Learning to play the game
Featured Content
June 2011
Most people know the names BP, Chevron, Shell and ExxonMobil. What they don’t know is that these oil giants own only 10 percent of the world’s oil and gas reserves. The remaining 90 percent is owned by national oil companies (NOC) like Aramco, Gazprom and Sinopec — rarely household names to anyone outside the industry or those who don’t live in the region where the NOC is based.
Over the past decade, that has dramatically changed. More and more NOCs are emerging onto the international stage, well-funded and eager to move beyond simply selling oil and gas from their large reserves. They want to construct pipelines, run refineries and own the shipping lines that move these coveted resources around the world.
State-owned NOCs have been expanding internationally for years, but with rapidly developing countries like China and India creating a huge demand for oil, gas and petrochemicals, the process has sped up dramatically — changing the industry landscape.
NOCs have more incentive and cash than ever to pursue cross-border mergers, acquisitions, joint ventures and strategic alliances with international oil companies and other NOCs. But international business at this level is often a new frontier for them, creating a host of complex legal challenges.
Growing pains
The transition to running a global operation can be challenging for NOC management. Many of these NOCs, based primarily in the Middle East, Eastern Europe, South America and Africa, enjoy a high level of autonomy. As state-owned entities, they are used to being the only game in town and making their own rules.
Thus, doing deals with international oil companies that are subject to tighter control can create unexpected difficulties for NOC executives. As they move into Western markets, NOCs are encountering new concepts like antitrust rules and more stringent regulatory compliance they typically don’t contend with at home.
“It’s not just about advising them on the law, it’s about helping them establish global business practices,” says Daniel Matthews, managing partner of Baker & McKenzie’s Baku office. “They need to understand how the industry works far beyond their borders.”
When Matthews established the firm’s Baku office in 1998, he focused primarily on inbound investment—advising international oil companies on Azerbaijani law and helping them negotiate production sharing agreements (PSAs) with SOCAR, the local government-owned NOC.
SOCAR, established in 1992 through a merger of Azerbaijan’s two state oil companies shortly after the country won independence from the Soviet Union, didn’t have the resources to develop its large reserves of oil and gas. So it signed PSAs with the oil giants, which provided the funding, technology and expertise to tap the reserves in return for a stake in the profits.
Today, with two of SOCAR’s major oil fields in full production, the company is using those profits to establish a larger footprint. Since SOCAR emerged onto the world market in 2006 after nearly 15 years of development, Baker & McKenzie’s work in Baku has also shifted.
Matthews and his team now focus on outbound investment—helping SOCAR expand through cross-border deals like buying a new oil terminal in Georgia and a stake in a Turkish petrochemical company. As SOCAR continues to develop a global strategy, the Baker team also advises the company on technology licensing agreements, joint ventures, strategic alliances, tax structuring and competition laws.
Filling the gap
Like SOCAR, NOCs expanding overseas face the same legal, regulatory and business hurdles that international oil companies have been contending with for years. The difference is that NOCs often lack the experience of operating in a global marketplace.
Because they are state-owned, NOCs tend to be highly bureaucratic and make decisions slowly, making it difficult to compete in the fast-moving international oil and gas industry. Because of their rapid growth over a short time, their legal departments often lack the experience to operate at the global level.
They often need help with sophisticated issues such as tax structuring, transfer pricing, global mobility, currency repatriation, competition laws, environmental issues and regulatory compliance. Doing cross-border oil and gas deals also requires a thorough understanding of industry economics, technology, regulatory schemes, volatile market conditions and uncertain government policies.
For decades, Baker & McKenzie has advised international oil companies such as Exxon Mobil and BP on exactly these issues. With offices in all major oil and gas regions, we have a long history of advising clients on the development, construction and operation of large international energy projects around the world.
We also represented dozens of NOCs in major deals, such as CNOOC’s USD 3.1 billion 50-50 joint venture with Bridas in 2010, and MOL Hungarian Oil’s USD 1.27 billion co-operation agreement with Oman Oil Company in 2008.
Because of our global footprint and vast experience with all aspects of the oil and gas industry, Baker & McKenzie is perfectly positioned to help NOCs get up to speed on doing business on the international stage. At every turn, we can help clients navigate the ever-evolving rules of the game.