Transactional Construction Law: Focus on Energy Projects

Wednesday, December 3, 2014 - 15:42

The Editor interviews Scott A. Greer, Partner in King & Spalding’s Global Transactions Practice Group.

Editor: Please describe King & Spalding’s construction practice and your role.

Greer: Our practice is unique in being among the first that is entirely focused on transactional construction and procurement law, rather than an offshoot of the litigation practice. The logic behind the firm’s strategy was that focusing on a core specialty would make dominant industry experts of our lawyers and, therefore, ensure the highest quality in our work. I lead the firm’s global construction transactional practice, which is the largest in the U.S. Our work is split fifty-fifty across domestic and international projects, and I’ve personally handled projects in 24 countries and 40 U.S. states. We have eight construction transactional attorneys in the U.S. and three more in the Middle East.

The majority of our work involves very large-scale energy, petrochemical or industrial projects, such as petrochemical facilities, liquefied natural gas (LNG) projects, power plants, or multi-state pipeline projects. For the balance, we handle infrastructure deals, such as mining projects, particularly outside the U.S.; cement manufacturing projects; and commercial projects, such as the Atlanta Falcon’s football stadium.

A distinguishing feature of our team is that it comprises lawyers – five out of eight U.S. attorneys on my team alone – who hold technical degrees in engineering or architecture, most of whom previously practiced in these technical fields. This is significant because the projects we handle don’t follow the familiar process we associate with building a house, which starts with a pre-existing architectural plan attached to a construction contract. Rather, it’s our job to specify the output requirements and performance guarantees, for example, “design a car built to accelerate from 0 to 60 in X seconds” and, more fundamentally, “ensure that the design has not omitted basic features like seats and a radio.” The important point for lawyers is that our work product is words, not drawings, so those of us with technical knowledge on the design side will have a real advantage in drafting precise contract language. 

We take a holistic view and review every single aspect, including on the technical side, to ensure that a contract is seamless and clearly enforceable. Some law firms focus just on the terms and conditions, but we work as much with in-house lawyers and the commercial leads of our client companies as with their engineers.   

Also, a number of the attorneys on our team were construction litigators prior to becoming full-time construction transactional attorneys. As a result, we have a good understanding of the issues that can arise during the project and ultimately in litigation or arbitration, and therefore draft and negotiate our clients’ construction contracts to mitigate or eliminate these issues.

Editor: Expand on the team’s industry expertise, and give us a sense of the magnitude of the work you’re engaged in.

Greer: We are currently involved in over $115 billion in U.S. and international projects. We have a very strong reputation in certain sectors and are a global leader in LNG projects. As just one example, in response to a natural gas shortage in 2003, we started working on U.S.-based LNG import terminals, which essentially receive LNG that has been frozen to -273°F to shrink its volume 600 times and shipped across the ocean. The imported LNG is stored in stadium-sized tanks at the U.S. facility and then heated up before it is delivered it to customers via pipelines. Interestingly, recent shale gas discoveries have allowed the U.S. to overtake Russia as the world’s largest natural gas producer, so for the past half dozen years, we’ve been converting projects originally designed as U.S. import terminals for the newer purpose of exporting gas to other countries.

Editor: Are these reconceived projects bringing new challenges?

Greer: Yes. For one thing, LNG import terminals are much smaller in size and value, usually costing less than $1 billion, whereas LNG export projects, depending on their size and whether they are new or an expansion, could run $5 to $10 billion or more. Export projects are more complex in terms of building the liquefaction “train,” meaning the facility for freezing the gas, which was not necessary with import terminals.

Editor: What accounts for the surge in U.S. energy construction projects?

Greer: Due to a confluence of factors, we are seeing more U.S. projects relating to the shale revolution in both gas and oil. The U.S. is now not only the largest global gas producer but, as a result of shale oil, has also overtaken Saudi Arabia as the world’s leading oil producer. Further, because natural gas prices have dropped significantly, the economics of U.S. production work in favor of locating projects in the U.S.

The next factor is Japan’s Fukushima disaster, which resulted in the shutdown of all 50 of its nuclear power plants, accounting for 30 percent of its domestic power generation. With a need to replace that energy, and without any appreciable natural resources of its own, Japan has elected to import LNG to a significant extent. This demand adds impact to some of our U.S. and international LNG projects, as most buyers for U.S. energy exports are from Japan and, more broadly, from Asia. 

Third, the U.S. Environmental Protection Agency (EPA) has implemented numerous measures that restrict the building of new coal-fired power plants, so we anticipate numerous closures of existing plants over the next decade. As a result, there is a resurgent interest in building natural gas power plants, which have a smaller carbon footprint, in the affected areas.

And further to the point about gas prices, global companies that used to build elsewhere are now coming to the U.S. to build large petrochemical facilities that rely on cheap natural gas. For example, we represent Sasol Chemicals (USA) LLC, a South African company that is building an $8.1 billion chemical facility in Louisiana and is planning to build a gas-to-liquid project on the order of $15 billion. The Wall Street Journal reports that this project likely represents the largest foreign investment in U.S. history, and this is just one example on the petrochemicals side.

Additionally, there is a surge in the construction of ammonia plants, which also rely on economical natural gas in the production of fertilizer. And more generally, the surge in pipeline construction relates to the physical location of shale gas and shale oil and the resulting need to build pipelines in different geographical regions.

