

Time to invest

Oil and gas companies are making record profits. The top oil producers are expected to bring in $200bn in profits from last year but the big question is, where are they going to spend it all?

Well, after years of suppressed investment due to the pandemic and climate-related policies - oil companies are ready to expand their horizons. Spending for the industry rose to $450 billion last year, up from a 15-year low of $350 billion in 2020.

This trend is expected to continue this year. However, all this new money is not flowing to the same old places...

Shifting Priorities

The American and European oil giants are reducing their exposure to regions such as Russia, Britain, and Southeast Asia, and shifting their focus to South America and Africa.

• Investment Rounds: ExxonMobil is investing heavily in newfound fields in Guyana, while Chevron is funneling more than a third of its capital expenditure to American shale and another 20% to the Gulf of Mexico. Meanwhile, BP and Shell are quitting Russia and turning their gaze to the south, with Shell and Norway's Equinor signing an agreement with Tanzania to build a $30bn liquefied natural gas terminal. TotalEnergies is investing in gas projects in Mozambique and South Africa.

Why are strategies changing?

There's two main reasons for big oil's change in strategy:

1. Investors in oil companies are demanding greater care when it comes to spending. The message has been clearly received as the industry's spending is down from a peak of nearly $800 billion in 2014. Most of their cash is now going into "short-cycle" investments that generate a return within five years. They are also backing more projects in familiar jurisdictions and avoiding countries with riskier factors e.g. politics and geology.
2. Responding to increased pressures from consumers, policymakers and investors to start decarbonising their portfolios. They are looking for new places to invest because such investments, which use the latest technology, tend to be more efficient and less carbon-intensive than legacy assets that rely on leakier, ageing infrastructure.

How does this Impact Law Firms and their Clients?

Note: In this section, we consider how law firms' clients may be affected by the story we discussed. We then explain how law firms can help, and which particular legal departments could see an increase in work and why.

💼 What does this mean for law firm's clients?

Oil Companies

• Concerns: Oil companies are primarily concerned about managing risks to their projects whilst complying with investors' desires to carefully manage capital, and the need to focus on greener solutions. As part of the new strategies they may face more competition in the Americas and Africa.
• Opportunities: Access to untapped or under-explored oil and gas fields, as well as the potential to tap into new and growing energy markets. Additionally, the focus on efficiency and capital discipline in the industry means that companies are investing more judiciously, reducing the risk of large and expensive failures. This shift could also bring new technologies and best practices to the regions, which could help to modernize the local energy industries and promote more sustainable energy development.

Infrastructure Companies

• Concerns: The oil majors' focus on more familiar jurisdictions may limit opportunities for infrastructure companies specialising in left-behind locations e.g. Russia. They will be concerned about the decrease in mandates and the potential for competitors who operate in sought-after locations to boost profits.
• Opportunities: Infrastructure companies may have the opportunity to support the growth of renewable energy projects in Africa and provide infrastructure for the development of newfound oil fields in South America. These are large mandates, and infrastructure companies will be looking to expand their reach in these regions to collect as many of these as they can handle.

Governments (Africa and Americas)

• Concerns: The governments of countries in Africa and Americas may face concerns about the environmental impact of increased oil extraction and the impact on their economy from the shift of investment from other regions.
• Opportunities: On the plus side, these governments may have the opportunity to benefit from increased foreign investment and job creation in the oil and renewable energy sectors, as well as an increase in tax revenue. Oil companies may also invest in infrastructure development, such as building roads, ports, and other facilities, which can provide long-term benefits to local communities.

Renewable Energy Companies

• Opportunities: Big oil's shift towards green solutions can be good news for renewable energy companies who may be acquired or receive investment. Last year the oil majors already signed 22 renewables deals, the five biggest of which added up to $12bn. They will be keen to capitalise on new green projects in the Americas and Africa with the oil companies.

⚖ Which legal departments would this impact?

Corporate/Mergers & Acquisitions (M&A)

Mergers & Acquisitions: The department would advise on various M&A transactions, such as acquisitions and divestitures as oil companies pursue growth in the Americas and Africa. The department would review agreements and negotiate terms and conditions of contracts, as well as ensure that the transactions comply with local laws and regulations.

• Example: ExxonMobil is considering acquiring a local oil and gas company in South America, and the department would advise on the due diligence and negotiation of the acquisition, including reviewing the agreements and ensuring that the transaction complies with local laws and regulations.

Corporate Governance: The corporate department would advise on various corporate governance issues, such as compliance with local laws and regulations, shareholder relations, and board of directors matters. The department would help ensure that the companies comply with local laws and regulations and that the interests of shareholders are protected.

• Example: Shell is forming a joint venture with a local company in Africa, and the department would advise on the governance of the joint venture, including compliance with local laws and regulations and the protection of shareholder rights.

Energy

Contract Negotiation: The department would advise on the negotiation and drafting of contracts for oil and gas projects in the Americas and Africa, including agreements with local authorities, partners, and contractors. They will ensure that the contracts are in compliance with local laws and regulations and protect the interests of the companies.

Regulatory Compliance: The department would advise on ensuring compliance with energy-related laws and regulations in the Americas and Africa, including environmental and health and safety regulations. The department would assist companies in obtaining necessary permits and approvals for their projects and ensure that the projects are in compliance with local regulations.

• Example: TotalEnergies is investing in gas projects in Mozambique and South Africa, and the Energy legal department would advise on obtaining necessary permits and approvals for the projects, ensuring that the projects are in compliance with local environmental and health and safety regulations.

Infrastructure and Planning

Project Development: This department would advise on the development of infrastructure projects, such as pipelines and liquefied natural gas terminals, in the Americas and Africa. They would review agreements with local authorities and partners, as well as negotiate terms and conditions of contracts to secure the rights of the companies.

• Example: Shell and Norway's Equinor have signed an agreement with Tanzania to build a $30bn LNG terminal, and the department would advise on the planning and development of the terminal, including negotiations with local authorities and partners.

Land Acquisition and Zoning: The department would advise on the acquisition of land and obtaining necessary permits and approvals for infrastructure projects in the Americas and Africa. The department would ensure that the projects are in compliance with local zoning and environmental regulations and that the interests of the companies are protected.

• Example: ExxonMobil is investing heavily in newfound fields in Guyana, and the department would advise on the acquisition of land and obtaining necessary permits and approvals for the development of the fields, including compliance with local zoning and environmental regulations.

Commercial Contracts

Agreements with Local Partners and Authorities: The department would advise on the negotiation and drafting of agreements with local partners and authorities related to infrastructure projects, such as pipelines and LNG terminals. The department would ensure that the contracts comply with local laws and regulations and protect the interests of the companies.

Supply and Service Contracts: The department would advise on the negotiation and drafting of supply and service contracts related to infrastructure projects in the Americas and Africa. The department would ensure that the contracts comply with local laws and regulations and protect the interests of the companies.

• Example: ExxonMobil is investing heavily in newfound fields in Guyana, and the department would advise on the negotiation and drafting of supply contracts for the development of the fields.