Energy and infrastructure 2016 is the fourth edition of our sector specific guide to the legal markets of Asia-Pacific, Central and Eastern Europe, Latin America, the Nordic and Baltic region and Sub-Saharan Africa.
In the last six months our team of legal journalists in London, Hong Kong and New York have interviewed lawyers, industry figures and in-house counsel active in the relevant sectors to source their opinions on law firm performance and the state of the energy and infrastructure sectors in their jurisdiction and regions, and what they see as the main talking points, challenges and areas of activity.
From these conversations and their extensive research, the IFLR1000 team in London has summarised, by country or sub-region, the main trends and developments across the Nordic and Baltic regions below.
Energy and infrastructure 2016 is the first research project to utilise IFLR1000's new Deal Database, a fully searchable database of significant deal records from over 120 countries. Our team has selected some of the most significant Nordic and Baltic energy and infrastructure projects which emerged from this research period, and you can view the data records below.
Denmark is a pioneer of renewable energy and remains one of the most important centres for wind power in the world. Outside of that it has a number of significant interests in the energy and infrastructure sectors. With a North Sea coast there is a substantial oil and gas industry operating in the west of the country. It is also home to some of the most innovative infrastructure projects in the world, most notably the Fehmarn Belt Fixed Link, an immersed tunnel project that will link the Danish island of Lolland to the German island of Fehmarn, and the controversial Nord Stream 2 pipeline.
On the energy side, there continues to be a lot of work in the wind sector as Denmark aims to provide half of its electricity through wind power by 2050. In 2015, that figure managed to reach 42% – thanks to a particularly windy year where for at least one day wind power supplied 140% of the electricity needs of the entire country – but there is still scope for further projects. These, in particular, are attractive to major investors like pension funds.
“What we have seen the last couple years is, this low-interest market means we have a lot of pension funds that are looking for alternative investment opportunities to be able to earn an interest for their customers,” says Nicolaj Kleist, a partner at Bruun & Hjejle. “They are very much looking towards infrastructure and energy investment where they can have a 15-20-year plan with secure payoffs.”
It is a different story on the so-called ‘black energy’ side, where the trend is towards divestments rather than new investments. “The coal fire plants are separated from other parts of their business,” says Per Hemmer, a partner at Bech-Bruun. “We have seen it particularly with Vattenfall, which has sold all three of their coal-fired plants in Denmark, and they have all been acquired by local municipalities due to their dependence on heat production from the plants. I think that’s a trend that you can see with Dong, with Eon in Germany and with RWE in Germany as well. That’s definitely a major trend.”
The oil price slump that has impacted markets worldwide has also been felt keenly in Denmark. “We have seen the pressure on the smaller oil companies – in Norway they call them the ‘mosquitoes’,” says Hemmer. “The small companies that were able to operate in the market where prices were at a normal level, they are not able to finance their operations anymore. They simply have to leave the market and it’s quite obvious also that the big companies feel the pressure on them.”
On top of all that, the anticipated IPO of Dong Energy, slated for Q1 2017 – the largest IPO in the nation’s history that could value the company at some $11 billion – is having an impact on the market as it seeks to divest operations. This is providing a great deal of transactional work, but also a lot of regulatory and disputes work as these entities are untangled from the energy behemoth.
“I think what we saw last year is likely to continue,” says Kleist. “There’s all sorts of things happening with the upcoming listing of Dong Energy and that will also generate a lot of transactions, both because they have to sell up certain activities before being listed, but also the listing itself and all the questions and cases that might give rise to.”
Despite the challenges of both economic stagnation and a depressed oil price, the Danish energy and infrastructure market had a relatively positive year, with 2016 looking to be the same, if not better. Renewable energy projects and the large-scale construction of connectivity infrastructure with its neighbours are ensuring the lawyers in this area are not going without work.
Jon Moore – Journalist EMEA
It has been a tough year in Finland economically and the energy and infrastructure market has not escaped its share of the woe.
“The Finnish economy is, unfortunately, doing very badly,” says Waselius & Wist partner Christoffer Waselius. “There are really no signs of the economy itself picking up… the Finnish market is not doing well and the state economy is miserable.”
Within the energy market many of the trends have centred on renewables, both positive and negative. A change of government at the end of May saw a change in policy direction, with the resurgent wind power market suddenly left bereft of its subsidies.
“What we saw last year was a very busy year for renewables, particularly wind power,” says Casper Herler, managing partner at Borenius. “We got a new government and in the new governmental programme they took a totally different approach to subsidies for renewables, particularly wind. They wanted to focus more on biofuels and biomass and that led to a lot of turbulence because they very suddenly wanted to make retroactive changes in the tariff scheme.
