CEE – Generating Growth

Oil and gas? Renewables? Nuclear? Whichever energy source you’re selling, there’s no doubt that the appetite for power in Central and Eastern Europe (CEE) seems almost insatiable. That demand, coupled with the urgent need for infrastructure, is ensuring that even those CEE economies facing the imminent threat of recession are viewing the fulfilment of their relevant construction programmes as a number one priority.

‘National authorities are seeking to improve capacities in conventional energy sources, increasing energy independence and phasing out or upgrading older polluting generation capacities,’ says Bryan Jardine, partner in the Bucharest office of Austrian-headquartered Wolf Theiss. ‘The CEE is a region that has tremendous need. Growing energy demands, coupled with ageing, inadequate and inefficient energy supply infrastructure (a legacy inherited from 45 years of Soviet-era planning and investment) is driving the need for this increased sector work and investment in the CEE.’

The main geographical hotspots for infrastructure development are Romania (where the government is looking at further energy privatisation) and Poland (where a movement towards shale gas is becoming an increasingly significant trend), as well as the Czech Republic, Slovakia and the Ukraine.

Corporate head Clemens Hasenauer and banking and corporate finance partner Volker Glas of Austrian firm CHSH Cerha Hempel Spiegelfeld Hlawati (CHSH) recently advised OMV, the leading energy group in the European growth belt, on the increase of its stake in Petrol Ofisi, one of the leading companies in the Turkish oil products retail and commercial markets, which was a deal notable for being one of the largest transactions involving an Austrian company in recent years.

‘The insufficiently developed infrastructure and the forecast of growth in the consumption of all types of energy, particularly electrical power, have made the region of south-east Europe increasingly interesting for the investors,’ says Johannes Aehrenthal, CEE partner at CHSH. ‘According to the results of a World Bank study, it is expected that until 2020 south-east Europe shall have average annual growth rate of consumption greater than 2.3%.’

 

Going nuclear

Over the past decade, as European governments tried to find ways to ensure that they could meet their EU energy targets (20% of energy derived from renewable sources by 2020, according to the Directive on renewable energy) nuclear has been an increasingly credible option to plug the gap without raising carbon emissions. Even the UK, traditionally reticent to include nuclear as part of the country’s energy mix, has experienced a nuclear renaissance over the past decade. However, a series of equipment failures, nuclear meltdowns and the eventual release of radioactive materials at the Fukushima plant in Japan in March 2011 put paid to many sovereign nuclear plans. However, going nuclear is still the favoured option for several countries in the CEE.

Vienna-headquartered Wolf Theiss is one of the dominant law firms in central, eastern and south-east Europe. ‘While the nuclear renaissance is apparently declining all over the world following the Fukushima disaster, in Hungary there is a political decision to continue investing in the nuclear field,’ says László Kenyeres, partner in Wolf Theiss’ Budapest office. ‘In addition to the service life extension of the existing blocks of Hungary’s only nuclear power plant at Paks, the parliament also granted preliminary approval for the creation of one or more nuclear blocks at the Paks nuclear power plant back in spring 2009 – a political decision reinforced in Hungary’s recently adopted National Energy Strategy.’

As Kenyeres goes on to suggest, renewable energy investments are expensive and unfeasible without a stable and predictable support scheme, which Hungary lacks, making nuclear a far more palatable choice. ‘The promulgation of the re-tailored renewable strategy, which would set the framework for the long-awaited support scheme, has been postponed several times,’ he adds. ‘Thus, renewable project development has seen better days.’

Hungary is far from being the only CEE country that remains committed to the nuclear option.

 

‘Within the Czech Republic, a major strategic decision has been made by the government to support nuclear energy generation.’

 

PRK Partners is a top-tier corporate firm in the Czech Republic and also has offices in Budapest and Bratislava. ‘In Slovakia, the finalisation of the Mochovce power plant and the anticipated extension of another nuclear power plant in Jaslovské Bohunice to some extent signals the direction of the Slovak energy market,’ says Miriam Galandová, corporate and tax partner in the Bratislava office of PRK Partners. Slovakia currently has four nuclear reactors, which generate around half of its electricity, as well as two under construction. According to the World Nuclear Association, Slovakia’s commitment to the future of nuclear energy is strong – not least because all of the country’s gas comes from Russia.