Finally, the construction of nuclear power plants is trending downward in the United States, though there are two new plants being built in South Carolina and in Georgia. Notwithstanding that environmentalists tout their near-zero emissions, we don’t expect to see further construction of nuclear power plants built in the U.S. any time in the foreseeable future for a few reasons. First, they take a long time and are expensive to build, though they are very economic once they are up and running, and second, low natural gas prices allow natural-gas-fired power plants to operate just as competitively. We do expect, however, that Asian countries will continue to focus on nuclear power, and we are representing one client that is designing and seeking to build small module reactors there.

Editor: Can you give examples of the firm’s high-profile work?

Greer: The Oregon Clean Energy project, located in Ohio, is an example of a natural-gas-fired power plant that will replace coal-fired power and help in meeting a predicted 12,000-megawatt demand due to retiring coal-fired power plants, among other reasons. So far, this project has involved the negotiation of an engineering, procurement and construction (EPC) agreement for the power plant and switchyard, and we are handling a number of similar projects at various stages of development in locations such as Maryland, New Jersey, New York and New England.

We are also handling two LNG export projects for Cheniere Energy, one in Louisiana and the other in Texas, with a total value exceeding $28 billion. These projects involve the construction of liquefaction and purification facilities, or LNG “trains,” which do the work of freezing natural gas in preparation for transport, as described above. The first of its kind in the U.S., the Louisiana project involves a total of six trains and is among the largest manufacturing investments in the state’s history, and the Texas project, involving three trains, likely will be the largest lump-sum contract ever signed by Bechtel. The Freeport LNG project is an example of another LNG export project we are handling in the U.S. and, at $14 billion for their first three trains, represents the largest private investment in Texas history.

One of our non-U.S. projects relates to the construction of LNG trains in Mozambique for Houston-based Anadarko. Phase 1 is valued at approximately $20 billion, and the entire buildout is expected to exceed $50 billion in value. This project involves a myriad of EPC agreements relating to the onshore construction and the offshore development work, among other aspects.

In Saudi Arabia, Sadara Chemical Company, a joint venture of Saudi Aramco and Dow Chemical, is engaged in a $20 billion project that is the largest petrochemical facility built in a single phase, the largest export credit financing ever sought, and the first-of-its-kind rail project in Saudi Arabia. We are serving as external counsel to Sadara on all aspects of construction, procurement, employment, intellectual property, corporate matters, tax, trade and finance.

Editor: Talk about what’s involved in putting together deals of the size, scope and complexity you’ve just described. I imagine staffing is critical.

Greer: It is. Generally, we staff large international projects with experienced team members from various jurisdictions. As a global firm with a leading LNG practice, for instance, we can help U.S. companies looking to build internationally or help a company looking to sell natural gas anywhere in the world. The critical element for my team relates to the contracts because these tend to be long-term projects with agreements that span twenty years or more, and unless the parties are major players like Shell or Chevron, most LNG deals are project-financed and involve non-recourse loans. Some equity is provided for these projects, but the financing for these deals is based solely on the economics of the project and, therefore, is particularly reliant on the negotiation and drafting of related construction, financing and LNG sales contracts.

The firm has 17 offices across the globe. Our international attorneys negotiate government concession agreements about building rights, obligations with respect to local labor, environmental and regulatory requirements, and all tax- and customs-related aspects of the deal. Certainly banks are involved on the finance side, but in some countries, project finance may be provided by export credit agencies, such as the U.S. Exim Bank or the JBIC (Japan’s export-import bank), so the firm’s expertise is needed there. And for international matters involving local issues like real estate where we don’t have an office, we will often coordinate with local counsel to navigate regulations and requirements.

Editor: Let’s delve into some of the contractual details.

Greer: There is a wide range of contractual structures on the construction side. The most common in the energy sector is an EPC contract, which is used by an owner that wants to hire one company to handle all aspects of a construction project – from engineering through construction completion – essentially a turnkey approach that also provides a single point of contact for issue resolution. Less commonly used are contractual structures that separate engineering and design from construction, and these are sometimes used in pipeline projects.

Construction projects involve significant risks. We have to assess the company’s appetite for risk and whether it has the financial means to put its balance sheet on the line; we look at financing on a lump-sum or fixed-price basis and, depending on the risk profile and available resources, whether it is advisable to contract on a reimbursable basis, meaning that payments are based on expenses as they are incurred.

In some cases where the owner is willing to assume more risk, the owner essentially acts as the general contractor but still needs assistance to design and manage the project. These projects call for an engineering, procurement, construction management (EPCM) contract, which has the advantage of fewer embedded contingencies for events that may not occur, but also the disadvantage of greater overall risk to the owner.

Editor: In closing, give us the view from the outside for clients looking to hire a firm with a construction transactional practice for energy-related projects. What are they going to like about King & Spalding?

Greer: They will like our deep skill sets, as lawyers with technical qualifications, plus our breadth of experience within a very specialized area, particularly as it relates to the number and scale of projects we have already managed to successful outcomes. In fact, the firm strategically developed this energy practice on a project basis, meaning that we almost always get involved at the outset and manage every aspect through to completion. For instance, we will manage everything from constructing the project, selling the offtake, and dealing with regulators across the globe, whereas most major law firms involved with energy projects focus on project finance and come in much later in the game. At King & Spalding we follow the molecules and electrons, and we understand how projects work from start to finish.

Please email the interviewee at sgreer@kslaw.com with questions about this interview.