“The tariff scheme has been so over-favourable to investments because it locked a very high energy price level, which the wind power producers get for putting their energy into the grid. Since the energy prices have been at a record low that means that the difference between the secured price and the actual market price has been much more than the government was ever expecting, so it’s been a very costly subsidising scheme.”
With investors seeing the writing on the wall, there was a rush by companies looking to take advantage of the subsidy scheme at the beginning of 2015, aware that once all the licences had been issued there would be no more forthcoming. Once the new government ended the scheme, therefore, there was a sudden drop in the market, with the only business for the rest of the year in the wind sector largely coming from the sale of those existing licences.
“In terms of wind power, there are regulatory concerns still, they are not solved,” says Waselius. “The new government amended the subsidy law for wind power. They pulled back and promised a new scheme, but that new scheme, nobody knows exactly what it will be. So in terms of wind power investment in Finland I think investors are holding off because nobody knows exactly what the returns will be in the future. However, there are a number of Finnish investors and some foreign as well who have invested in wind power projects.”
On the other side of that decision, however, the drop in wind power work has, to some extent, been replaced by an increase in biomass projects. As Herler explains: “The new Finnish government is led by the Centre Party. The prime minister and those others [in the party] have traditionally had very strong roots with the Finnish landowners and the farmers. That’s why they want to subsidise, and are in favour of, projects that involve wood and forestry and therefore this biomass approach is politically based.”
Despite being one of Finland’s traditional industries, forestry and its associated businesses have struggled in recent years, with some saying it has been on a negative path for more than a decade. These new projects that exploit the country’s vast forestry reserves – including one of the first major Chinese investments into the country, a €1 billion plant to be constructed by Kaidi in Kemi – have seen a reversal of that trend.
“The Finnish government has greatly emphasised that we need to move to a much larger use of reusable fuels and of course forest products are the resources that we have,” says Waselius. “So I think we will see more investment into biofuel made out of forestry products: pellets and pellet-propelled power plants.”
That is also the case for associated industries, which have also seeing a resurgence of activity this year. “Pulp, being the raw material for paper, is very strong right now,” explains Herler. “The market price for pulp is very strong and that has been driving projects back to Finland. Previously, Finland suffered from the forest industry suffering and always closing down factories and so forth. Now there are a lot of greenfield and brownfield projects relating to pulp.”
That new source of energy production could become increasingly important as Finland struggles to come to terms with a potential energy crisis. “What is worthwhile remembering is that about 2,500MW of old coal-fired plants are at the end of their lifetime and at the end of their permitted period within the next five years or so,” explains Kristiina Leppänen, a senior adviser at Borenius. “This will practically mean that Finland needs to make some serious decisions on how we produce electricity in the future. There has been an eager investment in wind farms but we all know wind farms do not produce electricity on a stable basis. Some other kind of electricity [generation] plan will have to be built up and this is an ongoing discussion. It started actually this winter, when it was really, really cold we practically almost ran out of electricity. So, the politicians realised that this problem is in front of them at the moment; it’s not something that can be solved several years from now.”
While nuclear power will likely play a part in that, those plants that are under construction will not come on line for a number of years, says Leppänen, while the existing plants will come to the end of their lifespan with the next decade. In the interim there will be a significant need for new generation capabilities.
“I would presume that we will be seeing more biomass burning plants,” continues Leppänen. “Then we will also probably be seeing more combined heat and power in connection, for example, with these new pulp and paper plants.”
There certainly appears to be a sea change in the Finnish energy market, one that could mean busy times ahead for lawyers. Finnish energy behemoth Fortum announced in February 2016 that it would be focusing heavily on new wind a solar production – an surprising step given it sold off a substantial amount of its wind portfolio only a couple of years ago – as well as seeking to harness the power of new technologies.
Herler predicts this signals the direction the market is moving and it seems likely in the next few years there will be an increase in the development of things like carbon capture technology. Also, with that there will likely be a move to more decentralised production, with smaller local producers utilising new technologies to maximise their output.
Jon Moore – Journalist EMEA
It was all looking so positive for the people of Iceland. After years of economic turmoil, following the collapse of the country’s banking system in 2008, it seemed as though a corner had finally been turned.
In July 2015 the government announced it would be easing capital controls – in place since the collapse – on some kr150 billion (€10 billion) of assets. While the process would be phased and there would be substantial measures put in place to prevent capital flight, the general consensus was this was good news for the island nation’s struggling economy.
“We generally believe there will now be more foreign investment,” says Benedikt Egill Árnason, a partner at Logos. “We believe that now, since the problem of the old banks is going away, the current capital controls that are in place in Iceland right now will be reduced to some extent. This might induce foreign investors to come into Iceland to a greater extent. Obviously, having capital controls provides a very negative image for foreign investment.”