Galandová also points to the Czech Republic as a significant proponent of nuclear energy and highlights the firm’s high-profile work, led by partner Radan Kubr, for global nuclear giant Westinghouse Electric Company on a tender for the construction of two new nuclear units at the Temelín power plant. The project, worth several billion euros, is currently the world’s largest energy tender. The Czech Republic already has two active nuclear power stations (Temelín and Dukovany) and the government’s focus on the expansion of that power generation capability is unbendingly fixed.

Kocián olc Balatík (KSB) is another leading domestic firm in the Czech Republic. It has a strong track record for energy financing and in 1995 advised on a pioneering deal in the sector: acting for ECK Generating on establishing the biggest independent power generator (370MW) in the Czech Republic, notable for being the first (and, to date, the largest) non-recourse project financing deal in the country. Since then, KSB has continued to advise ECK Generating and its affiliate companies on all energy, environment, corporate, real estate, construction and financing matters.

‘Within the Czech Republic, a major strategic decision has been made by the government to support nuclear energy generation and there are additional discussions as to whether the country should open new coal mining facilities as the majority of power plants are coal fired; it is not certain if this will proceed though,’ says Václav Rovensk       , project finance and environmental partner at KSB. ‘After the so-called solar boom of 2009/10 and the subsequent governmental cut of subsidies, the renewable energy market slowed down. A completely new act on renewables has been passed by the parliament and will be effective as of 2013.’

 

Solar, so good

Certainly, the renewables option is a far less controversial way for a country to diversify its energy mix, which has ensured that it is the top choice for alternative energy sources across many parts of the CEE. In particular, Austria’s dedication to green energy saw it commit to raising its share of energy consumption from renewable sources to 34% by 2020 – already renewable energy produces about 63% of the country’s total electricity, with hydropower accounting for over 55% of the country’s power generation. Indeed, while many parts of Europe have seen subsidies for renewable energy schemes slashed, Austria remains a staunch advocate of state aid in this area.

‘Austria recently implemented major changes to the Green Energy Act increasing subsidisation schemes, particularly with regards to new windfarm projects in 2011,’ says Thomas Starlinger, head of the energy law department at Vienna-based Fiebinger Polak Leon & Partner Rechtsanwälte. ‘This gave the wind sector of the renewable industry a certain boost and new projects are being developed in an increasing scale.’

It’s not plain sailing for all eastern European countries however. The Ukraine’s troubled relationship with Russia has made the country’s need to diversify its energy dependence an urgent priority, but its legal and technological infrastructure is making modernisation difficult.

Kyiv-based law firm Arzinger has been actively investing into the development of its infrastructure and energy practices to support clients in this area.

‘The main drivers for the development of the renewable energy sector in the Ukraine are quite clear and the most obvious one is its dependence on Russian gas,’ says Timur Bondaryev, managing partner of Arzinger. ‘Government policy is determined to remove this dependence and to stimulate renewables development. Laws have been developed to promote investment in this area – indeed, the legislation provides for the best green tariffs in Europe as well as significant tax and custom duty exemptions to make the business more attractive for foreign investors.’

 

‘We do not expect to see much carbon capture and storage (CCS) related work in this part of Europe as public opinion does not appear to support it.’

 

However, as Bondaryev points out, the global economic climate is making financing tough to find. ‘In addition to the economic situation, the very restrictive nature of land legislation does not allow for the development of high-scale renewable projects, prohibiting the change of designation of agriculture lands.’

Despite this, there have already been some successful projects, most notably Arzinger is advising the developers on the construction of the world’s biggest solar park in the Ukraine. Certainly, the whole country is behind the government’s drive to get the sector moving and remove its dependence on what many see as its bullying neighbour.

