29 February, 2016
FOCUS: Record low oil prices and the desire to expand internationally will offer lucrative overseas investment opportunities to oilfield services companies willing to navigate sometimes complex regulatory regimes.
Although respondents to recent research conducted on behalf of Pinsent Masons, continue to back the US and UK as attractive markets for acquisitions, the tides are turning towards Asia as a target for investment. The oil price may be low, but investor-friendly governments and advanced production facilities make southeast Asia an attractive prospect for 59% of respondents.
When it comes to the factors that would encourage companies active in the oilfield services sector to look towards emerging markets as a target for expansion or investment through strategic mergers and acquisitions, prospecting opportunities (68%) come second to regulatory stability (73%). But with Singapore, Mexico, Indonesia, China and Nigeria all proving attractive to our respondents, the ability to establish a presence in a country with geographic proximity but more experience with the commercial needs of foreign businesses may tip the balance depending on a company’s long-term goals and appetite for risk.
Target markets
Geographies of interest for oilfield services companies and private equity investors are shifting in accordance with many factors, which in many cases are less tangible than proven reserves and prospecting opportunities. For 88% of respondents, the US is a top target given its political and regulatory stability. Thanks to the commercialisation of shale gas and oil the US is set to turn from an energy importer into an exporter, with the Energy Information Administration (EIA) estimating 8.8 million barrels per day (bpd) production in 2016.
Within the context of an improving economy and an excess of capital, US-based corporates and private equity (PE) firms have already begun consolidating through M&A in areas including the Permian Basin, the Bakken shale and the Eagle Ford and this is likely to continue in the future. However, non-US businesses we surveyed are also keenly observing developments in the US market due to its regulatory stability and its R&D capabilities.
In southeast Asia, Malaysia and Indonesia have been oil producers and exporters for a long time and offer experienced local partnerships. Singapore, besides having been a shipping and trading hub for the region, is further improving its position with new investments in storing liquid natural gas. The city state has also embarked upon an aggressive programme of free trade agreements and double taxation treaties with nearby oil-producing territories, and continues to promote itself as a regional seat for commercial arbitration.
Among the respondents to our research, 59% said that southeast Asia was an attractive target region with many citing pro-active and investor-friendly governments and well-set up production facilities – especially in those countries with a stable economic and regulatory environment. The International Energy Association (IEA) has projected 80% growth in energy demand between now and 2040, further adding to the long-term attractiveness of the region.
Many of the traditional oil & gas-exporting countries in the region including Indonesia, Malaysia and Thailand are becoming importing countries, making it a particularly interesting time for investments into the region. With many of the newest discoveries located offshore, investment in subsea and ultra-deepsea exploration technology offer potentially lucrative returns for investors looking to the long-term. Ultra-deepsea projects, such as the Gumusut-Kapak off the coast of Sabah in Malaysia at 1,200m, require a high standard of engineering and maintenance skills during production and therefore large amounts of investment.
Recent deals in the region include Japanese engineering company Chiyoda entering into a joint venture with Ezra Holding’s Singapore-based subsea services business for $180m in September 2015. The rationale behind the deal is for Ezra to leverage on Chiyoda’s technical expertise and global supply chain management experience to enhance its engineering, procurement, construction and installation (EPCI) capabilities in delivering large and complex projects, ultimately lowering the cost of subsea development. At the same time, the deal provides Chiyoda with access to new geographies and a new market segment.
However, capital efficiency for expensive deepwater offshore extraction will become increasingly important as profit margins are squeezed. As companies become increasingly motivated to squeeze the last dollar of productivity out of any field, we will see an increase in R&D – and the intellectual property (IP) issues that come with it. Structuring your contract to protect IP rights will be fundamental, especially in regions with particularly mobile labour forces.
Foreign investment laws
Many overseas investment targets have complex, historical foreign investment regimes in place that set limits on the extent to which a foreign entity may invest in specified sectors of the national economy – or, in some cases, may prevent investment in certain industries entirely. The good news is that overseas governments are becoming increasingly open to the idea of foreign investment due to a combination of globalisation and economic need, and many countries are gradually liberalising restrictions or actively taking steps to encourage outside investment.
Issues that companies should bear in mind when researching a potential investment target include, and are not limited to:
- restrictions on certain categories of investment as set out in national foreign investment catalogues;
- the need to establish a national presence;
- permitted forms of investment – can you set up a wholly-owned subsidiary or franchise, or must you participate in a joint venture with a domestic business?;
- issues surrounding shareholding, transfer of shares, tax exemptions and reliefs;
- national permitting, licensing and approval regimes;
- any restrictions on capital imports or borrowing placed on international businesses;
- technology transfer requirements;
- local content laws;
- any necessary mandatory contributions, health insurance and employee protection measures.
Dispute resolution
Foreign investors have traditionally preferred to have their disputes resolved through arbitration rather than the local courts. This allows them to avoid unfamiliar national legal systems, which may lack transparency or require proceedings to take place in the local language.
Most jurisdictions recognise the principle of freedom of contract, albeit limited by mandatory laws specific to the jurisdiction. Companies will usually not be able to set aside local public order laws, labour laws, criminal laws, environmental laws or health and safety laws as part of their contracts, and these will vary according to the jurisdiction.
Companies may wish to provide for arbitration in some of the more established regional seats, such as the UAE or Singapore, as part of their contracts. Although there will not usually be anything to prevent a seat such as London or Paris for a particular contract, regional arbitration can avoid any accusations of perceived bias and is much more attractive to local contractors in the event of a dispute. The use of arbitration is also growing in China, as the country works hard to improve the quality of its arbitration system and adopt international standards.
The benefits of arbitration include familiar, commercially-focused rules and the recognition and enforceability of awards elsewhere in the world, provided that the jurisdiction is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
For further information, please contact:
John Yeap, Partner, Pinsent Masons
john.yeap@pinsentmasons.com