However, the leaking of the Panama Papers in April 2016 had a huge impact on the country’s politics. Sigmundur Davíð Gunnlaugsson, then prime minister, was embroiled in a scandal relating to his ownership of a stake in a company that was not declared when he entered parliament. According to reports, he later sold his 50% holding to his wife for $1.
What sparked the controversy was that the company turned out to be a creditor of the Icelandic banks, one that materially benefitted from the deal struck by Gunnlaugsson’s government in 2015.
The people of Iceland were not happy. By some accounts more than 6% of the entire population of the country turned out in protest, eventually forcing Gunnlaugsson to step aside, replaced by Minister of Fisheries and Agriculture Sigurður Ingi Jóhannsson ahead of planned elections in autumn of 2016. Turbulence is always troubling for new investors so the uncertainty surrounding Gunnlaugsson’s departure, and the extent to which it will impact planned financial changes relating to the banking system, will likely have a negative effect on potential foreign investment.
Despite the turmoil, though, there are positives that suggest things may still improve this year. Major silicon projects already underway will continue and there has been strong investment in the fishing industry, one of Iceland’s most important. Iceland’s growing importance as a tourist destination will see continued foreign interest too, and as one of the world’s foremost producers of geothermal energy the ability to sell technology and expertise remains a lucrative option.
“Across the board hopefully there will be a greater amount of projects this year,” says Árnason. “We are hoping that there will more involvement in mining projects in Greenland for our clients. There is also always a debate about whether to build a subsea interconnector to the UK. That’s a constant debate and if that would move along that could be a very interesting project. It’s still very, very early days in respect to that project though we have been involved in some preliminary analysis, etc. But hopefully, that’s a very big project if that would ever, ever be done.”
Jon Moore – Journalist EMEA
As one of the world’s leading oil and gas producers, Norway has felt the brunt of the oil price slump more than most in Europe. The industry has taken a big hit, with a number of smaller players already out of the game and the bigger names hunkering down to ensure they survive.
While the price slump has certainly changed the nature of the work being done by lawyers – moving more to disputes and restructuring – they have, by and large, been kept busy, despite all the challenges.
“It’s fair to say that the oil industry is having a pretty rough time,” says Wiersholm partner Sondre Dyrland. “The level of activity has dropped for all market segments, so the times are tough for everyone. I think it’s fair to say the weight has shifted [away from project work], but there are different types of work still.”
In fact, even within the oil and gas sector there is still some work going on. The development of the Johan Svedrup oilfield is ongoing – a possible 3 billion barrels, with production expected to start in 2019 – and the oil price slump has ironically been something of a boon for the owners. With prices so low, oilfield services companies are having to slash their prices in order to remain competitive in a field with ever-decreasing options. This is allowing those developing Svedrup to gain those services at rock-bottom prices, which will mean big profits as long as the price rises again in the next three years, as all believe it will. That trend can be seen all over the industry, as the big companies learn to operate in leaner times.
“What we saw in oil and gas was reduced activity by the E&P (exploration and production) companies in particular,” says Rune Soldberg, a partner at Thommessen. “That has had an impact on the oil services sector, with all this caused by the reduction in the oil price. So you see a lot of developments have been delayed, with not much exploration activity, and that has a consequence for oil services.
“There is one giant development in Norway, the Johan Svedrup field, and that’s going ahead, fortunately, but there are other areas, the Barents Sea, etc., where the oil companies are delaying their decision process. In oil services we see a lot of restructuring and refinancing activities. Looking forward, it depends on whether the main players do see the drop in oil price as reaching the bottom. What has happened in the market now, both in oil services and E&P, both have actually taken down their costs significantly. They don’t need a price of $80 anymore, it’s more like $40-$50.”
Outside of oil and gas, wind power is increasingly becoming an important part of the energy sector. Indeed, in February 2016 the Fosen Vind project was announced, a €1.1 billion, 1000 MW collection of six wind farms on the Fosen peninsula, the island of Hitra and Snillfjord that will effectively double the country’s wind power generation.
On the infrastructure side too, major projects continue to move forward, especially in the grid sector. There are several domestic projects but the North Sea Link, a joint venture between National Grid and Statnett to lay a subsea interconnector between the UK and Norway to connect the two nations’ grids, has to be the most ambitious.
So, while the economy has certainly been significantly impacted by the oil price slump, it has by no means been crippled by it. Energy and infrastructure work, even in the oil and gas sector, continues to roll on and the lawyers in the market remain busy.
