Energy & resources is something of a barometer for lawyers and firms in the region trying to gauge their success in overcoming the effects of the global downturn. And with plenty of investment still to come alongside strong government support, the readings are good.

Those who know their way around the energy and resources (E&R) sectors will be familiar with the saying “as energy goes, so goes the economy”. In many ways the E&R sector is as much a perfect microcosm of the broader economy as it is a bellwether for overall macroeconomic health. Yet how true is this conventional wisdom in an economic climate where even the most elementary of economic theories has been turned on their head? ALB investigates.

Resilient leanings

Asia’s E&R sectors have always enjoyed a special status. They have been talked of as possessing the potential to effect economic miracles and to deliver to regional economies that sometimes-elusive growth they thirst for. When things aren’t going to plan the E&R sector is considered the panacea – the ingredient most able to pull ailing economies out of recesssion and into the black.

Arguably, no other region in the world is blessed with such abundant reserves of power, minerals and resources as is Asia. In the past, dilapidated power infrastructure development in places like Indonesia, Vietnam, Thailand, India and China was cause for embarrassment. Now this is part and parcel of the growth occurring in the region, a story which continues largely unabated despite the current financial crisis. It is this growth story – and those investors, sponsors and governments who want to be part of it – throwing E&R practices into overdrive.

Even lawyers are somewhat surprised by the levels of activity in the sector. Brad Roach, a Singapore-based partner at Lovells Lee & Lee, says transactional activity in specialty areas like oil & gas remaining resilient (despite the financial crisis) has more to do with the types of deals coming to the market than prevailing economic conditions. “Our clients are investing in projects that have a 15- 25 year time horizon in many cases, such as LNG, geothermal and IPP projects. Their view of project economics is long-term and not driven by market volatility,” he says. “The fundamentals for energy demand in Asia are extremely strong, so time horizons are measured in decades rather than short-term business cycles.”

Government stimulus packages have also helped focus attention on the long-term outlook. Since the beginning of Q3 2008, nearly US$100tr has been sunk into developing economies across Asia – with nearly half this amount being set aside exclusively for either oil, gas and power projects or the industries that are supporting them. Hector de Leon Jr, a partner with SyCip Salazar Hernandez & Gatmaitan in Manila, singles out infrastructure as the most prominent industry, saying funds earmarked for this area will continue to push along E&R deal flow. “The huge stimulus packages being implemented around the world will result in the construction of more infrastructure, which will in turn result in increased demand for metals and drive up metal prices,” he explains.

In the Philippines, de Leon says, it is the mining sector which is most active for lawyers. Here, firms are spending a greater percentage of their time advising companies that mine, process and sell minerals. “We [are] providing legal assistance on all aspects of mining projects including project structuring, mergers and acquisitions, joint ventures, corporate financing and project financing, due diligence review and permitting.”

Over the past year de Leon and his team has been involved in the following big deals: closing the sale of Anglo American’s interest in the Silangan project (formerly the Boyongan Project) to Philex Mining; the acquisition by Gold Fields of the right to earn certain projects of Mindoro Resources, and project financing by a group of banks (led by BNP Paribas) of the Masbate gold project by Filminera Resources/CGM Mining.

For Lovells’ Roach, LNG activity in southeast Asia, particularly in Indonesia, remains a hot-spot for his practice. The firm is advising Indonesia’s largest independent exploration and production (E&P) company, PT Medco Energi, in connection with the Donggi-Senoro LNG project in Sulawesi, being developed in conjunction with PT Pertamina (Persero) and Mitsubishi.

Changed spaces

While E&R dealflow may not have been as adversely affected as that in the M&A or equity market space, it has nonetheless seen its fair share of change since the onset of the financial crisis. “During a period of depressed metal prices, low demand and a tight credit market, mining companies try to cut costs and operate more efficiently,” says SyCip’s de Leon. “They focus on core assets, and in certain cases they divest assets that are not on their priority list.”

Part of this positioning also involves seeking out alternative financing arrangements. “Since bank financing can be very difficult [to obtain] mining companies try to raise funds through joint venture arrangements and bringing in strategic investors,” de Leon says. He goes on to note that while “only the brave” would contemplate listing their shares on stock exchanges and conduct public offerings at this stage, it is more common for some companies to scale back their operations or place certain projects on hold.

While the focus of mining clients may have changed, the way deals are structured – at least in the Philippines – remains largely the same. “I have not seen major changes in how deals are done and structured insofar as Philippines transactions I handle are concerned,” de Leon says. “There are tried and tested means of structuring deals and while we are always on the lookout to innovate, the structures used prior to the financial crisis are still adequate for this purpose. There may be a tightening in the way some provisions are drafted, in order to address the issues and concerns brought about by the GFC.”
As novel forms of financing are becoming popular in other Asian jurisdictions (mechanisms like forward sales of revenue streams or ‘flow-through shares’) these have not yet reached the Philippines – although de Leon does not rule out the possibility that they may arrive soon.

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