Legal Week – 18 November 2015
The Middle East market has been rattled by the drop in oil prices. Anna Ward examines the consequences for independent law firms in the region
Over the past 16 months, the plunging oil price has hit government budgets in the Middle East hard. But while Saudi Arabia – the world’s second largest oil producer – continues pumping out oil to protect its market share in the face of swelling US crude output, what is the impact of reduced spending in the region for the legal market and how are local law firms faring compared to their international counterparts?
With the price of key oil benchmark Brent crude still hovering at around six-year lows of just under $50 per barrel, local law firms are seeing a reduction in work as projects are put on hold or suspended, with many saying they felt the deepest effects of the drop in oil prices during the summer.
Certainly, international outfits have shown signs of struggling this year with Latham & Watkins and Herbert Smith Freehills (HSF) opting to close offices in the region and retrench their strategy around Dubai with its more diversified economy, though HSF is to re-launch in Saudi Arabia as well.
Hopes of an uptick in legal work after the Islamic holy holiday of Ramadan ended in July were in vain. “It started to have a noticeable effect in August this year,” says Husam Hourani, managing partner of Al Tamimi, which has offices across the Middle East. “Prior to that, many projects were still pushing forward and it seemed like government initiatives were still going ahead. We were hoping for the situation to improve after Ramadan but it became clear many projects had been put on hold or suspended.”
“In the Middle East we rely heavily on projects initiated by government owned entities, in particular in Saudi Arabia, Qatar and the UAE”
In the private sector, three corporate IPOs were suspended in August, says Hourani, declining to name them. It is understood that many other projects have also been either delayed or suspended. For example, earlier this year, state-owned Qatar Petroleum and oil major Shell ditched plans to build a $6.5bn (£4.2bn) petrochemical plant in the emirate.
“In the Middle East we rely heavily on projects initiated by government owned entities, in particular in Saudi Arabia, Qatar and the UAE. The fact that the price of oil has remained low and is expected to remain at the same level means there are fewer projects,” explains Hourani.
Earlier this year, the International Energy Agency, the world’s leading energy forecaster, said that slowing global economic growth together with robust output from the Organisation of the Petroleum Exporting Countries (OPEC) producers, which include Iran, Iraq, Kuwait, Saudi Arabia, Qatar and the UAE, will mean the oil market glut will persist through 2016.
In some cases, the government has extended the deadlines to bid for certain projects as they take a fresh look at their budgets for the work, says Qays Zu’bi senior partner of independent law firm Zu’bi & Partners headquartered in Bahrain. “Projects are not being shelved in Bahrain but their values are being re-calculated including further revisions on the bids to conform to economic realities,” he comments.
The tiny island kingdom of Bahrain, which has smaller oil and financial reserves than its neighbours, has begun cutting state subsidies on essential items to raise money.
“The drop in oil price has contributed significantly to competition for new legal instructions where the market has become even more challenging”
Sharing The Burden
The outcome of all this is more competition amongst law firms for instructions and a shift in the nature of the work.
“The drop in oil price has contributed significantly to competition for new legal instructions where the market has become even more challenging,” says projects partner Mike Wakefield, projects partner at Galadari Law in Dubai. “It is much more competitive compared with two years ago.”
Meanwhile, clients are piling on the pressure to push down legal costs and in some cases; local firms are struggling to collect fees owed to them.
“With regards to local law firms, there is definitely pressure on fees and in some instances payments are delayed. We now have to make sure we get paid, unlike before,” says Zu’bi, adding: “It is our belief that should the economy slow down further, law firms working in the region be they local or international will have to take a fresh look at their business models and size.”
Ahmed Barakat, managing partner of Asar Legal, headquartered in Kuwait, says clients are becoming “more and more sensitive”, adding: “They are more conscious about money and how to spend it. This also applies to the government which is trying to share the burden with the private sector and push the economy forward.”
Hourani comments that there should also be more privatisation work, particularly in Saudi Arabia. “The Saudi government wants to rely less on oil and come up with new resources to support it. I expect there to be more privatisation work in Saudi. Law firms are trying to bid for work like this and the magic circle firms will, I’m sure, look to get part of the work.”
In addition, Dubai passed a new law in September to encourage new projects to be developed under the public private partnership (PPP) model, saying that they must be economically, technologically and socially feasible, according to the report. The new law was scheduled to come into effect on 17 November.
“We now have to make sure we get paid, unlike before”
However, it is not all doom and gloom. Local law firms are also finding ways to open up opportunities out of the downturn. “Some of my clients who are cash rich are keeping a close eye on markets and looking for projects abroad,” says Zu’bi. “We see an upsurge in litigation and arbitration covering various industries such as construction.”
Other independent law firms are also opting to diversify away from oil and gas.
“We are taking on a broader variety of projects and not simply looking at oil and gas. A number of the ones we are bidding for are in the renewable energy sector,” says Wakefield.
Moreover, the consolidation in the oil industry has also thrown up legal work, he comments.
“An increasing number of smaller oil companies are looking to merge and in some cases, as a result, we have seen an increase in redundancies and employment litigation work.”
And, in the midst of all the upheaval, Dubai has emerged as a relatively safe haven. Most recently, Shearman & Sterling launched an office in Dubai in September spearheaded by the firm’s Middle East managing partner Marwan Elaraby.
“We are taking on a broader variety of projects and not simply looking at oil and gas. A number of the ones we are bidding for are in the renewable energy sector”
Meanwhile, in June HSF announced it was closing its Abu Dhabi office and shifting its five-lawyer team to Dubai. Latham also revealed earlier this year that it will close its Doha and Abu Dhabi bases before the end of 2015 and asked its 11 lawyers there to relocate to Dubai, though three of its existing Dubai partners are set to join Hogan Lovells.
So do local outfits in the region have plans to move their strategy towards Dubai?
Zu’bi says that he already has plans to shift two partners and one associate from the firm’s Bahrain headquarters to its second office in Dubai. Overall, the firm has 25 lawyers, including six partners.
Meanwhile, Wakefield is picking up more work in the real estate space in the city, citing infrastructure plans for global showcase Expo 2020, which proved a bountiful economic magnet for current host Milan this year.
“Not all projects in Dubai are dependent on oil prices. Some are independently sponsored or relate to real estate and we are seeing some increase in activity in real estate development.”
Independent law firms are clearly taking steps to shoulder the burden of oil price crashes at a time of political uncertainty in the region.
However, the issues that have beset the legal market in the Middle East look set to hang around for a while longer, concludes Hourani.
“We expect that the oil price drop will continue to affect the legal market in the Middle East for a long period of time. I don’t expect any changes before April 2016.”