Jon Moore – Journalist EMEA
Energy and infrastructure work is not a traditionally a strong area in Sweden, seeing as much of the advanced networks and roads needed are already in place. One area that does see a fair amount of work, however, is the wind sector.
For example, the Markbygden Wind Farm currently under construction west of Piteå, in the north of the country. Scheduled for completion in 2020, it will become the largest wind farm in Europe. The 4GW, kr55 billion (€5.1 billion) project will cover a total area of 450 km2 and will include 1,101 turbines, a number of which will be the Enercon E-126, the largest wind turbine in production.
This push towards increased renewable energy supply is part of the government’s plan to move away from fossil fuels entirely in the coming years. Announced in the budget towards the end of 2015, the plan includes investing in renewable generation in a range of ways, both industrial and domestic. With nuclear and hydro power already dominating production – almost 85% between them – the focus for new projects is therefore focused on things like wind and solar.
The government is also keen to invest heavily in infrastructure projects in the near future, both to improve on the existing network and as part of a political manoeuvre to decrease joblessness. One of the major projects in that area is the €3.1 billion Förbifart Stockholm, a new route for the E4 road that will bypass the capital.
In addition to that, there are a number of other planned projects currently on the books. Västlänken – the West Link – is a major transport infrastructure project in Gothenburg that will see the construction of a rail tunnel under the city. There is also the planned East Link – Ostlänken, a 150 km high speed rail link between Järna and Linköping, the Gothenburg-Borås Project, a 60 km high-speed rail line linking the two cities and the Mälarbanan, an expansion of the railway between Tomteboda and Kallhäll from two tracks to four.
Jon Moore – Journalist EMEA
It has been another year of upheaval in the Baltic legal market, with several firms taking the opportunity to reinforce their teams through a series of demergers, mergers and consolidations, including the exit of one of the major names.
As a result, the look of the entire landscape at the beginning of 2016 is somewhat different to that of the beginning of 2015. Notably, the trend seems to be moving more towards big, multidisciplinary firms. The concept of a pan-Baltic offering has been part of the thinking in the market for a number of years now, but what has changed is the emergence of firms with more than 100 lawyers, providing a truly full-service offering with experience across a full range of sectors and practice areas. With that, you are starting to see a number of the small and mid-sized firms either being folded into larger groups or merging to form new larger entities themselves.
“In general I would say in the legal market there might be more changes,” says the head of Cobalt’s real estate and infrastructure department in Lithuania, Simona Oliškevičiūtė-Cicėnienė. “The competition is really fierce and some of the law firms are not performing that well and I would say that this year there could be even more changes; either mergers or split-ups. I would say the market as such has not settled.”
The driver of this trend can be traced to the expansion of the marketplace itself. Across the board, deal values and volumes are increasing. For energy and infrastructure work this includes major interconnector, rail and social infrastructure projects, as well as a large amount of work in the energy – particularly gas – sector.
“The legal market in this area is developing, and I think increasing,” says Jaunius Gumbis, a partner at Ellex in Lithuania. “Energy companies now understand that they have to use outside counsel to succeed with their projects. All those big players in the energy market have their own internal lawyers, big departments of lawyers, but due to those very significant projects they understand that this is no longer enough; they need outside lawyers with big international experience. I think that is why the market is expanded and we find external counsel are treated with much more of a welcome than before.”
As has been the case for a number of years now, one of the major driving forces behind energy and infrastructure projects in the region is a desire to ensure the flow of gas not only remains open, but is sourced from locations outside of Russia. The Klaipėda liquefied natural gas (LNG) floating storage and regasification unit (FSRU) terminal, completed at the end of 2014, was one of the key elements to that. It has given rise to a number of related projects: the expansion of the Inčukalns Underground Gas Storage facility in Latvia, the Gas Interconnector Poland-Lithuania and BalticConnect, a gas pipeline connecting Estonia and Finland, all of which fall under the EU’s Baltic Energy Market Interconnection Plan.
“The LNG terminal is a huge project for our country, a huge project,” says Gumbis. “There is a lot of activity on energy independence in the country at the moment. It is a huge challenge to not be dependent on one supplier, Russia. That is why it’s a state policy to be independent, not to be politically independent, but to be energy independent.”
With all the recent upheaval in the market it will inevitably be a few years until it settles down entirely to a new normal. Partners talk about a generational shift taking place, as those at the top who emerged at the beginning of the 1990s following independence now move into retirement. The new cohort of partners seem to have different views, and desire different partners, to their predecessors. What the final landscape will look like once the dust settles is perhaps not set in stone yet, but many of the major changes have already taken place and the new face of the Baltic legal market is beginning to emerge.
Jon Moore – Journalist EMEA