‘The biggest bulk of the Ukraine’s energy comes from one supplier – Russia – and today the Ukraine pays the highest price for Russian gas in Europe (if not in the world),’ says Glib Bondar, general banking and finance partner at Avellum Partners. ‘Given the heavy consumption of natural gas by Ukraine, and the current structure of the Ukrainian economy, as well as the overall energy system and age and quality of technologies used by most Ukrainian enterprises (in particular, steel production and chemistry industries), then the current gas price is unsustainable in the medium and long term.’

However, Bondar highlights the Ukrainian government’s strong push towards motivating investment, pointing out that its promotion of special national legislation concerning the regulation of the development and utilisation of renewable energy as well as its introduction of a green feed-in tariff (significantly the highest in Europe) is encouraging renewables work. Generally then, it seems fair to suggest that green energy matters are providing a steady stream of work for the region’s energy lawyers, but are these emerging industrial states all so environmentally-friendly?

Austria’s status as one of the world’s leading generators of renewable power means that its law firms are well placed to export related advice throughout the CEE and it also awards firms with an interesting comparison of specific country markets. According to Austrian heavyweight Schönherr, while renewables interest may be increasing, CEE countries are also increasingly mooting less green types of energy.

 

Conventional methods

‘There continues to be a high demand for renewable power throughout the region, which we expect to continue, and also with the increase of renewable energy, investments into the grids and interconnection capacities will become increasingly important,’ says Markus Piuk, corporate and energy partner at Schönherr. ‘But there will also be more investments into gas-fired thermal power plants as well as into gas-related infrastructure (pipelines, storages, etc). We do not expect to see much carbon capture and storage (CCS) related work in this part of Europe as public opinion does not appear to support it.’

However, Piuk draws attention to the current debate surrounding the production of shale gas: further to recent discoveries, questions are being raised over its extraction and use as the whole area of shale gas becomes a political hot potato. As he points out: ‘While important reserves have recently been detected in Austria and Poland and so on, it is yet unclear if, and when, and under which legal conditions, these reserves will actually be used.’

The controversy around shale gas is a constant source of debate, with the Obama administration arguing that its development will help to reduce greenhouse gas emissions and other studies believing that it actually releases more greenhouse gases than conventional natural gas. Whatever the case, there is no doubt that shale gas is here to stay and the CEE is making its interest in its recent valuable discoveries very clear.

 

‘A major new trend is neither on the renewable nor on the conventional side, but rather in unconventional energy’

 

‘Although it is impossible to generalise across the entire CEE region, one of the major new trends is neither on the renewable nor on the conventional side, but rather in unconventional energy,’ says Paul Luiki, banking and corporate partner at Austrian law firm Fellner Wratzfeld & Partners. ‘This essentially is the search for shale gas. Poland for example has seen a boom in this market over the past two years, while the Ukraine has shown its willingness to open the shale gas market.’

In a major recent highlight, Fellner Wratzfeld & Partners is representing a major oil and gas company following a tender for large concession areas – including shale gas. ‘The tender process is open to all interested bidders,’ says Luiki. ‘But one of the key developments in the Ukraine is that in order to win such a licence the Ukrainian government requires that the Ukrainian state maintain a 50% interest.’ An interesting contract, as most states in the region are looking at selling their stakes in national companies.

 

Going private

In addition to keeping project finance practices busy, oil and gas work should drive M&A work throughout the region as governments look to continue with the ongoing privatisation of their energy companies. The main activity will most likely be concentrated in the energy markets of Slovakia, Poland and Romania, with Slovakia housing the smallest deals. ‘Although the volume of privatisations seen in the past has decreased substantially, we see some activity in this area, for example the government has contemplated the privatisation of six heating plants,’ says PRK Partners’ Galandová. ‘However, due to the early elections to be held in March 2012 the process was put on hold and it is hard to predict the approach and intentions of the new government.’

Sol?tysin´ski Kawecki & Szle?zak (SK&S) is a Polish firm that boasts an enviable balance between acting for domestic and foreign clients. The firm’s experience in energy work is broad and energy and infrastructure partner Krzysztof Cichocki recently advised the Polish oil group PKN Orlen on the construction of a 400MW combined heat and power plant, while environmental specialist Dariusz Skuza advised EuRoPol GAZ on the construction of the Polish section of the Yamal pipeline.

