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by Kent Moors
The market for legal services in the oil and gas sector is expanding--and not as a result of an increasing number of traditional projects or contracts.
Several significant changes are emerging in the manner whereby parties are designing contract and holdings structures. These developments are certain to increase in the market for a variety of hydrocarbon supply, demand, pricing and sourcing reasons.
In addition, the rise of what I have often referred to as NIOM (the "New International Oil Market") will impact how we service even the traditional oil and gas proprietary, financing, operational and flow-through projects, both upstream (wellhead, field) and downstream (refinery, transport, retail).
All of this directly translates into revisions in how we approach much of the corresponding litigation and contract support demanded.
Three trends that will provide a robust sector requiring a full range of legal services
1. Within the last 18 months, the market has been moving from the well-recognized holdings controlling process and facilities to new approaches controlling product and access.
Intermediary leverage entities, often domiciled offshore, are occupying a greater position in access to crude oil and oil products, tanker leasing, refinery capacity control, hawser management, oil field servicing, and related areas, as well as a range of accompanying finance and fiduciary considerations.
2. Arbitraging control of product and market access is intensifying.
This emerges in several distinct ways. We are witnessing acceleration in swap transactions among energy types. This is enhanced in those markets where trading in carbon and other emission quotas is established.
However, the rise of liquefied natural gas (LNG) will have a decisive impact in transforming the market. LNG is the most significant change to occur in global energy in a generation.
As the volume begins to increase over the next several years, it will profoundly change the arbitrage market, the regional swing of contract and deliveries, and the kinds of litigations and recoveries sought.
In addition, arbitrage among traditional energy supplies is on the rise, with profits now often generated more from the price differential or trading spread than from the actual delivery of product.
Finally, with the phase-in of novel sources of crude (oil sands, oil shale), replacements for oil products (e.g., ethanol or biodiesel) or alternative energy sources, the arbitrage market will undergo further change.
3. All manner of oil finance, traditional and new, is about to change.
Apart from the rise of new derivative and mezzanine paper associated with a range of deals, the currency factor is shortly to undergo a fundamental revision. This may well comprise the largest single change in the oil market near-term, and it will have a decisive impact on how we structure legal support in response.
All global oil contracts have been transacted in US dollars. This has meant a considerable amount of US currency at any given time is off the table, remaining in foreign banks as petrodollars to secure consignments and finance future contracts.
This is equivalent to an interest-free loan to the American economy. So long as the dollars remain out of circulation, they cannot contribute to inflation in North America.
But all of this is about to change. Given the weakness of the US dollar and the emergence of the European Union as a major unified energy player, pressures are building to denominate contracts in euros.
Both Iran and Russia have given notice that they will introduce new benchmark crude rates, along with new oil exchanges. Those contracts will be in euros, not dollars. A few OPEC consignments sold on the Dubai Exchange have already gone forward in euros.
A de facto euro discount is already in force. Reviewing the past two years of sales, crude oil has increased 84 percent in dollar terms but only 71 percent in euro terms. The market is already factoring in the strength of the euro and the likelihood of euro-denominated oil contracts.
When these emerge in regular transactions, fewer petrodollars will remain in foreign banks. The dollars will be exchanged back to the US to fuel a significant resurgence of inflation. That inflation, in turn, will affect every energy contract in force or negotiated.
What New Opportunities Require
Providers of legal services need to understand that the oil and gas sector is changing and quickly. The new opportunities require a flexible response that relies upon expert service provisions to support what the law firm provides to a client.
Kent Moors, Ph.D., is an internationally recognized expert in global oil/natural gas policy and finance, cross-border capital flows, emerging market economic and fiscal development, political, financial and market risk assessment, as well as new techniques in energy risk management. He has been an advisor to the highest levels of the US, Russian, Kazakh, Bahamian, Iraqi and Kurdish governments, a consultant to private companies and law firms in sixteen countries and appeared over 500 times as a featured television and radio commentator in North America, Europe and Russia. A prolific writer and lecturer, his six books, more than 400 professional and market publications, and more than 150 private/public sector policy presentations and workshops have appeared in 38 countries.
Dr. Moors is President of ASIDA, Inc., an international consulting firm specializing in Russian, CIS, Caspian, and other developing market hydrocarbon and financial strategies, and Executive Managing Partner of Risk Management Associates, International, LLP, a full service global management consulting and executive training firm. He is a contributing editor to the two current leading post-Soviet oil and natural gas publications (Russian Petroleum Investor and Caspian Investor), monthly digests in Middle Eastern and Eurasian market developments.
Professor in the Graduate Center for Social and Public Policy at Duquesne University, where he also directs the Energy Policy Research Group, Dr. Moors has developed international educational programs, run training sessions for agencies of the US government, and served as an external implications consultant to ongoing policy areas having high levels of uncertainty.
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