‘The Polish treasury intends to attract investors to participate in the privatisation of energy groups, Enea and Energa,’ says Cichocki. ‘In addition, the second attempt of the privatisation of the oil giant Lotos – the second-largest Polish oil refining company – is likely to be launched. The energy sector in Poland is mostly state-owned. Therefore the intended privatisation of Enea or Energa in the power sector, companies with very good financial and market standing, will likely attract interested investors.’

According to Cichocki, Poland is also looking at overhauling its legal regime to make its energy market even more attractive to those potential investors.

‘In December 2011, the Polish ministry of economy announced drafts of three legal acts regulating the power, gas and renewable energy sectors,’ adds Cichocki. ‘These acts are intended to facilitate the liberalisation of the energy market, the implementation of the Third Energy Package and to modify the legal framework for investment into renewable energy sources.’

In short, Poland is introducing an extensive programme of measures designed to encourage private participation in the country’s modernisation of its energy infrastructure. Banks, such as lender PKO Bank Polski, have also been included in the country’s state asset sale, scheduled for later this year. Poland forecasts that it will raise $3bn from the sale of state companies. On the other hand Romania’s privatisation programme, it seems fair to say, appears less anticipated.

Following its E20bn bailout led by the International Monetary Fund (IMF) in 2009, Romania made a deal pledging to sell stakes in its energy (and transport) companies to increase efficiency and boost government coffers. However, in July the government failed to sell a 10% stake in oil and gas group Petrom. Firms remain optimistic.

‘In Romania, the government is intending to further partially privatise the energy sector through an announced secondary public offering on the Bucharest Stock Exchange of minority stakes in Transelectrica [the IPO for Transelectrica took place a few years ago and was many times oversubscribed], as well as IPOs for state-owned stakes in Romgaz and Hidroelectrica,’ says Wolf Theiss’ Jardine. ‘The state-owned energy complexes of Turceni and Rovnari have also been placed on the government’s list for upcoming privatisation, at the insistence of the IMF.’

Firms have mixed views about the levels of success Romania’s programme can expect, but either way in the short term it should create work for law firms.

‘Romania’s privatisation has attracted a lot of interest already, even among US investment banks, despite the relatively small volumes involved [below E100m]. Hence there is plenty of related work for law firms,’ says Schönherr’s Piuk. ‘On the other hand, most of the recent privatisations in Turkey (power distribution companies for example) have failed after the successful bidders (and the second and third in line) preferred to forego their bid-bonds rather than to close the deals.’

In most countries in the region, state privatisation has reached its final stages so a good proportion of these sales should still be of interest to investors. That said, the euro crisis is depressing asset values and stalling the big sales – but that’s not stopping governments from trying to lure private investors. Indeed as government revenues drop, and budget deficits climb, privatisation looks like the only option for some countries. This explains why, in addition to energy companies, countries such as the Czech Republic are still preparing to sell off their last remaining infrastructure assets.

‘The only remaining key candidates for privatisation in the Czech Republic are Czech Airlines and Prague Airport,’ says KSB’s Rovensk . ‘An attempt was made to privatise Czech Airlines in 2009 but this did not ultimately go ahead. Remaining to be privatised are the Czech energy giant C?EZ and the state enterprise brewer Bude?jovick Budvar – although the privatisation of Bude?jovick  Budvar, due to ongoing trade mark disputes, is not likely to be on the cards any time soon. Additionally, given that it is still a state enterprise, the law would first need to be changed.’

In addition to the upgrading of its grid connection and general need for energy modernisation, Poland also has some interesting non-energy infrastructure assets up for grabs.

‘Although most of the sectors in Poland are already privatised, there are some big potential transport-related sales on the horizon,’ says Radosllaw Biedecki of Biedecki Biedecki & Partnerzy. ‘Upcoming big privatisation projects should be LOT (Polish airline carrier) and Bank Gospodarki Zywnos´ciowej.’

As governments become increasingly anxious to offload their assets, the question remains: who will the buyers be? LB

maria.jackson@legalease.co.uk